This week, I’m going to start with a digression to my standard weekly digression and ask y’all to first give it up one time to Peter Tork: the Monkees, er, bassist that checked out this past week. Against all odds, Tork was actually a stone cold baller, the fact that he rose to fame as part of a made-for-TV bubble gum boy band notwithstanding. I won’t delve into the whole history, but let’s just say that Tork, as he proved over subsequent decades, could actually play. But Don Kirshner, the media impresario who brain-childed the band as a takeoff of the Beatles’ meandering, illogical, but commercially gargantuan feature film “Help”, had other ideas. Kirshner didn’t want the music Beatles; he wanted the goofy guys doing handstands on the beach. So he hired some photogenic lads to front for a group of uber-legit musicians and songwriters, the latter roster including the magnificent Carol King and Neil Diamond.
Actual band members, most notably Tork and Liquid Paper-scion Mike Nesmith, were aghast when they found out their musical contributions were not wanted. And, bravely, they broke away from Kirshner (who went on to form The Archies – famously stating his preference to deal with cartoon musicians that wouldn’t talk back to him), and gave it a go on their own. The results were a couple of records, which, while perhaps failing to rise to the heights of, say, Electric Ladyland, were legit contributions to the rock and roll catalogue. The best of these is probably “Head”, written and performed by the Monkees themselves, and, if you haven’t done so already, you’ll do yourself no harm in checking it out. Say what you will about the group, they did once headline a tour that also featured an ensemble fronted by a Seattle guitarist named Jimi Hendrix.
And now, ladies and gentlemen, let’s transition to our main digression. Americans who passed their elementary school years during the ‘60s were under a full-on assault by the Monkees. They were everywhere: on TV, on the radio, in magazines, and perhaps most ubiquitously of all, on lunchboxes. Now, I don’t want you to get the wrong idea; it would’ve been an unthinkable assault on burgeoning manhood for me or any of my male friends to bring a food container bearing the images of Davey, Mickey, Mike and Peter to school. We all actually shaded towards the equally popular Batman to carry our mid-day meal. But the contents were always the same: an Oscar Mayer bologna sandwich, topped off by one or more individually wrapped, single slices of Kraft American Cheese.
And if you’ve been paying attention, you know that it has been a bad week for Krafts of every stripe. And it’s their own fault. In order to understand this, we must traverse 30 years of history. In 1989, a then-still-somewhat independent Kraft Foods Corp acquired Oscar Mayer, and this made me believe that all was again right with the world. In a vertical integration move that even John D. Rockefeller Sr. would have admired, the contents of my favorite sandwich were now stacked on top of one another — under a single corporate umbrella. Good and Good. But now wind the clock forward a generation — to 2015, when Kraft Foods completed a merger with the H.J. Heinz Corporation, forming an unholy, unsavory cuisine corporation under the moniker of Kraft-Heinz, Inc.
I was beside myself; tried to warn Management against taking such a fatal step. Because the divine combination of Oscar Meyer bologna and Kraft individually wrapped single slices (provided you removed the latter’s wrapper), wanted nothing to enhance it, and certainly not the intrusion of a ketchup company. I viewed the very concept of bringing ketchup into the equation to be not only an assault on the senses, but an insult to humanity itself. Moreover, I feel that Kraft had missed perhaps the mother of all business opportunities by virtue of its failure to rescue Hostess Brands, which in 2012, was forced into bankruptcy. Had they taken this bolder, more god-like action, they would’ve completed the sweetest lunchtime symphony of all, because they would’ve then not only owned Wonder Bread (the preferred outer layer of the divine sandwich of my youth) but would also gained control of the Twinkie that provided the coda to my lunches of yore.
But instead, they went the ketchup route, and on Friday, Kraft Heinz announced a write-down to the tune of $16B on these assets. Investors reacted with justifiable wrath, selling down the Company’s shares by more than 25%. So bad was this news that it actually kneecapped the Q4 earnings of the mighty Berkshire Hathaway, the fact that the write-down not hitting the tape until Q1 notwithstanding.
Like I said, not a banner day for Kraft-Heinz.
And for Kraft in particular, because, on the same day that ticker KHC issued its tape bomb, a gentleman of the same name, and one who happens to be the owner of the Super Bowl LIII-winning New England Patriots, got busted on a prostitution solicitation rap that is, according to published reports, just in its embryonic stages, and which also snagged a guy who spent decades in the C-Suites of both Morgan Stanley and Citigroup.
But to all of these bad tidings market participants gave nary a second thought, as our indices roared to their 9th straight week of gains, the best such streak since 1964. For those following my annualized return tallies, the 2019 standings are: Gallant 500 +114%, Captain Naz +118% and Ensign Russ +214%. In other words, the great, giddy rally continues. But, one wonders, for how long?
I’m going to stick to my guns here and suggest that: a) at best, the engines are bound to slow down a bit; and b) for the good of investors, perhaps the sooner they do so the better. Like I mentioned last week, the best year that even the Naz has ever recorded was 89% in 1999, and like I also mentioned in that note, this ain’t 1999.
Heck, I don’t even think it’s 1998.
Absent a few stragglers, Q4 earnings and guidance are now fully in the books, and while they might have been good enough to induce some relief, they were hardly gonzo. And the rest of the year is looking pretty bleak from that standpoint as well. Full-year profit forecasts are now measurably below the socialized Mendoza Line of $170/SPX Share, but, as indicated in the following chart, the response has been “who cares?”:
Well, we may find out this coming week (who cares, that is), which will be an interesting one from an information flow perspective. Chair Pow is scheduled to riff off to the Senate Banking Committee on Tuesday, and here’s hoping that he doesn’t modulate – change keys – from his current, docile stylings, because that could mean real trouble. Particularly as, while the spotlight shines on him, the Treasury Department will be issuing another mindboggling $200B of paper across the maturity curve.
On balance, the macro data calendar is light; for reasons not entirely clear to me, the Feb Jobs Report drops on the second (3/8) rather than the first Friday of March. But I urge those thinking that the week will end on a quiet note to bear in mind that Friday ushers in two nominally important deadlines: the end of the suspension of the debt ceiling and the stated point at which, absent a deal (or significant progress thereto), the U.S. is scheduled to drop a pant-load of tariffs on the Chinese.
In terms of the former, there’s no particular reason to anticipate the date with any horror. Yes, the suspension of the ceiling will be lifted, but the consensus of the obtuse suggests we won’t actually breach the debt limit until later this Spring, at which point we can expect our elected officials to act in the spirit of sobriety and cooperation that has been the early hallmark of the 116th Congress.
And, in all likelihood, March 1 will come and go without any Sino-tariffs going into effect. Both sides appear to be itching to do a deal, and whatever else is going in in China, the anointed ones seem to be of a mindset to goose capitalistic economic activity:
If I’m reading this chart correctly, it was indeed one helluva January Jump. And to me, along with other steps taken in the Chinese Credit Markets, it suggests that Chair Xi is feeling some pressure to boost the recently flagging economic fortunes of the Peoples’ Republic.
It also suggests that we may catch wind of a broad framework for a trade deal even before the 3/1 deadline transpires, and that alone could give this here amazing rally a significant incremental boost.
However, on balance, I’d urge caution and prudence here. I have no particular objection to you’re playing around a bit, but would on the whole recommend that you embrace new risks in single slices, as opposed to going off whole hog.
And all of this is making me very hungry. And it’s nearly lunchtime. So I reckon you know what I’m about to do. The Oscar Meyer-Kraft-Wonder Bread trifecta awaits me, and if all goes well, I will indeed reward myself with a Twinkie for dessert: a step I can take due to the beneficence of two private companies: Flower Foods and Apollo Global Management, who rescued the baked goods portion of my culinary trip down memory lane from oblivion.
Finally, as might be expected, I’ve also got the Monkee’s “Head” teed up on Spotify. And as I listen and dine, I will hoist a whole-milk toast to my main man Peter Tork, who was not a clown, but a bona fide musician. I’m thus feeling very good about my next steps, and hope that with great care, you will place yourself in a position to feel the same about yours.
TIMSHEL