Crazy 8s

Got me a new phone. 

Specifically, an I-Phone 8. 

It has a lot of nice features, like stuff to do with the camera. And the apps. And other sh*t as well that they told me about at the store, but I forgot most of it. 

I just thought you might like to know. And case you can’t tell by now, I am immensely proud of my new I-Phone. 

So much so that I flew Joe Montana in from the West Coast to stand next to me, in a picture of my recently acquired prized possession. 

That’s Joe on the right. I, on the other hand, am on the left. Sharp-eyed observers will notice a portable device in my hand. 

And you are correct. It is my brand spanking new I-Phone 8. Of which I am immensely proud. I would go so far as to characterize this pixel-captured moment as one of the finest I’ve ever experienced, falling short of divine ecstasy only insofar as it was not captured for posterity on my brand new I-Phone 8. 

But if I did that, took the picture on the 8, then, by definition, it would’ve been nigh impossible to include the device in the visual frame, and as such, would’ve rendered Joe’s 3,000-mile journey somewhat quixotic. So I think I made the right decision here. Because (or so it is said) if you’ve got it, you may as well flaunt it, and whoever said this must’ve been referring to the 8. 

But in reality, the time had come to make the move. I’d been rocking a 6 for the last couple of years, and, other than the irritations associated with its inability to hold a charge, its faulty speaker, and the various cracks across its façade, I had no particular complaint. It had a good run, but it’s time had come and gone. And, as Apple has discontinued the production of the 6 Series (including the 6-S and 6-Plus) swapping out for the same model wasn’t an option. For any of readers worried on my behalf that I may have moved too precipitously, I present the following photo (take, of course, with my brand new I-Phone 8) as Exhibit A:

Exhibit A: My Wounded Warrior I-Phone 6 

Yup, that’s my poor, abused 6. So long, amiga. You won’t be forgotten. 

In the modern era, a man’s relationship with his phone is a rather intimate affair, and when he ditches his stalwart but aging electronic companion for the sleek, newer model, there is always some mixed regret. But even here, I didn’t assume what they call in the investment world a “full position”, as doing so would have compelled me to go the whole route and grab myself an X. But what the hell is an X anyway? For Greek Mathematician Pythagoras it is the square root of the length of a non-hypotenuse side of a triangle (as in X2 + Y2=Z2 – aka the Pythagorean Theorem). 

Separately It has served for many generations as the default signature of the illiterate. 

Beyond this, and in general, it is the vexing, mysterious, eternal variable for which humanity must solve. And at the Verizon Store (and I won’t lie: this was a major driver of my decision), it fits into the following equation: 

X = Cost of I-Phone 8 + ~$250 = Cost of I-Phone 

8 on the other hand, is easier to understand. It is 2-cubed. It is the answer, in fact the only one that exists in the mathematical universe (using its Cubed Root: 2 as a substitute for that infernal X), to the following equation: 

(X*X)*X = (X+X)*X. 

It also serves as a cheery homonym for consumed solid sustenance (i.e. “ate”), whereas in homonym-land X can only matches, winsomely, a former love interest. 

It’s linkage to Joe should be relatively easy to identify for the intersection of the sports-aware and the mathematically mature. During his glory years with the Niners, Joe wore the number 16, or twice 8. So for those keeping score, in one sense, two of my new devices equals one Joe Montana. Of course, you don’t get the 4 Super Bowl rings or the 7 Pro-Bowl appearances with the 8, but on the other hand, and to the best of my knowledge, you cannot, with your fingertips alone, direct Joe to find you the shortest route to Hackensack, NJ. 


At the point of this correspondence, there are 8 full trading sessions left to this year (plus a couple of holiday halves). And what a year it’s been! Financial Assets have been rallying to beat the band, and if you weren’t long (and I wasn’t) well then all I can say is too bad for you (us). Of course, the news isn’t all good (is it ever?). Holders of agricultural commodities, for instance, have experienced the indignity of witnessing a benchmark basket of their inventories breach an all-time low, having shed fully half their value over the last 5 or so years, and enduring a downdraft of more than 5% this month alone – all as captured in the following chart of the Energy-deemphasized Continuous Commodity Index:

Continuous Calamity (er, Commodity) Index 

Now, I admit this ain’t so good for some of my “earthier” constituents, but let me ask you: how bad are things if, in a raging bull market, the raw materials that we put into our tummies or wear on our backs are now cheaper than they’ve ever been? 

Not so bad, right? And let’s face it: who invests in ags anymore? I mean Soy Beans and Wheat and Cotton are certainly quaint little markets, but us men and women of the world, it is hardly consummate with our grace and dignity to allocate risk to these realms. 

Nay, my friends, the locus of action has been in more contemporary markets, such as Crypto. But I don’t really have anything useful to say about Crypto, and am thus compelled to revert to my fallback asset class: Equities. Fortunately, they have not disappointed, and my read on them is as follows. 

I consider 2013, call it the last hurrah of US QE, to have been the real outlier year. The Gallant 500 returned ~30% to investors, in the process ginning up a modest volatility of ~10%. As these were the heady days of Zero Interest Rate Policy (ZIRP), I set a risk free rate at zero, and derive a Sharpe Ratio of approximately 3.0. Its 2013 Downside Deviation (defined as the standard deviation of negative observations) clocked in at a logic-defying, 7.31%, which translates into a Sortino Ratio ((Return – Risk Free Rate)/Downside Deviation) of ~4.1. Now, in my experience, any SPX Sharpe above 0.5 is a pretty strong showing, as is a Sortino above, say, 0.7. As such, I was loud at the time in my proclamations that we would never again in our lifetimes (or, remembering my codger-like status, in my lifetime) see such a Joe-to-Dwight Clark sort of performance out of the Index. 

But I was wrong. Thus far in 2017, the S&P 500 is on pace to deliver 20.4% returns on a volatility of 6.7%. As we no longer are in ZIRP-land, I subtract 1% risk free rate, and derive a Sharpe of 2.9. But the analysis doesn’t end there; the 2017 SPX Downside Deviation currently resides at a sub-atomic 4.3%, implying a Sortino of 4.5. 

Lightening has indeed stuck twice in the same place. 

And who’s to say we can’t gather ourselves in the last two weeks and eclipse even the ’13 Sharpe threshold? At the point of this correspondence, Tax Reform appears to be on its way to passage, and whether this helps the capital economy or not (and it should, at least some), recent pricing action suggests that if Trump actually signs a bill, it may be good for a couple of hundred basis points to the upside on the benchmarks. If so, we may well breach into a 3 handle on the Sharpe, yet again. 

This past week, we also killed off the cynical government power grab known as Net Neutrality. And Twitter/Facebook absorbed the blow. The tree huggers, when not screaming bloody murder, are weeping crocodile tears on this one. But they are being misled. The big dogs, whatever they state publicly, loved the barriers to entry/innovation and other bennies that devolved to them from deeming the frigging Internet a public utility that needed the same regulatory regime first put in place for telephones in the ‘30s, when AT&T had a monopoly. Expect, now, more capital investment and much better ranges of services and value propositions for consumers. In fact, I challenge any of my prog friends to come back to me within a year with any evidence that the repeal has harmed anyone. To balance matters, I will be glad to identify ways in which the new freedoms have been accretive to consumers. 

Finally, and in keeping with the spirit of our weekly theme, I will take the opportunity of devoting the last section to a glimpse into my vision for next year: the 8th of this improbable decade. 

I tend to view the early days of any given year as jump ball territory. The solemn, time-honored ritual of tape painting has run its course, , and beyond this, I view each marker year as its own novella, with the story unfolding at its own pace over a period of months. Part of me adheres to this paradigm, but then I remind myself about the glaring supply/demand imbalance which continues to socialize a bid on high quality assets. If you’re looking for more evidence of this, consider the M&A action over the past several weeks. Let’s say you like to Invest in Insurance Companies. Post the merger of CVS and Aetna, there’s one less of them to trade – unless, of course you wanted to own a pant load of drug stores as part of the package. Similarly, those predisposed to speculate on media content will soon no longer have the opportunity to take a piece of 21st Century Fox without also purchasing a healthier dose of Mickey, Donald (Duck not Trump), “Dancing With the Stars” and Monday Night Football. 

So I rather think, albeit prematurely, that stocks and bonds will remain in short supply next year, and that their valuation paths will reflect this scarcity. Of course, a lot could go wrong across a 12-month interval which has yet to begin, but all other factors being equal, I don’t believe that high-grade securities “on offer” will remain so, at an point in the sequence, for extended periods of time. 

No, this won’t last forever. Nothing ever does. So it may be worth considering getting some while you can, because when it’s over, it will indeed, as Yogi instructs us, be over. Consider, if you will, that the case of the fabulous I-Phone 8. It was released on September 22nd, and managed to remain at the top of the Apple product tree for approximately 6 weeks, whereupon it was displaced (November 3rd) by the X. 

Or just ask my friend Joe. After winning 4 Super Bowls with the 49ers, injuries forced him to the sidelines. As fates would have it, he was replaced by a direct descendant of Church of the Latter Day Saints Founder Brigham Young: a chap who never looked back, and won himself 3 more Super Bowls on his own. 

And for the record, Joe’s replacement Steve Young’s jersey number was 8. 

Crazy, no? 


Taking One for the Team


“Politics ain’t beanbag” 

— Finley Peter Dunne (1867 – 1936)

I don’t like writing about politics, particularly in these days of unhinged, two-sided advocacy, and I’m not particularly enamored of Senator Al Franken (D, Minn). But duty calls. I found Franken to be a mildly amusing (if secondary) character in the early days of SNL, and would’ve preferred he left it at that. He could’ve carried on as a latter day Joe Piscopo, appearing in a handful of bad films and then taking his place among the back benchers in Branson, MO and Atlantic City, NJ. But Al had other plans. In 2008, he ran for Senator of his adopted home state: The Land of 10,000 Lakes – which once handed the governor chair over to Jessie (the Body) Ventura. He won by 300 votes over Incumbent Norm Coleman (a nice enough fellow, it would seem), but only after a recount and some controversy respecting hundreds of ballots discovered after the fact by a Democratic election official in the trunk of her car. He was re-elected with relative ease in 2014, so, for the better part of a decade, we’ve been forced to endure him as a member in full standing of the World’s Greatest Deliberative Body.

So be it.

That is, until this past week. Finding himself in the midst of a veritable tsunami of pushback against men who may or may not have been over-enthusiastic in their love overtures, he was forced to announce his resignation. While it was an accident of which I’m not proud, I must admit to having actually witnessed his departure speech on live TV, and let me tell you: he was none too happy about the turn of events. And I don’t blame him. But his, er, address was very odd. No mention of either his Party or his Nation, but a hard slap at the Republicans and a great deal of slavish praise for the State of Minnesota. Let’s be generous and give him a pass for that one.

Be that as it may, what has been reported may be just the cold tip of the nose of Frankie’s horn-dog activities, but his verifiable actions do not, I feel, justify his forced removal from high office. And this whole thing is getting frightening. What happens, for instance, when those seeking retroactive l’affaires de couer redress point their arrows not at Congress, but rather at an important institution such as the NFL? Or the NBA? Based upon the Franken Standard, these thug-ridden leagues, whose players’ favorite wooing tactics often involve nothing more than grabbing the objects of their desire and doing what they will to them, would not have enough players left on their rosters to last out the week. Heck, I’m not even sure that the SPCA could survive this type of anal probe into the macking histories of its principals.

King David, were today’s newfound protocols to be enforced upon him, would be strung from the highest cell-phone tower. As would Henry VIII. And as for Genghis Kahn, well, I don’t even want to think about what they’d do to him.

But I will offer a hearty tip of the hat to the Democratic Party for its thus far near-flawless execution of what I must acknowledge to be a clever political stratagem. It may work; it may not, but I really can’t blame them for trying. Franken is expendable because Minnesota is pretty Blue, and happens to have a Democratic Governor (do you think this would’ve happened if a Republican ran the State House in St. Paul and thus could name Al’s successor?), and his forced departure allows the party to own the zero tolerance standard with respect to overenthusiastic interactions between (or, for that matter, within) the genders. It costs them almost nothing to do so, and the positioning may (or may not) have legs. This coming Tuesday marks the special election in Alabama to fill out the term of misanthropic Attorney General Jeff Sessions. The accused child molester is almost certain to win, which is the whole point. I won’t plague you with a reiterated inventory of the problems that this evokes for the Republican Caucus, but they are considerable.

Then there’s the Trumpster, who, in trademark fashion has chosen to aggressively join a battle he could’ve avoided and is unlikely to win. After some initial hemming and hawing, he’s launched a full-throated support of his party’s tainted candidate. I reckon he has his reasons for doing so, and under the circumstances, he may not have had any choice. His only other alternative: a ship that sailed long ago, would’ve been to use his influence to remove Moore shortly after the primary. But now, one way or the other, he’s gonna own the Moore Senate run.

And, of course, they’re coming after him. It does not require an elaborate leap of conceptual analysis to suspect that his enemies are out in force looking for further examples of the type of rhetoric and actions captured in the (Billy) Bush tape. And the play, of course, will be to hold him to the Franken Standard. I’m not sure it’s gonna work, but already new claims of Trumpian sexual abuse are emerging, and there is a growing chorus of progressives who are calling on him to follow Franken’s gallant (though indisputably involuntary) example. Again, I’m skeptical as to the prospects for the success here; indeed, insofar as it may harden his base, it could actually backfire. But it is not helpful to the conservative policy agenda. And who’s to say that the progs won’t take this thing to the house: demonizing every single man, who, over the last couple of generations and in a moment of sub-optimal judgment, has placed his hands or his mouth in intimate proximity to someone who had not granted explicit, premeditated permission for him to do so? If so, Trump (and so many others) is a goner.

But what really hacks me off is that all of this nonsense may be acting as an obstacle to the otherwise serene path investors had blazed for themselves to tape-paint their way to maximum year-end returns. I can’t blame Franken and his handlers entirely for this disruption, but the episode carries the same motifs as other efforts bearing similar objectives. Last week’s misreporting of the Flynn plea cost some investors serious shekels, and some of these unfortunates are my friends and clients. More stories of this nature will be floated out there, like King Farouk wading into the Dead Sea, and the market will react.

I know that I am committing the unpardonable sin of striking a tone of sympathy here for the President and his allies, but c’mon people, can anyone assert with a straight face that sometime more than a year back, Trump actually explicitly enlisted Putin’s help in the Presidential campaign? To me, the idea becomes more absurd with each passing day. Consider, for instance, that even by the time the polls closed on the East Coast, the odds of Trump actually winning were about 20:1 against. His victory was something of a fluke, and, had he failed, does anyone think that the Clinton Administration would’ve let him off the hook for election tampering? Or that any of his high-powered buddies, all of whom stood to take a hit if he lost, would have had his back? Is he thus really stupid enough to have taken the risk of utter ruination, by using Putin to help him win an election he was almost certain to lose? And if he is that stupid, what does it say about the rest of us?

OK; never mind that last question.

But setting aside the gropers, grabbers, gabbers and gasbags for a moment, the main action on the power corridor between Washington and Wall Street is the tax bill. I am on record as warning my minions not to allocate risk based upon their views as to the final outcome, but most of these admonishments appear to have fallen on deaf ears. The sell side is giddily hawking “tax reform baskets” and a large number of similarly oriented ETFs have emerged. I see some of these creeping into client portfolios, and I am thus wishing for the best of fortune for my crew. But I don’t think there’s much edge to be had with these trades. The bill’s final details are being negotiated inside a magnetic field of lobbyists and special interest groups the likes of which the world has seldom seen. Whatever comes out is likely to be dramatically altered from that which has currently been proposed, and may not make its way through both houses of Congress in any event. Like I said, no edge to this trade.

Equity indices modestly broke new highs again this week, and the NDX did manage to briefly breach into the dainty and romantic handle of 69, but one feels the resistance here. By contrast, the global bond market remains en fuego, and nowhere more so than on the Continent. Swiss, German, Italian, French and even Dutch 10-year debt yields are plummeting to year-to-date lows, and one wonders who’s doing all of the bidding. Some of the professionals with whom I roll say it’s the ECB, but they’re buying the same amount they were a few weeks ago, when Bund yields reached a usurious 0.41%, in contrast to now, when these rates have dropped to a more reasonable 31 basis points. So there is incremental demand outside the environs of Brussels, but who is responsible for it and what do they want to accomplish?

Well, I have my theories, but you’ve heard them before. With all of that global cash sloshing around, there simply aren’t enough bonds to go around, so they get bid up. And, for what it’s worth, they’re taking equities along for the ride. None of this would likely be transpiring without the alchemy of QE, but there are other factors at play as well. Consider, if you will, the following tidbit. According to the unimpeachable models of the International Monetary Fund (IMF), 2017 global GDP growth is clocking in at a robust 3.6%. Virtually every country is participating:

Global GDP Growth – 2017 

Now, as men and women of the world, let’s acknowledge the reality that most of these bennies are flowing to Institutions, Corporations, High Net Worthers and other fat cats. And are they spending these gains on brand new, all-aluminum Ford F-150s (god I want one of those)?

They are not. Rather, they are investing in tangible financial assets, and in doing so are competing not only amongst themselves, but also with Central Banks, the entire country of China, some Russian oligarchs and a few Arabian Petro-barons (one of which spent half a yard this week on a Da Vinci. It’s a nice painting of Jesus, but $500 $^#$@# Million?)

The World Bank (of which the IMF is a wholly owned subsidiary) estimates Global 2016 GDP at $75.6 Trillion, so a 3.6% increase adds between $2.5T and $3T, an amount equal to over half of the size of the Fed’s Balance Sheet, to the disposable wealth of the global community. Indisputably, much of this bounty is finding its way into the capital markets, which arguably didn’t need the boost.

But with the world’s economies on a remarkable, synchronized rocket ride, with Central Banks still printing billions of new money each month (and those that are not printing going along for the ride), with no commodity inflation to speak of, is it any wonder that asset inflation has taken hold at an alarming threshold?


The Federal Reserve Bank of the United States, the first to print QE money, and the first to terminate the process, is doing its level best to lift short term rates, in the presumed hope that longer term yields will rise in sympathy. While not widely reported, it has actually made a pretty good start at reducing its Balance Sheet. But it seems for now, no matter what the FOMC announces, no matter how many longer dated bonds they try to sell, prices for these instruments drift upward, or, at minimum, remain stable:

Fed Sells Down to 2014 Holding Levels with Little or Negative Impact on Long Term Yields: 

So, again, I’m not convinced that this here rally, longstanding though it may be, is anywhere nearing its “sell-by” date. Of course, risk is not properly priced into valuations, and it will be eventually, but until it is, tangible assets will remain in short supply and are likely to continue to be bid to the heavens.

If that’s not good enough for you, you can always dive into (cue the obligatory reference to) Bitcoin. Tonight marks the historic opening of exchange traded futures on the virtual currency, an event, somewhat improbably, transpiring at the Chicago Board Options Exchange (CBOE). As mentioned in last week’s installment, the CBOE and the CME received contemporaneous approvals for Bitcoin listing, and the Merc’s contract is scheduled for unveiling on the 18th. CBOE, in its frenzy to be first, leapfrogged its cross-town rivals and is busting out its product tonight. Its product will settle to a Winklevoss Auction that currently sports average daily volumes of just over a million dollars, and if one was looking for yet another warning sign as to why this whole episode won’t end well – at least for some – that might be it.

And that, ladies and gentlemen, is all I have to convey about Bitcoin.

But for those with more traditional investment tastes (including yours truly), the valuation arrows appear to continue to be pointed heavenward. The signal to noise ratio has dropped some — in part to the political shenanigans described in great detail above. But the light appears to be flashing green.

As the great Finley Peter Dunne once pointed out “politics ain’t beanbag”. And he was right. Just ask Al Franken. And investment ain’t beanbag either. Just ask, well, just ask nearly anyone you known. Dunne’s son Phillip went on to a notable career as a Hollywood screenwriter, penning such enduring scripts as “The Agony and the Ecstasy” – a term that might apply to either discipline.

It would appear, for better or for worse, that we’re stuck with both.


Chain Reactions

On November 27, 1942 – 75 years ago this past Monday — Johnny Allen Hendrix was born in the town of Seattle. Sometime during his 4th year, his parents changed his name to James, and, as everyone knows, during his brief but remarkable adult life, he used the handle of Jimi. For those who cared to notice, he changed the world.

Five days after his birth – 75 years ago yesterday by my count– a group of scientists working under the bleachers at the University of Chicago’s Amos Alonzo Stagg Field, initiated the humanity’s first ever successful nuclear chain reaction. The results were de minimus; the blast barely able to knock down a precariously positioned series of dominoes, but the concept had been proved. Pretty much no one able to fog a mirror could fail to notice that this milestone, too, changed the world.

The bigger part of me would like to believe that these events are related, because such a connection would imply that our affairs are governed by more than our finite, fallible responses to pseudo-random natural stimulus, and as such, bring us closer to God.

But I just don’t know.

However, as I ponder this series of Diamond Jubilees, it strikes me that chain reactions abound. Investors entered the week somewhat obsessed with two concepts. In no particular order, these were: pending tax legislation, and Bitcoin. The latter is based upon a chain reaction-like technology called Blockchain, which, whatever happens in the realms of digital currency, is likely to dominate our telecommunications affairs — until something better comes along. As for Bitcoin, though it hardly needed it, the virtual currency received an enormous boost this week, when the Commodity Futures Trading Commission (CFTC) approved its listing on derivatives exchanges, and both the Chicago Mercantile Exchange (CME) and the Chicago Board Options Exchange (CBOE) responded by immediately announcing the launch of Bitcoin futures and options later this month. The Merc is my professional home, it’s where I grew up, and I owe it a debt of gratitude that I cannot reasonably expect to repay – at least in this world. So I wish them all the fortune that Heaven allows with their new product line.

And that – at least for now – is about all I have to convey about Bitcoin.

Those such as myself, with ids more firmly rooted in the past, focused their attention on the tax bill, and the ebbs and flows of valuations across asset classes appeared, most of the week, to be tied to the real-time prospects for its passage. By Friday morning, the majority announced that it had the votes –sufficient “ayes” to move it through the Senate, and thus to pass it back into Committee, where Obamacare-like, it will likely be altered beyond recognition: through a dainty little do-si-do with the lower chamber. This is a process called a Reconciliation, and more than that you don’t want to know. Thus, as the noon-hour approached, everyone’s eyes were giddily affixed on yet another stroll to all-time valuation records. But then…

…Sometime just after 11 a.m. EDT word came down that drive-by National Security Advisor Michael Flynn had pled out to the Mueller investigative team, and that, as part of the deal, he was prepared to give up some big names with respect to this whole Russia thing – including, perhaps (or so it was speculated) even the Trumpster itself. The ladies on “The View” broke into spontaneous on-air celebration, but the equity market sold off. Hard. Or at least what passes for Hard in these low volatility times. A little over an hour later, it stabilized, and then gathered itself sufficiently to close near flat for the session.

Touchingly, my phone sort of blew up Friday afternoon, as risk takers from every corner of the universe sought my wisdom on the episode. I’m not sure I had much to offer, but to those not looking for regime change, I could at least furnish the comfort associated with the unfolding reality that Flynn’s plea involved Perjury (as opposed to something more nefarious like Conspiracy with a Foreign Adversary), that the active sequence appears to derive from a point after the election (when, presumably, the act of an incoming National Security Advisor discussing matters with a Russian Ambassador cannot be viewed as a fatal breach of diplomatic protocols), and that if a real smoking gun had been revealed through the Flynn plea, the markets would be likely be crashing harder. This was about all I knew. And all I know.

On the other hand, the whole matter is beginning to eerily resemble the manner in which Watergate took down Nixon. Special Prosecutors start at the outer layers, and seek to create a chain reaction, which pushes their initiative closer and closer to their Ground Zero target. Yes, from my perspective, this here affair is assuming a similar trajectory, but I have little insight as to whether it limits itself to impacts that can be contained inside the walls of a small laboratory underneath a bad football team’s home bleachers, or expands, in Nagasaki-eqsue fashion, to threaten the destruction of whole civilization. As a risk manager, my sense is that the story will continue to ebb and flow, and that until the end game is revealed with greater clarity, most of the associated market action is not much more than unhelpful noise.

(Side Note: Comey must be feeling pretty smug right now. After bumbling his way through the 2016 election cycle – screwing up everything within his reach and p*ssing off everyone involved, he knew he wasn’t going to hack it in the Trump Administration. So he gets himself fired, and testifies before Congress in such a way as to, by his own admission, invoke the Special Counsel clause. He then dances off to Howard University (?) in an endowed chair, cops a 7 figure book deal, and sits back and enjoys the action. Nice work, Big Jim.)

Meanwhile, as all of the above was transpiring, other chain reactions were assaulting our senses. Take the sex harass pushback paradigm for example, a chain reaction that, depending on your point of view, originated with Weinstein. Or further back, to Cosby. Or even further back, to Clinton. Or even earlier, to Kennedy. Or, if as is probably the case, extending into the past all the way to the point when we first emerged from the primordial ooze. One way or another, it rolled on in an arguably accelerated fashion. This past week alone, it claimed a ubiquitous master of network news and a nice old fellow who takes to the radio to read stories he’s written about life in the heartland. It now is poised to devour the previously esteemed Music Director of the New York Metropolitan Opera and even perhaps that slick dude from “Entourage”. Where it ends, no one can say, but I suspect it will keep tongues wagging amongst the chattering class for many months to come.

Perhaps more importantly, and lest we forget him, L’il Kim emerged, after a 3-month hiatus – to lob a missile based upon the same chain reaction technology developed under that Chicago football field, into the Sea of Japan. Experts were quick to point out that his claims to be able to send WMDs pretty much anywhere within the civilized world had some merit. Trump said he’d take care of it, and here’s hoping he does. But one could, er, pardon him if he’s a little distracted these days, and as for me, I don’t see many alternatives that don’t involve us turning his palaces and military installations into non-functional parking lots. Not a pleasant prospect to ponder.

Yes, it’s all just a tad depressing – particularly as these freak show/peep shows are serving to distract us from what appears to be an accelerating global growth dynamic. With our biological bandwidth completely consumed by the machinations of Mueller, Flynn, Flake, Lauer, Kim and whoever it was that gave us Bitcoin, we missed a pretty fly string of economic releases. Home Sales/Valuations, Consumer Confidence, Business Confidence, Manufacturing Flows, and (last but not least) GDP all came in at the upper end of consensus or beyond. A close reading of the tape suggests that a successful round of tax legislation has not been fully priced into the market, and as such, if the Ruling Party can just get this one thing done, we’re probably looking at significant incremental upside between now and year end.

We do need to remain leery of these bloody chain reactions, though, but even here the news is not all bad. Last week’s note featured a diatribe about the outgoing Director of the dubious Consumer Finance Protection Bureau’s effort, as he exited, stage left, to name his own successor. The President justifiably countered this stunt, putting his own man into the job, and then, sure as the moon turns the tides, the outgoing Consumer Tsar’s heir apparent went to the courts to block the presidential appointment. However, for perhaps the first time in this administration’s tenure, the courts actually sided with the Executive Branch – under the obtuse notion that the nation’s Chief Executive is within his rights in naming his own staff. This drama may not be over, but let’s hope it is. Some of you will disagree with this notion, but the idea of a federal agency being able to set its policy into perpetuity – by simply having the current office holder name his or her own successor (and so on) is not the type of chain reaction that I believe the framers had in mind for us – all those years ago.

Other chain reactions will, presumably, endure, some visible to the eye; others not so much. 75 years ago, a poor black boy was born in Seattle, and grew up to set the music world permanently aflame. A week later, a bunch of scientists finished their efforts to create a process for setting the hottest physical fires known under the sun. The former, though dead for more than a generation, continues to delight and amaze; the latter, at least in its early days, was applied to end the most terrible war that mankind has ever known. Perhaps these things are connected through some cosmic chain reaction. Perhaps not. And all I can add, in conclusion, is a heartfelt…



Mutual Fund Admiration Society


(To AMG on his 26th birthday. I love you — from the first time I held you in my arms — until Eternity, where, if heaven allows, we shall meet again.) 

I hope everyone had a nice Thanksgiving, and yes, mine, for what it’s worth, was pleasant enough. Like everyone else, I used the opportunity to go through an inventory of items for which I am particularly thankful, and a few for which I’m not. I’ll spare you some of the highly personal stuff, but thought I might share a few matters of mutual interest.

First, I’m thankful for the Macy’s Thanksgiving Day Parade, to the best of my knowledge the only such affair, broadcast, beginning to end, on national television (I think that one of the networks shows the Tournament of Roses on New Year’s Day, but please, is that affair even watchable?). Those who know me best are aware that not only am I a parade guy, but tend to divide the world’s population between those who appreciate parades, and those who do not. I, of course, am in the former group, and pity those who are not.

However, I’m not pleased that the good folks at Macy’s retired the Underdog balloon. They probably did this many years ago, but somehow it escaped my notice. This year, I purposefully looked for it, came up empty, and found myself in a state of blind rage over its absence.

I enjoyed the three NFL games, and am thankful that they were there to serve as a televised aid to my digestion. But I’m not pleased with the fumble into the end zone rule, which cost my 3-7 Bears a win against the hated Packers. The loss was beside the point, which more precisely is as follows. On 99.9999% of the gridiron, the concept of a fumble that results in a turnover is predicated on the team that does not possess the ball recovering it in the field of play. There is elegance, simplicity and divine consistency embedded in this premise. But somehow, the overlords of the NFL have seen fit to upset this universal order. By order of the League’s Rules Committee, a fumble into the end zone — 0.00001% of the game-space — evokes a change of possession. No need for the recipients of this improbable largesse to actually have even touched the ball; it is simply awarded to them – entirely unearned. My only explanation for such idiocy is that we have indeed descended into a state of pure madness (Spoiler Alert: I’ll have a little more for y’all on turnover and the turnover rule a little farther down the way).

But thankfully, I don’t really hate the Packers. My son-in-law grew up 10 miles from Lambeau and he is rearing my grandsons up as Packer fans. It is said that blood is thicker than water, and indeed it is. But two Sundays a year…

It would seem, as well, as a shout out is due and owing to the film “Casablanca”, which premiered at an unspecified New York theater 75 Thanksgivings ago (or, as Arlo Guthrie might put it, 75 years ago on Thanksgiving). No one can rationally dispute that this movie is pure celluloid perfection. And about all I can add is the remarkable reality that its late 1942 release means it dropped at a time when the outcome of the war it chronicled was very much in doubt.

I am also thankful for the migration of the rules of engagement regarding sexual harassment. This was too long in coming, and I’m glad that we’re working it out at long last. Moreover, as an added bonus, focus on this topic has blissfully placed the endless discussions we’re having about racism as a secondary subject for debate. I’m sure the race talk will return, and in force, but let’s all take a moment to enjoy its temporarily reduced volume. Shall we?

I am, however, incensed by the outrageous stunt pulled by the outgoing chief of the dubiously formed, perpetually over-reaching Consumer Finance Protection Bureau (CFPB). The Bureau was created as a sop to the shrill, sanctimonious Senator Elizabeth Warren (D. Mass), and is unaccountable to any elected branch of government. It self-funds – mostly through the fines it issues at its own whim – and, for the six years of its existence, it has done the questionable bidding of progressive redistributionists and their trial lawyer paymasters. When it was determined that Ms. Warren could not be placed at its head, the previous administration appointed what it believed was a suitable alternative tsar – one Richard Cordray – who has gleefully and grimly (yes, both are possible) done what the creators of the CFPB set out to do – politically weaponized yet another an unaccountable government organization. As expected, Corbray stepped down recently. But he had one last gift on the way out: he ignored the President’s directive to replace him with someone of his own choosing, and sought instead to elevate his deputy. As a result, yet another political/legal battle will now ensue, and one that proves the folly of the agency’s charter. According to Cordray and his ilk, elected officials have no business interfering with the workings of the bureaucracy over which he lorded, and should simply butt out while their betters do their bidding. He will now run for Governor of Ohio, and will probably win, so look for the Buckeye State to join the ranks of Illinois, New Jersey and Connecticut as economically failing jurisdictions whose leaders will blame us filthy capitalists as businesses and families flee the jurisdiction. Nice work, Rich. But perhaps you should return that U. of C. law diploma, as, somehow, you must’ve missed the lectures on constitutional separation of powers.

But as long as we’re in “thank you” mode, let’s offer a final salute to lame duck Chair Yell, who offered as a helpful parting gift, some very dovish minutes and subsequent commentary, respecting forward looking monetary policy. She can take comfort, as she departs, in the global embracing of the cheap money paradigm that she helped create. Consider, for instance, the following handy little chart:


Now to me, that’s a pant load of bonds out there for which lenders actually pay interest to borrowers. Here in the States, the tradition of the latter having to pay for funds, provided in fixed duration, from others, remains intact, but only at the most modest levels.

Still and all, most of these bonds get hoovered up the moment they are made available for sale – again at low or even negative expected return.

But the news isn’t all bad – consider, for instance, the bounty of the equity complex, which is tilted in an upward direction from two perspectives. First, creating and managing a portfolio of Fixed Income securities – except for the truly talented and/or exceptionally lucky — has been for a dog’s age an exercise in futility. And borrowing costs remain ridiculously low. Almost indisputably, both available cash and financed funding have migrated to the equity complex, where positive returns are not only theoretically feasible, but, in recent days, easily achievable.

As a result, I offer a final note of thanks– though mostly for my minions – that our fabulously fly equity indices are currently perched at yet another in an astonishing string of all-time records. I’d like to be happy about this on my own behalf, but due and owing to solemn, longstanding protocol that preclude me from market participation, I can only enjoy this blessing vicariously.

As I’ve mentioned before, I believe these happy trends are catalyzed in large part by a scarcity of private securities that sharp-eyed observers can hardly fail to notice. For example, once upon a time, the broadest of the broad-based indices: the Wilshire 5000, actually contained 5,000 stocks. However, perhaps out of sheer humiliation, the Index has been renamed the Wilshire 4500. But even still, the good folks that bring us this index have failed to fully eradicate their exaggeration: the product, comprised of every tradable stock in this fair land, actually only contains about 3,600 securities.

Under such a paradigm, it has simply become unsafe to sell down any equity holdings. Though this wasn’t always the case (consider the Mesozoic period of Jan-Feb, 2016), position reduction has become riskier than holding fast or even topping off one’s stock stash. It’s almost as if selling a long is tantamount to being short.

But this also is nothing new: in the benchmarked world of mutual funds, lack of full investment in a given security contained in the benchmark is the financial equivalent of holding a short position in the name. And that’s how the market trades these days – like one big fat hairy mutual fund.

If you doubt this, consider the recent behavior on my home turf of the hedge fund industry. Time was, hedgies used to buy and sell stocks at the first hint of a change in the prospects of the companies that issue them. No more, however. As indicated in the following chart, turnover – here a measure of changing portfolio composition – has reached an all-time low:

It may be that the condition described above is temporary, but I feel confident in the assertion that it will continue while it lasts. And I don’t see much chance of the trend dissipating in the two dozen odd days that remain in the improbable year of 2017. Meanwhile, my best advice is to enjoy it while you can.

But there are a number of signs that there are indeed storms a’brewing beneath the tranquil-at-the-surface investment seas. Friday’s early close brought some fishy action in realms such as the VIX, which experienced a transient ~20% drop before regaining its equanimity at the close:


I won’t lie: this kind of action disturbs me greatly. Somebody made some nice quick cash here, but somebody also lost a good bit. Nobody was much around to notice any of it, but it might be worth a few tax dollars for some regulatory body (please not the CFPB, though) to take a look at the buy/sell orders here. Something transpired that does not appear to be entirely kosher.

Beyond this, it was a tough week for China and, on balance, a strong one for the Continent of Europe.

And as for the USD, well, perhaps it’s better not to ask:


I do expect the next two weeks to offer some fast and furious cross-asset class action. In addition to what the period may reveal about the prospects for tax reform legislation, we are also staring down the nose of yet another potential government shutdown, and will be forced to endure another high drama lead-in to the inevitable continuing budget resolution: with the latest drop dead date fixed for December 8th

So it may be wise to strap on in, but whatever else you do, don’t sell any stocks. In the first place, it’s un-American. But beyond this, if you channel your inner mutual fund, it will become clear that by not owning your favorite names at fully invested levels, you are actually short.

One way or another, it appears that for the moment, owe have established a newfound mutual fund admiration society. And all I can say is that this development didn’t come a minute too soon for that beleaguered corner of the investment universe. What with ETFs, Unit Trusts, SPACs, MLPs, UCITs products and even (almost as beleaguered) hedge funds stealing their thunder, the guys and gals in mutual fund land certainly deserve the love.

Thus, in closing, I raise my glass in salute of the long-only guys and gals, who trade capital pools idiosyncratically, under the watchful eye of the overlords of the Securities Exchange act of 1933. They have been sucking hind t*t long enough, and their fleeting time in the spotlight is well-earned.

Historically, their turnover rates are significantly lower than that of hedge funds, and, because they rarely, if ever, reach the end zone, even under NFL rules, they get to keep the ball.

Perhaps, across the long weekend, this alone is enough reason to give thanks.


Don’t Buy A Vowel

Just. Don’t. Do It. Buy a vowel that is. Call it Kenny G’s Wheel of Fortune Rule for Risk Management. If you’ve been living under a rock for four decades, I’m talking about the ubiquitous, mindless Merv Griffin-created game show that works as a strong early evening sedative for millions of Americans (and, in modified form, apparently, Chinese as well). It is loosely based upon the ancient childhood game called “Hang the Butcher”, and involves contestants taking turns guessing letters until the population of blank spaces is sufficiently exhausted to enable one of them to reveal the phrase hidden in the in the blanks – a practice the solver undertakes with both unmixed joy and solemn, impeccable diction.

On the T.V. version, to the best of my knowledge, no butcher is actually hanged. Instead, show contestants/puzzle solvers actually receive both monetary and life-enhancing prizes such as a car or a trip to a fabulous vacation resort. Said players are warned in advance that they had better bring their checkbooks with them to the filming of their participation, as, at the close of every episode, state and federal revenuers are the first to greet them with immediate demand for the satisfaction of tax obligations tied to their winnings.

Often, TV programming quirks are such that “Wheel” is aired in the precise time slot as that of reruns of “The Andy Griffith Show”. And, though it pains me to admit it, this unfortunate turn of scheduling has caused more than one interruption in my otherwise sustained state of marital bliss: my wife is a serial “Wheel Watcher”, while I am a lifelong, borderline obsessive fan of “TAGS”.

Invariably, I lose almost all of these remote control standoffs.

So, in the interest of familial harmony, I myself have become a “Wheel Watcher”, and often marvel at the show’s ability to run its affairs (if the backdrop can be taken as a valid indication) with the set (wheel, puzzle board and all) directly established on such presumably problematic premises as the beaches of Waikiki, in front of the Liberty Bell, or even occasionally, atop a mountain in the Swiss Alps (the last of these with Pat in the obligatory lederhosen, and Vanna, natch, dolled up like a Swiss barmaid).

On the other hand, I find myself perpetually frustrated by what I am convinced is an overly dilutive tendency for contestants to waste their hard-earned winnings on the purchase of vowels. The earlier in a given contest this occurs, and the longer the puzzle sequence in question, the more the practice enrages me. I mean, how hard is this to grasp? If you’re an early spinner in a 5 phrase/30 character puzzle, and you successfully request a “T”, why on earth would you follow it up with the purchase of an “E”? You’re not likely to have solved the puzzle on that particular spin, so you’re only helping your opponents, right?

Thus, a critical corollary to Kenny G’s Wheel of Fortune Rules for Risk Management (KGWoFRfRM) is as follows: the importance of KGWoFRfRM stands in direct positive correlation to the length of the puzzle, and has a material negative beta to the number of spins that have already transpired.

Got that? Good, because I don’t wish to go over this again. Ever.

Unfortunately, however, my observation is that the market has been chockfull of the investment equivalent of over-enthusiastic, premature vowel buyers, committing such financial-equivalent sins as shorting the VIX at all-time lows, trading either side of Tesla, and seeking, yet again, to monetize on the still-yet-to-burst bond bubble of thirty years standing.

On the one hand, this breaks my heart; on the other, or so I remind myself, these dubious actions arguably ensure my continued gainful employment for as long as the band plays.

This past week (perhaps in a nod to Grandparent/Grandchild Week on Wheel) featured nostalgia-heavy motifs of the type of two-way market action that those of us in the geriatric set remember, on balance fondly. The SPX, while dead flat on the month, needed Thursday’s astonishing 1% rally to avoid the infamy of a full 100 bp downdraft. Overall, there was some downward pressure on virtually all asset classes, but the only market that evidenced noticeable pain was the U.S. Dollar Index:


With earnings substantially in the bag, the action remains policy/macro driven. If one wishes to solve the puzzle with only a smattering of consonants and (if you insist) a couple of vowels, it would appear that the ebbs and flows of valuation are for the most part being driven by two factors. The first, by all indication, is the tax reform psychodrama. And I don’t mind informing you that I find this dynamic particularly depressing. I do not believe that what’s currently on the table is either a critically needed unshackling of the masses from economic servitude (as one side would have you believe); nor is it in my judgment a cynical and diabolical handout to the economic elite (the gospel of their opponents). But this is the rhetoric that is being shoved down our collective throats every minute of every day, and I don’t see any possible end to the madness.

I predict that at the end of the process, victory and its attendant spoils will devolve to the side that manages to outflank their opposite numbers in rhetorical hysteria. That this is the dynamic which drives our governance outcomes is perhaps what depresses me most. But that’s where wemare, and my guess is that out of pure desperation alone, the “reformers” may win the day. But they have a hard slog ahead of them, and they can expect no help from anyone in the middle, because, politically speaking, there is no middle ground. “Praise be Nero’s Neptune, the Titanic sails at dawn” Dylan once sang “Everybody’s shouting, ‘which side are you on?’” he concluded. And he was right. About the shouting at least. But I’m not gonna lie: all of the noise is giving me a headache.

But if you want to track this nonsense, it might behoove you to keep your eyes on these yield curve trends, which are showing decades long flatness:



The other audible strain is the well-documented-in-this-space year-end tape painting sequence. According to my calendar, next Thursday is Thanksgiving: the traditional point in the season when such rituals are scheduled to commence. But just as we have already, and for several weeks, been subject to an onslaught of Christmas advertising (Thursday night’s “Wheel”, for instance, featured, by my count, at least 4 cycles of the car with the bow “Lexus December to Remember Sale”), so too have the market bids driven by a need to manufacture optimal year-end performance arrived in premature fashion.

And why not? With realized volatility on the indices in the mid-single digits, and with this year fixin’ to close with a record low of 4 days of down more than 1%, what could possibly go wrong?

In the spirit of the holiday season, I even offer you my blessing in these actions. Just don’t do anything really stupid, though, OK? Like the Grandpa last week who asked for a “J” (a “J”? No one asks for a “J” for chrissakes). It got even worse from there. Later in the show, that particular elderly chap’s granddaughter tried to by an “O”, and got dinged.

I’d like to be able to help these people, but some things are beyond even my considerable powers. So if you do make an investment decision to buy a vowel, and come up empty, though I’m sorry to have to say so, you’re on your own.



Bird Watching

Let’s start with a little ornithology: specifically, the unmitigated pleasure of the Monty Python Dead Parrot Skit. I hope you dig.

Customer: I wish to complain about this parrot what I purchased not half an hour ago from this very boutique. 

Owner: Oh yes, the, uh, the Norwegian Blue…What’s,uh…What’s wrong with it? 

C: I’ll tell you what’s wrong with it, my lad. ‘E’s dead, that’s what’s wrong with it! 

O: No, no, ‘e’s uh,…he’s resting. 

C: Look, matey, I know a dead parrot when I see one, and I’m looking at one right now. 

O: No no he’s not dead, he’s, he’s restin’! Remarkable bird, the Norwegian Blue, idn’it, ay? Beautiful plumage! 

C: The plumage don’t enter into it. It’s stone dead. 

O: Nononono, no, no! ‘E’s resting! 

C: All right then, if he’s restin’, I’ll wake him up! (owner hits the cage) 

O: There, he moved! 

C: No, he didn’t, that was you hitting the cage! 

O: I never!! 

C: Yes, you did! 

O: I never, never did anything… 

O: No, no…..No, ‘e’s stunned! 


O: Yeah! You stunned him, just as he was wakin’ up! Norwegian Blues stun easily, major. 

C: Um…now look…now look, mate, I’ve definitely ‘ad enough of this. That parrot is definitely deceased, and when I purchased it not ‘alf an hour ago, you assured me that its total lack of movement was due to it bein’ tired and shagged out following a prolonged squawk. 

O: Well, he’s…he’s, ah…probably pining for the fjords. 

C: PININ’ for the FJORDS?!?!?!? What kind of talk is that?, look, why did he fall flat on his back the moment I got ‘im home? 

O: The Norwegian Blue prefers keepin’ on it’s back! Remarkable bird, id’nit, squire? Lovely plumage! 

C: Look, I took the liberty of examining that parrot when I got it home, and I discovered the only reason that it had been sitting on its perch in the first place was that it had been NAILED there. 

O: Well, o’course it was nailed there! If I hadn’t nailed that bird down, it would have nuzzled up to those bars, bent ’em apart with its beak, and VOOM! Feeweeweewee! 

C: “VOOM”?!? Mate, this bird wouldn’t “voom” if you put four million volts through it! ‘E’s bleedin’ demised! 

O: No no! ‘E’s pining! 

C: ‘E’s not pinin’! ‘E’s passed on! This parrot is no more! He has ceased to be! ‘E’s expired and gone to meet ‘is maker! ‘E’s a stiff! Bereft of life, ‘e rests in peace! If you hadn’t nailed ‘im to the perch ‘e’d be pushing up the daisies! ‘Is metabolic processes are now ‘istory! ‘E’s off the twig! ‘E’s kicked the bucket, ‘e’s shuffled off ‘is mortal coil, run down the curtain and joined the bleedin’ choir invisibile!!He’s f*ckin’ snuffed it!….. THIS IS AN EX-PARROT!! 

It’s pretty clear, by the end of the sequence, that the parrot is dead, but let me ask a different question: are there any coal miners out there? Don’t be shy; speak up. We need you.

Recently, there’s been a good deal of discussion respecting your industry’s safety practices, and, among other matters, the exchange enabled me to clear up a lifelong misapprehension. Heretofore, the concept the canary in the proverbial coalmine evoked images for your humble correspondent of a songbird trapped in a dark, subterranean workspace, warbling its little beak off with no response other than the echoes of the walls. Now, however, I learn that the canary is placed in the mine for the sole purpose of its demise offering a warning that there may be a tad too much carbon monoxide in the air for the miners to safely operate.

I stand corrected.

So, as a market analogue, the canary in the coal mine actually represents a small bit of damage that may be a harbinger of more dire conditions in the offing. Well, U.S. equity indices suffered their first reversals in two months – to the tune of about 0.2% on the SPX. Think of this as a dead canary, standing in comparison to, say, an all-out crash, which in relative terms, would be akin to the entire crew expiring of carbon monoxide poisoning.

Should we, based upon this dollop of evidence, abandon the premises before we turn tits up ourselves?

For the first time in many weeks, the answer might be yes. It was, after all, a strange week for the besooted wretches who mine the depths of the markets for investment returns. The somewhat nauseating feeling, at least for yours truly, began in the morning hours of Thursday. I had gone to bed whistling my own happy tune, becalmed in the knowledge that the Nikkei 225 (an index in which I have no particular stake) had opened up ~2.0%. But the next morning, before the life-restoring caffeine had even kicked in, I observed the blessed thing actually trading down for the session, and closing in that improbable configuration. Worse, the stalwart NK, still up a hearty 18.66% for the year, yielded an additional unthinkable 80+ basis points on Friday. Visually, the carnage takes the following form:


For those who must either turn their eyes away, or cannot un-see what I am displaying, the peak to trough bloodbath rose to the dignity of 2.9% — a downdraft not seen in domestic realms for what is now more than a year.

Here’s hoping that such a catastrophe never hits our shores.

But are we really immune? I mean, after all, the SPX did sell off 5 handles this past week, and if it can do this, why not 10? Or 20? Or 75 (i.e. the rough percentage equivalent, in percentage terms, of the Japan meltdown). It’s not my intention to alarm anyone, but at some point, we’ve got to face our worst fears.

Further, it falls to my grim lot to inform you that last week’s cycle brought other subterranean-songbird-meets-its-maker warnings. We’re now~75% of the way through Q3 earnings, and while the tally comes to a tidy 4.6% gain, according to the good folks at Factset, fully half of the companies that exceeded expectations actually traded down in the wake of this good news, and this by an amount (3.6%) even greater than the give-back associated with disappointers (2.4%).

And it strikes me that contrary to what is indicated in the textbooks you’ve read (or at least the ones I’ve read), earnings do not appear to be driving the valuation train. Instead, in a depressing indication of the state of the times, it seems that the affairs of governments and nations are the key to current pricing dynamics. Residing instead at the top of this daisy chain is U.S. Tax Policy. That fateful Nikkei Thursday also brought the first glimpse of the associated handiwork of the World’s Greatest Deliberative Body. And I ask anyone who found that this distributed wisdom, brang, on balance, additional clarity to the proceedings to contact me immediately. Because I remain more confused than ever. It seems to me that pretty much every phase in the tax code is in play; any and all of them could change, or not, in the final bill. And once these details are settled, the bill itself will either pass, or not. The Republicans may be able to gin up the requisite 50 Senate votes (or not), and if so, VP Pence can bring it home, and we’ll then learn whether the House can resist the temptation to hack it up again, beyond recognition. On the other hand, the issue was in doubt even before the Party’s choice to fill out the remainder of the term of former Alabama Senator Jeff Sessions (now Attorney General) was hit with decades-old allegations of sexual harassment against minors. As such, he may lose, and if my mental calendar is correct, then this Jackson Pollock of a tax bill has a window of about three weeks for passage, lest the seat shifts over to the left side of aisle. Conversely, the above-referenced Judge Moore could still win the election, under which circumstance the thing may have a sell-by date further into the future than is currently assumed.

But I fail to see how or if it either helps or hurts us market miners, and I’d caution against reacting too precipitously on the trajectory the process assumes. Investors do appear to be a bit skittish here, and if recent pricing trends can be extrapolated, they have particular concerns about such “pay for” components as a prosed cap on the deductibility of interest payments at 30% of operating earnings. Contemplating these outcomes, investors took out their wrath on the equity and credit portions of the capital structures of serial borrowers. Ground Zero, as one might expect, is small cap stocks and high yield debt:

High Yield Bond Index:

Russell 2000: 

If one were looking for dead canaries, these markets might be a good place to start. And, if that’s not enough for you, I’d recommend taking a peek at the Saudi Arabian Mao-like Great-Leap-Forward purge (which catapulted Crude Oil prices to 2-year highs), the even more Moa-like Xi Jinping consolidation of Chinese power, and, while we’re at it, the donkeys-run-wild outcomes of last Tuesday’s elections. The Virginia guy seems like a nice enough fellow, but New Jersey went ahead and elected itself a left-leaning Goldman Sachs alum, champing at the bit to raise taxes and light up his buddies. As a result, the Garden State may well achieve his apparent objective of rewinding the clock to those heady days of another ex-Goldmanite: Governor Jon Corzine. Now that the cones are removed from the entrance ramp on the eastbound George Washington Bridge, this is likely to hasten the exodus of the economically sensitive to the money side of the Hudson River.

Any or all of these doings could be the telltale gassed birds that are the object of our agita, but I’d caution against jumping to the conclusion that they are. I mean, after all, as indicated in recent installments, the joyous ritual of year-end tape painting is, by some measure, already upon us. There’s $10 Trillion of government debt trading at negative interest rates, and if you want to lend to the treasury folks in countries such as Spain, Portugal and Italy out two years and (in some cases beyond), you must pay for the privilege of giving them your money. By contrast, here in America, the government treasury curve has re-steepened to bestow upon lenders the types of spreads to which it is our God-given right to extract from the great unwashed masses:

So, like the purveyor of parrot in the timeless Monty Python skit, if we simply employ our gratuitous imaginations, our little melodious Norwegian Blue friend, though it fails to respond to stimulus of any kind, may not be dead, but rather simply shagged out after a prolonged squawk.

Perhaps he’s pining for the fjords at this very moment.

I know I am.




Let’ s begin with a favorite old joke of mine. It tells of a man who sits down on a plane next to an elegant woman wearing an enormous diamond ring. He asks her about it, and she tells him that it’s the Klopman Diamond: beautiful, one-of-a-kind, but that like the Hope Diamond (so she tells him), it comes with a curse. “What’s the curse?” he asks. 

“Klopman” was her reply. And that was all. 

In the early parts of my life (and for the record, I’m typing these words on my 58th birthday), I heard variations of this bon mot — mostly from my maternal grandmother – Sylvia Goldstein Manaster. She contributed 25% of my DNA, but its own chromosomal origins remain a partial mystery to me. I don’t even know for certain the name of her mother. Her father Louis, on the other hand, looms large in family legend. Through my middle and Hebrew names, I actually carry his moniker, and I can only thank my late mother for showing nomenclature restraint here. She could have gone the whole route and named me Louis, but then I’d have been forced to endure life with the handle of Lou Grant, and that, my friends, is a prospect too horrible to contemplate. 

Louie was, as a matter of heredity, 100% Litvak; all his ancestors can be traced that earthly Eastern European paradise of Lithuania, nestled as it is between the Edens of Latvia, Belarus and Poland, and featuring a modest but important coastline on the Baltic Sea. From there, it’s a short, if treacherous boat-ride to Sweden and Denmark. I’m not sure why the Goldsteins ever considered departing the land of their forebears, but somehow, they set their sights on Chicago. Due, however, to the idiosyncrasies of late 19th Century European migratory fate, Louie was actually born in London. The family was detained there over a multi-year period, so he was born and spent his first 3 or so years in England’s glittering capital. The Goldsteins did eventually make their way to the Windy City, and at some point during his adult years, Louie made some modest but rather savvy real estate investments on the city’s South Side. This set him up for life, leaving, alas, little of the spoils to pass along to his progeny. I, for instance, got nothing. 

But Louie Goldstein spent the better part of the late 19th and early 20th Century leading a comfortable existence, with even (if family history can be believed) a touch of elegance. It is said, for instance, that he never left the house without his top hat, spats, cane and other accoutrements befitting an English dandy such as himself. 

He died before I was born (how else could I have been named after him?), and even my grandmother resides only in the vague contours of my long-term memory. I do recall that she was a killer behind-the-ear scrubber, and that she still holds the record for cooking the driest briskets ever choked down by humanity. I also know that she loved me. I reckon that’s about it. 

But perhaps her greatest legacy to me was the whole Klopman thing, with which, having been raised by a Klopman of sorts, she had first-hand experience. As a Wall Street guy in general, and a hedge funder in particular, I’ve have also known many Klopmans, and, knowing them, have had innumerable occasions to recall the wisdom of our title theme. Yes, my loves, Klopman comes with the Klopman Diamond, and we can either acclimate ourselves to this reality, or find something else to do with our time. I, of course, have chosen the former path, and have few regrets. In any event, this late in the game, it would be difficult to change course. 

It doesn’t take much of a strain of the imagination to notice that the world in which we live appears to becoming increasingly Klopman-like. Impossibly wealthy but eternally irritating Klopmans are everywhere in our midst, and we are forced to accept both the gifts and annoyances they bestow upon us. However, for the most part, we appear no worse for the wear. 

If the equity tape can be read with any faith in the numbers, new Klopmans are being minted on an hourly basis. About 80% of the indices I track remain at all-time record highs. Rates are low and stable, and the good old greenback, after a difficult summer, is recovering some of its mojo. Commodities are all over the map – except the energy complex, which features many more Texan, North Dakotan and Arabian Klopmans than one would’ve otherwise imagined. With WTI and Brent Crude on a wicked rally, I expect more of these oily K’s will appear on the scene anon. 

There is a great deal of information flow coming at us this seasonally content rich time of the year. The big dogs of tech continue to bark, and let me give you fair warning: they’re gonna eat. On Friday, Apple, in the wake of its own blowout results, breached the $900B market capitalization threshold on an intra-day basis, before settling in at a rather tepid $891B. Does anyone doubt that they will power past the once-thought-unreachable “T” threshold, and soon? On balance, I think I’ll take the other side of that trade. 

The action was also fast and furious in what I’ll broadly refer to as macro-land. On Wednesday, the soon-to-be-lame-duck Yellen Fed, as expected, literally mailed in its stand-pat policy decision, along with written warnings that a December rate hike is a matter of near-certainty. The laming of Janet became official on Thursday, with the naming of Jerome “Jay” (never one to set Louie Goldstein’s Thames on fire) Powell as her successor. On Friday, the October Employment Report dropped, to the mixed delight of labor market observers. Jobs growth was strong, but not so much as had been hoped for. Hourly earnings were stagnant, and while the base rate declined, the decrease derived almost exclusively from a somewhat alarming reduction in the Labor Force Participation Rate. 

All of the above was arguably, er, “trumped” by Thursday’s Godot-like arrival of the House’s tax plan. Reading even the most general summaries of this gave me a raging headache, and after having done so, I had to lie down. Upon first glance (and I know it’ll break your hearts to read this), it doesn’t look like it’s going to save me any money. In general, the document looks exactly like the muddled mess that is probably about the best we can hope for in these truculent times. I won’t add much to the ocean full of erudition on the topic that has overwhelmed the blogoverse, but will point out that: a) after anticipated Senate handiwork and what is sure to be an energetic reconciliation cycle, what’s on the table now is likely to bear little resemblance to the final product; and b) I wouldn’t bet the ranch on passage of any tax bill of any kind. 

I should also add that I feel disenfranchised by the entire episode. On the one hand, the bill looks pretty sucky to me; on the other, even though it probably costs me money, I feel compelled to root for its passage, because a failure here creates potential political outcomes that I believe would be suckier still. 

At any rate, investors, for the most part, yawned. So there’s that. Meanwhile, as if a new Fed Chair, an FOMC decision, a big Jobs Number, etc. wasn’t enough Washingtonian cud for us to chew, we have other issues to contemplate. These include the prospect of our big best bros Google and Facebook being grilled by various committees for allowing, across trillions of information units and hundreds of billions in revenues, about $150K of Russian sponsored political advertising (out of an estimated $1.8B of aggregate political expenditures) to slip past the goalie. I consider this more in sadness than in anger. With each passing day, the afore-named companies are tracking, and to an increasing extent, influencing our every move — all with frightening accuracy. I expect that at some point, we’ll begin to notice t that – probably after it’s too late to do anything about it. 

Beyond this, and though it will be unpleasant, I’d suggest keeping one eye on the Trumpster as he boldly strides across East Asia. There’s a good deal riding on this trip, including the likelihood that it probably help advance the plotline of the current North Korean morality play. On a related and perhaps more important note, it will be the first meeting between the gentlemen who now are indisputably the world’s two most powerful. In a matter that drew little attention in these distracted realms, a couple of weeks ago, the once-in-a-generation Chinese Party Congress convened to bestow absolute, life-long powers upon General Secretary Xi Jinping, rendering him the most stone-cold baller dictator since, well, since Mao. How Comrade Xi plays his new hand is maybe about as important an issue for the global political and capital economy as any that comes to mind. 

But one way or another, I think we’ve now reached the point in the calendar when the solemn process of locking down prices and performance for year-end purposes is upon us. I don’t see any asset classes selling off much between now and 12/31, and some, including equities, may rise. 

All of which leaves just one question. Like I said, there’s a lot of Klopmans out there and more being created with every tick of the tape, but perhaps only on KLOPMAN. So who is he (or she)? Trump? Too much all over the map. Jay Powell? Please. Cook/Bezos/Serge/Larry/Zuck? Perhaps, but it may be too early to tell. Xi? Now that’s a good one, but in xenophobic America, this is likely for the moment an ethnic differential bridge too far. 

I have my own thoughts on the matter and they are as follows: We’ve met KLOPMAN and KLOPMAN is us. If we’re going to enjoy our diamond, we must be willing to live under our own curse. 

On a happier note, it is my hope; nay my belief, that we are up to the challenge. 


To Mock a Killingbird

You’re killing me. Again. You birds are killing me. In fact, you’re killing me so badly, I have a new name for you. You are killingbirds. Maybe not all of you, but definitely the tree-hugging, wing-nutting contingent out there, are, every last one of you, killingbirds. My protests notwithstanding, you keep flapping your flightless wings, and warbling out your one or two-note melodies. And I’m not sure I can take it anymore.

To the rest of you, I offer my heartfelt apology, but the killingbirds out there have left me with no alternative: before I go, I must mock you. In fact, I must mock you in wicked, Monty Python fashion:

Killingbirds: your father was a hamster and your mother smelled of elderberry.

So there.

I’m sorry to be so harsh, but this time you deserved it. Your coupe de grace took the form of an editorial published on the NBC website, which advocated for the removal of Harper Lee’s “To Kill a Mockingbird” from school reading lists – ostensibly because it provides validation for the questioning of a woman’s rape claims.

Now, I’m going to assume y’all are at least nominally familiar with Mockingbird’s plotline, which tells of a widowed father, the leading lawyer in the forlorn, depression-ridden nowhere of 1936 Monroeville, AL (current population: 6,519). It unfolds through the eyes of his then-six-year-old tomboy daughter: Jean Louise “Scout” Finch. The dual narrative describes her father Atticus’s loving attempts to raise his two motherless children, while courageously defending a crippled black man on a bogus rape charge. While it does not, to my thinking, rise to the dignity of a bona fide literary masterpiece, TKaM is a pleasing, satisfying read, capturing a moment in time, a place in history, and released at a point (1960), when America was most ready to receive its embracing vibe. It is also one of the few works where the film can truly be said to be better than the novel upon which it is based.

Until nearly the end of her long life, it was the only work the reclusive Miss Lee ever published (urban legend has it that the adorable, lisping Capote, who, somewhat improbably appears in the text as a neighbor/bestie, actually may have ghost-written the piece). However, shortly before her death last year at age 90, she uncovered among her personal papers a manuscript for another book “Go Set a Watchman”, which describes the lives of the Mockingbird characters 20 years hence. In it, Jean Louise is a grown sophisticate living in New York, who returns to the environs of her childhood to confront a number of demons, including the passive racism of her father.

There was considerable hype in the release lead-up for Watchman, and I dutifully bought it on the day it dropped. I thought it was a very good book, but the critics were disappointed. It sold a lot of copies, but beyond that, it is likely to be largely forgotten. Perhaps this is because the uncovering of Atticus as a bigot was too disturbing a development for Mock fans to process.

One ironic element of the backstory is the recently-revealed nugget that while Watchmen, in terms of the chronology of the storyline, is a sequel, with respect to the order in which the books were written, it is actually a prequel. Miss Lee wrote Watchman first, and publishers rejected it. They were, however, enamored of the flashback scenes from Scout’s childhood, and suggested she rewrite the book to focus on these.

Well, she went them one better and wrote an entire book about those earlier times. The suits greenlighted “To Kill a Mockingbird”, and it went on to sell 40 million copies. The film won 3 Academy Awards, including the Best Actor Prize for Gregory Peck, who forever will be emblazoned into our brains as the sober, steady, enlightened (and decidedly non-racist) Atticus Finch.

All of this should’ve been well and good, and in fact it was. Until our moral betters at NBC decided that one of the all-time most iconic works of racial tolerance is in fact a sexist screed that serves to delegitimize the claims of rape victims.

Who knew? And now we stand corrected. If we’re wise, we will learn for the experience and impute our original sin on the entire American experience – all ~240 years of it. Here, we will be guided by our morally infallible killing birds, and I’m sure we’ll all be the better for it.

While I copped my original paperback copy of Mockingbird at Barbara’s Bookstore on Clark Street, and paid cash, my purchase of Watchman was undertaken in an entirely digital fashion. Here, I availed myself of Amazon’s Kindle service, with amounts deducted from my Amazon Prime account. Based upon this past week’s news flow, there’s a lot of this latter-day form of commerce taking place. The eponymous, sponsoring company took to the podium this past Thursday to announce a quarterly earnings performance 7.5 times the Street’s consensus (53 cents actual vs. 7 cents expected). The company also reported blowout revenue increases from its core shopping business, which shipped, or zapped, $26.4B of product this summer. But get this: Amazon Retail actually lost money in the quarter. The entire profit margin (and more) was made up by the performance of Amazon Web Services, a charter member of the oligopoly that is set on a technological takeover of the world.

And AMZN was hardly alone. On that same fateful Thursday afternoon, The-Alphabet-Formerly-Know-As-Google clocked in with shockingly strong numbers, as did Microsoft and Intel. The nexus of these tidings, as perhaps was to be expected, catapulted the U.S. equity complex from what was shaping up to be an “off” week, to yet another jolly romp to all-time records. And I doubt that the romp/ramp up is over – yet. Apple and Facebook report next week, and the former, having finally busted out the exorbitantly expensive X phone, enters the sequence with the tailwind of having sold out the product in a matter of minutes. With respect to the latter, while no particular previewing nuggets have come my way, I… kinda… suspect …they’ll have a happy story to tell.

Last week, in fact, featured happy talk – not just in equities, but virtually everywhere one cared to listen. Hurricanes notwithstanding, the first glimpse of Q3 GDP reached into a heavenly 3 handle. Other macro statistics also brought tidings of growth, with Durable Goods Orders and New Home Sales both coming in at the upper range of estimates or beyond. Draghi addressed his minions mid-week, to announce modifications to QE, with lower monthly purchases being offset by an extension of the period over which said purchases would take place. The market took this, on balance, as being dovish.

Brent Crude rallied to close above $60/barrel for the first time in 2 years, and carried the GSCI to similar valuation milestones along with it:

In Washington, the precision execution of our governing processes continued apace, with a budget now almost prepared for the President’s signature, a milestone thought to be an essential pre-requisite to the Holy Grail of Tax Reform.

In reviewing the confluence of these events, I find some common threads. Global economic growth does indeed appear to be accelerating, and if something useful can actually be accomplished in the realm of Tax Reform, well, let’s just say that the infallible, oxymoronic “smart money” believes that the benefits have yet to be priced into current valuations.

But let’s revert to the land of Amazon, Alphabet and the rest of the chosen few. I believe that the unifying theme of the giddy goodies they are sending our way is an acceleration in the demand for disrupting technologies. Cloud services, Edge Services (apparently the cloud of clouds), Big Data Applications, Electronic Commerce, Digital Payment Services – all are achieving escape velocity. And, while no one should doubt that our Silicon Valley Chieftains will be the most visible beneficiaries of these trends, it strikes me that they are deeply reflective of a gathering round of capital investment away from the FAAMANAG complex. But thus far, the Market Gods are bestowing their blessings almost exclusively on the Big Dogs of tech:


The chart shows that the equal-weighted RSP actually lost value this past week, even as the glittering stars of TMT shined to super-nova proportions, in the process launching the capital-weighted SPX into the stratosphere.

I think, over a finite interval, the other constituents in the indices may be where the action lies. They’re spending like never before on new technologies, and I wouldn’t necessarily bet against their successes.

In the meantime, I might keep my eye on broad-based index divergences, which have been becoming more noticeable in recent sessions. To wit, on Friday, the spread between the return on the NDX (+2.2%) and the Dow (+0.14%) was the widest recorded in 15 years.

Bond yields, at least in these realms, are also on rise, and, if I’m correct about the looming technology boom, and, if the kids in Washington actually pass rational tax reform, the 30-year Fixed Income bubble could face a mortal threat (I can’t believe I’m actually writing that).

In any event, capital, stationary to the point of oblivion over the past few months, appears to be on the move, and, though I’m reticent to lean this way, I see this as a constructive development. Certainly, the fix is in for the rest of 2017 – it’s inconceivable – particularly now that October tax selling is nearly over – that anything other than a catastrophe can knock this rally off its kilter. But if I’m reading tech trends correctly, the good times could roll well into 2018 and beyond.

Much as I hate to sound optimistic in a world which is now characterized by an unmixed assault on the sensibilities of snowflakes, I must yet call ‘em as I see ‘em. I also will step out on a limb and predict that Miss Lee’s Magnum Opus will grace the curricula of educational institutions as long as the band plays. In one of its key passages, Atticus instructs his children that “it’s a sin to kill a mockingbird”, and he was probably right.

I’m here to declare the mocking of a killingbird, on the other hand, to be fair game, as long as one doesn’t abuse the practice. So I take my leave with the following Pythonesque admonition:

Away, progressive killingbird types, or I’ll mock you a second time.

Remember, you were warned.


Not All Those Who Are Lost Wander

All that is gold does not glitter, 

Not all those who wander are lost; 

The old that is strong does not wither, 

Deep roots are not reached by the frost. 

— J.R.R. Tolkien 

I lifted this poem from Tolkien’s “Fellowship of the Ring” – the first volume of voluminous and the now-ubiquitous “Lord of the Rings” Trilogy. But as has been consistent with the protocols of this forum, I have this rather startling and embarrassing confession to make. I’ve never read Tolkien, not even the Trilogy’s widely-considered-more-accessible prequel: “The Hobbit”. And no, I’ve never seen any portion of the film sequence. Not one minute of it.

In the days of my youth, Rings was all the rage. I even knew a couple of particularly erudite brothers who were part of a Tolkien Club, which analyzed and re-enacted scenes, etc. In solidarity with my betters, I bought these books, but could not get through them. Then Tolkien disappeared from the scene for about a generation, but was resurrected, around the turn of the Millennium, in (it must be said) glittering, fashion by those crazy kids in Hollywood. JRRT had been dead for about a generation by then, but boy oh boy, had he lived, would he have been happy. And rich. The Rings Trilogy not only copped an astonishing 17 out of the 31 Oscars for which it was nominated, but generated a box office gross that places all 3 in the top 50 takes of all time.

So clearly there must be something there, and our little poem, which appears twice in the text of “Fellowship”, reinforces this notion. But the glitter/gold thing does not originate with Tolkien. Indeed, it had been used, in various forms, by stone cold ballers ranging from Chaucer to Shakespeare. And even them guys took poetic liberties. Some references in literary history trace the glittering gold reference all the way back to Aesop, who did most of his writing about 600 years before the birth of Jesus.

So, while that more famous line does not strictly belong to Tolkien, it should be noted to his credit that he cleverly inverted it, advising his readers that all that is gold does not glitter. Moreover, the next phrase in the sequence, the elegant, thought-provoking observation that not all who wander are lost, appears to belong entirely to him. However, it strikes me that this phrase also lends itself to inversion, as it may very well be the case that all who are lost do not wander. 

I can cite my own experience in support of the foregoing. Though I have often felt lost, perhaps out of laziness, I seldom wander. 

And I’m not alone in this practice. To wit, it can be argued that the inverted version of the phrase applies to current market conditions. Consider, for instance, our equity indices, which we observe as being in single-direction motion, namely upward. Their refusal to diverge from their set course takes various forms, but let’s consider a just this one. As of Friday’s close, the SPX achieved a record set of consecutive sessions (241) during which the index has failed to yield as much as 3% of valuation ground.

A determined march in an identifiable direction is arguably the antithesis of wandering. If my theme has merit, though, this doesn’t mean they aren’t lost. So are they?

A lot of smart folks with whom I deal would answer in the affirmative. They observe in frustrated awe the unfolding rocket ride of our equity complex, click their collective tongues, and darkly suggest that wherever Mr. Spoo and General Dow, Captain Naz and Admiral Russ are headed: a) they will be unaware of their precise coordinates; and b) they may be impelled to reverse course when the reality of a) hits them.

Unfortunately, I’m not in a strong position to predict with certainty whether or when these darker hewn prognostications will come to pass. However, I can state with some confidence that if they do, then the equity complex, though not wandering, would fairly be described as being lost. 

Further, if said complex is in fact missing, it might be due to a trend illustrated in this handy little graph making its way across my Linkedin feed over the last few days:


Now, I’m not sure the source of these time series, but the numbers appear to be approximately correct. And if so, the solution to our problems is obvious: the markets need more hedge funds! Maybe lots more! I mean, if there are only now two fund platforms available to hunt down each listed equity security, then how are we supposed to find the little buggers? Perhaps, if the ratio increased to, say 3:1 or even 4:1, we’d stand a better chance.

But setting aside the troubling flatness of the hedge fund growth curve over much of this decade, one might do well to train one’s eye on the disturbingly diminished number of listed equities available to buy and sell – a figure that has dropped by nearly half over the last couple of decades. This trend reinforces one of the main themes of my most recent written rants: an increasingly alarming imbalance between the supply of, and demand for, marketable securities.

For me, the problem begins in the bond markets, with the persistence of global QE serving to catalyze the hoovering up of all govies – immediately upon issue (if not beforehand). As such, if you wanna trade something, it’s almost gotta be equities. But with low borrowing costs and miniscule yields that have characterized the debt markets for several years, the appropriate response – particularly for large conglomerates has been to borrow, acquire and bury incremental available float inside corporate treasuries.

I will stake some proprietary claim on this hypothesis, and, if pushed, can back it up with evidence, but the idea is catching on. Over the weekend, I read something pithy by some hedge fund dude which points out that stock buybacks account for 40% of post-crash earnings growth, and that in 2015 and 2016, public corporations spent more than their entire aggregate operating income buying their own stock and issuing dividends.

If I’m making myself less than clear, perhaps the following chart will reinforce the point:

There’s some other stuff in this note that I found less than compelling, but I don’t think one can misinterpret the implications of reduced of supply on equity prices.

I foresee no imminent end to this technical imbalance, but clearly, it cannot go on forever. On the other hand, it could continue for quite a spell, and, as long as it persists, I believe that so too will the rather perverse immunization of equity securities (and, for that matter, bonds of all forms) from price effects created by risk-enhancing or downright negative news flow.

This past week’s annoyingly predictable climb to yet again another set of all-time record valuation levels was catalyzed in part by the custodians of our government policy. Surprisingly, and again against the consensus smart thinking, the members of the World’s Greatest Deliberative Bodies managed to actually come close to passing a budget framework. In turn, or (so the thinking goes) this sets the table for that swell tax cut we’ve been promised by the ruling party.

The mere hint of these tidings caused equity investors to swoon with delight, and then buy up every available share of every stock in sight on Friday. Consider, for example, the case of General Electric Corporation, the stock of which has been perhaps the hottest dumpster fire of this improbable year (it’s underperforming the SPX by nearly 40% this year: down 25% vs. up 13% for the index). On Friday morning, newly anointed CEO John Flannery strode grimly to the podium to announce the Company-that-Never-Misses’s first earnings disappointment in 10 quarters, along with plans to divest of some $20B in business lines. For a brief moment, investors showed their ire, actually selling of the stock down by a little more than 1%. By mid-morning, however, they had returned to their senses, and GE actually closed up by an equivalent amount.

And as for those tax cuts, well, I reckon we’ll see. I suspect that the Pachyderms will indeed push something through, especially with their increasingly alarming election prospects now looming just one short year on the horizon. But we’ve seen these guys soil themselves before, and come what may, I expect the final product – if we ever get there – to look much different than and diluted from what is being described to us. Good luck with that removal of mortgage interest deduction kids, and (while we’re at it) with the elimination of the state and local income tax offsets.

In the meantime, next week marks the busiest section of the Q3 earnings sequence, with nearly 200 companies reporting. On Friday, we’ll also get our first glimpse at that mulligan inducing GDP print. I don’t see any of this knocking the indices off of their determined path.

But I will admit to remaining a bit lost. This is nothing new to me, but it is getting increasingly bothersome. Perhaps I should knuckle down and read some Tolkien. Or at least dial up the movies. But given the length of these writings and film Hollywood Blockbusters, this could keep me distracted for months, if not years.

Let me know how you make out.



Random Length Lumber, Random Walks and Other Random Thoughts

Sigh. I have written and published more than 600 of these erudite pieces – across a baker’s dozen years – and seldom if ever has the task been more challenging.

And I blame you. For not giving me anything about which to write. Nobody to whom I am particularly attached died this week. I have ZERO interest in this Weinstein thing, and important topics such as the decertification of that swell Iranian nuclear deal that Obama cut, and Trump’s unilateral removal of health insurance premium subsidies, are doing little but causing my eyes to glaze over. The markets don’t care about these things, so why should I?

I therefore thought I’d use our time together this week to take a random walk across some recent random events, which, taken together, perhaps tell us more about our present state than we might otherwise care to know.

This Friday marked the last voyage of sorts of a routine Finnair flight from Copenhagen to Helsinki. The same route remains in place, but under a different numerical scheme. As such, it was the last flight 666 to HEL. And it took place on Friday the 13th. The journey transpired without incident, but I think we all owe a shout out to the brave souls – passengers and crew – who had the intestinal fortitude to take a ride that particular triply jinxed aeronautical bird.

On a more encouraging note, the Nobel Committee awarded the 2017 Prize in Economics to the University of Chicago’s Richard Thaler. Not to blow my own horn (always a difficult task, but now a nigh impossible one), but Dr. Thaler is the 7th, former professor of mine to cop the prize, joining the likes of Merton Miller, George Stigler, Robert Mundell, Gary Becker, Eugene Fama and William Vickrey in this pantheon. Congratulations are due and owing both — to Professor T and to the Nobel folks, who almost (BUT NOT QUITE), have atoned for the mortal sin of having given the award to the odious Paul Krugman in 2008.

Continuing on in Ivory Tower configuration, I read with interest that Hillary Clinton is in discussions with Columbia University regarding a teaching post. I offer my premature “welcome aboard” to Secretary C – with one caveat: I haven’t taught a course in Lion-land for nearly two years. I may do so again in the future, but put it this way – It’s not gonna be because I reached out to them. 

This Thursday, we will celebrate(?)the 30th anniversary of the 1987 Crash, and though I can’t say for sure, my sense is that the market has recovered nicely in the intervening three decades. In noting the milestone, this week’s Barron’s got pretty weepy-eyed with nostalgia, going so far as to reprint the late, great Alan Abelson’s “Heard on the Street” column, first published on the weekend after the event. As evidence of how much times have changed, the column features quotes from one John Tudor Jones, my former boss, who (or so the story goes) was correctly positioned going into the drubbing, and who went on to tear a new one into the markets for the next generation and beyond. This all would’ve been a nice touch by Barron’s, had it only gotten Mr. Jones’ first name right.

I finish my random walk with an important financial development, and one that no one, no matter how remote their proximity to the markets, could’ve failed to notice. Here, of course, I refer to the absolute melt-up in the CME’s Random Length Lumber contract:

What gives? My scan of the news flow suggests that the full-on bid is in part catalyzed by some tariff beef with the Canadians, but I have a different theory. The tradeable contract calls for the delivery of 110,000 feet (+ or -) of 2x4s. And, given the news flow as I observe it, one can certainly envision a surge in demand for this commodity, to be inserted into the nether regions of bad actors too numerous to inventory in this publication.

Beyond Lumber, of course, other markets are ascendant as well, most notably those winged butterflies in our equity complex. Another week, another set of records, and all transpiring through the gentlest climb that humankind can experience in a world where (to the best of my knowledge), the acceleration due to gravity remains at a rate of 9.8 meters per second squared. Realized volatility is headed in the opposite direction, and the SPX now features a rolling, annualized standard deviation of returns of approximately 3.5%.

 Will anything change this trajectory? With 10 weeks left in this wacky year, I kind of doubt it. The Gallant 500 did manage to breach into a forward-looking 18 handle – for the first time in quite a spell:

But there’s no reason I can identify why we can’t go the whole route and break the zenith of 24. All we have to do is repeat our playbook from ’99. Anyone for

There are a few other interesting price developments, including a flattening of the yield curve to levels not witnessed, well (it must be said), not witnessed since the last recession:

So, are we headed toward recession? I don’t see it on the horizon. And I definitely don’t see any rationalization of index volatility, valuations or yield curve characteristics – at least until the calendar turns.

I’m a little more optimistic about a return to the norms for the Lumber markets. After all, even though we could all benefit from the 2×4 treatment, this form of discipline and amusement, like everything else in this godforsaken world, is subject to the laws of diminishing returns.