Runaway Train

Runaway train, never coming back,

Wrong way on a one-way track,

Seems like I should be getting somewhere,

Somehow I’m neither here nor there

— David Primer (Soul Asylum)

Let’s begin with a brief as possible sojourn into passably edgy Early ‘Nineties Alt Rock, which, I tell you fairly, is not my particular jam. So let’s get this over with. Our title track comes to you by way of the Minny-based outfit Soul Asylum, amounting perhaps their only recognizable song and certainly their only hit. I’ve kind of cottoned to the riff on my guitar and think the boys did a good job here; that’s about it.

But that ethereal, eternal theme of a runaway train seemed like as good a place to begin as any, so let’s do it. Begin, that is.

I am delighted to report that after one ripper of a week, into which we entered through the dark tunnel of my published fears that our equity indices might be losing momentum and not even produce the low end of triple digit returns this year, we’re back on track. The Gallant 500 has re-fired its engines — up to an annualized rate of >124%, Captain Naz is revved up to 136%, and that often-overlooked super steamer powered by Ensign Russ churning at a rippling 224% rate.

On balance, we can therefore perhaps state that it was a good week for bullet trains, but not unilaterally so. Shortly after my CA high speed rail project screed, newly minted Governor Gavin Newsome announced a decision to scrap the effort – at least insofar as it aspired to connect by hyper-locomotion those quaint little villages of Los Angeles and San Francisco. All, however, is not lost. The initiative will shoulder on with its plans to build a bullet between the thriving metropolises of Merced and Bakersfield. As the Governor pointed out, this will be a major boon to the misanthropic residents of that corridor. Now, I’ve never had occasion to visit Merced, but I was born not too far from the field of bakers, and have kicked it more than once with my crew there. My biggest memories are of two dominating forces: auto racing and churches, big-a$$ churches. I take great comfort in the fact that sometime next decade, the residents of these two urban colossuses (and those of points in between) can speed their way to a NASCAR event or an old school revival rally. I think, once some track is laid and the engines mounted, ambitious Merceders may even be able to wake up on a Sunday morning, take in some old time religion, catch a race, and make it back home for family dinner.

The other signal event of the week, of course, was the decision by the Almighty Amazon Corporation to abandon plans to establish an HQ2 (or HQ2a) in the Long Island City Section of Queens County, NY. This, of course, was viewed as a great victory by the same political forces that envision a Shangri-La of high-speed electronically powered trains across this great land of amber grain waves — so effective, comprehensive and efficient that it will remove the blight of airplanes infecting our spacious skies. That some of this track may force its way through majestic purple mountains and dissect/disrupt fruited plains is a subject that has yet to be addressed, but I’m sure they’ll get to it sometime or another.

Now, I will cop to sharing prog-like squickiness about the whole AMZN HQ2 thing, which featured a lot of promises from Team Bezos, and caused at least a hundred cities to come begging with treasures to play host to the one-time bookselling concern — only to be forsaken in favor of the two municipalities where they were best positioned to expand their considerable power (NY and DC). As such, a certain feeling of sangfroid is nothing about which any of us should be ashamed. In fact, the whole thing reminds me of the wholesale heists pulled off by innumerable sports teams who have forced their towns to gift them glittering new stadiums and/or arenas, lest their capitalistic extorters, with crocodile tears in their eyes, follow through with their threats to pack up their squads and move them to the embracing arms of another jurisdiction. The worst of these offenders, at least to my knowledge, is the New York Yankees, owned of course by the billionaire shipbuilding Steinbrenner family. They demanded a cool $1B from us Empire State taxpayers, which of course turned in to more like $2B. Bear in mind that this was 2008, when NYC was awash in fear. I haven’t been to the New Yankee Stadium, and even resisted the temptation to turn up there when my Wisconsin Badgers put their 2nd straight beat-down on the Miami Hurricanes in the Pinstripe Bowl. I had already been hating on the Yankees anyway, and had been hating on them for quite some time but every time I drive by that stadium, the dubious gift to these fat cats (to which I contributed material amounts) reminds me why this is the case.

Still and all, I can’t completely fault Amazon for grabbing with both hands what was theirs for the taking. And New York would’ve in all likelihood seen a speedy return its $3B investment. But as I mentioned last week, we must render unto Bezos what belongs to Bezos, and it was a pretty easy and slick move on his part to convey the message that, deal notwithstanding, if you don’t Amazon to come, it will stay away. Some businesses and consumers in that forlorn section of Queens are of course left holding the bag, but hey, they’ve got the promises of the dream girl that represents a contiguous district in the Boro to carry them through.

Perhaps at greater issue is the potential joining of a battle whose time for action is, if anything, overdue. We have all watched with great discomfort the dubious alliance between America’s most powerful corporate concerns and the increasingly self-righteously empowered progressive left, and wondered about the elephant in the room. In an arrangement that, writ small, resembles the 1939 treaty of non-Aggression between Nazi Germany and the Soviet Union, both sides know that they must at some point do deadly battle, but both realize they’ll be better to defer hostilities to future points of their own choosing. So, as long as major TMT companies parrot the appropriate progressive orthodoxy, hire Chief Diversity Officers and the like, and underwrite progressive causes with their seemingly unlimited supply of capital, as long as prog groups (and I’m not referencing Emerson, Lake and Palmer) are recipients of these financings and can use the forums to advance their messages, the uneasy alliance sustains itself. But to my way of thinking, it only sets up for a bigger showdown between these forces down the road. Those Big Tech companies are capitalists with capitalistic agendas, capitalistic modes of operation, and as much power to advance their schemes as anyone this side of John D. Rockefeller, Sr. They are headed on a collision course with the redistributionist dreamers in green fairyland, and it will be quite a spectacle to observe.

So the CA bullet train goes from nowhere to nowhere, and Amazon, while clearly going somewhere, will not point its runaway train towards NYC, so no high speed train from Seattle to Long Island City is at the moment urgently required.

And meanwhile, the economic signs at the switching stations of the landscape are flashing not green, but yellow. Recent macro data (albeit likely skewed downward by that tragic, five-week partial shutdown that heartbreakingly imposed 5-week paid vacation on about 800,000 bureaucrats) has shaded toward the dismal. The delayed December Retail Sales number of -1.2% was so bad that it has many economists smelling some sort of fix. Of course, by now we should be already processing the January report, but that number is delayed till 2/25, placing those interested in the odd position of being compelled to review two monthly reporting cycles in the space of two weeks. And this time, there’s not even a survey (at least yet) by which to benchmark consensus. On the other hand, if the December bomb was indeed an empty payload, we’ll know by virtue of the contents of the January print.

Meanwhile, the Inflation numbers came in like zombies, and it looks like the GDP juggernaut is feeling some significant gravitational pull:

Maybe it’s a Super Bowl hangover, spurred on by embedded cranial images of Adam Levine’s ink, but the Atlanta Fed’s Q1 projection has dropped by some 40% in less than a week.

I intend to pay attention to these trends and believe it would do you no harm to do the same.

Investors, however, and as is their prerogative, are cheerfully ignoring these tidings. The Q4 earning season is entering its last innings, and, as indicated below, it’s been many a quarter since capital allocators have taken in bad news in such forgiving fashion:

The implied message from investors is this: don’t worry if you bitched up the quarter. We know you did your best and let’s go get ‘em for the rest of 2019 and beyond.

I must admit: this attitude of charity is a bit unique in my experience, and I have an uneasy feeling that it won’t last forever. My read is that there’s a good deal of pressure on CEOs to deliver over the reporting cycles that confront them in the near term.

And, much as we’ve enjoyed contemplating a set of equity benchmarks projecting a more than doubling over the full course of 2019, it may behoove us to look at the hard facts of the current rally. The best annual return ever recorded by the Gallant 500 was 46.6%. And that was in 1933, which few of you likely remember, but (trust me here) was not a particularly wise time to be fully invested. It has only exceeded returns of 30% a handful of times since then. The newer Naz clocked in at 85.6% in 1999. But whatever one can say about current conditions in the global capital economy, I think we can agree on one thing: this ain’t 1999. The party may not be over but it’s well past the point of its introductory surge.

So, best case, the near-certainty is that the equity complex bullet train will slow, stop, or even reverse across the next 10.5 months. It could still be a very good year for investors, but even now, I suggest y’all ask yourselves the following question: back on January 2nd, if you could have locked in a full-year 2019 return of 10.72% on the SPX, 12.62% on the NDX and 16.36% on the Russell 2000, would you have taken it? Thought so. Well, that’s where we are right now. And I ask you to take this into consideration in your determination of risk profiles on a going-forward basis.

But on this wintry weekend, let’s hail the bright side. The Fed is on ice, the Chinese appear willing to deal, and, wonder of wonders, the Federal Government is even funded. I recall that a couple of weeks back Pux Phil failed to see his shadow, foretelling of a short winter. And, from a market perspective, he may be right; the green shoots of February are indeed a welcome sight to these decaying eyes of mine.

And then of course we’ve got those trains coming. Big, beautiful trains, all painted in emerald hues. So let’s forget Soul Asylum, shall we? How could we possibly be going the wrong way on a one-way track? Yes, we should be getting somewhere, and if Team Bezos is any example, we may indeed be neither here nor there. But we’ve been there before, and will be again. It falls upon our lot to deal with all of it.


Exile on Flame Street

Come on, come on down, Sweet Virginia,

Come on, come on down, I beg of you,

Come on come on down, you got it in ya, uh huh,

Got to scrape the sh!t right of your shoes…

— Mick and Keith

Exile on Sane Street? Brain Street? Blame Street? Wall Street? It matters not. This week, we pay tribute to what is widely acknowledged to be one of the greatest records ever produced for public consumption: The Rolling Stones’ “Exile on Main Street”. Some, including yours truly, believe that this album marked the high point of “the world’s greatest rock and roll band”. Mick and Keith were at the height of their artistic powers, Charlie was in the pocket as always, and Mick Taylor had found a magnificent (if temporary) niche in the ensemble, as a replacement for the luminous but misanthropic Brian Jones. They had their moments after that. The follow-up: “Goat’s Head Soup” was almost as good. But from there, with the passage of time, with each new album release more banal than the last, their increasingly diminished edginess became more difficult to overlook. While I love the lads, I think it’s mostly fair to say that they’ve been mailing it in for the better part of 35 years.

We feature Exile for two reasons. First, the title derives in part from the reality is that it was recorded in the South of France, as band members, tired of paying 95% tax rates to Her Majesty’s government, and justifiably concerned about associated wealth seizure, decamped to more that more favorable financial jurisdiction. In other words, the Stones had become tax exiles, and, given the general tone of the fiscal debate in this country, I felt that a featuring of the topic was, shall we say, timely. As this note goes to press, the 116th Congress and other sub-legislative bodies are busy outflanking themselves as to who can catalyze the biggest cycle of tax exodus achievable. There are proposals to set the top income levies at 70%, only to be outdone by nostalgic souls who would like to revert back to the post-WWII top bracket of 90% (which no one paid due to myriad loopholes that no longer exist today). As referenced in recent posts, one truly energetic (though identity challenged) senator/presidential candidate has floated the idea of a wealth tax – one that is not likely to gladden the hearts of the paymasters that are needed to fund her desired move to 1600 PA Ave.

And there are lots of ideas as to how to use this gusher of new money that would presumably roll in — unimpeded from eager high earners/fat cats who never really cared about themselves (only wanted to help the less fortunate), and as managed, of course, by selfless public servant who have no private agendas and who would no doubt spend it with flawless efficiency. We can rebuild every structure in America! We can offer a nice little stipend to those unwilling to work! Best of all, we can replace fossil fuel- hoovering cars and airplanes with a network of high speed trains that will get anyone anywhere they want to go in a jiffy, at lower personal expenditure, and at great benefit to society and its component parts (i.e. humans).

What could possibly go wrong? Well, to begin with, the high-speed rail crew may want to take a look at the Cali bullet train project. 10 years into the effort, the Cali bulleters have burned through $10B, but here’s the good news: the first leg – that uber-dense, car-choked stretch of land between the thriving hubs of Madera and Bakersfield – may be ready to actually transport some passengers by 2025, some 17 years after the launch of the initiative. Yes, it may be ready, but here’s a risk management tip: I wouldn’t bet the ranch on it. If one cares to look even further back into history, to the construction of the Interstate Highway System in the 1950s, one sees many thousands, tens of thousands of homes and businesses being uprooted. Can you imagine what it would take to build a train system from any Point A to any Point B on the map today? In these troubled times, when a stray word, a questionable look, and any minor inconvenience spawns a pant-load of lawsuits, the only job creation I can envision associated in bullet train fairyland is an infinite amount of billable hours for the future attorneys of this great nation.

Oh, even now I can feel the flames.

All of which brings us to our second motivation for our Exile theme. Across the great divide, the rhetorical flames perhaps burn hottest in the Commonwealth of Virginia, Sweet Virginia, for whom the best song on the Stones’ best album was named. I won’t extrapolate overmuch here, other than to say that yes, you got it in ya, and that you GOT To scrape the sh!t right off your shoes.

But if investors are feeling the fires in terms of any of this, they’re not doing much to show it. Equity markets did indeed cool down a bit over the past few sessions. It was by and large a flat week for U.S. indices, and it saddens me to report that this stasis leaves the annualized return for the Gallant 500 at a beggarly 105%. On the whole, however, I find the price action encouraging, as, particularly late in the week, dark forces were clearly attacking it, with little to show for their efforts.

One asset class that remains en fuego, however, is the global bond market. It would seem that there is no amount of paper that sovereign jurisdictions are able to issue that is not immediately consumed by the fires of global demand. Just this past week, our own Treasury brought to auction an impressive $150B of debentures – across the curve – and it did nothing but socialize a rally at every maturity. The godforsaken Italians put out 30B and the issue was overbid by about 50%. Contemporaneously, JGB yields are again negative – this time out almost 30 years, German Bunds command an annualized return of 0.085%, while their neighbors: the always accommodating Swiss, now charge nearly 40 basis points for the privilege of lending to them. True, French rates are at a near-usurious half of a percent, but then again they do have that whole yellow vest thing to finance.

And the corporate buying binge continues apace. The week brought tidings of (regulatory approval, of course, pending) nuptials between two large southern banks: BBT and Suntrust. This would be the biggest bank merger since the crash, but across all sectors, more are likely to be forthcoming. In particular, I’d be keeping an eye on Big Tech and Big Pharma for revelations of items on their shopping lists.

And what’s all of this telling us? Well, like I been saying, there’s just too much cash sloshing around chasing too few securities. It’s probably true that the global economy is slowing, and, by way of corroboration, one need to look no further than the performance of the Baltic Dry Shipping Index, plunging like a mofo since the summer:

Now, tempting as it is, I won’t try to hold myself out as an expert on the Baltic Dry. Suffice to say that it is a measure of shipping activity and associated costs, and as such, is viewed by many smart folks as a leading indicator of the well-being of the global capital economy.

And right now, as of the end of the first full week of February, it is annualizing at -99%+, which I reckon ain’t so good.

So, with rates on a one way ride on the “down” escalator, and amid indications of an economic slowdown other than acquire market share and/or retire stock, what’s a CEO to do?

We’re most of the way through Q4 earnings and pretty much done with anything about which anyone should care. The projections for the full year of 2019 did drop below the socialized Mendoza Line of $170/share on the SPX this week, and the trend-lines aren’t pretty. But hey, it’s early in the year, and if nothing else, there’s always the above-mentioned acquisitions and buybacks upon which to fall back, now isn’t there?

In terms of the upcoming week, there are two important deadlines to consider, both of which happen to fall on Friday. First, the historic 3-week budget deal struck in January expires on that day. And, while the legislatures are at it, they may want to fold in something that also expands the debt ceiling – perhaps permanently – as our ever-voracious Treasury is expected to reach yet another limit of its statutory borrowing powers – the 10th such milestone this century – on or about March 2nd. The latest headlines indicate that the two sides are yet again at an impasse, but I’m not overly concerned. Because if there’s any topics upon which politicians can overcome otherwise intractable differences, it’s their pressing need to spend borrowed money.

Feb 15th also marks the 45-day hedge fund redemption window, and, like the market rally itself, it looks like perhaps my clients and their peers may dodge a 100-year flood. Absent the post-Christmas equity melt-up (in which most funds at least nominally participated), the deluge did appear to be in the offing. However, I suspect that the numbers now will be more benign, and, from a personal perspective, I will thank God for that.

There’s not much else on the immediate horizon that appears likely to either enchant us or vex us, so I’ll close with a couple of risk management warnings. First, Thursday is Saint Valentine’s Day, and I suggest that those who do not wish to be flamed by their flames take the trouble to adhere to prevailing protocols.

Because, with extreme negligence, they risk complete Exile from Flame Street. And as for the Stones, they remain tax exiles from their native United Kingdom. Mick Taylor is long gone, replaced by the accessible but uninspiring Ronnie Wood. Bassist Bill Wyman, now an octogenarian, also split the scene, replaced by Daryl Jones, who contributes much, but somehow has not been granted band membership status. My advice to them is that the clock is ticking, and that they should amend this oversight before it’s too late.

The band is now said to be working on a new album – their first containing original compositions since 2005, and will take the material out on their 1,223,407th World Tour. But in terms of the locus of the studio, you can bet your boots it will be outside of the reach of Inland Revenue. Mick spends a great deal of time in New York these days, and if he’s following the news, he may be aware that state tax revenues are sinking like, well, sinking like a stone, and that even Governor Cuomo has warned the masses that they can only tax the local fat cats so much before they pull their own en masse Exile from the Empire State.

For this reason and others, it may behoove us to watch them, and pick up some pointers to deal with what may be the menacing reach of our own revenuers – which may be coming to a venue near you, and sooner than you think.


The Continuing Rally of 2019: Baby It’s Cold Outside

I am told that our titular theme bears the same name as a song that evoked some controversy this past holiday season. In my distracted state, as I was watching with horror what amounted to a wholesale plunge in global equity valuations, I must’ve missed it. Yeah, I know the song; it doesn’t fill my pencil with lead, and part of me wonders what the fuss is all about. But lord knows, in this time of heightened sensitivities of every shape and size, where long-established idioms of communication can be transmogriphied into triggers and dog whistles, I don’t wish to offend anyone.

But Oh baby, it’s cold outside. Or was.

Midweek, my home turf of Chicago registered some of the lowest temperatures in recorded history. There’s been a great deal written, said and filmed on this topic, but to me, one fact captures the torturous physical reality of the arctic blast more than anything else. For the first time in its history of world class erudition and scholarship, The University of Chicago (one of my three alma maters), actually cancelled school. Ye Gods, they didn’t shut down during the Blizzard of 1967, and the only reason no classes were held in the wake of the Great Chicago Fire is that the University itself did not exist, would not be formed for another 20 years. Must have been pretty cold on the Midway last week.

And the mercury wasn’t the only thing plunging in the Windy City. The (somewhat) widely watched Chicago Purchasing Managers Index took a polar plunge on Thursday as well:

I really don’t want to make too much of a thing of this. After all, it is Winter, and drops of this nature (as well as those described above) are perhaps nothing more than what the Good Lord intended.

And yesterday was Groundhog Day, which, at least for me (along with Mardi Gras) is the point at which it becomes appropriate to begin the countdown to longer days, warmer temperatures and (dare I mention?) Green Shoots sprouting from the now bare trees and frozen ground.

Meanwhile, temperatures in the market have remained, well, temperate. Our equity indices put up an impressive run last week, to cap off the best January in, well, in quite a while. I must somewhat shamefully admit that after the previous week’s somewhat tepid performance, I was harboring fears that the triple digit annualization rate, so enthusiastically celebrated in these pages, was unthinkably at risk. But this past week renewed my faith, and I’m happy to report that all of our benchmarks regained sufficient vigor to suggest that their doubling or more this year is still in the cards. Winding the clock back to Christmas, each of them looks like a 3x. Or better.

And there’s still better news that I am able to share. Returning to our holiday theme of addition by subtraction, I feel that the miraculous rally is, at this point, justified by the underpinnings of the global capital economy. By way of elaboration, I must dwell yet another spell in the realms of the Ghosts of Christmas (Recently) Past. 5 weeks ago, as we all sipped upon our egg nog (or other strong waters), there was much on the investment horizon to disturb our seasonal tranquility. Earlier that week, the Fed had not only hiked rates, but done so with rude, aggressive accompanying language. The trade representatives of the United States and China were at long daggers. The economy was showing signs of deceleration, and all along the corridors of Wall Street, there was banter not of Peace on Earth and Goodwill to Men, but rather about Peak Earnings and Recession.

There was, in summary, a great deal to vex our troubled souls as we contemplated our return to our investment battles on January 2nd. And somehow, since that point, virtually every catalyst for short-term consternation has broken favorably.

As we entered the last week of the month, the tailwinds were already gathering. Fed rhetoric had softened, as had the dialogue between the Trump and Xi factions. But byy the 2nd full week of January, it was time to undertake the often-arduous task of hunkering down and dealing with what looked to be a very iffy earnings cycle.

All of which led up to the events of last week, by far the most important Monday-Friday series of this young year. And by god it was a good one. The major action began after Tuesday’s close, when Apple CEO Tim Cook took to the podium. His performance won’t go down as one of the Company’s finest, but in the wake of his January 2nd tape bomb letter, the consensus was relief that Apple was able to hit at least the low end of the socialized ranges, that trade-related slowdowns in China accounted for more than 100% of the revenue and earnings shortfall, and that its recently lauded service business had a blowout quarter. Apple, in other words, has yet to complete its Newtonian destiny and hit the ground full stop.

Investors breathed a collective sigh of relief, and girded their loins for a Wednesday session that would likely set the tone on a going-forward basis. It began with Chairman Powell’s FOMC testimony, which in addition to the happy and expected announcement of a “stand pat” on short-term rates, featured pledges to the masses that his crew would be patient in terms of its overall rate normalization objectives. Well, the markets swooned with delight, as well they might’ve, particularly given the cooing and wooing language emanating from the U.S. and China in the wake of Wednesday’s trade summit.

And, just as investors were catching their collective breath after some frenzied buying into the close, the stage was set for the quarterly reporting rituals of Microsoft and Facebook. In terms of the former, the Company generated better than expected results in its cloud and other business service units. Its guidance was similarly encouraging. However, in a perversely encouraging sign of higher expectations for U.S. companies, the response was tepid, and the stock has actually traded down since the announcement.

We now come to the quixotic case of Facebook, which endured about as difficult a 2018 as any of God’s favored should ever be forced to withstand. At the end of the their Q3 earnings call, in one of the most astonishing “oh-by-the-way” events in quarterly reporting history, their CFO actually guided down for the next three years. Well, what a difference a couple of quarters make. The Company announced blowout numbers and told of its gleeful optimism for the future. Investors, of course, responded with an unmitigated thumbs up, and the stock regained over 10% of ground it lost during the dark year of MMXVIII.

The final earnings bark of the week by the big tech dogs came from Amazon, after the close on Thursday. Team Bezos, too, beat every marker but suggested caution in terms of the remainder of MMXIX. But Amazon is Amazon, and we must render to Bezos what is Bezos’s (except, of course, what his soon-to-be ex-wife’s lawyers wrangle out of him). Investors weren’t impressed, but I was. Their macro-critical business unit: Amazon Web Services, in my mind a leading indicator of business sentiment, clocked in with a whopping 45% increase in sales; 61% in Operating Income. Let’s face it, guys and gals, it coulda been a lot worse.

Next week brings the Alphabet Googlers to the podium, and I don’t think they’ll disappoint – at least by much, and, by the time they’re done, most of what we care about in terms of earnings will be in the books. It has not been, by any measure, a blowout quarter, but the SPX looks poised to meet or beat the aggregate, full-year Mendoza Line of $170, and when I asked a number of investment warriors whether, back at Christmas, they would’ve been satisfied with corporate performance as it appears to us today, the answer was a resounding, unilateral yes.

The week ended with a highly gratifying January Jobs Report, which only the dowdiest of Debbie Downers could evaluate with a jaundiced eye. Non-Farm Payrolls blew through the partial government shutdown and spit out more than 300,000 new permanent gigs. Labor Force Participation increased, and even my acquaintance Debbie D was forced to admit that the figures showed no signs that the American economy is grinding to a halt.

So, as compared to all that Christmas agita, we are now operating in an environment where the Fed is on ice, America and China are converging in their trade dance, earnings are showing a stronger than expected pulse, and the domestic economy is chugging along in robust fashion. I feel, therefore and on balance, that the risk overhangs of the market have dissipated dramatically, and that the underpinnings of the V-bottom are by and large justified.

As to what happens next, well that’s another matter entirely. I kind of doubt that all of this good vibe news will catalyze an extended rocket ride; in fact, a strong argument can be made that stocks are at present fairly and fully valued. But I think that the winds have broken favorably in divine fashion and my main takeaway is as follows. Investors now have my blessing to put their full positions on for any name for which they have done the appropriate work and drawn constructive conclusions. Such a statement hardly puts me out on much of a limb; such a blessing, in a better world, should be the rule rather than the exception.

But I haven’t felt this comfortable since the summer. It’s been 6 long months since the macro risk overhangs have been this benign, so when I offer my blessing, it might be well to, well, count our blessings.

I’m also happy to note that temperatures in the Chicago have risen more than 50 degrees since that polar vortex blew threw town. To the best of my knowledge, classes have resumed at the city’s eponymous university. On the other hand, it’s still February, and the frigid gales may not have fully run their course.

The mercury and the index charts could always take a southbound turn. However, while it as always behooves me to urge caution, perhaps we can take a moment to enjoy the gentle breezes while they continue to blow.


The Continuing Rally of 2019: Still Spittin’ Mad Game

Let’s begin with some Newtonian physics, and before y’all run for cover, I’m referring to the basic, arithmetically-driven laws of motion; not the calculus he is also purported to have invented. In terms of the latter, I myself (truth be told) have done more spit-balling than spitting mad game, but on the whole have few regrets. Calculus, like many God-given/human enabled tools, can be as complicated or as simple as one chooses to make it. With apologies to Robert Frost, I have taken the road (i.e. simpler) more travelled, and that indeed has made all the difference.

But more pertinent to our present concerns, it is with a mostly serene mind that I report to you that last week’s across-the-board rally notwithstanding, the SPX 2019 annualized return has dropped over the course of the week from 263% to 144%, the NDX’s from 308% to 177%, and Russell 2000’s from 582% to a beggarly 300%.

Annualized index returns, in other words, are adopting the path described by Newton’s proverbial Apple (as driven in part by the sad recent stock performance of the orb’s consumer electronics namesake). Still and all, with year-end gains projecting out well into the triple digits, where I come from, this is referred to as spitting mad game.

In fact, for my money, last week’s action across many markets was the most gratifying thus far this young year. After a pre-MLK Day interval of rocket rides, I believed that the stage had been set for perhaps a modest correction – one which never transpired. When trading resumed on Tuesday, they tried – and failed – to smack ‘em, and tried again on Wednesday morning. But by that afternoon, the Gallant 500 began a regathering cycle that was sufficiently robust as to enable it to end the week above its 50-Day Moving Average, and place it within a stone’s throw of the 100 Day and 200 Day equivalents. Moreover, all of the action transpired within a top-to-bottom range of barely 2.0%. Part of the gospel which I have so long preached to you is that sustained rallies require intervals of quietude – low volatility – to confirm their validity. So this past week’s dull action, ending as it did with indices at or their (holiday-shortened) weeklong highs, is just what was needed, validation-wise. In the (again) Newtonian world of investment, this is the functional equivalent of spitting mad game.

So my hats off to mad game spitting investors everywhere, who showed their cajones, among other ways, by shrugging off even weak performances at the earnings podium, and buying ‘em anyway:

That’s right, friends, even those CEOs who dropped tepid numbers and/or sheepishly suggested that their business outlooks required a downward expectations boot were rewarded, on balance, with heartwarming rounds of purchases.

However, I hasten to remind my readers that we’re not even a quarter of the way through this rather critical earnings season and that what has yet to be revealed is likely to be more pertinent than what has already been disclosed.

From this perspective, we’ve got an important week indeed coming up kids, with many of the stone cold ballers of the U.S. equity complex reporting, in frenzied sequence, midweek. The action starts in earnest Tuesday afternoon, with Apple’s Tim Cook hopefully atoning for that buzz-killing letter bomb on our collective @sses he dropped on January 2nd. Wednesday, we hear from Microsoft (and, for what it’s worth, Facebook), and Thursday brings tidings from the soon-to-be-single-and-less-wealthy Mr. Bezos. I am fervently hoping that these guys and gals are preparing to lay some irrational projectile saliva on the rest of us, particularly taking the form of uplifting forward guidance. I don’t much care how fat the bottom lines are, but will be paying particular attention to the prognosis for the growth of their business service units, as these will be highly instructive from a broader economic, mad game spitting perspective.

The Mad Games continue in other relevant dominions as well. Without much fanfare, the FOMC meets this week, but I expect Chairman Powell’s rate hiking mouth to be dry. To the extent, however, that he does hock one up, we can hope that it has the same viscosity/consistency as that of Friday’s WSJ reports that the Fed is rethinking its balance sheet reduction commitments, and may not engage in further sell downs at all – at least for the time being. I can’t emphasize enough how helpful this would be, so perhaps the following pictures will reinforce the point:

Ghost of CB Balance Sheet:

Past Future (?):

To synthesize, any way you look at it, over the past decade, whenever Central Banks have been net buyers of paper, it has created a rising tide for our Gallant 500. Conversely, as they have divested (to mix metaphors) it has created headwinds of problematic proportions. And, as to Wednesday’s FOMC presser, I will cop to being a bit nervous. It would appear that anytime the Fed changes its tone in either direction, the market overreacts. To the extent (as I’m fairly sure is the case) that Chair Pow would just as soon NOT be influencing pricing on a day-to-day basis, he may very well at least obtusely seek to refute published reports of a pause. By my count, he’s reversed himself 3 or 4 times since Thanksgiving alone, and the whole thing is getting to be rather wearisome, now, isn’t it?

Wednesday’s action is also graced by an important sit down between U.S. and Chinese trade representatives, and we have already covered in this space the vital impact of either positive or negative vibes emanating from those quarters. After all this, we can anticipate Friday’s Jobs Report, which will be released after all in the wake of our elected officials’ miraculous decision to set aside their intractable differences to re-open the Federal Government for a 3-week détente. Though it pains me to admit it, while both sides were clearly spitting, the Mad Game award for this round must be awarded to Speaker Pelosi. She didn’t budge an inch, and, after the LGA air traffic controllers began what was sure to be a widening and deepening job action (causing the one thing that no one can abide: inconvenience to NYC air travelers), Trump appears to have had no choice but to cave. No doubt, in the wake of all of this, he’s spitting something, but my guess is that it has the look and feel of metallic spikes typically embedded in wooden planks. This, in turn, bodes less than delightfully for those trying to invest across the backdrop of a political landscape that appears much more likely to heat up further before it begins to cool down. If I’m reading published reports correctly, Trump, Pelosi, McConnell and Schumer are now gonna take a well-earned blow, and leave the next round to a set of scrubs that – let’s face it – will be hard-pressed to bitch things up more than the first team has already done.

There is, in addition, lots of mad-game-spitting of the unhinged kind transpiring with respect to the 2020 Presidential Election in general, and the Democratic nomination in particular. For the first time in perhaps my adult lifetime, I’m actually enjoying the spectacle, and looking forward to watching it unfold. Perhaps as the best news of all, our boy Bernie announced on Friday, and thank god for that. My guess is he still sets the standard in terms of staking out the party’s core message. Namely, the position that much of America, and throughout its history, is little more than a criminal enterprise, and that the only path forward is for us to beg the world’s forgiveness and confiscate the assets of certain domestic socioeconomic classes, in order to distribute them to those are deemed to be more worthy. He faces at least 20 competitors, and I doubt that he will win (wrong age, wrong skin color, wrong gender), but anyone who wants to beat him is going to have to out-Bernie Bernie. Watching it all unfold ought to be quite a hoot, to say nothing of the bennies associated with the ultimate standard bearer being stuck with a policy agenda that only the editors of Mother Jones Magazine could love. In light of 45’s continuing and likely-to-continue string of errors – forced and unforced – for those like me who still have a soft spot for the blessings of free enterprise, this is nothing short of a miracle.

And it’s all starting to come to pass like Christmas in late January. The Mayor of New York (himself a White House wannabe) recently informed the world that the City has plenty of money, but it just needs to be confiscated from its owners and placed in different hands (presumably at his discretion). A newly elected Congresswoman from the same jurisdiction who shall remained unnamed but who sports the singular credential of an undergraduate degree in economics from the venerable Boston University has put forth a really swell idea to establish a “tippy top” tax rate of 70%. Both are outflanked in policy hysteria by the now Senior Senator from Massachusetts – who has achieved tenured professorship status at not one, but two, Ivy League institutions, and who is herself a declared candidate for the 2020 Presidential Election. In addition to having this past summer sponsored a bill that would put all forms of governance for large American corporations under a Washington scoring system with heavy weightings assigned to such factors as climate change policies, gender awareness and progressive sensibilities, she has topped herself by proposing a 2% annual wealth tax. My guess is that some of her paymasters may be a little less than fully enthusiastic on the prospects of sharing the love in such a manner. Still, in terms of spitting mad redistributionist game, it’ll be hard to top Professor Warren’s stunt.

In the meantime, equities roll along, and bonds continued to be hoovered up like there’s no tomorrow. Also, some late mad game spitting transpired in the often overlooked Gold market, which rocketed to highs last seen in June of ’18 – all during the afternoon of Friday’s session:

I’m really not sure what’s going on here, but if I find out, I’ll get back to you. However, I will state that the frenzied buying of gold typically portends an ill wind of some kind, blowing somewhere out on the horizon. And lord knows there are plenty of ill wind candidates from which to choose.

I’m not going to worry about this too much – yet.

Instead, I’ll just hope that the mad game spitting cycle continues, with one caveat. If you spit anything into an ill wind, it is likely to come back to you in unpleasant ways. And this mis amigos, is about all the useful risk management advice I can offer on this winter’s day.


The Great Rally of 2019: Addition by Subtraction

Welcome, friends, to the show that never ends (but probably will anyway). Early in the cycle though it may be, I believe it’s time to throw a “rager” in celebration of the fabulous performance thus far generated by our favorite domestic equity indices.

So grab yourselves a brew and a slice (or if you prefer, some caviar and stronger waters), and raise your glass to our collective success. Through 13 skinny sessions this year, our Gallant 500 have thrown up an annualized gain of 263%. And, get this, the SPX’s half-a-league, half-a-league, half-a-league onward returns pale in comparison to those of other intrepid comrades, most notably Captain Naz (annualizing at 308%), and the stone cold biggest baller of them all: Ensign Russ (582%). Gentlemen, we salute you.

Yup, it’s been quite a run – not only thus far this year, but in fact since before the yuletide. Specifically, and while most of you are not likely to remember that far back, if we set our starting point to the close of that wretched Christmas Eve half session, the numbers are even more astonishing. From that point, the SPX return has annualized 543%, the NDX 670%, and the Russell 2000 a chunky 892%.

If investors keep buying them at this pace, 2019 will indeed be one heck of a year. But let’s cast our eyes back to that putrid Christmas Eve session, and let me ask you, with respect to the gaudy performance numbers inventoried above, who had the over? Well, I most certainly did not. In fact, as I was cooling my heels at my mother-in-law’s on the afternoon of December 24th, I was a’fearing we might be headed for an all-out crash. I’m not particularly proud of this, but as a scribe operating in a world where journalistic standards of adhesion to the truth are climbing to previously unimaginable thresholds, I feel honor-bound to record this history as it actually transpired.

Besides, I published the fears I had at the time far and wide, so, as a practical matter, there’s no escaping the historical record as to the divergence of my concerns from the pricing action that followed.

On the other hand, as I repeatedly remind myself and my readers, even a stopped clock is wrong 23 hours, 59 minutes and 58 seconds of each day, so there’s that. And now there’s nothing left to do but try to unpack what has happened, why it happened, and what may happen as a result. Moreover, at the risk of playing spoiler to my own article, I find that, while, at best, the pace of the rally is likely to slow considerably, some of the positive reversal has indeed been justified by subsequent events.

If I haven’t already lost you, let’s contextualize this by winding the clock back even further, all the way to mid-Summer ’18. During that time period, so I remind myself (perhaps as a balm to my bruised, soothsaying wounds) I correctly called for a big spike in volatility over the final trimester of the year. My justification for doing so was the myriad risk-enhancing catalysts that the global capital economy was confronting, including, in no particular order, a potentially investor-hostile mid-term election outcome, a burgeoning international trade war, an intransigently hawkish Fed, Brexit, a slowing global economic paradigm, a decelerating earnings outlook, etc.

I felt that, at best, many of these events could induce investors to pause for a moment of reflection, and might, in various combination, cause this here sweet 10-year rally to turn tits up at last. Well, we all know what happened after that. Market volatility did indeed accelerate like a particle collider, and most of the action was on the downside (something I did not predict). Nonetheless, and as I anticipated, the risk premium rose dramatically, implying that the cost of holding risk assets had increased, and inducing the more reserved among us to engage in some serious divestiture.

But knocking these off in chronological order, many of the risk-generating hazards that most vexed me have played themselves out in — if not in bliss-inducing ways, then at least in non-fatal ones. The election produced a split legislature, which has historically been a fairly favorable environment for securities. The Fed has spun itself around like a whirling dervish, but, presumably having been chastened by the market’s reaction to its 12/20 hawkish hike, has placed itself on ice in terms of its ability to aggressively normalize rates and reduce its balance sheet. With respect to the latter, the same can be said of other Central Banks, as, over the last several weeks, the aggregate holdings of these entities has reversed dramatically to the upside:

Much of this reinvestment is owing to Chinese purchases of their own paper, and appears to be part of a broader initiative to inject multiple forms of stimulus into their gravitationally challenged economy. They’re likely to take incremental simulative action from here, and, while purists may quibble, as for me, I’ll take it. With a visibility range of 0.0000%, the pundits nonetheless all agree that the numbers coming from China are looking weaker by the day, and, if the ruling cabal wants to use its unlimited powers, to reverse this trend, they have my blessing to do so.

Likely for similar reasons, the trade dialogue between the Chinese and the Americans has been almost unilaterally amorous in recent days.

So, we entered 2019, with reduction (call it subtraction) of the risk premium, and this, I believe, more than anything else, has catalyzed the maligned-in-this-space-but-ensuing-to-this-day V bottom, the back half of which began on Boxing Day, 2018. The market, I thus posit, is adding valuation by subtracting elements of risk concern that no longer seem as dire as they did a few weeks ago.

Obviously, we’re not out of the woods quite yet, but all we can do is knock off these risk annoyances one at a time. This past week, like a lot of folks, I was paying close attention to bank earnings, not only due to my perpetual, obsessive hope that bankers receive the largest bonuses that humankind can bestow upon them, but also for signs often found in those realms of accelerating problems in the broader economy. Well, it was hardly a blowout quarter; in fact, on the whole, it can only be described as a disappointment. By all accounts, the big dog trading desks were caught sideways on more than one occasion during Q4, but deal flow and loan growth held up acceptably, and, on the whole, there was nothing that any of them said that indicated a dropping off of the bottom of the great financial engines of the domestic economy. I therefore subtract, at least for the time being, the world of U.S.-based international finance as an outsize risk factor.

But the earnings season has barely begun, and the early returns fall well-short of divine status. By all accounts, it looks like Q4 will hit the 10% year-over-year bogie, but not by much. Moreover, the broad consensus is that the extended, magnificent profit run of U.S. corporations may have peaked out. As suggested in the following chart (purloined, in accordance with time-honored tradition from the folks at Factset), guidance for the next two quarters has dropped in a manner not seen since Paulson was begging Pelosi to bail out his former partners and colleagues:

Anyone with the intestinal fortitude to extrapolate these numbers forward is bound to conclude that the NDX is unlikely to rally the full > 300% which it now projects, but I don’t know that it makes much sense to worry our little heads off just yet on that score. My strong sense is that we’ll learn a great deal in waning days of January, when our betters: the leaders of Apple, Facebook, Amazon, Google, Microsoft, etc. take to the podium.

And when this transpires, I will be looking at the results through my thematic “addition by subtraction” lens. We should learn a great deal about how the economy is holding up by reading between the lines of business service flows at AMZN, GOOG, and MSFT in particular. If they continue to sell cloud services at heavenly clips, we can cross off another item currently prominent on our risk premium balance sheets. Alternatively, if the cloud outlook across the cloud is cloudy, it may again be time to worry.

Lord knows what February will bring. The reporting arm of the Federal Government may well still be shut down, but I’m fairly confident that the earnings cycle will continue on schedule (whether or not Pux Phil sees his shadow, I won’t hazard to speculate). But one way or another, March (not by a long shot my favorite month on the Julian Calendar) is certain to be a barn burner. It begins, as the fates would have it, with another episode (no one, somehow, can say for certain the date) of that great borrowing engine otherwise known as the United States Treasury Department hitting its statutory ceiling for debt issuance. Particularly if the current funding impasse has remains unresolved, this, of course, would be as good a time as any for the Thunder-dome showdown between Maxine (Mad Max) Waters and Donald (Nightrider) Trump (still, at the point of publication, President of the United States) to enter its final, fatal round. Two (wo)men enter, one (wo)man leaves, may not be the precise outcome, but you never know.

March 1 is also the pre-announced deadline for imposing 25% tariffs on hundreds of billions of goods imported from China. It’s hardly worth typing, but if that happens, look out below. If there’s a deal, though, then the biggest risk premium contributor on my list will vaporize exquisitely.

I remain worried also about the default implications of a hard selloff in the energy complex. And, as March performs its ritual “lion-to-lamb” transformation, we’ll be faced with a moment of truth respecting the Brexit Battle. March 29th is the date upon which Article 50 of the European Union Constitution calls for the Brits to exit, stage left (pursued by a bear?). I have absolutely no idea how this plays out or what it means. Besides, we’re running out of space and bandwidth on l’affaires des risqué, and I’ll leave off by stating my continued belief that the big risks of 2019 are concentrated, with these events, in Q1.

In the meantime, I hope you’ve enjoyed the party thus far, but as any polite guest is well-aware, the timing of a departure from a celebration is as important as that of an entrance. This, my friends, was never my strong suit, but it may be time to wind things down. It’s been a grand old time thus far, but the likelihood of indices continuing to annualize into the fat triple digits, is, in my judgment, slim. Moreover, if you find yourself the last partaker of the punchbowl, if you see your hostess lifting your feet from the floor next to the couch on which your slouching so she can run the vacuum, if the rice remaining on the sushi plate evidences discoloration, you’ve probably overstayed your welcome.

But we’re better than this, people! So, in closing, I suggest you don’t let your subtraction from this here wingding be viewed as an addition by your fellows, who will be only too glad to rest up and take your abandoned spot when the next party commences in earnest.


The We Market (WM)?

Lost amid our justifiably obsessive focus on such matters a 0.1% outlay for border security, the frantic search for someone – anyone – willing to host the Oscars, and other matters of vital importance, was a one-two punch, which, depending upon how it plays itself out, could make or break us. Early this past week, Softbank Inc. announced a slight revision to its funding plans for new-age commercial real estate venture We Work Inc. Oh, it still intends to invest, but at a lower magnitude. $16B has morphed into $2B. Apparently, according to published reports, a couple of players in the deal backed out, compelling Softbank to go it alone. And it decided, in so going, that it wasn’t going to go big.

In this, the world’s most powerful and prosperous nation, where government agencies spend $8T a year and where total unfunded liabilities (including such trivialities as Social Security and Medicare) exceed $120T, we might need a larger unit of account to measure these metrics. So, if a southern border wall is said to cost $5B, let’s just say that the We Work raise came in light by about 3 Walls. There’s the elegance of logic in this. After all, what would We Work be if not for its access to Walls?

For the uninitiated, We Work, over the last several years, has joined the ranks of millennial iconoclasm by – get this – securing huge swaths of urban commercial real estate, and leasing the space to business enterprises. And if this concept fails to sufficiently blow your mind, consider this. We Work doesn’t simply provide workspaces and office accessories, it actually offers a feel-good sensibility to these realms. No doubt the feng shui of each unit is meticulously calibrated, but there’s more – much more. Each office features such work/life balance essentials as ping pong tables, nerf guns, well-stocked beer taps and bean bag chairs. Thus, WW lessees are not just renting space, they’re investing in a business ethos – one that is almost guaranteed to facilitate their success.

Unfortunately, however, they have yet to solve one intractable challenge of commercial real estate – when you use debt to secure large commercial spaces and seek to amortize these obligations through short term revenue streams, you create what is known in the banking biz as a gap funding challenge. Even nerf marksmen with the deadliest aim might flake off – particularly during periods of economic difficulty, but your bankers will expect you to meet your repayment schedules with unfailing precision.

I’d long been wondering about how the Company would get around this, and will admit, in the wake of the previously announced $16B Softbank deal, to thinking that these guys and gals may just have mad skills that elude my cognitive capacities, honed, as they have been, over nearly six decades.

And this remains a possibility, because just when I thought that an 82.5% downsizing of a critical funding round might be problematic, Team WW pulled off a coup of which they perhaps alone are capable. On the heels of the Softbank doink, they announced that they are rebranding and expanding. What was once We Works is now The We Company, with plans to extend its feel-good vibe beyond the grubby world of office space, and into banking, hotels, residential real estate, social media, and the Big Enchilada: Yacht Charter (the last of these under the sublime moniker of We Sail).

What on earth could go wrong?

I think it’s time to give these guys their props, and expand their concept to the entire capital economy, which, for the purposes of this argument, I will rechristen The We Market.

Here in the We Market, financial conditions, business prospects and matters of supply and demand don’t much matter; it’s the lifestyle, people, don’t you get it? It’s time to unshackle ourselves from the oppressive restrictions of valuation, solvency and growth. After all, we only walk this earth for a short time, and if we can’t recognize that markets are nothing more than another way to connect people with people, then we’ve lost the opportunity of turning our daily struggles into something more meaningful.

I do have a hunch that rather than having created this concept, I am merely reflecting what has already transpired. The WM has started to form, having begun with the extension of a V-Bottom upon which I threw shade, but which has nonetheless managed to sustain itself through the first 7 trading days of 2019:

SPX, NDX, RTY, JNK: V’s Abound… … Even in Junk

Connecting the dots for the pattern-recognition impaired, a V is a half of a W, so, from a certain perspective, we’re 1/4th of the way through the formation of the WM construct, and who’s to say we won’t complete the sequence?

In fact, I’m more than optimistic that the next leg is coming to a theater near you. Unfortunately, however, in order to turn a V into a W, one is next required to travel a few flights on the down escalator. And, as I see it, over the next several weeks, there’s every opportunity for such a downward movement to transpire. At the conclusion of that wretched Christmas Eve half-session, the Gallant 500 resided at a putrid, almost unthinkable, 2351. We’ve since rallied more than 10% — nearly 250 handles, but get this – we haven’t even recovered half of the cumulative losses from September’s all-time highs. We still have a weary ~335 index points to scale to reach those lofty elevations, and this through treacherous terrain filled with enemy combatants behind every rock and tree.

The earnings season is now upon us, and it kicks into high gear this coming week, with a lot riding not only on the tellings of beleaguered banks, but also of such We Market-critical components as Netflix, which itself V-bottomed in impressive fashion off of giddiness over the release of something called Bird Box. Its stock is up over 30% in 3 weeks, re-enriching the faithful to the tune of about $50B. At the recaptured $150B capitalization threshold, Team Bird Box is worth twice the value of the entire U.S. Auto industry (Tesla, of course, excluded) and if that isn’t a re-affirmation of the We Market sensibility that has overtaken us, well, then, I just don’t know what.

Nominally, it is also an interesting week for economic data, with scheduled releases of the all-important December Retail Sales being of particular significance. Unfortunately, however, at the point of this correspondence, the odds-on likelihood is that Retail Sales data will not be released this week because the portion of the Federal Government that calculates this data – the Census Bureau – is currently shut down. Moreover, even if it were to magically re-open, the results are likely to be obscured by the diminished participation of the 800,000 poor souls who expected to collect taxpayer-funded checks, but didn’t – at least this week. The shutdown has now extended sufficiently to render this portion of the workforce unemployed by the standards of the Bureau of Labor Statistics, so even when/(if) the Jobs Report drops in a couple of weeks, the numbers will be off.

Did I mention that there’s a government shutdown underway? Well, if I didn’t, shame on me, because as of this weekend, it has entered the pantheon as the longest running incident of its kind since we decided that this was as good a tool as any to resolve legislative impasses, back during the Clinton Administration. I don’t know that we’ve been much harmed by it, but will stick to my long held call that it is illustrative of what I believe will be a full-on showdown over the next several weeks, as to whether or not Trump should be allowed to retain the office to which he was duly elected. I expect a lot of tape bombs on this topic, but if nothing of this sort transpires, we can at least look forward to Attorney Michael Cohen’s testimony on Capitol Hill during the first week of February. Here, it will only be a question of how much mud he can sling at the President, and how much the new Congress and the media can make stick.

But for me, as for everyone else, all roads lead to China. Almost unquestionably, the fortunes of the market (and, for that matter, the We Market) will turn on whether or not we can come to some sort of accommodation with them. There are virtually infinite numbers of outcome possibilities here, but one thing is certain: over the next 5-6 weeks, the two countries must come to some sort of accommodation that removes the threats of an escalating global trade war, and negates any possibility of the contingently scheduled tariff increases taking effect. I sense that if those tariff increases are indeed imposed: a) Trump won’t be living in the White House to see the cherry trees blossom; and b) the down leg of the W will take the markets to excruciatingly low levels.

On the other hand, if, as is entirely plausible, the two sides come to terms, then this here V could travel upwards a fair distance before it even begins to start transforming itself into a W. But we’ve got a lot of wood to chop between then and now, and if earnings disappoint, if the rhetoric between the Chinese and ourselves takes a nasty turn, if Mueller drops a damaging report and/or Trump Jr./Kushner are indicted, then that W will begin to form with a vengeance. I feel that any combination of these is plausible, I don’t think investor risk appetite is sufficient to absorb the blow, and I strongly suggest that the risk sensitive orient their portfolios accordingly.

For what it’s worth, I’m also rooting for the Crude Oil markets here. It’s not that I enjoy paying more at the pump, but given the widely discussed credit tsunami forming on the horizon, and the likelihood that energy company defaults could be the trigger for a game of default dominoes, higher prices strike me as a small price to pay to ensure that the crude cowboys are able to refinance their debt. If not, then the financial oil could spill into other asset classes, and pretty much negate any hopes we may have for P/L.

But there’s more to the markets, The We Markets, than risk-adjusted returns, now isn’t there? There’s the quality of the experience, which of course is more important. I close by advising my friends at the We Company to bear this in mind as they wend their way through the new world they are so heroically creating. They lost $1.2B through the first three quarters of 2018, and that was before the markets started to take in water. Their debt trades at levels currently consistent with a high default expectation, and they will need to borrow/refinance to beat the band if they are to sustain themselves, much less achieve their grand vision. I kind of like the sailing thing, but I’d advise them, as their grandstanding risk manager, to think again about the hospitals, banks and housing concepts. These things cost money, which I think is in shorter supply at The We Company, than, say, good vibes.

In the meantime, for the rest of us, while the WM remains a possibility, we can perhaps take comfort that it is not yet a reality. After all, by the time we finish the M, we’re much worse off than when we started. So forget about the life experience, and in God’s name be careful about your risks. Things are likely to get much tougher somewhere in here, and if you don’t proceed with due caution, those beanbag chairs will collapse, the beer will not quench your thirst, and all the nerf guns in the world will not protect you.


Jobs: The Good, The Bad and The Ugly

“Whoever double-crosses me and leaves me alive, he understands nothing about Tuco”.

— Tuco, from “The Good, The Bad and the Ugly”

Well, for better or for worse, the epic western drama of Good, Bad and Ugly, also known as the 2019 global capital markets showdown, is hard upon us. I will confess to waking up on Wednesday morning wondering whether or not I was up to the fight. I’ve been at this a long time, and there are elements of what I see on the horizon that rendered springing out of bed on 1/2/19 an iffy proposition at best.

But then I remembered Tuco; good old Tuco: The Ugly element of Sergio Leone’s 1966 masterwork. He was a stone-cold Mexican bad @aa, who, by my count, was murdered at least a half a dozen times in his unwavering and ultimately successful pursuit of The Gold. He paid a steep price, but in the end the prize was his. As a further element of inspiration, it should be noted that Tuco was portrayed by Eli Wallach – a Brooklyn-born Jew who lived to be nearly 100. He absolutely stole the show in TGTGaTU (nearly dying himself on three occasions during the filming), and then pretty much disappeared.

But he got The Gold; that’s the important thing. He. Got. The. Gold.

And as such, I reckon it is incumbent upon us to follow his example, marauding our way through the treacherous terrain of this market, whose main inhabitants are desperados, banditos, snakes and other vermin, and try to grab that stash at all costs.

It didn’t take long for the action to begin in earnest, and a good deal of it ties directly or indirectly to the concept of Jobs. So, in typical mash-up fashion, I have chosen to review the recent proceedings through a Jobs-inspired week that featured The Good, The Bad, and The Ugly.

Ideally, I’d prefer to follow the flowing sequence of the film’s title, but for a number of reasons feel more strongly compelled to track these events in chronological order.

We thus begin with The Bad. Sometime around the close on the first day of trading, Apple CEO Tim Cook dropped an astonishing negative pre-announcements on the market. Apple never does this, but chose, in this incident to top even that unfortunate incident last spring, when Facebook’s management decided that >$4B of free cash flow per quarter and an embedded user base of >1B souls notwithstanding, it had no visible means to re-energize itself, and guided down for the subsequent three years. I reckon Mr. Cook had no choice; by all accounts, the company has missed Q4 numbers and missed them badly. He was therefore duty-bound to share these tidings with the investment world. As was perhaps inevitable, he placed most of the blame on our burgeoning trade war with China. I’ve no doubts that all of this is legit. However, I cannot help but wonder if there wasn’t something of a political element in terms of the timing. If so, if he wanted to begin the New Year with a message to Washington that this whole tariff thing has real consequences for the glittering board rooms of the Silicon Valley, which will devolve into sufferings for the great unwashed, then I’m OK with this.

But the smart guys I talk to had been expecting Apple to receive Newtonian gravitational blow for the last several quarters. Their consensus is that the Company is out of tricks, and will need to come up with something not in its visible bag of tricks to regain its lost luster. And I can’t help wondering what Jobs, Steve Jobs would have made of all of this. After all, he was the wizard, and whether he might’ve been able to bring to market some bright shiny objects that would’ve changed the equation, we’ll never know.

Because he’s gone, he’s go-one and nothing’s gonna bring him back. So investors, already terrorized by factors too abundant and varied to inventory in this space, took for the hills. Global equity indices plunged in sympathy on Thursday, and at that precise moment, all the key elements needed for a real crash were in perfect configuration.

But then came The Good: a December Jobs Report that played to the unmixed delight of any objective observer in its orbit. Non-Farm Payrolls blew the doors off expectations, the previous two months were revised upward, the Labor Force Participation Rate rose by several hundred thousand, Average Hourly Earnings surprised to the upside as well. Investors everywhere sucked in a huge sigh of relief.

But if market participants were becalmed by the Jobs Report, they were rendered positively giddy by Fed Chair Powell’s remarks at that afternoon’s American Economic Association’s annual conference in Atlanta. As is widely known, Chair Pow used the opportunity to walk back the interpreted-to-be-hawkish comments that accompanied a rate hike at December’s FOMC meeting. Of course, we’re flexible here, he cooed, and, for the most thick-headed among you, this means that if the economy starts to take in water, we’re prepared to bail on both further rate hikes and balance sheet reduction.

Investors swooned like teenage girls at a Beebs concert. Equities surged, and suddenly, what began, after the first two days of trading, as the worst start to a new year this century, transformed to a point where all major indices are actually showing gains for the first partial week of ’19.

Well, I’m a little skeptical here. As prophesied in these pages, volatility surged in Q4, and I think that pattern continues for the next several weeks at minimum. In early December, and in the wake of a Bad/Ugly/Not Good rout this fall, our Fed Chair issued similar soothing set of comments, only to kill the buzz when the FOMC met later that month. Now he has reversed course yet again, and perhaps not, given the pattern he’s forming, for the last time.

I was unilaterally encouraged by one element of his comments though. When asked if he would resign if requested by the President to do so, he responded with a resounding “No”. Good on you, Jay! You’re the Big Dog of the Fed, as appointed by the Bigger Dog at the White House, and he cannot justifiably play you as a political football. You were appointed to do a job, and, absent some palpable malfeasance on your part, you should do all in your power to keep it. I may not agree with the steps you take (and didn’t when you raised rates in December), but with the wearying prospect of yet another presidential election now taking form, your unimpeded presence and focus is vital to our collective concerns.

And speaking of elections, it was hard to miss the fact that the 116th Congress took their oaths of office on Thursday, and wasted no time in (predictably) making spectacles of themselves. Within 36 hours, they had introduced bills for Impeachment and the elimination of the Electoral College. As indicated in recent columns, my biggest fear for the markets derives from the reality that of many of them believe that Job 1 for them is removing 45 from his current job. This, my friends, is The Ugly of this essay.

While the wizened heads that beat down the unhinged progressives for leadership positions are, wisely in my judgment, taking a wait and see attitude about how hard to attack The Prez, my guess is that they won’t be able to hold the discipline of their caucus. A lot of these folks were elected for the express purpose of taking Trump down, and one can forgive them any urgency they feel in starting the process. The time for them to attack, at least in my judgment, is now. If they don’t seek the removal initiative over, say, the next few weeks, then they may have lost their best opportunity to do so. Team Trump also wants to get the showdown under way, most probably as a better construct then allowing the removal forces to hold their fire until the 2020 election battle is fully joined.

Nobody can quibble over-much about the state of the economy, and the Trumpsters must use this to their advantage. But if Trump really wants to end this nonsense, he’ll move quickly and aggressively to cut a deal with China. This, in and of itself, will not solve intractable issues with them guys and gals; whatever we sign will likely be worth not much more than the paper on which it is printed. But it would be an enormous boon to the markets, offering the dual benefit of removing the specter of tariffs that have dampened down valuations, and tearing up key portions of the track on the Impeachment Train.

Conversely, if those tariffs, set tentatively to be implemented in mid-February, do become the law of the land, I think the markets will be in full panic mode. Prices will drop, companies will begin to shed Jobs, and the bonfires outside the White House will burn White Hot.

So I think the big risks for 2019 play out, in rather dramatic fashion, over the next several weeks. If we can get through to spring without having to deal with the Emoluments Clause, the 25th Amendment, or Impeachment proceedings taking form, if we cut a deal with the Chinese that has even optical teeth in it, then 2019 could be a very good year for the markets indeed. Stocks, against the backdrop of a strong economy with still-ridiculously low financing costs, are if anything cheap, as illustrated by the following chart, showing P/E’s below their 10-year averages for the first time since 2013:

Sharp-eyed readers will note that the last time these metrics resided at the 10-year Mendoza Line of ~14.5 it was on the way up; catalyzed by a recovery from the crash.

It doesn’t take the skills of a wizard technician to understand that piercing a 10-year time series average from below and above are very different constructs, and ones with polar opposite implications.

Again, I believe that if we can somehow muddle through this geopolitical mess, there are happy tidings for stock market gold hunters out there. And again, I’ll point to one of my core premises for believing that significant rallies are any rate, plausible: the alarming and increasing shortage of investable names to trade in the equity complex. Case and point: while it drew scant notice, this past week, Bristol Meyers Squibb announced a $74B purchase of Celgene, combining the world’s two biggest cancer drug companies under a single ticker. Now, in my experience, nobody has traded or invested in Bristol for a long time, it missed the biggest part of the Bull Market and resides at valuation levels of a 2014 vintage. By contrast, everyone trades Celgene – long and short – that is until now. It will soon join the likes of Red Hat as an innovative company that is subsumed into a mushy global conglomerate.

And those companies that aren’t in acquisition mode are likely to continue their buy-backing ways. Consider, if you will, the case of Apple. With no Jobs to pull new rabbits from the product hat, but still generating >$60B of free cash flow, they almost have a fiduciary obligation to continue to buy back and retire their inventory of free floating stock.

So I say that The Gold is out there, but we will likely be compelled to channel Tuco to harvest it. Yes, we will pay a price, as Tuco himself discovered. Fans of the movie will tell you that Blondie (Clint Eastwood) left him hanging by a rope over bags of it, and then liberated him with the unfailing aim of his bullet. Tuco didn’t like this, but presumably took The Gold anyway. Perhaps a slightly easier path will light our ways in 2019. But I doubt it will be so by much of a margin.


This Week’s Column Brought to You by the Letter V

Sharp-eyed readers will note that for my last piece of this wretched year, I have borrowed liberally from the good folks on Sesame Street. I hereby apologize for any unseemly liberties that I have taken in this respect, because, let’s face it, everyone loves Sesame Street: a bona fide American Institution now in its 50th year of continuous production. Far be it from me to exploit its good name and good works.

As is the case with many transcending forms of children’s entertainment, what SS perhaps does best is to address its audience without talking down to them. Most every adult who has not yet reached 60 years of age has passed through its portal, and, for our current breed of adorable little shavers, the show, by all accounts, continues to inform and delight. It targets, of course, preschoolers, but there are also little bitties in there for their guardians – ones that extend beyond the divine blessings of distracting the young ones so that mommy, daddy, auntie or grannie can grab themselves a few minute’s rest.

It occurs to me, though, that in light of the many infantile doings that have abounded this rapidly expiring year, many of us past the age of majority could stand to benefit from a Sesame Street content refresher course. Hardcore fans are aware that most episodes are based upon alphanumeric themes, and I did think long and hard about starting at the beginning, with “A”. However, upon further consideration, I felt that such a return to the rudiments of would be overly insulting to my constituents.

So, as indicated by our title, I have chosen a single letter: “V” for this week’s sponsorship, and if you hang with me, you’ll soon know the reason why.

First and foremost, my selection is a tribute to the near-miraculous V-bottom registered by the indices in the three-day sprint that took us from Boxing Day to the point of this correspondence. For the nonchartists among us, and focusing on the S&P 500, it looked something like this:

OK; so as V’s go, this is hardly the most elegant representation of the 22nd member of the King’s 26- letter arsenal. Moreover, Linguistic purists, noting the double dip, might even justifiably call it a W, and could also further quibble with the modest descent socialized in Friday’s session.

But for me (and, I suspect, other market-obsessed participants) this is unambiguously a V as I’d ever hope to see. And boy was it ever timely in its arrival. As everyone knows, after an abbreviated, horrific Christmas Eve session, the SPX was experiencing its worst December in about 70 years, capping off the worst quarter of the worst year in a decade.

So the ~7% rally from the pre-Saint Nicholas ride lows, hard won as it was, evoked an enormous sigh of relief for most every professional investor and associated paymaster in my wide acquaintance. Unless Monday’s New Year’s Eve session generates a never-even-contemplated single day rally, it won’t save December. Or the 4th Quarter. Or the entire year of 2018. But it may have breathed renewed life into any number of presumed-to-be-toe-tagged portfolios, so I reckon we’ll take it nonetheless.

And now for the bad news. Particularly insofar as it applies to their abilities to generate sustained rallies, I’m not much of a believer in V-bottoms. They tend to work over shorter periods of time, but in my varied experience, they peter out rather quickly. Sustained recoveries, as I have long lectured, do not often materialize until the wide price dispersion has dissipated, large capital pools are able to examine at the carnage, come to the conclusion that price levels are compelling, and start shopping in earnest.

And this particular V-bottom strikes me as being especially transient. Regarding the regathering of buying forces towards the end of last week, I believe we should take note of a number of technical tail winds that indisputably aided our cause, but which will probably run their course rather quickly. First, it generally agreed that Monday’s half-day puke took equities into deeply oversold territory, which, from a forward-looking perspective is always a good thing. Next, as had been widely reported (including in this space), the ~20% correction in the equity complex forced pension funds with fixed allocation targets (e.g. 60% stocks/40% bonds) to purchase tens of billions of dollars of stocks before year end. Further, I’ve no doubt that there were any number of short sellers out there who got their nuts squeezed and had to cover when the buying began to materialize on Wednesday. Finally, and as always, we can (as a matter of convenience if nothing else) be pretty well-assured that buy signals of the algos, long in hibernation, arose from their slumbers to lend their always helpful assistance to the cause.

Well, if the markets were oversold on the morning of 12/26, they are less so now. I’m not sure whether or not the pension fund rebalance is yet complete, but you can bet your boots it will be over by Monday’s close, because that’s the deadline. If you’re long, short squeezes provide the dual benefit of positive returns accompanied by a measure sangfroid, but once the covering is over, there is, by definition, no more squeezing to be done. Finally, what algos giveth, algos, of course, can taketh way.

So I think whatever happens Monday, we will usher in the new year with the slate will be, so to speak, wiped clean. Which brings us to our next V in this -themed note. Volatility has been ascendant for several months, and it says here that Volatility will continue to make its formidable presence felt once the calendar turns. In fact, as we enter 2019, about the only thing which I can predict with any confidence is that sustained Volatility will prevail. I can’t remember the last time that I felt we were entering a new year with as much opacity as that which confronts us as 2018 winds down, and I’m not gonna lie: it’s not exactly giving me a warm, fuzzy feeling at the moment.

We’ve covered the problems confronting the global capital economy in the coming months, so I won’t tax your patience with a reiterated, detailed inventory of same. But some contextualization is necessary. The odds-on likelihood is that the world will experience an economic slowdown. Most jurisdictions are feeling the bite, and important ones such as Germany are already in recession. Whatever is or is not happening in Japan, it bears mention that 10-year JGBs actually went negative on Friday, and that our friends in Switzerland now want ~25 basis points for the privilege of using our money for a decade:

Now, with the Land of the Rising Son’s rate rising ambitions yet again failing, when the Swiss extort investors into paying them for stashing cash in Zurich, it hardly portends glad tidings for the global economy. But that’s not all. Draghi is on the hook with his pledge to turn off his money-printing machines – at a time when all member nations are feeling the pinch, and while the U.K. dithers about how – or if – to turn in its membership card. Meanwhile, in this here monetary jurisdiction, the psychodrama catalyzed by a skinny little 25 bp Fed Funds hike has generated more Central Bank agita than any time perhaps since Andy Jackson shuttered an earlier version of the outfit back in eighteen hundred and thirtythree (ah yes, I remember it well). As mentioned over the last couple of editions, I think the Fed made a mistake with its latest stunt, but it wasn’t, and shouldn’t have been that big a deal. The real damage was done in my view by virtue of the President attacking an institution which of course is political, but must avoid publicized political battles if it is to do its job competently.

Oh yeah, and there’s a government shutdown unfolding at the moment. And the point of dispute is so infantile that even newly-minted Sesame Street watchers might turn away in disgust. While it shouldn’t affect most of my readers overmuch, its optics of it are unilaterally bad. I don’t expect it to be resolved in the foreseeable future. And the 116th Congress will be sworn in early Thursday afternoon. And they will be out for blood. And they are likely to draw some.

On the other hand… …by all accounts, the U.S. economy does not appear to be evidencing any signs of rolling over. News reports over the last week have brought forward a gusher of glad tidings respecting holiday sales. Earnings will almost certainly fail to match ’18 out-performance, but I suspect when Q4 numbers start dropping, they’ll shade positive relative to expectations, perhaps significantly so. And, for what it’s worth, absent some unforeseen catastrophe in the economy, while one can claim that our final V-word: Valuations, are rich, they are much less so than they were a few weeks ago. There’s also happy talk about settling matters with China, which I would discount excepting the significant reality that the incentives are high for both parties to fix this thing. Gun to my head, I think they will, and it will help.

So maybe we can skate through what is bound to be an emotionally overwrought January, and get back to normal. I think a good deal of this turns on how hard Mueller and Congress hit Trump in the new year. I’m highly convinced that he will be compelled to absorb a body blow the likes of which he has yet to experience, and it is far from a sure thing that he can withstand it. At this point, few would much lament his absence, if the script holds, if he does go down, he won’t go alone. If so, it could be look out below.

But on balance, I think I’ll hold to my faith in private enterprise to prevail. Yes, the V-bottom may be winding down, while Volatility is likely to sustain itself for at least a few more weeks. But Valuations are now within reasonable ranges, and know this, my children: there’s hope in that.

And so ends our Sesame Street lecture, brought to you by the Letter V. And I’ll leave you with this. After nearly five decades of being owned and operated by Public Broadcasting, in 2016, the rights to the show were acquired by HBO, which itself is a subsidiary of AT&T’s Warner Media. In a more perfect world, its corporate ownership would be that of Verizon or Viacom, thus completing the symmetry of my analysis.

Unfortunately, boys and girls, the realms we occupy are seldom as tidy as we wish, and yet we carry on. My kids of course watched Sesame Street, as do, now, my grandsons. There’s some comfort in this (among other things, HBO/AT&T/Warner do not appear to have bitched up the show). So, if you’ve nothing else to do, and if the meaning of my rantings has escaped you, it may behoove you to download the episode dedicated to the Letter V. I suspect it’ll do you no harm. In the meantime, Happy New Year and, as always…


Exit, Pursued by a Bear

A sad tale’s best for Winter: I have one of sprites and goblins”. And so begins Shakespeare’s “The Winter’s Tale”. It is not, for my tastes, among his finest efforts. With its convoluted narrative of childhood friendship between kings, accused adultery, uxoricide, banishment and reconciliation, it is part comedy, part tragedy, part romance, and even part history, but perhaps not enough of any of them to rise to the sublime level of Hamlet, the pathos of Othello or the retributive morality of Macbeth. On the other hand, even the dregs of Willie Shake’s pen probably compare favorably to most of the written output produced before or since, so there’s that.

However, as last week ended on the Winter Solstice – the shortest day/longest night of the year: a point in the calendar that we denizens of the Northern Hemisphere deem to be the first day of Winter, it seems like as good a place as any to point our tortured, thematic wanderings. And the exception that proves the rule. If Friday was indeed the shortest day of the year, you could’ve fooled pretty much anyone paying attention to the markets.

“The Winter’s Tale” also features what is almost indisputably the most famous stage direction in dramatic history: our titular “exit, pursued by a bear”. And I’m guessing that in this holiday season, I am hardly taxing the associative powers of my readers by asking them to connect the dots. The singularly wretched year of 2018 is about to take its leave, and nobody in any way connected with the financial markets can doubt that as it prepares its egress, it does so with a big nasty bear in hot pursuit.

In fact, as it applies to certain market realms, The Bear has already arrived. Longstanding convention defines a Bear Market as one that experiences a >20% decline, and, with Captain Naz now moored 22% below its Q3 highs, the NDX already resides within ursine clutches. The same can be said, in this jurisdiction, of Ensign Russell, and, across different oceans, of Herr Dax and Citizen CSI.

Many other indices, including our own beloved Gallant 500 and General Dow as well as their opposite numbers across Eurasia are not there yet – but The Bear is in hot pursuit, and may overtake them before we close the books on this ghastly, bounty-less train wreck of a year.

I hardly need to inform you that the collateral damage has been brutal, removing any doubts that 2018 will be remembered by historians as the worst performance year in a decade. In this respect, is even giving the 2008 crash a run for its money. But at least back then, we had excuses: the global banking system was in full collapse, a housing market waking up to a cold reality after a years-long trip into fantasy land, and an orgy of dubious financial engineering enriched the hundreds while impoverishing the tens of millions.

While one can quibble with current conditions, nothing of a similar nature is appears to be looming on the horizon, at least to me, which begs the question: this time, what’s our excuse?

Plus, it’s not as though periodic 15 – 20% type corrections hasn’t been part of the price of admission for risk-takers since time immemorial. But I won’t lie: this time it feels sorta different; sorta worse.

So what gives? Well, for one thing, virtually every major capitalist jurisdiction is in one form of crisis or another. We know, but don’t know, what ails the U.K. Germany is for all intents and purposes leaderless, and in recession. France is in complete turmoil. The sharks are circling around pseudo-capitalist China, and it wasn’t doing that great before those menacing fins appeared on their horizon.

Then there’s the good old U S of A, once and always the head of the dragon. From certain vantagepoints, the economics of this country don’t appear to offer much cause for consternation. Q3 GDP was revised down last week, from 3.5% to 3.4%. There is some softness in the Housing Market, but nothing even remotely approaching what transpired last decade. Durable Goods Orders were light, but the Jobs Market remains historically strong, inflation, by any important measures, is under control, the consumer spending parade marches on, and confidence remains high. Yet, as has been widely reported, last week was the worst interval for equities in a decade (dating back to those heady days when Bernie finally came clean and Treasury Secretary Hank Paulsen threw himself at former/future House Speaker Nancy Pelosi’s well-shod feet, to beg her bail out his former employer and pals), and is closing in on the worst December since 1980 (when Nancy Reagan was measuring drapes for the East Wing). So, again, what gives?

Well, I have my theories, and, pending yuletide rituals notwithstanding, duty compels me to lay them on you. To me, the American capital markets are cracking more than anything else, as a direct result of observing, in real-time, the pending disintegration of the governance structure in Washington.

As I have pointed out in past editions, while I could not bring myself to pull the lever for 45, I did consider myself a supporter, and remain terrified by the prospect of the ascent of his most strident political opponents. So when I take shots at the big guy, I do it in sorrow. But facts is facts. By my reckoning, Trump just experienced had the worst week of his turbulent presidency, and I don’t think the contemporaneously-manifest market rout can be viewed, in any way, as being a coincidence.

Three headline-grabbing episodes defined the cycle, and each was worse than the other two. First, without consulting or even informing anybody in the know, Trump announced a withdrawal of our remaining troops in Syria. Now, I won’t presume to lecture on the folly of this policy decision (mostly because I don’t know), but his having done so without seeking the input or even giving a heads up to his military heads, was ill-advised and classless. And his people responded accordingly. Mad-Dog Mattis resigned in a justifiable hissy fit within 36 hours, reinforcing the increasingly undeniable reality that competent, talented and dedicated public servants cannot operate effectively in the Trump White House.

Next of course came the FOMC decision, which I believed would catalyze a further drop in equity valuations no matter what they announced. And of course, we all know what happened after that. The FOMC went through with its hike, and, with barely a pause, asset prices dropped. And kept dropping.

I am on record as standing with my betters such as Jeff Gundlach and Stan Druckenmiller in believing the Fed made a mistake. While reasonable minds can debate, myriad problems in the global capital markets that would not be eased (and might be exacerbated) by higher yields at the short end of the U.S. Treasury curve made it fairly apparent to me that continued accommodation would far outweigh any potential benefits deriving from rate normalization.

But Powell did what he did, but you know what? I believe that any blame from the fallout devolves directly on the shoulders of Donald J. Trump. I had dearly hoped that he would comport himself, at minimum, in such a way as to recognize and respect the Fed’s independence. But here he failed miserably. He’s been in Powell’s grill for months, and that on an increasing basis. Matters have now deteriorated so thoroughly that plausible rumors are afoot that Trump is actually considering firing him.

God help us if he does, because at that point, the consequences are too frightening to contemplate, but as of now, he appears to have thought better of this lunacy. However, he’s done plenty of damage even as matters now stand, and I strongly suggest that if he would’ve minded his big fat business, the carnage extracted by the Fed’s latest action would’ve been significantly mooted. Yes, the Fed probably made a mistake, but it’s one we can live with, I believe, and now I think that they’re boxed in: I don’t see them raising rates – and may in fact be lowering them – unless the economy heats up, at which point it would be the type of high-class problem for which we can only pine in the present moment. The President, however, publicly shoving himself into monetary policy is a potentially more permanent and damaging blow.

If all of this weren’t enough, we ended the week with a straw man government shutdown arising out of a dispute over a funding item that is: a) a mere few basis points of our total outlays; and b) is and can be financed without all of the psychodrama. All parties appear to be spoiling for this stupid battle, and of course no one will feel any impact from the shut-down – except, of course, the already put upon investor clas.

And all of this is transpiring in advance of the reign of terror certain to be brought down upon the Administration’s head as soon as the new Congress is sworn in – an event now a mere 10 days away.

So investors can certainly be forgiven for wondering whether >230 years of effective governance on these shores is collapsing, and the decorum of the proceedings is deteriorating before our very eyes. I now think it’s a fair bet that Trump won’t make it out of 2019, and, if he were to vaporize tomorrow, I doubt that there are many remaining among us who would strongly lament his absence. But the uncertain path towards his removal, guaranteed to be accompanied by a great deal of infantile machinations, is a spectacle that cannot be filtered through a risk-taking lens with anything but fear and loathing.

So on the whole, I’m starting to feel that the lower we close a week from Monday, the better the return prospects, meagre though they appear to be in 2019, are likely to present themselves. But even here, the path is wrought with frustration. Given the alarming outperformance of bonds over stocks this year the domestic pension fund complex appears to be compelled to add ~$64B of equity exposure to their portfolios over the next few sessions:

Going into Monday’s truncated Christmas Eve session, this may be about as joyless a stock purchasing cycle as any we’ve experienced in our lifetime. These pension funds will have to sell bonds at the same time, but a look at the continuing juggernaut of a rally in global govies, it says here that the Fixed Income markets can absorb the blow.

Yes, there are cheap stocks to own, and for my money, current valuations may offer as favorable an entry point as one could hope for.

But as Jim Morrison reminds us, the cold grinding grizzly bear is hot on our heels. Yes, he’s out there, he’s hungry, and he’s intent on capturing his dinner. And in closing, all I can think of is the old joke about two campers running for their lives from such beast. One says to the other “you know this is a waste of time: you can’t hope to outrun a bear” to which his partner replies “I don’t have to outrun that bear, I just have to outrun you”.

And this, my friends, all things considered, is about the best risk management lesson I’m able to offer at the moment. So, Merry Christmas, and, as always..


Vegetable Spirits

So? How’s everybody feeling out there? With two weeks left in this wretched year, how many of you are ready to channel former Salomon Brothers Chairman John Gutfreund’s marching orders, and wake up ready to eat the a$$ out of the proverbial bear? If you are, you have, at least from some perspectives (but not from others), my full admiration.

In the current paradigm, The Gutfreund Principal is more widely, in fact ubiquitously, referred to as Animal Spirits, a phrase first coined by iconic economist John Maynard Keynes, in his seminal 1936 treatise: “The General Theory of Employment, Interest and Money”. Since the Crash, the term has been serially abused, in the written and spoken word, by commentators too numerous and outrageous too inventory in this family publication. Over this period, other cringe-worthy terms have come and (mercifully) gone (“green shoots” for instance), but Animal Spirits, for better or worse, abides.

However, in these troubled times, the term has been applied most commonly through its obverse: with the wizened among us lamenting the lack of Animal Spirits across this fair investment land as the primary case for our ills. Well, OK; fair enough, but you will never hear this term uttered from my lips. In fact, though I may fail within the realms of this very piece, from this point on, I will strive mightily not to even type the letters into any electronic device within my current or future disposal.

The wizened ones are correct, though, at least insofar as that the absence of the never-to-be-mentioned-inthis- space phrase is, today, among the market’s most prominent characteristics. This got me to thinking that what we really are looking at, more than anything else, is a case of Vegetable Spirits – a condition I will define as one where risk-taking agents lack perception of their surroundings, and thus the ability to adapt to them, and must simply accept the caprices of natural forces. The financial peaches, tomatoes and yams of the investment universe may win prizes at county fairs, or they may be unceremoniously chucked into boiling pots along with the turnips and cabbages, as part of an undignified, unsavory, unsatisfying Mulligan Stew. We just don’t know, and anyway, there ain’t a great deal we can do about it.

So yes, I’d say that the markets as a whole, and not in a good way, are currently wallowing in Vegetable Spirits, but perhaps the condition is more broadly applicable to the full range of human activity. A couple of examples should serve illustrate my point. This past week, I met up with one of my oldest and dearest professional chums, at the social gathering locus of his alma mater: The Manhattan Yale Club of Yale University. The place was buzzing, and upon greeting my friend, I mentioned that it appeared that business was good at The Club. Not so, he responded; in fact, times are so tough that the custodians of this sacred meeting place, where stone cold Eli ballers have been gathering for more than 5 generations, has now become a shared dominion with (wait for it) Dartmouth University.

I’m not sure when this happened, but I will say this: it shocked me. By everything that is holy in this world, Yale needs its own, exclusive NYC clubhouse. And, though the oil paintings of famous Eli’s ranging from William Howard Taft to the Bushes – Junior and Senior – still stare down at those imbibing in the Great Room, they have now, at least for me, lost some of their luster. I never had the juice to make it to Yale myself, but, other than some sympathy for the recently banished Andrew Jackson Vice President John C. Calhoun (dispatched due to his stance on slavery, while the University’s Founder: slave trader Elihu “Eli” Yale’s name remains on the door), I have heretofore had no particular quibble with the place. But I’m not gonna lie: letting the modestly down-market Dartmouth Big Green into the previously exclusive Bulldog House kind of brought me down. And I blame Vegetable Spirits, which apparently have now seeped into the Ivory Towers of the Ivy League.

More closely aligned to our immediate concerns, I’d be remiss if I didn’t take note of Friday’s 16% drop in the price of Johnny John, as the maker of virtually every consumer product under the sun felt the wrath of investors — for covering up an apparently liberal use of asbestos in the production of their talcum and baby powders. However, it bears mention – pursuant to our theme – that the key ingredient in these marvelous items is corn starch. And corn, according to my own protocols for determining these matters (my phrase; my rules) is unambiguously a vegetable, and therefore by its very nature guided by Vegetable Spirits. So it could do nothing useful to impede the assault on its corporate paymaster.

And so it goes for the markets as a whole this past week, which, after a couple of sessions that gave rise to hopes that perhaps the menacing volatility cycle was winding down, sold off hard on Thursday and Friday. The Gallant 500 is now not only to its lowest level since March, but also — albeit by the merest titch — sporting an undignified 25 handle (2599.95). In addition to the JNJ talcum bomb, Friday’s selloff was catalyzed by weak numbers out of China. But I’m not in a position, particularly with respect to the latter, to find fault with those who turned tail on this intelligence. Everybody knows that China gooses their numbers with all of its considerable might, so when it reports bad figures, one can rest reasonably assured that the numbers are indeed bad. Perhaps really bad.

But as we cast a leery eye towards 2019, I think there is something more menacing creeping into valuations, and that is the likelihood, nay, near-certainty of a once-in-a-lifetime (at least let’s hope) battle taking shape across the political parties in Washington. In mentioning this as a risk factor, please know that I’d rather cover any other topic (how ‘bout them Bears?). But duty calls. My best guess is that before they’ve even cleaned up the mess in Times Square from New Year’s Rockin’ Eve ‘19, the proceedings will devolve to levels that will make 2018 political escapades look like Woodstock.

On January 3rd, the 116th Congress will be sworn in, and it says here that the new (same as the old) bosses will waste no time before laying an all-out legal assault on the Trump Administration. I anticipate hundreds of subpoenas, dozens of Grand Jury formations, and a galaxy’s worth of innuendo and worse, to materialize before January turns to February. Pelosi, Schiff, Nadler and the rest will be out for blood, and will begin their efforts to extract it immediately. Yes, they will pink their swords multiple times, but it’s also clear to me that Trump and his allies have little intention of simply rolling over and getting stiffed.

The prevailing level of abject cross-party hatred is beyond anything any of us ever have experienced, and I challenge anyone to refute this point. I also am comfortable in suggesting that Trump has received more vitriol than any president since Lincoln, who had to sneak into Washington for his 1861 inaugural, and who immediately faced the reality that a dozen states had left the Union. The outgoing Vice President at the time (John C. Breckenridge), actually became a Confederate General.

There have been periods of strife since those historic days, but nothing that comes close to what is emerging at the moment. Many dozens of congressmen, millions of citizens, and untold billions of dollars are bent on the destruction of the current administration, and they stand a fair chance of achieving their goals. They now control the enforcement arm of the legislature, and they will use it with abandon.

Please forgive the political diatribe here, but look at what the Democrats have wrought even while in the minority. I won’t inventory everything, but anyone who isn’t shocked and dismayed by what has been revealed about the Michael Flynn episode should take another look. They set the poor b@stard up, bigtime, and he is a decorated war hero for f#cks sake! This shocking exercise in entrapment, one of many such episodes, should chill the bones of even the most tree hugging snow flake who’s paying attention.

A judge may throw the plea deal right back in the prosecutor’s face, but that’s beside the point. Clearly some nasty stuff from the Mueller probe (so far completely removed from anything remotely related to Trump/Russia collusion) is about to drop, as will the subpoenas, etc. Most of the next several months will feature an obsessive focus on whether Trump resigns or is impeached. Many members of his family may be indicted.

I find this all beyond sickening, and will just remind my many prog friends that you reap what you sew. Some of you would do well to review the history of the French Revolution, which began in righteous effort to bring due process and civil justice to the masses, but ended up with its sponsors taking turns sending one another to the guillotine. Every. Single. One. Of. Them.

But enough of this, right? More pertinent to our purpose is that if I’m right, then it would be foolhardy to commit any more risk capital into the markets, or, or for that matter, into the real economy than is absolutely necessary for survival. In terms of the former, with nothing but a Battle Royale raging in Washington, it will be extremely difficult to commit capital to real-world projects. And this, my friends, renders the generation of investment returns over the next couple/few quarters a very quixotic exercise.

At the same time, though, other forces strike me as serving to significantly diminish any framework for an outright. Again, for the bajillionth time, there’s is a shortage of stocks available for investment on a global basis, and this deficiency is almost certain to increase. As pointed out in earlier editions, there are now less than half the number of names to trade in the US equity complex as there were 20 years ago. The 3,000-odd survivors are the beneficiaries of buybacks, mergers, acquisitions and the like, which further reduces the inventory of securities available to own. Over the last decade somewhere in the neighborhood of $40 Trillion of new currency has been created, and, while the money printing machines have slowed and in some cases shut down, all that new money needs a permanent home. As a result, and in true Twilight Zone fashion, there aren’t even enough bonds out there in which to invest. And if you doubt this, just take a look at current yields across the globe. Even here in America, where debt prices are arguably more rational than in other jurisdictions, the 2s/5s spread remains inverted.

I reckon, on a related note, and seeing as how this is Fed week and all, I should mention something about the FOMC announcement on Wednesday. I really have very little insight here, but suspect that the equity markets will not like any decision to follow through with their planned rate hike. But get this: they may like an announcement that instead the Fed has chosen to pause even less. One way or another, I don’t see much in the way short-term prospects for higher yields at the longer end of the curve (i.e. the maturities where real economic agents actually lend and borrow) – at minimum until 2019 is well under way.

So, with interest rates frozen or at least capped, and dysfunctional government dampening enthusiasm for private sector risk taking, I believe that corporations will continue to hoover up both other companies and their own available stock. This won’t socialize much of a rally, but at points not much lower than this, absent an unforeseeable catastrophe, investors will be compelled to buy stock, because there is simply no alternative.

I thus am projecting a highly volatile, range-bound tape for at least the first half of 2019, and we’ll just have to hope for the best. Perhaps the Good Lord will provide ample sunshine and precipitation for us, if not to thrive, then at least survive, in our own rich soil. These are the fruits of Vegetable Spirits, my friends, and I suggest you order your activities accordingly.

It could, though, be worse. At least at present we’re not looking at a Mineral Spirits construct, under which investors are dumb as rocks and equally immobile. I don’t think this is likely, and the holidays are of course right around the corner, so let’s keep our spirits up – whatever materials of which they be comprised.