The Whitey Bulger Market

So, somebody finally did Whitey. And though I search high and low, I find it difficult to identify a single tear being shed in his memory. On the other hand, you gotta hand it to Ol’ Whitey; he was truly one of a kind. Brother of the President of the frogging Massachusetts Senate, Boss of the Winter Hill Gang, Serial Murderer, Enforcer, Drug Dealer, Arms Dealer, FBI Informant, and successful fugitive from justice for 25 years, he was clearly cut of a different cloth. He double crossed partners, double crossed the government, ratted out his cronies, ratted out rats, and even ratted out the Feds. And then he ran out. And no one could find him. But for more than 50 years, no one ever ratted him out, and anyone who tried didn’t live long to tell the tale.

Whitey may very well have been the GOAT of the modern thuggish class, but, inexorably, the fates and furies caught up with him, and, in what looks to be an inside job, someone finally got him. We’ll return to this theme a little bit later in this edition, but first a word from our (market) sponsor.

Because to me, the market action over the last few weeks looks like something directly out of the Whitey Bulger rap sheet. Investors, on a high octane volatility tape, got took, presumably, at least in part by short sellers, and then the short sellers themselves got whacked. The last couple of days of the October were much more Treat than Trick, but then we moved on to All Saints Day, and the action, yet again, reversed itself. Everyone paid the price, and the more “connected” you were, the bigger was the toll. Entering last week’s proceedings, there was little that the “made” guys: the friends of ours in the hedge fund industry, could do to offset the reality that October was going to be the worst month of the decade in terms of performance, but you’ve got to give them credit for fighting to the bitter end. Heroically (albeit on a deeply oversold tape), they ginned up a rally, managing in the process to mark up their positions, and some of them may have even staved off their own toe-tagging for another day.

In seasonal fashion, earnings came at us fast and furious, and, for the most part, they came in strong. Factset has the aggregates at >24% for the quarter, and ~6% revenue growth. Q4 guidance is not as bad as I anticipated, and, when viewed in aggregate, few earnings followers have reasons to call for a sitdown and/or to initiate a beef.

Except for this: the capos in the equity mob have almost unilaterally let us down. After last week’s misses by AMZN and GOOGL, we received FB’s tidings, which might’ve been viewed as a disappointment had it not been that Zuck and Company tanked last quarter’s report so thoroughly that anything they said which didn’t feature a padlock on the front door of the firm’s glittering new headquarters in Menlo Park, CA was likely to be viewed constructively.

OK; fair enough, but then, Thursday, after the last apple had been bobbed upon for Halloween, AAPL turned the tables bobbed upon us. It missed profits by nearly 20%, reported barely pulse-registering iPhone sales growth, and guided down on holiday revenue expectations. Somewhere in there, it also pulled a stunt that must have Godfather Jobs rolling in his grave: the announcement of a discontinuation of the reporting of unit phone sales on a going-forward basis.

The confluence of these events caused this long-time capo di tutti capi of the equity markets to experience its worst performance day in about 5 years. Even more unthinkably, the Company’s valuation slipped below the $1 Trillion level, and at the point of this correspondence resides at a beggarly $986.5B.

And, just as we were absorbing the blow, we were forced to confront what turned out to be something of a betrayal from our own Bureau of Labor Statistics: the October Jobs Report, which showed such unilateral strength across the board that it made investors weep. And hit the sell button. Non-Farm Payrolls, Average Hourly Earnings, Labor Force Participation Rate, etc., all demonstrated remarkable vigor.

Apparently, Whitey or no Whitey, any longshoremen out there showing up for duty at the Boston Harbor are not likely to be turned away.

But investors viewed these tidings with a combination of disdain and anger, selling off both stocks and bonds in the ensuing closing hours of the week.

But wait, there’s more. In case you missed it, there’s something of a trade war going on, and the rhetoric surrounding it is moving the markets with every twitch and tweet. I find this utterly vexing, because as I’ve stated on previous occasions, I think that whatever is being reported publicly bears very little resemblance to the actual negotiations between the U.S. and its trading partners. They’ll spoon feed us the rhetoric they believe it appropriate for us to imbibe, while the real action: a) is taking place behind closed doors; and b) particularly with respect to China, will probably not be clarified for years.

There is a G-20 meeting at the end of this month, with the current presumption being that President Trump and Supreme Leader Xi will indeed be sitting down to talk turkey. Of course, this will take place a week after Thanksgiving, at which point, if you’re like me, even the mere mention of turkey (much less the prospect of choking down another bite of the noble bird) will be sufficient to turn your stomach. On the other hand, there is the slight chance that the rhetoric could spin out of control, which would almost certainly cause indigestion for investors of every stripe.

Finally, and hopefully for the penultimate time (I reckon I’ll have to include some recap commentary next week), the much-anticipated, much-feared Mid-Term Election is now upon us. I won’t contribute much to the overwrought erudition here; I reckon it’s now just a matter of waiting and hoping for the best. I suspect that from a market impact perspective, it will be a non-event, but I encourage everyone reading this to remember the horrific run-up to the cycle, which was, well, eventful. I did, as you know, prognosticate that the Mid-terms would catalyze a significant vol increase, and as of now, the pictures tell the story:

Vol for every index is at least a double relative to its longer-term equilibria, and I attribute this in part to a delayed reaction to the highly surprising outcomes of the last two critical voting cycles: Brexit, and of course the 2016 U.S. Presidential Election. In both cases, the “chalk” came out very assertively, and in each case the “chalk” couldn’t have been more wrong. I suspect that especially with everyone so amped up and all, it has been the possibility of unlikely outcomes that has given investors such chronically happy feet, and I think that they can be forgiven for this reaction. And yes, something very strange could happen on Tuesday, but I’m not prepared to predict what form that might take.

If something weird indeed transpires, the hyper-volatility will, of course, continue; otherwise, we probably calm down a bit. In the event of the latter outcome, I’d say that U.S. equities are perhaps a titch undervalued, but have limited upside in these troubled times. However, if the dust settles a bit, then the development which encourages me the most is IBM’s acquisition of Red Hat. It doesn’t matter that they overpaid; they are removing one of the most actively traded, actively invested stocks in the universe from the investment equation.

Investable names are indeed dropping like foes of Whitey Bulger in 1980’s Boston, and again if the vol subsides, I will remind my readers that there is a visible and growing shortage of securities to trade and own in this world. The inventory that is not rubbed out entirely by merger/acquisition is being kneecapped by buybacks (heck, even Buffet is buying back his own shares, and when has he ever been wrong?). This should, at minimum, place a floor on valuations for years to come.

However, I suspect that this game, too, will run its course. After all, even Whitey’s bag of tricks eventually emptied. Admittedly, with winning Mob wars, taking over Southie, turning State’s Evidence, murdering associates, sending guns to the IRA, and, disappearing for a generation, it was quite an impressive arsenal. But eventually he used it all, and acquired too many enemies in the process. When his time came, it’s pretty clear that the government-run prison system not only looked the other way but actually facilitated access for mob hitmen to complete their destiny. And now, James J. (Whitey) Bulger has gathered to the dust of his forebears.

There is indeed a lesson in here somewhere, but on this, my 59th birthday, I’ll be switched if I can figure out what it is. But before blowing out the candles I can at least wish you a sincere….



Posted in Weeklies.