Trump and Bernie: A Match Made in Tech Hell

Remember a few editions ago when I wrote in celebration of the cross-aisle cooperation between Senator Elizabeth Warren and President Donald Trump with respect to the re-engineering of the equity complex? After all, it was only a month ago. However, for those who fail this recall test, the gist of it was as follows. Senator Warren introduced a bill to regulate large corporations in a manner that de-emphasizes profits as a corporate objective, and the President sought to soften the blow by suggesting a reduction in the frequency at which company chieftains would be required to announce the certain-to-be bad news to the investing public.

At the time, I was deeply touched by the prospect of narrowing the gap between two schools of economic thought — so deeply at odds with one another, to such deep annoyance and detriment to the well-being of the masses. However, I feared it was a “one-off”.

So it brings me great pleasure to report upon the happy news that the divide continues to close. As my readers are probably aware, everyone’s favorite Socialist Senior Citizen Senator: Bernie Sanders, took to the airwaves this past week to denounce the evils of what by many accounts is everyone’s favorite publicly traded corporation. In live television interviews, and, of course, on Twitter, Bro Bernie entered into a full-throated denouncement of Amazon, going so far as to include a series of ad-hominem attacks on its fabulously infallible founder: one Jeff Bezos.

In doing so, Sen. Sanders joins a critical chorus led by the President, who for months has been throwing shade at the erstwhile bookseller that would take over the world. Bernie is passionately (if questionably) upset about the unfair treatment of Amazon workers. Trump is presumably most peeved at the temerity of Bezos at having taken ownership/control over the Washington Post. But both agree on one thing: the great unwashed are getting a raw deal with respect to the business arrangement between the Company and the U.S. Postal Service.

I’ve looked into these matters, and objectively as I can determine, this is not an open and shut case against Amazon. Yes, they’re getting a government (and therefore a taxpayer) subsidy, but they are arguably performing services that would be difficult and more expensive for the post office to undertake without them – rain, sleet, snow and gloom of night notwithstanding.

Meanwhile, to their everlasting credit, both Amazon and its shareholders reacted to the rhetorical pummeling with characteristic equanimity:

It’s not as though they didn’t feel the sting a bit, and here, the sentimental can be forgiven if they lament the timing. Sharp-eyed observers will note a slight down-tick in the price at the more immediate, right end portion of the graph. This reversal is all the more unfortunate because on Tuesday, the day after our traditional holiday celebrating the working class, the Company’s valuation joined that of Apple’s as the only business enterprise ever to surpass the lofty and heretofore unimaginable $1T threshold.

But that was then; as of Friday’s close, Amazon’s market capitalization fell to the beggarly-by-comparison level of $952B.

It says here that Amazonians of every stripe should keep that stiff upper lip demeanor at the ready, as I suspect they may face a string of challenges before the inevitable happens, and the Company achieves full global hegemony.

Because, while the following edict did not make the cut on my “10 Commandments of Risk Management”, it probably should have: any enterprise that has found itself in the cross-hairs of both Trump and Bernie has reason to worry.

And if Amazon is staring into the face of a political spit storm, so, too, perhaps, are those other lovable Tech Titans whose stock performance have so deeply enriched us in the post-crash era. Consider, if you will, the recent pricing action of a couple of other tech darlings: Facebook and Twitter, linked not only by the social media stranglehold they collectively command, but also by the fact that each company sent one of their gods down from their heavenly Silicon Valley Olympus, to earthly Washington, where each faced full-on Capitol Hill roasting:

Facebook Defacing:

Twitter De-Tweeting:

Now, this is a Dickensian Tale of Two Stocks if ever there was one. With Zuck presumably hiding under his desk, Sheryl Sandberg taking the Congressional heat this round. In the wake of all that, Facebook managed to breach the lows registered after its historic July tanking of earnings, and is knocking on the door of breaking the bottoms recorded when Zuck had to explain away to hostile legislatures the pimping out of user data to sketchy organizations like Cambridge Analytica. By contrast, the long-besieged Twitter, which had been on an improbable profit upswing of late, managed to give back all and then-some in the wake of Jack Dorsey’s Capitol Hill Star Chamber Inquisition.

Anybody notice a pattern here? Well, for me, what we’re witnessing is the early innings of what I expect to be a slowly unfolding, populist/political undermining of the flower of the American Tech industry. Now, I don’t expect anything overly nasty to transpire in the short term; more likely than not, the garroting of Silicon Valley high-flyers will be a multi-year proposition. Rather, I suspect that the TMT/big dogs of the NDX will more than likely reach new highs – perhaps material ones – before they face the prospect of careening, Icarus-like, to terra firma.

But if the prevailing tone – taking place as it is under a presumably business-friendly political paradigm — is any indication, I shudder to think about what happens when the progressive elements re-assert their mojo and take hold of the control panel. And trust me, they will: if not immediately then eventually.

Of course, one cannot help but admire the way that West Coast Tech monsters – from San Diego to Seattle – have anticipated this, and attempted, and with some success, to brand themselves as torch carriers for the progressive mindset. I believe is that this will work for a while, but not into perpetuity. Eventually, they will be unmasked and vilified as the filthy, profit-seeking capitalists that they are.

And here, perhaps, is the main (if most obvious) point: as Tech goes, so goes the stock market. I don’t have the exact figures handy, but I can assure you that if you review index gains over the last, say, five years, and remove the contribution of Apple, Amazon, Facebook, Microsoft and Google from the equation, you’re looking at a chart that, best case, is flat as a pancake. As such, I don’t think that the unfolding Madam Defarge (villainess of Tale of Two Cities, known most prominently for knitting at the guillotine) dynamic that I fear may be emerging in Tech-land is much cause for celebration.

The shortened week brought a small taste of the look and feel of the new-age vibe that awaits us. Equity indices retreated, but only modestly, and in manner that failed to capture the carnage that lies beneath. I may be connecting dots too far flung to merit they’re linkage, but it is not lost on me that all of the above transpired against the backdrop of a deteriorating geopolitical sneaker fire (Nike?). I won’t waste much space here, but between the editorial stylings of Anonymous, the absolute (if unsuccessful) effort to turn the Kavanaugh hearings into a pig circus, the breathless anticipation of another Bob Woodward political workover, and the unfortunate ramping up of trade skirmishes, it’s hard not to look at the world with a glaze in one’s eyes and a growing pit in one’s stomach.

But of course and as always the news by no means all bad. The Jobs Report pretty much checks every bling box, so much so that slumbering holders of longer-term U.S. debt, and sold down some of their holdings. Factset is projecting another boffo quarter at about ~+20%.

Equities, though, remain a quandary nonetheless (as do Commodities), but my hunch is that the indices will gather themselves a bit over the next few sessions, before breaking everyone’s heart – yet again — later in the month. Moreover, if the months-long pattern holds (Trump offsetting domestic political bludgeons with accretive policy actions), I would expect some happy noise from the front of the trade wars over the next several days. There’d better be, because the long knives are out against the current administration, and the only defensive weapon at their disposal is one that involves playing offense on the economy.

I’m more than willing to do my share, so, as I sign off, know that I’m logging into my Amazon Prime account to purchase a holy document called “The Art of the Deal”, along with “Our Revolution: A Future to Believe In”, written by one Bernie Sanders, and released on November 15, 2016, exactly one week after the author of the former book, against all odds, won the presidential election.

Who knows? Maybe Donnie and Bernie have more common ground than they realize, and if I find anything of this sort, I’ll be sure to pass it along – to them, and, of course, to you.

TIMSHEL

It May Take a Village (but the Village Lacks a Voice)

Careful readers will notice that in recent weeks, I’ve made an effort (at any rate) to trim down the digressive introductions that are a signal feature of these weekly missives. Know that I have my reasons for doing so. But sometimes it remains necessary to note certain galactic milestones, which, like the cave dweller etchings of antiquity, mark the ebbs and flows of human existence. Such an event took place on

Friday, and I’d be remiss if I allowed it to pass unremarked. On Friday, August 31st, a sister, weekly publication that we admired a great deal put out its last original content. It would be perhaps a stretch to state that The Village Voice went dark on Friday, because: a) it discontinued its print edition a year ago; and b) a handful of loyal e-journalists remain on the premises to perform the vital task of web-archiving its rich, multi-decade inventory of the written word. I’m really glad they’re taking the trouble to do this, because The Voice, whether you agreed with their viewpoints or not, always had something interesting and topical to convey. But insofar as they will never again provide commentary in contemporaneous time, I suspect that soon, the on-line scanning of back issues will assume the same morbid and depressing vibe as taking a trip to the library and reviewing micro-fiche editions of Look Magazine or The Saturday Evening Post. One is no longer reviewing news, but rather history, and whatever one finds therefore is likely to be lacking in terms of bite and sting.

One last thing about The Voice: anybody who connected with it did so in a very personal way, because that was your only choice. For me, it was about columnists like Hentoff, critics like Christgau, and comic strips like those crudely drawn by Lynda J. Barry. The music section takes me back to a long-lamented era when there were actually viable live music options in Manhattan, when you could see Lou Reed at the Ritz, Patti Smith at CBGBs, or even Sly Stone at the Lone Star. So, like legions of others, when the new issue dropped on Wednesdays, I often immediately turned to the music section, to check out those elegantly cropped lineup listings offered by clubs from the Apollo down to the Knitting Factory.

It was also through the VV that I first learned about a disease menacing the neighborhood called Acquired Immune Deficiency Syndrome, – a malady which woulr hover over the existences of my generation for the next decade and beyond. Nobody could stop talking about AIDS for the rest of the ‘80s, but to have first encountered it through the advanced journalistic efforts of The Voice is something I’ll never forget.

So I hope you’ll forgive me my little opening blues riff, which is also catalyzed by our current positioning on the Julian Calendar. August is over, and its ending always brings me down just a bit. Fittingly this year, it resolves itself into Labor Day weekend, and, as my most loyal droogies know, I hate Labor Day.

To me, Labor Day sucks. Maybe this is due to my having long ago cast my lot with Management, a hardpressed group for whom no one ever thought to set aside a holiday from its toils. Nope, instead they gave us Labor Day, and the attendant honor of paying our staffs for the privilege of NOT contributing to the bottom line. But my beefs with the season extend beyond all that. Though I no longer have school age children, and my grandchildren are too young to have begun their formal education, it always makes me forlorn this time of year to see back-packed little fellers at bus stops, heads down in anticipation of 9 dreary months of toeing the line. Really, though, it’s no better for us adults. July and even more so August typically provide ample pretext to put aside unpleasant but unavoidable tasks, because, hey, it’s summer. The later you get into August, the more you can just tell yourself that no one is working, no one is reachable, so why not boot down a bit?

But then August ends and it’s “go time” again. And this year, not only do most of us have some catching up to do, but will be compelled to operate in this mode at a point concurrent to many unfolding dramas that are likely to command our full attention – perhaps all the way up to the point of the Times Square Ball Drop/horrifying Dick Clark hologram re-emergence, and beyond.

My guess is that pretty much every risk factor is in play as we enter the final trimester of ’18, and I’ll take this opportunity to reiterate my call that volatility should rise across most tradeable instruments before we close the books on XVIII. As I am not shutting down this publication, we should have ample opportunity to comment on the action in contemporaneous time, and we can begin almost immediately, but first I want to get another vexing issue off of my chest.

Specifically, after a reasonably promising start to the year, my observation is that from about June 15th on, hedge funds have struggled mightily in terms of performance. With the market up and most funds positively correlated, the implication is one of alpha give-back. I witness this across a reasonably reliable number of funds that I track, but felt a sense of relief when I found corroboration in the following chart:

Some context is in order here. The graph only references long/short equity funds, but my anecdotal observation is that the pattern traverses all strategy classes. Of course, long/short equity has for years been an unstable region of the investment landscape. Contrary to its longstanding branding, only it erratically and partially generates upcapture, but invariably experiences carnage when its benchmarks selloff. But the underperformance on a tape that has been a one-way ticket upward since the problem started is particularly distressing. The closest historical analogue I can draw is to mid-2014, when the markets threw shade all over the tech sector, while embracing “value” names like Johnny John in a manner that might suggest that baby powder had just been invented.

So I’m guessing that a lot of fund platforms may be soon heading the way of the Village Voice, and my sources tell me that the process is already under way. In the current era, the redemption moment of truth tends to coagulate around mid-quarter (the dreaded 45-day redemption deadline), and if my intelligence is accurate, then a goodly number of equity hedgies received their death sentences around August 15th. Again to the extent that I’m “on-theme” here, it may just be the case that the SPX final push through entrenched resistance to multiple all-time highs can perhaps be attributed in significant part to a short squeeze.

I reckon we’ll find out, but suffice to say that I have viewed the > 90 handles glibly dispatched by the Gallant 500 over the back half of August with something of a jaundiced eye.

Time will tell; it always does. But there are a number of reasons why, as I reminded everyone last week, September is the worst calendar month of the 12 for equity investors. Data flows tend to produce dodgy results: nothing but pre-announcements in equities along with macro data reflecting the often-seasonally slow summer. In election years, and this one in particular, the risk premium tends to climb a wall of worry. Then there’s tax selling, portfolio window dressing and kitchen sink negative earnings warnings.

And this month may be an accurate case and point. I will not address the political risks again this week, because hopefully I made my point in the last installment, but they are palpable. On this holiday weekend, progress on resolving these vexing and untimely trade wars appears to shade negative. Commodities continue to be hard pressed, and if you doubt this, just consider the rather astonishing reality that Sugar is down ~30% this year. Why, particularly on a holiday, it’s positively un-American!

Emerging/impaired markets are a raging dumpster fire, with the Argentine Peso joining the Turkish Lira in a death spiral. In a bold, but hardly major league move, the Italian Government thumbed its rhetorical nose at EU deficit guidelines. Investors, in Pavlovian fashion, sold down their bonds to new yield highs.

Argentine Peso:

Italian 10 Year Yields:

Beyond this, everyone who believes they are in the know is also worried about the yield curve, which has fought mightily against inversion – perhaps aided by the sense that there is now, improbably, insufficient debt issuance from those fly folks at Treasury to satisfy insatiable demand:

So maybe the short end of the curve rallies a bit this month, but that probably won’t last either. The smart money says that the purveyors of Yankee debt are likely to ramp up their issuance in the 4th quarter, and, adding to the pricing pressure will be the odds-on likelihood of at least one more Federal Reserve rate hike before the year bleeds out.

But whatever they do, there’ll still be a Twilight Zone-like shortage of government paper available for consumption by ravenous investors, and, for what it’s worth, there aren’t enough stocks to go around either. As a result, any good news drawing forth from that quarter could socialize a rally to even higher highs. My early hunch is that Q3 earnings will crush expectations, and push against a strong geopolitical (and domestically political) headwind.

So, on the whole, I’m expecting it to be adult swim in the volatility markets, starting Tuesday. On balance this is probably a good thing – particularly for those hedge funds not yet toe-tagged but stuck in the critical care unit and desperately in need of a reversal of fortune if they are to carry forward at all.

That not all will survive is a matter of certainty, but then again, nothing lasts forever. Just ask the publishers, staff and readers of the Village Voice. And my morbid suggestion to those that won’t make it is to try to go out with dignity, perhaps taking a cue from the dearly departed weekly whose demise we lament this weekend. Almost exactly a year ago, their printing presses went silent, but not before rolling out a cover featuring a youthful Bob Dylan, circa January 1965, looking at the camera and offering a full military salute. How cool is that? If (when) I check out, I’d like to do it in similar style.

TIMSHEL

Hedge #45: The Chicago Fix for Trump Drama (and Everything Else)

Please take me in earnest about this: I hate writing about politics. Hate it. For one thing, my staff always yells at me when I do, and, being a man of sensitive feelings, their rage cuts me to the quick. Equally important, like those unspeakable points of lower body dorsal human egress, everyone has a political opinion, and, by and large, they all share the same unpleasant characteristics.

But when it’s late summer in an important election year, with earnings in the books along with most macro data, with all playas heading to regions like the Hamptons (or, for stone cold ballers, the Wisconsin Dells), and with mad troubles of various strains a’brewin’ in Washington and other government power centers, do I really have a choice? Didn’t think so.

I ask you to bear with me as I begin with some editorializing. Whatever one thinks about our Commander in Chief (and I am on consistent record in stating that he gives me a headache), one thing is clear: his organization (particularly selected members) has been subject to alarming assaults on their civil rights. Documented evidence confirms that (whatever else occurred), the Trump Campaign was the victim of sabotage by its opponents, working, regrettably, in coordination with members of a sitting government. They were infiltrated without warning. There was deep collaboration between the Democratic Party, the FBI, the CIA and the Justice Department itself. To the extent they found foreign threats, these entities failed to either disclose their concerns or warn the targets – that is, until it suited them to do so.

The process ensued past the election/inauguration, and continued or continues well into the tenure of the present Administration. Some fancy footwork has given us a Special Counsel, who has had free reign to harass and entrap anyone deemed to be useful to his apparent objective: removal of a president by any means necessary. As a result, a couple of shady Administration associates are now convicted felons, and may be ready to say whatever they believe that may reduce their punitive burdens. Trump’s oily lawyer copped a plea, and his reps are now all over the ionosphere seeking money and other forms of assistance to support his efforts to abet the takedown. His drive-by former campaign manager stands convicted of crimes that will certainly send him to prison for the rest of his life. None of the charges that have taken hold of either, er, gentleman has anything to do with the mission of the Special Counsel’s Office when it was originally framed. As I understand the current situation, because Attorney Cohen has implicated the President in the unproven and seldom-prosecuted crime of diverting campaign funds for personal benefit, there’s now a socialized theory going about that casts Trump as an unindicted co-conspirator, evoking cries for his immediate resignation.

OK; fair enough. But I offer the following warning to anybody watching this episode with a measure of glee. You yourself (or someone you admire or support) may someday find that empowered, aggressive political opponents instruct the guys with the hoodies to break into a lawyer’s (or close associate’s) office and home and confiscate everything in sight, with an objective of finding dirt on their target. Perhaps they find something unrelated or more than a decade old. The unfortunate associate may then land himself (or herself) in solitary confinement – a step that former uber-cop/current Trump acolyte Rudy Giuliani only took once during his storied tenure as a prosecutor: in response to Colombo Crime Family Boss Carmine (the Snake) Persico’s offer of $200K to kill him.

But this, my friends, as Rachael Maddow said on election night, is our country now, so I reckon we’ll have to take it as we find it.

By all accounts, the market has ignored these proceedings, as the Gallant 500 fought its way through sustained resistance to set an all-time record close on Friday. Again, fair enough, but I’m going out on a limb to suggest that investors won’t be in a position to ignore political considerations from their valuation calculus for much longer. It strikes me that the sequencing of these cable news-dominating events is entirely political in nature, and if I’m correct on that score, then we can expect an upping of the ante in the weeks after the Labor Day hiatus. I strongly suspect that Mueller will release at least a preliminary report on his quixotic quest to connect the Trump Campaign to Russia by late September/early October. If so, it is certain to be filled with a passel of innuendo – all designed to put his fat thumb on the scales of the mid-term elections for the benefit of the Democrats. To whatever extent he’s successful in doing so, it will likely add to the already-material probability that the Dems recapture the House, and maybe even the Senate.

In terms of investment fortunes, there’s a lot riding on all of the above – even for those that don’t particularly care who pardons the turkey on the Thanksgiving Day White House lawn. Even a slim Democratic House majority (to say nothing of an entirely plausible broad one) would be absolutely impelled to begin impeachment proceedings almost immediately after the 116th Congress is sworn in on January 3rd. As I’ve stated previously, I don’t think the Democratic Leadership is overly warm to this notion. I suspect they’d much rather keep Trump where he is — as an Orwellian/Goldstein-like foe — at whom they can take shots all the way up until 2020. But millions of their constituents (including, notably, most of their big donors) will not allow them to do so. They will demand that the Leadership do everything in its power to place that big orange head, with its one of a kind hairdo, on a silver platter.

Of course, based on what is currently known, they don’t have a prayer of winning an impeachment trial – a nigh-impossible task requiring 2/3rds of the Senate to vote guilty. But I think the process will be an ugly one. I suspect, for instance, that millions of Americans on the other side of the spectrum, who would on the whole prefer to mind their own business, will finally lose their patience. And rightfully so. Elections cannot be justifiably overturned on the basis of 15-year old, tax evasion crimes committed by subordinates, or because a middleman paid off some women to keep quiet about decades-old affairs.

As these matters unfold, the parallels to the Whitewater investigation of 20 years ago come eerily into play. Then, just as now, a dubiously appointed Independent Counsel received a mandate to look under rocks, and (of course) he found some bugs. Folks who probably shouldn’t have gone to jail faced prison terms. Unseemly details about a president’s private life (that had nothing to do with the original investigative mandate) took center stage. The accusing political party hopped on the Impeachment Train and tried to ride it all the way to the Office Removal Depot. Not only did they get thrown off the tracks, but they paid a terrible political price at the next voting cycle. Meanwhile, a wickedly strong equity tape continued unperturbed, and didn’t hit any air pockets until a couple of years after the episode fizzled out.

Sound familiar? Well, yes, but I’m not convinced that we can expect the same happy outcomes here. To be sure, the economy looks strong, and market participants are positively giddy. But this time ‘round, we have no internet revolution to propel us to higher valuations like an angel ascending into the heavens. Trump never had the personal charm of Bubba, and, for that matter, when he did get elected, he received approximately 3 million fewer votes than Bubba’s long-suffering, insufferable wife.

So, particularly if I’m correct about Mueller sticking to the political timetables and attempting to drop his load at a point of maximum damage to the governing majority party, I suspect we’re in for a rocky ride in the markets over the next few weeks. This will be particularly true if the bomb he detonates comes earlier rather than later in September. It bears mention, here, that contrary to popular conception, September, not October, is the historically-worst performing calendar month for equities, and this by a wide margin. The Q3 earnings cycle doesn’t begin till October, so no help can be expected from that quarter. Fed Chair Powell has all but committed himself to a rate hike, to be announced a short week after Yom Kippur.

Meanwhile, not only are investors snapping up equities to beat the band, they are also purchasing longer-term government debt at a frenzied pace. As a result, the U.S. yield curve is now flatter than even Japan’s, and looks ominously like its headed towards full-on inversion:

Who’s to say, before the above-described worst happens, that these happy trends won’t continue? Plus, if the demonstrated (if uneven) political skills of the current Administration come into play, there’s every likelihood that they will pull rabbits out of their own hats. Perhaps trade deals with China and Mexico; maybe a big temporary fiscal stimulus on their part.

I certainly don’t expect them to roll over and get stiffed by hostile actors across the opposition party, the media, and selected members of their own administration.

Thus, once we get through the Labor Day ritual, I am projecting a significant increase in volatility – perhaps in both directions. This will be difficult to play in the markets, in what has already been an extremely frustrating year for professional investors.

I casted about for an answer, any answer, to this dilemma, and, perhaps out of force of habit, my search took me to my home turf of Chicago. This, arguably, is the birthplace of the “borrow your way out of debt” School of Finance, and, as those who are paying attention are aware, they’re up to their old tricks again. Facing $28B of unfunded pension liabilities and an additional $9B of delinquent payables – all against an annual revenue budget of $8.5B, the custodians of the City with the Big Shoulders have all but committed to the biggest debt issuance in the history of municipal finance. Specifically, the Chitown crowd is likely to lay some $10B on the market within the next few weeks, at a projected rate of between 5% and 5.5%. But not to worry, they’ve got a plan: they’re going to invest the proceeds in the market and are certain to get a rate of return of at least 7%. If you doubt they’re ability to do this, just ask them.

By my math, they’ll book a ~1.5% spread here, allowing them to pay both interest and principal down by, say, the year 2050 – all at no incremental cost to taxpayers.

And now, at long last, I’m able to reveal my 45 hedge: invest with the Chicago Pension System. You are guaranteed a rate of 7% under any and all market conditions, and if you’re greedy, you can do like they do in the Windy City and even lever the trade up.

By doing so, you will be immunized against any adverse developments in Washington, Wall Street, and, for that matter, Brussels, Tokyo, Pyongyang, Beijing and even Moscow.

This was a bold move by my Midwestern peeps, and I salute them for it. It took guts and vision – particularly in a year when both the Mayor and the Governor of Illinois must face the voters. However, nothing in this world is either certain or can be taken for granted. So, my backup approach, which I will call the Pritzker plan (in homage to the likely winner of the state’s gubernatorial race), involves being born into one of the richest families in the country, and spend your days dreaming up ways to help the less fortunate – all while keeping your big fat wallet intact and growing.

And this, mis amigos, is about the best I can offer in this quickly elapsing summer of discontent.

TIMSHEL