Trump and Bernie: A Match Made in Tech Hell

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

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

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

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

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

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

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

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

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

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

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

Facebook Defacing:

Twitter De-Tweeting:

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

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

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

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

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

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

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

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

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

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


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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Argentine Peso:

Italian 10 Year Yields:

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

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

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

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

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


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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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


Merch Guy: An Appreciation

Merch Guy, Merch Guy, please sell me a shirt,

And if you’re a Merch Girl, at least let me flirt,

I wrote you this song, because you’re my friend,

Without any chords, so this is the end,

Can we please give some to Merch Guy? How ‘bout it kids? He travels from town to town with the band, sets up his table, and, of course, tries to move the Merch. It’s often a thankless job, and one that I don’t think I could perform myself – mostly out of a phobia I have involving a guy and his girlfriend walking up to my stand, buying matching tees from the latest tour, and immediately putting them on over the longsleeved tops in which they arrived. In fact, so horrified am I at the prospect, that I’m not even sure how I managed to bang a description of this outrage out on my keyboard.

There is one other aspect of the Merch game that we should recognize, nay, celebrate, specifically, the settled reality that the less popular the band, the cooler the Merch guy is likely to be. Conversely, the gigis not without its occupational hazards. Consider, for instance, the episode when Led Zeppelin’s beast of a manager, Peter (no relation) Grant, had to beat the stuffing out of a couple of Merch guys who he suspected of selling unauthorized Zep Merch in the lobby of a 1973 show.

However, irrespective of one’s viewpoint on the whole Merch thing, one cannot but feel for the Merch Guys in Istanbul (and if you doubt there are Merch Guys in Istanbul, then it’s pretty clear that you’ve never been to Istanbul, a town which may be the Merch capital of the galaxy). Their already beleaguered international biz took a major pounding on Friday, when, in the wake of (you guessed it) a Trump Turkey Tariff Tweet, their native currency got crushed to the tune of 20%. And the carnage wasn’t limited to financial conditions within the borders of that ancient, troubled land. Equity markets around the globe sold off in sympathy, and even our beloved lead-month Corn contract got pasted by over 3%. The news, however, was better in selected other asset classes. The USD touched its highest level in more than a year, and our dead Prez didn’t even claim the prize for top dog major currency – a title which for the moment belongs to the Japanese Yen. This, in part is evidenced by its dramatic rally against the EUR:

Dollar Strong but….


….Yen Stronger

The global interest rate complex was the beneficiary of considerable inflows, and here, as could only be expected, those inscrutable Swiss took home the honors. Lenders to the Swiss National Bank must now again pay 10 basis points per year for the privilege of placing their money in such capable hands.

In light of the foregoing, and as we try, with mixed success to undertake our August boot-down: so hardearned and so necessary to energize us for what promises to be a raucous last trimester of ’18, the questions are: a) should we care; and b) if so, why?

I’m inclined to answer path-dependent query by stating: a) yes; and b) for a number of reasons. For one thing, during a bad patch I vaguely remember from a decade or so ago, the savvy amongst us paid particularly close attention to JPYEUR, believing that the higher this currency pair climbed, the more risk-averse an attitude investors were embracing. Maybe the same can be said about the present day. To the extent that this is the case, it may just be owing to the sense that with each passing day, 45 is adding to a strategy that amounts to weaponization of the international trade complex. For all that I (or, for that matter, anyone else) knows, the strategy may work. But let me ask you: how aggressive do you wish to be in your portfolios while the saga unfolds?

But like it or not, I must return to Turkey, albeit briefly. Its GDP ranking cracks the Top 20, but it is falling, and is barely 5% of that of the U.S. It sports a respectable debt to GDP ratio in the 40s, but nearly half of these borrowings are dollar-denominated. And the lion’s share is owed to European banks. As has been the case with every currency crisis since mankind was still sporting tails, a significant currency devaluation increases the magnitude of the associated liabilities, and often renders it nigh-impossible for the obligors to make good.

So I suspect that if the current FX paradigms continue on their existing paths, we’re not far off from staring in the face of yet another round of bailouts. And here’s what you need to bear in mind in this respect. Every bailout you care to examine – from Mexico in 1994 to the U.S. bulge bracket in 2008, to Greece in the early part of this decade, is designed, first and foremost, to benefit the lending institutions themselves. Seldom, political rhetoric notwithstanding, does the general public get any help at all. And in this case, I suspect that as such nobody particularly cares of the hardships that may fall upon Merch guys from Ankara to Antalya, but you can rest easy that the global puppet masters will move heaven and earth to rescue the balance sheets of banks from Santander to Soc Gen to (of course) Deutsche Bank.

I’m not gonna lie: I find all of this mind-numbingly wearying. But that’s not gonna stop any of this nonsense. And, as a result, the risks cut both ways. An extended ratcheting up of the trade battles is likely to take bigger bites out of valuations as they unfold. On the other hand (and as I suspect is entirely plausible), if the big dogs in Washington start rolling out optically pleasing trade deals over the next several weeks, then we could be looking at a pretty serious melt-up.

I think it wise to keep it tight for the time being, but as for the Merch guys, I reckon that they’ll just have to take what’s coming to them. Most of them anyway. As part of the week’s festivities, the Russian Ruble took a major pounding as well. But believe me, Russian Merch guys know how to take care of themselves. And, in closing, my best risk management advice is that you avoid at all costs the testing of this hypothesis on your own.


Small Faces

It’s all too beautiful (the refrain from the band’s most famous song: Itchykoo Park)

There’s a lot to cover here, but we must first dispense with a couple of pieces of business.

In the midst of all of the hubbub around 45’s grandstanding insult of LBJ, y’all might’ve missed a significant milestone that presented itself midweek: The Apple Corporation of Cupertino, CA (or is it Mountain View? I get confused) became the first company every to achieve a market capitalization of $1 Trillion.

And that. Is all. I have to say. About that.

Moving on, I am compelled to address the galactic buzz generated by last week’s note about the Faces. Legions of followers pointed out that the group partially evolved out of an outfit called the Small Faces came first. Some even claimed the Small Faces were the better ensemble. Well, yes, there was a band called the Small Faces that predated the visages presumably of larger size, and yes, a couple of their members were a part of both groups. But any reasonable interpretation of Rock History would suggest that Rod Stewart and Ron Wood’s arrival – fresh from the magnificent and vastly underappreciated Jeff Beck/Truth combo—was the seminal event in the formation of the Faces. And, for the record, while I dig their diminutive predecessors, I’ll stick with my longtime allegiance to the core lineup of the Faces as we knew them.

Finally, and on a related note, I must follow up on last week’s Facebook diatribe. You see, instead of just spitballin’ like I usually do, I checked with a couple of cats that actually follow the stock, and they had some interesting things to convey. It seems that the FB Brain Trust had been warning for the two preceding years of the likelihood of slower user growth – a reporting pattern that ended somewhat abruptly with the Company’s Q1 release in April. Here, in the wake of the whole Cambridge Analytica thing, after Zuck’s Excellent Washingtonian Adventure, they issued their strongest guidance in many quarters. So it came as an enormous shock to the informed that for Q2, they did a 180 on the previous quarter’s 180. In fact, they did a 180+ — demanding that the markets recognize the folly of extrapolating into the future the firm’s extraordinary growth in revenues, sales and user engagement.

Unfortunately, however, this context only adds to the mystery. It would’ve been entirely logical for Team Zuck to take a 2×4 to their valuation back in April; late July, not so much. The most direct inference to draw here is that with respect to a company where > 70% is owned by insiders, where Zuck himself has a majority of the voting rights, the public is informed of its doings on a “need to know” basis. And Zuck doesn’t think we need to know – except what and when he chooses to tell us. A connection of the dots suggests that undisclosed problems continue to lurk beneath a still-shiny surface. And, while we certainly don’t need to know, what lies beneath may be more problematic for the markets in general than is generally assumed. I expect the Menlo Park (or is it Cupertino?) crowd to lay low on all of this, but to me, what happens down the road bears watching and is worrisome, come what may.

However, as the Augustine portion of the Julian Calendar unfolds in earnest, perhaps we can turn our attention to happier tidings. The Gallant 500 recorded its 5th straight week of gains, and is now 113 skinny basis points from its all-time highs. Good Captain Naz recovered his sea legs – albeit modestly, and nasty Viscount VIX retreated back into his shell. He now sports an obsequious 11 handle, and it wouldn’t take too much more complacency and giddiness to push him down to even lower depths.

Because, ladies and gentlemen, much of the news that has hit the tape over the last several sessions can be interpreted constructively. More than 80% of the way through the earnings cycle, reporting companies are exceeding even unambiguously lofty expectations, and projecting out to a plus 24%. Investors are taking notice, and, if that ain’t enough for y’all, feast your eyes on the following two charts:


So earnings are strong and investors are reacting favorably. Conversely, and as anticipated in this space, Q3 guidance shades to the negative. 65 intrepid CEOs have shared their associated near-term clairvoyance, and of these 2/3rds are defying both deer and antelope by uttering discouraging words. But hey, it’s early, so let’s not hang our collective heads just yet, OK?

I’d also be remiss if I didn’t share my elation at the positive reversal of fortune in the Grains, particularly Corn, which is showing some A.M. perkiness:

Morning Corn: The Blues Ain’t Gonna Get It

Those sneaky ag traders are attributing some of this to sizzling weather conditions – particularly on The Continent. But I’d be a little careful here. Corn is nothing if not a resilient crop, and if the Good Lord does indeed decide to dial down his heavenly thermostat in realms such as the Grand Republic (France, for the uninitiated), then perhaps it will be yet another sequence of “lookout below”.

But far away from fertile fields from Iowa to Alsace Lorraine, the focus was on very fancy macro events, and the results were, as could have been foretold by the Gods, lacking in clarity.

The Bank of Japan kicked off the festivities early in the week, taking no action and managing to confuse everyone interested in their strategy or associated timelines. Its country’s 10-year rate remains elevated to levels seldom seen outside the Gambino Family’s Jersey City money lending operation, at 0.102% basis points. The Fed did nothing. Finally, the Bank of England maintained its trademark stiff upper lip and raised its overnight rates from 0.5% to 0.75%. This, however, didn’t do much to stem, much less reverse, the gravitational forces currently descending upon the Pound Sterling.

All of this set up for a nominally dramatic July Jobs Report release Friday morning, but this, in retrospect, was something of a non-event. Private Payrolls were a little light at 157K, but the base rate dropped a titch to 3.9%. The much-anticipated Average Hourly Earnings component came in exactly as expected, and precisely in line with the GDP report at 2.7%.

All of the above merits, even by the harshest reasonable assessment, a Gentlemen’s B. But the macro situation is arguably more complicated than meets the eye – mostly due to the ubiquitous but unknowable overhangs of trade wars, and (increasingly as the calendar moves forward) a potential calculus changing election, now a skinny three months away. Of these matters I have little insightful to convey.

By contrast, the related trade action has been worth a gander, as evidenced, first, by a continuing build-up of short interest in U.S. long-term treasury instruments:

Certainly, we’ve seen this movie before. Lots of smart guys and gals have been, for years, anticipating both a rise in longer-term interest rates, and even, for the fully fanciful, a steepening of the yield curve. Maybe someday they’ll be right. Maybe even soon. But the perpetual bid on long-term Treasuries has been perhaps the toughest nut to crack across my market career, which (I remind you) began during the administration of Millard Fillmore. So I reckon we’ll have to see.

On a partially related note, I observe with interest that the self-same smart crowd has thrown in the towel on their long Crude Oil positions.

There are a lot of moving parts here, as Crude Oil is at least theoretically impacted not only by trade wars with the Chinese, but also various cajoling in the Middle East, where a dizzying matrix of production quotas and import/export protocols with utopias like Iran are creating mind-numbing crosswinds. I suspect that in many cases, rather than reversing their investment hypotheses here, crude speculators may be simply capitulating.

It’s all too beautiful, now, isn’t it? But one way or another, it won’t last. The Almighty did not intend us to spend all our days resting our eyes in fields of green, so, perhaps soon, we’ll be forced to bid farewell to Itchykoo Park. The Small Faces had its innings there, as did the (not so small) Faces afterward. Facebook has been the object of our desire for several years, but now we may be forsaking her in favor of our old flame: Apple.

And wouldn’t you know, after Friday’s $1T close, the Cupertino (or is it Menlo Park?) crowd was forced to contend with a shutdown of a major components supplier’s – Taiwan Semi – production plant, so it’s entirely possible that the lofty-but-menacing 13-figure valuation may disappear as early as the Sunday night session.

But here, having violated Paragraph 3’s solemn pledge, I will rest my keyboard, wishing everyone who receives this note a sincere (if redundant) Ooh La La.


Ooh La La

Poor young grandson, there’s nothing I can say,

You’ll have to learn just like me, and that’s the hardest way,

Ooh La La…

The Faces

Full disclosure: I’ve written about Ooh La La before. It was back in the days of “The Left Tail Report” – a publication I put out every quarter, the content of which was so “out there that”, by comparison, my current weekly musings look more like the Editor’s Note in Readers Digest.

Anyone out there remember “The Left Tail Report”?

For those that do, I freely acknowledge that I once dedicated an entire installment to O-L-L. The song – title track from the Faces last album –is an interchange between a grandfather and grandson about the mysterious ways of women. It was written and sung by Ronnie (Woody) Wood, and I think he did a fine job. By the time of its release, his bandmate Rod the Mod was flaking off to a solo career, whence we began to bear witness to his steady, horrifying, 45-year decline into a caricature of what he once was. From a commercial perspective, the Faces couldn’t survive his departure. Woody soon bailed, of course, to the Stones, and even here I was disappointed. I think they could’ve done better. When Mick Taylor split suddenly, I took great interest in his replacement, hoping for someone like Jeff Beck or even Mick Ronson. But they hired Keith-clone Woody, and I knew then and there they were going to settle into a comfortable middle age. And history proved me right; post Woody’s arrival, they seldom, if ever, challenged themselves musically. For the most part, they have simply mailed it in, writing boring songs, basking in their monumental, unshakeable legacy, and, of course, banking scads of cash along the way.

So Woody’s mid-70’s move arguably ruined two great bands. And it is the demise of the Faces that I particularly lament. So spontaneous, so delightfully under-rehearsed. For years, I’ve offered the following warning to my clients: the only development that could impel a hiatus from my professional toils would be a reunion of the Faces, because I’d have no choice other than to accompany the band on the road. This warning, for the record, still applies.

So it is with all of this in mind that I address the unavoidable the astonishing facial that those modern-day Faces: social media behemoth Facebook, delivered to their investors. Admittedly, nobody can shut up about this, but there’s something strange going on here, and duty calls me to weigh in. Let’s just say that the episode was so catastrophic that it’s causing me to rethink my general approach to financial advisory. Loyal readers will recall that earlier this year, and in advance of Zuck’s much-anticipated testimony on Capitol Hill, I advised him to eschew his trademark tee in favor of his Bar Mitzvah suit. I think he tried to comply, but presumably finding it a poor fit, he at least rocked a reasonable facsimile thereof. And he managed to endure the episode without emerging much worse for the wear. I further predicted that the markets would soon forget the incident, and I was proved right on that score – at least insofar as FB not only recovered, from a valuation perspective, everything it had lost from the grilling, but added another >20% to its historical highs – all within what amounted to about three months. I don’t know if the Zuck Suit did all of the heavy lifting in this respect; let’s just agree it didn’t hurt.

But perhaps thus feeling himself able to fully accept my counsel, he might’ve taken too literally my sentiments that the Q2 earnings cycle was logically setting up for downward guidance. Because boy did he guide down. And he had help. In fact, the earnings call evolved in such a way as hasn’t been seen in these realms, well, in forever. It all began innocently enough. Zuck took to the podium with chipper demeanor. It was a good quarter, he said. Just a tad light on revenues, but gosh almighty aren’t people loving Insty and Snapchat? He then turned the mic over to the redoubtable Sheryl, who put a damper on the festivities by fretting about such matters as currency impacts and ad revenues.

Here, the stock started to waver, but still, we were not in red flag configuration. That is, until 5:20 PM – EDT, when Sheryl punted to CFO Dave (Dr. Doom) Wehner, who not only punctured the sagging balloon, but burned down the all of the party favors, the house and the entire block. He didn’t simply guide down for Q3, or even just for the back half of 2018. He suggested that growth rates would be on a downward trajectory for years. We all know what happened after that.

FB shares plummeted to generate the biggest one day/single stock valuation destruction in market history. Again, a great deal has been written about this, but for our purposes, a number of factors merit our further attention. First, I don’t ever recall a company in such fine shape overall guiding down anywhere near that far into the future. Second, while I am not as laser-focused on earnings as some of my readers, it is my experience that when a CEO brings bad news to the podium, he or she usually drops it in the first five minutes of a call. But the Faces waited nearly an hour and a half before cluing in the investment community their fears that their fabulous innings in the sun are winding down.

I’m puzzled, here, about a number of things. Most of all, there’s no reason on this earth that a company generating > $10B annually in free cash flow, which has 2.5 Billion users (competing, at these levels, with Air and Water as the most ubiquitous product on the planet), and which clearly has resources and reach to continue to achieve astonishing consumer technology breakthroughs, should be talking about topping out on its growth. And for me, there is only one possible explanation: management tanked the stock, wanted it to go down. And hard. The obvious question follows: why?

But whatever the true explanation, I feel it behooves me to now be much more careful in offering my counsel about such matters as earnings guidance, because, if my sentiments are over-interpreted, the consequences can apparently be dire.

There were other hits (Googlers, Amazonians) and misses (beyond FB: Twitterers and Netflixers) across the rest of the week’s earnings extravaganza, but on the whole, we’re still looking at a >20% quarter. We’re now past half-time in this here contest, and I think we can safely assume that the last three months will be shown to have been kind to the bottom lines of public companies. Investors appear, on balance, to be mildly impressed, but pockets of doubt clearly remain, and maybe rightfully so.

The week’s other quarterly tidings feature our first glimpse at Q2 GDP, which clocked in at a robust 4.1%. The media-politic stuck to the script, with the current holders of power not slow to grab all of the credit, while their detractors groped about to tell the other side of the story. By any standard, 4.1 is a pretty solid number, but now, less than 48 hours after its revelation, it already feels like old news. In addition, after months of trade war brinksmanship, there appears to be some sort of détente in place between America and Europe, and this, my loves, if authentic, is unilaterally good news. Among other matters, it caused Commodities to move modestly off the schneid:

Commodities Off the Schneid

But the news isn’t all rosy. Virtually every metric associated with the domestic housing market is on it (the Schneid, that is). And the timing for its underperformance is arguably less than ideal. Bear in mind that ALL macro statistics are backward looking, but Housing particularly so. Right now, we’re getting our first insight into May numbers – a point in the calendar that represents the peak of the selling season. Not much buying (and hence selling) activity is in evidence.

One can identify numerous causes here. Mortgage rates are higher; inventory is low. Some areas in this country are just plain unaffordable.

However, in perhaps the unkindest cut of all, the ubiquitous website reports that the purchase of American terra firma by non-Americans has suffered a 20% drop. Leading the way are the two biggest sources of historic demand: the Chinese and the Canadians. At the risk of stating the obvious, it’s just possible that their feelings are hurt.

So I’d check any instincts I might otherwise have to ascend to giddiness about the GDP report. Among other matters, as we remain in a turbo-charged information release cycle, it might behoove the rational to be a bit reactive here. Next week brings a number of noteworthy earnings reports. First, of course, there’s Apple, and if that’s not 2018 enough for you, Tesla reports, in characteristic fashion, after the bell on Friday. Also, while admittedly a stretch for some of you, I personally have my eyes on the Pride of Peoria, IL: the Caterpillar Corporation. CAT’s been guiding up but getting no love for their troubles. If the numbers are bad/or and they guide down for the future, it’ll be look out below. I also think their briefing will be greatly informative for such topics as the strength of the overall economy and the potential impacts of trade wars.

Lest we forget, there’s plenty of data love for left out non-equity types as well. Tuesday/Wednesday is the next FOMC meeting, where no action is expected, but for which the accompanying policy statement will be parsed down to the letter. Also meeting – under high-drama conditions – are the Banks of England and Japan, respectively. There’s a good deal riding on these transoceanic monetary policy statement exercises – particularly in Japan, which is showing signs of getting tired of issuing debt at 0% interest rates:

And once we’re through all of that, we can point our peepers to the July Jobs Report, scheduled for release at its regular time next Friday. Everyone expects the number to be a pretty strong one: ~200K in new gigs; maybe a drop in the base rate and a rise in the Labor Force Participation level.

However, in familiar refrain, it is likely that all eyes will be trained towards the Average Hourly Earnings print; perhaps (but not likely) to solve the vexing mystery of why an economy humping along as ours is, that is known to have a labor shortage, cannot seem to gin up the wage inflation that would bring tears of joy across the great wide way.

I’ll be watching closely all week – unless, of course, the Faces reunite and decide to go on tour, at which point matters will be out of my hands. I’m not expecting this, so I wouldn’t worry overmuch on that score. In fact, it may never happen. Rod is working the Casino circuit, no doubt enjoying the swoons of females from ages 8 to 80. I’ll give him a pass on that one. Woody is scheduled to play to crowds in excess of > 100,000 across the globe for the next several months, so he’s presumably unavailable. Ronnie Laine and Ian McLagan have shed their mortal coils, leaving only drummer Kenney Jones to carry on. If so, then the Faces become the Face, and I’m less interested.

The band, no doubt, passes into finite history, but a few of us fans remember, and will try to pay it forward. I did manage to make my son and his friends hip to the Faces, and perhaps one or two of them are carrying on.

Now’s not the right time, but when it comes, I’ll share these gifts with my grandsons. But I won’t overdo this. I’ll play the records, tell the story and leave it at that. From there, we know what to expect: they’ll have to learn just like me, and that’s the hardest way. And now we can conclude this week’s business, as there’s only one more thing to say, and I hope you’ll say (or sing it) with me:

Ooh La La…


Here’s the Story

I read, with mixed regret and a great deal of interest, that a certain residence: 11222 Dilling Street in Studio City, CA, is up for sale. More pertinently, this 2,500 square foot, 2 bedroom/3 bath dwelling, has been since time immemorial, the home of the Bradys.

My first reaction (a logical one I feel) was to scream “Fake News!” After all, everyone knows that whatever else its appeal (sliding doors, eat in kitchen, etc.), 11222 Dill contains NO bathrooms. I think there was a closet with a mirror and a sink, where those whacky kids used to fight from time to time for sufficient space to brush their unilaterally, impossibly white teeth. But a bathroom? No.

However, I’ve checked and it’s true, Casa Brady is indeed on the market, and for the bargain price of $1.85 mil. And part of me feels that we’re all worse off for the prospective transaction. I developed an early fascination with the Bradys, perhaps in part because the Bunch are my chronological peers. I’m a little younger than Jan; a little older than and Bobby.

So when the series was in Prime Time, I never missed an episode, realizing even at a young age, that it offered a perfect caricature of life in 1970s America at its campiest and blandest. That it did so in contemporaneous time, and without any intended irony, is a marvel for the ages. It ran for about 6 seasons, but was eventually cancelled because the kids got too old. And neither Mike and Bobby’s dubious perms, nor the arrival of the ill-matched, misanthropic Cousin Oliver, could salvage it. But as the saying goes, Old Bradys die hard. A couple of years later, the cast convened through a variety series, which, somehow, and against all odds, managed to outdo even the Brady Bunch in Brady-ness. The same could be said of a spinoff called The Brady Brides, in which newly betrothed Marcia and Jan seek to economize by moving in together with husbands that hated each other. Trust me on this one: hilarity did indeed ensue.

Lingering, still, is the Marcia/Jan debate, and, to me, despite having a soft spot for Jan (easily the most unhinged of the Brady scions), in terms of romantic appeal, it’s no contest. It’s Marcia, Marcia, Marcia. Even with her banged up nose. But I do have one further matter to get off my chest: once, in a fit of sheer boredom, I took a BuzzFeed quiz to determine whether I was more Marcia or Jan, and I came up unambiguously as Jan. I posted the results Facebook.

But as Mick once sang (on a record that was released, as it happens, about the time that the Bradys kids hit their aggregate hormonal peak) “Time waits for no one”. Not even a Brady. Mike and Carol are both dead. Alice is dead, as is Sam the Butcher. Mangy mutt Tiger disappeared with no explanation after Season 1, and, nearly 5 decades later, we can perhaps safely conclude that he too has gathered to the dust of his forebears. Greg rocks a weave/dye job, and croons the borscht belt circuit. Marcia is born again, and no longer speaks to Jan. Peter turns up on the telly here and there. Cindy, I believe, is a radio DJ with pretty solid rock sensibilities. Bobby, improbably, sells decorative concrete on his home turf near Salt Lake City.

So maybe it was indeed time to sacrifice 11222 Dill, but I felt it my responsibility to not allow this milestone to pass unremarked.

So that’s the story. At least that story. But meanwhile, what’s ours?

Well, I’ve nothing to relate that rises to the dignity of the Johnny Bravo episode (or the one where Marcia resorts to cross-dressing, in her hot pursuit of the adorable Davy Jones), but it’s not like we don’t have some ground to cover, so let’s get to it, shall we?

In simpler times (say, suburban L.A. – circa 1972), market participants might’ve casted their collective focus on the many salient data points coming our way,: the acceleration of the earnings calendar, Fed Chair Powell’s testimony on Capitol Hill, and other information flows directly tied to the fortunes of the global capital economy. However, these are anything but simple times, because among other things, our fearless leader accomplished the nigh-impossible, drawing incremental attention to himself – at a point when his face had already become more ubiquitous than that of Orwell’s Big Brother.

More specifically, he’s fighting with everyone, and in doing so, is channeling his inner Jan: always at risk of descending into phantasmagoric delusion (the wig episode, the made up boyfriend, etc.) One time, she even decided, and was accommodated in this wish, to disown the entire Brady crew. And Trump is acting out in similar fashion. He’s brawling, of course, with China, with Europe, and even with Canada for God’s Sake. In his own way (though the superficial narrative runs in the other direction), he’s circling in menacing fashion around Russia. Moreover,, in addition to his longstanding beefs with the FBI, CIA and Justice Department, he’s now picking bones with the supposed-to-be-independent Federal Reserve Bank of the United States.

These are serious matters, but the markets, like the Bradys did to Jan in the aforementioned episode, have chosen to to pretend he’s not there. Thus, just as Jan’s brothers and sisters simply hopped around her when she tried to disrupt a backyard sack race, investors ignored such matters as threats to up the Chinese tariff ante to a cool $500B, and shade throwing at our Central Bank, and went about their business.

They didn’t have much to show for their efforts, but they did manage to gather themselves sufficiently to push the Gallant 500 up about 9 handles for the week (0.27%), and a similar tale can be told about our other favorite indices. Treasuries sold off a bit, pushing yields from ~2.82 to ~2.89, but continue to trade in the narrowest ranges witnessed for more than a decade. The Bloomberg Commodity Index was able to register a pulse, with my victimized grains catching a small bid, but other components – particularly the whole metals complex – continuing their descent into the netherworld. Thus, if nowhere else, we see the trade war risk premium rising in the mundane world of commodities.

Earnings, thus far, have been a mixed bag, with winners such as Bank of America, Morgan Stanley and Microsoft being offset by disappointers including eBay, NetFlix (improbably) and (of course) General Electric. Howver, with 17% of the SPX clocking in, the market is still on pace to reach its socialized target of >20% earnings growth, and if the trend continues, no one should complain.

Casting our eyes towards the VIX, we note benign volatility conditions, but again, that’s not the whole story on vol. As we’ve discussed, the VIX is a rolling measure of at-the-money SPX implied volatility, and it is indeed low by any relative/historical standard. But if one looks out at the tails of the volatility plain – i.e. the realms where investors actually purchase portfolio protection, we see that they are evidencing a willingness to pay up – substantially:

Now, just like the rest of you, having always been a bit leery of the VIX, my inclination is to evaluate an index of skew thereto with a particularly jaundiced eye. But the way this thing is calculated, a value of 100 implies that investors expect a normal distribution of SPX returns, and now we’re at 160 (record levels by a wide margin), which suggests an increase in the options-projected probability of a multi standard deviation crash to statistically meaningful levels.

On the other hand, I mentioned this to a couple of clients and they usefully pointed out to me that all of the implied overpayment for portfolio protection is as strong an indicator that this here bull market has yet to run its course as any we’re likely to find in these troubled times.

I reckon we’ll see. Next week, after all, brings another big series of earnings, including the Googlers and Facebook. Beyond this, on Friday morning, we’ll get our first glimpse at Q2 GDP, and, for what it’s worth, those crazy cats at the Atlanta Fed are up to their old tricks again, turbo-charging their projections back up to a big, fat 4.5%.

Part of me wishes that they’d just make up their minds, but then again, this would be a futile gesture. The Commerce Department will make minds up for them on Friday, and that is the number that will go into the history books.

Until, of course, it is revised. And then revised again. But pretty much everyone who’s cared to look into these matters expects an exceedingly rich quarter, and here it bears remembering, because > 4% prints on GDP don’t last forever.

On the other hand, nothing does. Last forever that is. And if you doubt this, just ask the Bradys. Given that for many of us (myself included of course) they will forever remain the perpetually perky, wellscrubbed teens and pre-teens that they always have been, it must be very upsetting for them to have their childhood home sold right out from underneath their feet. Here’s hoping that the buyer(s) whoever they may be, understand that they are not purchasing a house, but rather, a shrine.

And yes, I’ve considered bidding myself. But it’s a stretch. I can probably scrape together the 1.85 large asking price, but with little margin for error. More importantly, this would leave me with almost no financial resources to undertake certain structural adjustments that I feel are just nigh essential.

I probably don’t need to elaborate here other than to state that, at my advanced age, an upgrade in the plumbing arrangements at 11222 Dilling Street, Studio City, CA is among the most effective risk management actions of which I possibly can conceive.

If I were to take this step, it would be important for me to remind myself that my life in Studio City would not fit into tidy 22 minute segments, resolving themselves in crescendos of happy endings and lessons learnt. This is particularly true 45 years after the demise of the Brady Bunch, and even moreso in today’s markets. It’s tricky out there; not much edge to be found anywhere. Be forewarned.


Right Place / Wrong Time (POTUS Edition)

I been in the right place but it must have been the wrong time

I’d have said the right thing but I must have used the wrong line

I been in the right trip but I must have used the wrong car

My head was in a bad place and I’m wondering what it’s good for

Dr. John (the Night Tripper)

I reckon I’ll begin by getting a little unfortunate but vital business out of the way. My deepest apologies about the whole Corn thing last week, because it seems that my heartfelt salute to the stalky grain may have done more harm than good:

On the other hand, while I enthusiastically celebrated Corn’s comeback, I never intimated that it would continue. In fact it didn’t. Instead, it reversed itself and managed to record multi-year lows.

And, based upon this train wreck of a chart, I will promise never to write about Corn again. Well, OK; maybe not never. But at least not often.

Let us not forget – the situation, as it currently stands, could be worse. After all, I could’ve also pointed my admiring keyboard at Soy Beans. Or Sugar:



In fairness, I probably bear some responsibility for the Sugar slaughter as well. After all, last week’s note did include a reference to candy corn, which requires at least a Spoonful of Sugar to make the market go down.

But it’s not just Ags; last week, the whole Commodity Complex acted in consort to put on a flop seldom seen since the likes of of “Springtime for Hitler”. And here, I’m talking Precious Metals, Industrial Metals, Softs; even Energy. In fact, the whole smash. All of which is captured succinctly in the trajectory of the Bloomberg Commodity Index:

Now, presumably, not many people care about the Commodity Complex, because, let’s face it: nobody cares about the Commodity Complex. I mean, it’s not like anybody is impacted by the price of such quaint but uninteresting products as Copper, Natural Gas, Cotton or the like.

There are, presumably, some guys (with bad haircuts) and gals that must concern themselves with these matters, but I suggest that us Sophisticates move on.

So how about we give it up for my man, Dr. John the Night Tripper, born, bred and still pumping his 88 key ax in New Orleans? Our titular theme references his biggest hit, but there’s a lot more to the Night Tripper than one early 70’s FM Radio extravaganza. Meanwhile, I got to thinking about the Good Doctor’s main lyrical hook (a timeless lamentation if ever there was one) with respect to the current geopolitical situation.

More specifically, it occurs to me that we Americans have been plagued by a string of Chief Executives who have undertaken arguably justifiable strategic initiatives (i.e. been in the right place), with supremely sub-optimal timing. I’ll start with Bush 43, who squandered a galaxy of post-9/11 goodwill by turning our military towards the task of removing Saddam Hussein. Yes, Hussain was a bad guy, arguably a bull goose sociopath. But couldn’t we have tried to finish taking out the incrementally odious Bin Laden before committing to a quagmire that: a) cost untold blood and treasure; b) produced dubious strategic gains; and c) still remains somewhat unresolved, some 15 years later?

Treading carefully into more controversial ground, we come to Obama. It is indisputable that, for eons, the U.S. Health Care system has been a hot mess, and yes, he had pledged to reform it. However, whatever side of the Obamacare issue one may reside, it was deeply ill-timed to re-engineer a vital sector’s economics, one representing approximately ~18% of U.S. GDP, at a point when our economy had not formally checked out of the critical care unit. Had he waited a few more quarters, we might’ve all been better off.

All of which brings us to our current situation, unfolding under the steady(?) hands of 45. Yes, the Chinese have been gaming us in trade for many decades. Yes, they steal our intellectual property. And yes, the lovely Canadians, our besties, can probably justifiably be tweaked for their 3x tariffs on our dairy products, while we buy their cheese at no mark up. But, for crying out loud, couldn’t it have waited until after the Mid-terms? History shows that the current rhetorical path is a risky one. Trump may have the perfect strategy, but if his timing is off even by minute orders of magnitude, it could take a big bite out of the economy, and, consequentially, deeply impact the outcomes of the Midterms. I don’t know that this is where we’re headed, but consider, if you will, the obverse. I posit that absent the trade issue, equity indices would’ve ripped through new highs, economic indicators would’ve been much jauntier, and the political calculus (as a result) much more favorable for the fortunes of the investor class. But instead, he bulls on ahead, and creates what I believe to be the biggest risk overhang on what otherwise looks to me like a fundamentally strong environment that is poised to take valuations to higher realms.

Before taking leave of the POTUS component of the Right Place/Wrong Time thing, I must present the exception that proves the rule. If not thrilled about Trump’s Monday meeting with Vlad (the Impaler) Putin, I’m not sure it will do any particular harm. And, if these two statesmen for the ages are to convene, now may be as good a time as any. But Helsinki? Why hold the summit at that remote outpost, which by the way, fell on the Soviet side of the Molotov-Ribbentrop Pact of 1939, under which the entire sovereign nation of Finland, lock stock and barrel – was handed to Stalin? Wrong Place/Right Time. Check.

All of this notwithstanding, the private capital markets are in fairly perky configuration these days. As was the case with my Corn call, I was arguably in Right Place/Wrong Time mode when suggesting caution on equities in last week’s epistle. Instead of wobbling, the Gallant 500 managed to bust through to a 28 handle, while Captain Naz piloted his rocket ship to new all-time highs. Q2 earnings, though with only 5% of the precincts having reported, are coming in within the margin of error relative to lofty expectations. As suspected, forward guidance shades to the cautious, but in mild surprise (at least to me), CEOs don’t seem particularly concerned about tariffs, which thus far has clocked in as the 8th biggest concern among them with respect to their forward-looking prospects.

But we’ve only just begun this here cycle, which picks up a bit next week with the remainder of the Banks and a couple of high fliers like NetFlix and Microsoft taking their turns in the star chamber.

And investors seem to be conditioned at the moment to both receive good news and react favorably to it. I hadn’t expected such equanimity at this point, but then again there’s that whole wisdom of the crowd thing, etc. On the other hand, there may be some turbulence beneath the calm top-waters.

Specifically, while index volatility has dropped mercifully over the last several months, the same cannot perhaps be said about dispersion at the individual security level. Consider, if you will, the following chart:

Apparently, in other words, not everyone is buying into the rosy scenarios. Yet, history shows that the increase in the magnitude of short-sided individual stock positioning is perhaps the most consistently valid reason to own these stocks as any that can be imagined.

The most important objective, of course, is to be in the right place at the right time – one of life’s most difficult challenges. Investors who achieve this make billions, of course, while the rest of us take pot luck.

For politicians, on the other hand, it is nearly impossible, as a simple matter of odds, to avoid finding themselves in Night Tripper configuration, at least some of the time. We’ve already covered our last three Presidents, and, before that there was Bush 41, who probably would’ve been re-elected had he not raised taxes at an inopportune moment. For Carter and Ford, nearly all of their actions were ill-timed, and before that we have Nixon (Watergate), Johnson (Vietnam), and Kennedy (Dallas), which covers the full range of Oval Office occupants across my lifetime.

Except for two. First there was Reagan, who, through either dumb luck or improbable skill, seemed to time everything to perfection. And last, we turn to Bubba, and here I’ll leave his time/place mismatches to your own collective imaginations.



Morning Corn

Woke up one morning, ‘round San Francisco Bay,

She lay beside me, and this was our last day,

No tears were shed, though our hearts would soon be torn,

We just started smiling, laughing, rolling in the morning corn,

Morning corn, morning corn, the blues ain’t gonna getcha, when you’re rolling in the morning corn

— Corky Seigel

I’m guessing that few of you are familiar with this week’s featured artist (named above), who, along with his former Roosevelt University school chum Jim Schwall, lit the scene on fire a bit 50 years ago, under the eponymous moniker of the Seigel Schwall Blues Band. Give a listen if the spirit moves, and start with our title song, perhaps the band’s best.

Yes, I love “Morning Corn” but the truth is, I love all kinds of corn. Because (you’ve got to admit) corn is pretty cool. No matter what form it may take. And there’s lots. For example, there’s corn on the cob, popcorn, corn flakes, corn dogs, canned corn, creamed corn, corn syrup, corn bread and (of course) Jimmy crack corn, and I don’t care.

Corn is sometimes also called maize, but mostly only by either the indigenous peoples of this continent, or those affiliated with my deadly sports enemies at the University of Michigan.

Speaking of indigenous peoples, the European Settlers of the 17th Century first bonded with them guys, over, you guessed it, corn. Corn is also a main food staple — not only for humans, but also for the domesticated animals we breed to slaughter and convert into other culinary delights. Though highly inefficient, corn can, in addition, also be used as fuel for internal combustion engines.

Plus, to paraphrase Dylan, some of these bootleggers can turn it into pretty good stuff.

Corn, though, is not without its controversies. However, I must take issue with my doppelganger Lewis Black in his assertions that: a) all of the candy corn that exists in the universe was created in 1911; and b) its un-consumed units are collected, washed and resold to the masses each subsequent Halloween. In addition, to the best of my knowledge, and contrary to the inferences embedded in our title song, there’s not much corn to be had in the general region of the San Francisco Bay, and almost certainly not enough to go rolling around in the stuff in the immediate post sunrise hours.

But mostly I feel that this is NoCal’s problem (one of many), and other than that, I wish to convey the happy news that of late, is making a nice comeback.

Yup: Making a Nice Comeback

The accompanying chart indicates a month-long, dizzying collapse from ~$4.20/bushel down to a rather pedestrian $3.60 (its lowest level in > 5 years) as of last week. But the good news is that corn’s now back on the charts with a bullet at $3.71¾. But I don’t want to get to jiggy here. After all, I grew up in the grain pits at the Board of Trade of the City of Chicago.

There, you learn early on that grain speculators will often manipulate prices based upon ultimately inconsequential shifts in Midwestern weather patterns, so maybe some of the recent recovery derives from rather parched conditions in America’s Corn Belt. But I think on the whole I’ll park myself in Missouri (ranked 9th in overall corn production as of 2016) on that one.

Then there’s the whole China thing. But China imports less than $1B/year of corn from the U.S. – the approximate equivalent of the value of finished ceramic figurines we sell over there, and a single digit percentage of overall domestic maize production, so I need some help with the math here as well.

But then again, pretty much all tradeable asset classes have me confused of late. Investors returned from the whole Independence Day in a patriotic mood, and took all our equity indices into positive territory for the week, socializing the first across the board first Mon-Fri gain since mid-June. This move catapulted the Gallant 500 above all of its pertinent Moving Averages, also for the first time in a month, and, in solidarity, the always mystifying VIX plunged to depths not seen in a similar dog’s age.

As suggested last week, one could argue that the official action of the quarter began on Friday, with the release of the June Jobs Report. Here, the numbers came in on the shady side of in-line, with solid job creation and increased Labor Participation causing a modest rise in the base rate.

But as everyone kind of feared, Hourly Earnings growth continues to disappoint, clocking in at a drearily repetitive +0.2%. As such, long sought-after wage inflation and its presumed shot in the arm to consumers continues to be little more than a utopian dream for economists of every stripe.

Perhaps in part for these reasons, financial conditions remain both over easy and sunny side up, with government bonds rallying across the globe last week, and the always-generous Swiss National Bank now willing to charge an annual rate of ~0.15% for the money it borrows. Japan is paying 0.02% for the same accommodations. All of which is consistent with my stated hypothesis that the equity complex wants to rally.

But now I’m not so sure it will. Yes, earnings, set to commence next week, appear to be a poised to tell a happy Q2 story. Consensus estimates are clocking in at >20% profit growth, and high single digit revenue expansion. Q1 will, of course, be a tough act to follow but it’s my belief that if corporate chieftains in aggregate do no better than meet these estimates, no one should be particularly inclined to complain.

And, for what it’s worth, I have a hunch that they will beat them. Consensus estimates, that is.

But, for a variety of reasons, I am beginning to worry about forward guidance. First, I hasten to remind y’all that when the C-Suite crowd guides, it will be guiding for Q3, also known as the Kitchen Sink Quarter, when, according to time-honored tradition, bigwig execs tend to sandbag numbers, so as to make them look all the more fabulous when Q4 comes around. And who can blame them? After all, if you were a bigwig exec, would you rather walk into the Compensation Committee on the upswing, or forced to explain away nefarious gravitational forces plaguing your financial statements?

And in addition to incentives that may drive more modest future estimates, the current situation offers ample fodder for this sort of thing. Of course, we can start with trade wars, now, if the wires can be believed, begun in earnest. It may get worst, and it may hit bottom lines, one can almost hear the tune whistling on the lips of CEOs even now.

Then there’s uncertainty about currency, higher energy costs, questionable credit conditions and the like. I may be wrong here, but I’m just kind of suspecting that the tone at the podiums will shade towards the subdued.

My overriding concern is that there’s just too much uncertainty pervading the ionosphere for confident investment – either implicitly, through the markets, or even directly, through such quaint exercises as research, development and capital expenditure. This, I fear, may tether the markets to their recent narrow ranges. I don’t think there’s much outright crash risk, but I do wonder whether investors have sufficiently digested their Corn Flakes or Wheaties to carry this here market into new frontiers – at least for now.

On the other hand, there are those among us who are convinced that the bull market is over, and while I don’t agree with them per se, I must also concede that they may be right. If so, my fondest advice for you is to wake up early, grab the one you love, and head to the nearest cornfield.

If you don’t know what to do from there, then please accept my apologies for wasting your time.


Pearl of the Quarter

On the water down in New Orleans, my baby is the pearl of the quarter,

She’s a charmer like you never seen, singing voulez voulez voulez vous,

Where the sailor spends his hard-earned pay, red beans and rice for a quarter,

You can see her almost any day, singing voulez voulez voulez vous,

I walked alone down the Miracle Mile, I met my baby by the Shrine of the Martyr,

She stole my heart with her Cajun smile, singing voulez voulez voulez vous,

She loved the million dollar words I say, she loved the candy and the flowers that I bought her

She said she loved me and was on her way, singing voulez voulez voulez vous

— Donald Fagen/Walter Becker

A little Steely Dan on this hot, pre-holiday weekend? How ‘bout it kids? Well, anyway, it’s my call, and I say yes.

“Pearl of the Quarter” is merely one of the gem’s on the Dan boys’ 1973 “Countdown to Ecstasy” LP, the second in a string of remarkable albums, recorded over a 5-year period in the early ‘70s. The sequence begins with “Can’t Buy a Thrill”, continues on to “Ecstasy”, then soars through “Pretzel Logic”, “Katy Lied” and “The Royal Scam”. My own view is that the quality of the songwriting dropped from that point on. However, many disagree, feeling that the group’s subsequent release: “Aja”, was their finest work. But you can take that record, along with your Big Black Cow and Crimson Tide, and get out of here. There are a few sublime moments on “Aja’s” follow up: “Gaucho” (1980), but that’s about it. They didn’t hit the studio for the next 20 years, and the produced two forgettable albums around the turn of the century. Then, as I believe was a wise move on their part, they cashed in by touring for about a decade and a half (the only way even the Stones or McCartney make money these days). And now Walter Becker is dead. So it goes.

But oh those first five albums! We could’ve chosen to honor SD by featuring virtually any track contained therein. “Pearl” however, is among my faves, telling the age-old story of a loney guy falling head over ears for a Cajun prostitute in the French Quarter of the Crescent City. Her allure is irresistible, and yes, she loves him (or at least tells him so). But in her inscrutable way, she knows she must spread her love around. He knows it too.

Voulez, voulez voulez vous?

But of course, we have other reasons to home in on “POTC”. Friday, after all, marked the end of an interesting, but on the whole, frustrating, second quarter of 2018.

Across the three-month cycle, there weren’t many pearls about which to report, at least from an investment perspective. And I certainly have a personal beef with its swansong, which made hash out of a prediction of mine that the equity markets were poised for a rally.

But rally they did not. Yeah, after a horrific start, they threw me a small bone as the week wound down, picking up a skinny half a percent in the last two sessions. But their hearts weren’t in it. Friday morning, and on the back of a slight ratcheting down of the China thing, they gathered themselves for an energetic climb, but, as I suspected at the time, they lost their vitality in the afternoon. The Gallant 500 did manage to gin up a 0.3% gain for the April-June interval, and at least this is better than Q1, which socialized a loss of slightly smaller magnitude. Thus, despite an historic tax cut, an earnings cycle that has shattered records, and various other hope-inspiring catalysts, Mr. Spoo now tips the scales at +1.67%.

Of course, it could’ve been worse, and, in fact is — across most of the planet. To wit, of the ~20 indices tracked on Bloomberg’s ubiquitous World Equity Index (WEI) page, the SPX is the only one that has earned the right to paint its performance in green:

Sure, we could turn our attentions to happier environs, including those haunted by the indomitable Captain Naz (+8.79%) or Ensign Russell (+7.00% but falling fast). And certainly the news has, on balance, been positive for the holders of 10-year notes (and, lately) the USD, but I’m gonna go the whole route here and suggest to the Market Gods that, with half of the year now in the books, I’m just a tad bit disappointed.

But the Market Gods most certainly operate in mysterious ways, and who are us mere mortals to question these?

We’re entering what is likely to be a sloppy week, and I think I can speak for the market-obsessed masses when I suggest that Wednesday is the least productive day to celebrate American Independence. Most of us would prefer to either get it over with earlier, or postpone it to the end of the week so we can chop some wood before giving our shout-outs to the Stars and Stripes.

But the Julian Calendar was established well before most of you were even twinkles in the collective eyes of your forebears, so I reckon we’ll just have to live with that. Those of us who plan to return to our posts after the last Roman Candle has burned out will no doubt turn collective attention to next Friday’s Jobs Report, where the base rate is expected to hold steady at 3.8% and195K new private gigs are anticipated. The real action, though, is likely to revolve around Average Hourly Earnings, and the testing of the hypothesis of whether or not wage gain acceleration is, or ever can be, part of the picture.

This may be even more important than usual, because, as has been the case so often in recent years (and proven wrong each time), a big concern for us pointy-headed types is whether the indefatigable American Consumer might, at long last, be running out of steam. About the only interesting macro number that dropped last week was a surprising downward shift in Personal Consumption Expenditures, expected to clock in at +3.7%, but only managing to reach a tepid +2.7%. So alarming (to some at any rate) was this miss that it caused the recently high flying GDPNow Index to undertake an unsettling nosedive:

But what the Atlanta Fed taketh away, the Atlanta Fed can surely giveth back. And one thing that would almost surely invigorate both our domestic shoppers and give a boost to the broader measures of economic performance would be some evidence that pay raises, long promised, are actually manifesting.

There are indications, however, that the market doesn’t believe this to be the case – none more visible than the continued rally in global bonds, which also went against my recent call, and which now have tethered 10 year yields to a rather pedestrian 2.86%.

For those tracking such matters, yes, Generalissimo Francisco Franco is still dead, and 10 Year Swiss Notes are still offered at negative yields.

Once we get through the holiday and the Jobs Report, we can, the following week, turn our attention to highly anticipated Q2 earnings. The early returns have been good, but of course investors have not been overly impressed; otherwise the indices would have done what I ordered and rallied.

But c’mon, people.! Estimates for the quarter are the 2nd best (i.e. after Q1) since the crash, and have actually, been rising across the last three months. This, as indicated in the following chart, is something of an anomaly:

Current P/E’s, at 16.1, are below the 5-year average but above the 10-year mean. But please; the latter takes us back to the period covering the crash and the recovery, and are hardly reflective of what might be expected across today’s strong economic environment, with very favorable financing conditions, and an awful lot of companies putting up astonishing – and still expanding – bottom line performance.

So, though chastened by my misdeeds over the last couple of weeks, I continue to project the near-term balance of the risks in the equity markets to be shaded to the upside.

And, in closing, here’s hoping that Q3 generates more pearls than what was served up to us in Q2. However, this is most certainly out of our hands. After all, sometimes you walk alone down that Miracle Mile; sometimes you do so in the most pleasant of company. And sometimes the pearls we find are artifacts of God’s perfection, while other times they are Cajun women of easy virtue, singing “voulez voulez voulez vous”.

Either way, we take what we can get, because there’s really nothing else for us to do. So we carry our lovingly purchased flowers and candy, and utter our million dollar words, often to no avail. But we return, each day, to the Shrine of the Martyr, hoping for the best.

I reckon I’ll see you there, next week. In the meantime, I bid you a happy holiday, and, as always, a heartfelt…