When all else fails, we’ve still got Willie Shake, right? For what it’s worth, our titular quote may be my favorite line in the whole Shakespearian Cannon (much of which I haven’t read), the fact that it derives from perhaps his most muddled mess of a play – “Measure for Measure” — notwithstanding. But I can only offer partial justifications for yet another round of thievery from the Bard. And these are as follows.
With little fanfare last week, and at the ripe old age of 93, Charles Van Doren gathered to the dust of his forebears. He is best known for that Quiz Show cheating scandal in the 1950s, captured brilliantly in the eponymous 1994 film, which happened to be produced and directed by Robert Redford. There’s a scene in there, where, in apparent longstanding family tradition, Charles’ father (Pulitzer Prize winner Mark) busts out the line, and, on cue, Charlie correctly identifies the play that contains it. Van Doren cheated on “Twenty One”, and had a brief, high-profile descent, but he didn’t fall far. He ran the Encyclopedic Britannica Corporation for a few decades, he had plenty of family money to spend, and again died a peaceful nonagenarian death at his family’s estate in Canaan CT. Apparently, though, his hubris stayed with him throughout, as, when he wasn’t editing Photosynthesis updates for the Encyclopedia, he was pumping out books with modest titles such as “A History of Knowledge”, “How to Read a Book”, and, of course, the whimsical “Great Treasury of Western Thought”.
So maybe we’ll move on. Wednesday night, it was my singular pleasure to have attended a Mott the Hoople reunion concert at the Beacon Theater. The lads broke up in ’74. I saw them then. At the time, they were, to my ears, the perfect rock band. But they couldn’t hold it together and yielded the spotlight that might have been rightfully theirs groups such as Queen and the E-Street Band. At present, the rhythm section is well into the dirt nap, and the lead guitarist is full on daft. But they put on a great show – particularly given that their leader: The Fabulous Ian Hunter, will turn 80 in June.
I mention this mostly because once Mott had packed its gear and departed the premises, the Beacon set about to prepare for its next act: (I kid you not) Bill and Hillary Clinton. Wednesday/Thursday holdovers thus had the opportunity on the second night to hear the dulcet tones of John Podesta lobbing softballs to the Once Bitten/Twice Shy former First-Couple. Average ticket prices were $200. I paid $150 for my Mott seat in the Orchestra, and am entirely at peace in the belief that I got the better bargain.
At any rate, the Clintons (who would fill an entire encyclopedia covering their sins and virtues, their rises and falls) press on, laying their own inimitable ethical stylings on us, and fattening their bank accounts along the way. I’m not sure they fit our theme any better than Charles Van Doren does, but there’s something Shakespearian about the whole Clintons-Follow-Mott-at-the-Beacon motif, no?
Finally, by way of rationalization, I wish everyone to remain aware that I’m still disturbed by this whole ESG scoring thing, and to remind my droogies that in the oft-forlorn realms of finance, and as discussed below, the sinful do sometimes rise, and the virtuous too-often fall. It would be wise for anyone wishing to actually generate meaningful investment returns to bear this in mind.
But at the end of the day, we must revert, as we always do, to both Washington and Wall Street to justify our use of that magical “Measure for Measure” line. Let’s start with last week’s spectacle of the leaders of our largest financial firms being summoned to Capitol Hill for their Star Chamber Inquisition. The purpose of this exercise, of course, was to score political points by embarrassing these dudes. My own judgment is that they did pink their swords, but failed to draw significant blood. One of the Inquisitors managed to get on the record the reality that all seven CEOs were white males. Perhaps more impactful were their statements about the truly astonishing fact that while, in the wake of the crash, our banks paid fines amounting to an astounding $243B, not a single individual was incarcerated or even indicted.
On the other side of the equation, House Finance Chair “Mad” Max Waters and her crew had a couple of slip ups – including an attempt to tag the bulge bracket for the truly gruesome student loan mess we currently have on our hands, the reality that it is the government, and not lending institutions, that provide all of these funds notwithstanding.
So the jury’s still out on the sins of the banking industry, but as to the other component of our Shakespearian equation: the early returns are encouraging. On Friday, Top Dog J.P. Morgan reported record earnings for Q1 ‘19, their stock is up >10% this month, and the banking sector has now essentially recaptured all of the valuation ground lost in that grizzly year-end selloff.
But they should remember the long game here, and know their enemies. While all of this was transpiring, Senator Elizabeth Warren introduced a bill that would automatically impose criminal sentences (i.e. jail time) on any financial executive found guilty in a civil proceeding. As has been pointed out, and by inference, if the bill sponsors are at all troubled by constitutional dilemmas (civil outcomes are based upon a standard of preponderance of evidence, a much lower bar than the criminal threshold of beyond reasonable doubt) they’re not letting it stop them from pursuing this path of righteousness. Moreover, these heroic efforts to fix a broken socioeconomic system are only part of a broader package of measures that would also include a wealth tax, the imposition of explicit federal chartering and regulation of publicly traded companies, some form of reparations for the sins of slavery and god knows what else.
Plainly Senator Warren is leading the virtue-signaling, and it only stands to reason that by doing so, she is showing herself to be among the most virtuous of the virtuous. But she’s running for President, is way behind in the polls, and falling fast. She’s behind a guy who hasn’t even announced (and may choose to sit it out), an elderly senator that is not even a member of her party, a skate-boarding/punk rocking one-term representative, and a first-term Senator, who, as mentioned in earlier installments, rose to the top of the California political heap in part by being Willie Brown’s side piece. She may, as early as this coming week, even fall behind the previously unknown mayor of America’s 299th largest city. So maybe for the moment, with JPM on the rise and Liz on the down, Shakespeare was right.
However, if there’s any sector of the global economy more hated than the banks, it’s the Energy Complex. That they sin against the environment and us poor, trod-upon consumers is a widely held tenet. And they had a pretty big week. In one of the most highly anticipated debt transactions of the decade, Saudi Arabia’s Aramco, by some measures the world’s largest company managed to place a cool $12B of paper into the market. Published reports indicate that the deal was oversubscribed by many orders of magnitude. But when the notes hit the secondary market, they sank like a stone, and one way of looking at this is to suggest that Aramco extracted the maximum value achievable for their newly assumed indebtedness. And none of this could’ve happened without the yeoman efforts of their underwriters, as led by the above-mentioned, transgression-rich JP Morgan. Way to rise by sin, Team Aramco.
The week ended with the announcement of Chevron’s purchase of energy exploration enterprise Anadarko, for a cool $33B – an approximate 35% premium to the latter’s pre-announcement valuation. That’s a lot of scratch to pay for assets deployed in an attempt to mine oil and gas resources, in a world which, due to the sins of the Industrial Age, has only 12 years left as a shelter to All God’s Creatures.
If that ain’t rising by sin, well, then, I reckon I’ll just have to renounce Shakespeare once and for all.
And, more broadly speaking, this here sinful rally continues unabated. By Friday’s close, not only had the Sinful 500 breached the treacherous terrain of a 29 handle, but managed to retain this high ground. It now resides a slender 20 index points (~0.7%) away from its highest previous point of transgressional elevation. And nobody, or very few among my acquaintance, are wasting much time looking down. Case and point the CBOE Volatility Index, in my judgment one of the truly virtuous members among the community of financial instruments, has fallen ignominiously to levels not witnessed since those days of relative innocence late last summer:
Now, the holy books of investment (with the notable exception of my own “Trading Risk”) are all clear on one point: the VIX is intended, at least in part, to offer a hedge against the caprices of the equity markets, and to the extent that this is an accurate representation of its virtues, and as illustrated in the left side graph above, it has indeed fallen in a manner entirely consistent with our titular formula.
But further investigation suggests that there may be more to the story (please refer to right side graph). As was the case last time underlying valuations entered these realms, short interest in the VIX is rising towards record levels. Hopefully, at least some of y’all remember what happened next, but in case you don’t, just take a look at the number the Virtuous VIX played on the shorts in December, just when the broader market was in the midst of a crippling, if unambiguously virtuous, fall.
Maybe this time will be different; after all, it always is. But it says here that the VIX will rise again some of these days, rewarding virtuous hedgers and punishing any sinful short sellers that happen to be in its path at the wrong time.
More likely than not, we’ll know a great more about this over the next couple of weeks, as the great engine of an earnings cycle revs to full throttle. In the meantime, and as suggested in last week’s epistle, I suspect that the Sinful 500 will seek to gather itself in a noble effort to breach into new heights, from which, by its very virtue, it is likely – subsequently and eventually — to fall.
It will all be interesting to monitor. My guess is that in terms of sins, virtues, rises and falls, our formula will work – except when it doesn’t. But Willie Shake’s whole point, I think, was to remind us that it is not for us to judge. So my risk management advice to you is another one of Shakespeare’s greatest hits. “To thine own self be true” said Polonius to Laertes. Both were ultimately dispatched by the Mad Dane’s sinfully virtuous sword, but I think that this was wise counsel from a loving father to his son nonetheless.
The rest, my friends, is out of our hands. So keep your eyes open, look before you leap, avoid bending, folding, spindling and (most of all) mutilating if you can. And, as always…
TIMSHEL