Author Archive: steve

Rules 1a and 1b

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He’s a worldwide traveler, he’s not like me or you,

But he comes in mighty regular, for one who’s passing through,

That one came in his work clothes, he’s missed his last bus home,

He’s missed a heluvalotta buses, for a man who wants to roam,

And you’ll never get to Rome, Son, and Son this is Rule 2

— P.D. Heaton

I gotta say, I love Rule 2, so much so that I even included it in my book (remember my first book?). But before we get to it, we must first, as a matter of protocol, pass, wherever it may take us, through the portal of Rule 1. Moreover, while Rule 2 is fixed for all time, Rule 1 has historically been a bit more elusive.

Moreover, recent events point to its partitioning. Hence, I give you Rule 1a: TIMING IS EVERYTHING; and RULE 1b: IT’S ALWAYS IMPORTANT TO KNOW THE SCORE.

In comforting consistency with the age-old platitude, Rules 1a and 1b, are defined by their exceptions, of which this week there were several, of varying form and consequence. Having no better alternative, I have chosen to highlight a few pertinent examples – in chronological order.

Wednesday morning, Northbrook, IL-based Pharma concern AbbVie completed the buyback of its shares – taking the form of a Dutch Tender Auction (a nuanced transaction type that I won’t bother to explain — mostly because I don’t myself understand it). The Company’s intent to do so was known in advance by investors, as was the associated amount ($7.5B). The only unknown was the price it would pay, proclaimed in the pre-open to be $105/share. Later that afternoon, however, Management awarded itself a mulligan, informing the markets that the real price was $103. The pricing action attendant to this regrettable error is as follows:

Let’s all agree that the guys and gals in the AbbVie C Suite have had better weeks.

Further, it would seem that the Company violated Rules 1a and 1b, by failing to know the score, and by mistiming by several hours the announcement of the correction.

I am sure, however, that they have learned their lesson and will, at the point of their next Dutch Tender, reveal the appropriate price at the appropriate time.

Moving on across the week, we turn to the misanthropic Earl Joseph (J.R.) Smith III – Shooting Guard for the Cleveland Cavaliers. Smith and the LeBron-led Cavs entered the 2018 NBA finals as deep dogs to the annoyingly flawless Golden State Warriors as any I can remember. But with a gritty performance in Thursday night’s opener, the team was poised to snatch Game 1, when teammate George Hill stepped to the line for the second of two free throws, which, had it gone in, would’ve given the Cavs a 1-point lead with about 4.5 seconds to go. But Hill clanked it and Smith grabbed the offensive rebound. However, instead of shooting the rock, or passing it to arguably the greatest player in NBA history (sorry MJ) for a buzzer beater, he dribbled out the clock, sending the game into overtime, where the Warriors trounced.

Some debate has ensued as to whether, at the end of regulation, J.R. knew the score, but, indisputably, his timing was off, and now his gaffe passes into history as one of the most bone-headed plays of all time.

All of which brought us to Friday morning and a much-anticipated April Jobs Report. At 7:21 EDT, President Trump issued a casual tweet that he was looking forward to the 8:30 a.m. release. Not knowing for sure what this meant, but being aware of our Chieftain’s tendency towards bravado, a segment of savvy, early rising market participants suspected that the number was going to be a good one, and promptly bought stock futures and sold bonds.

Well, waddya know? The number was indeed strong. Nonfarm Payrolls, the Base Unemployment Rate and even Hourly Earnings were all encouraging. And yes, stocks rallied and bonds sold off. Undoubtedly, here, the Trumpster knew the score, but I’ll go so far as to state my opinion that his tweet timing was indeed off.

The episode set off the usual, wearying cycle of gleeful outrage by the Administration’s enemies, combined with spin control on the part of its friends. But at the end of the day, I ask my readers to keep some perspective here. A review of the SPX and 10-Year Note trading activity during the critical time period between 7:21 and 8:30 does not support overwrought claims of market manipulation:

Nope. Not much happened during the period between when Trump scooped the jobs market, and the actual number became part of the public domain. Still and all, I wish he’d refrain from pulling these types of stunts, because they begin to give me a headache. So I offer the following risk management advice to our Commander in Chief: in those many cases when you know the score, please be careful of your timing. You had all day to brag about the jobs numbers, and a little forbearance (never your strong suit, I know) on your part might save some aggravation or worse.

But now it’s time to move to exceptions to Rule 2. Contrary to our thematic quote, I did, at least rhetorically, manage to make it to Rome last week. For lack of anything else interesting upon which to opine, I actually wrote extensively about pricing problems associated with the government debt issuing forth from that glittering capital. My timing here (it must be allowed) was impeccible, but I will in no way claim to have known the score. It came as a fairly significant surprise to me that the political throw-down in that ancient seat of wisdom would roil the global bond markets, with collateral damage spilling over to other asset classes.

But it did. Roil the bond global markets that is. Yields on the Benchmark BTP Note, having traded all year in about a 20 basis point range around 2.00% careened up to a high of 3.15% before settling on Friday at a still elevated but entirely more civilized 2.67%. The unfailingly neutral Swiss Bond stayed negative. Presumably, in a frenzied flight to, er, quality, market players bid U.S. yields – which recently hit a multi-year high of 3.11%, down to 2.78%.

I do suspect, however, that there were other, slightly technical factors that impacted these tidings. As has been reported multiple times in these pages, net short speculative open interest in 10-year futures has been hitting, and for the most part retaining, record highs in recent weeks:

So, when the big Treasury rally hit us on Tuesday, it had to me the look and feel of a short squeeze. Since Tuesday’s blowout, and in light of Friday’s Jobs Report, the U.S. 10 Year Note has since sold off to a yield of 2.90%.

I suspect that the shorts will have another go at it this month, and that we will not only test 3.00% yet again, but probably break through and hold at these levels.

In addition, after allowing on Wednesday approximately $28B of our paper to expire without repurchase this past week, the Fed Balance Sheet now stands at a paltry $4.3275 Trillion – its lowest level in 4 years. If our Central Bankers have their way, this number will decrease at an accelerating rate over the coming months and quarters.

So, with the big dog domestic buyer in belt-tightening mode, uncertainty about foreign demand among traditional owners of our paper (with whom we may now be commencing a trade war), the logical path of rates probably remains upward. Plus, the economy –even beyond the jobs report – is showing signs of feeling its oats, as evidenced in part by the impeccably accurate Atlanta Fed GDPNow Forecast:

Yes, you read that right. The boys and girls down in Georgia have Q2 GDP clocking in at 4.8%. I personally believe this is something of a pipe dream, but if that’s the number (and we won’t know until late July), then you can be pretty certain that the 10-year note will be throwing off a pretty significant amount of incremental vig.

Again, I think this number will come down considerably before it’s official, but it does seem likely that the bond bears may yet have their day.

But timing will be everything, and here’s hoping that Trump can keep his twitter finger in check. Otherwise, we may just have to move on to Rule 3.

And trust me, brother and sisters, you don’t even want to know what Rule 3 is.

TIMSHEL

Turkey(s) at Risk (TaR)

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Forgive the indiscretion of the calendar here, but even over this holiday weekend, I’m worried about turkeys. All of them. In every form. All over the world.

What’s that you say? Turkeys are out of season? Precisely my point. We’re a full six months away from their interval of maximum exposure, as, each November, according to the United States Department of Agriculture, 5.32 Million of them are sacrificed to this nation’s quirky autumnal rituals.

So it becomes all the more alarming that at a time when the planet is almost precisely 180 degrees away from its typical turkey martyrdom position, the noble birds and their namesakes are unquestionably having a rough go of it.

So much so, that I am forced to create a new exposure metric: Turkey(s) at Risk (TaR). The guys in the propeller hats in the General Risk Advisors Jet Propulsion Laboratory – adjacent to the Strip Mall in Wilton, CT are testing these routines out now. And when their models are fully done and dusted, you’ll be the first to know.

We are compelled, in the meanwhile, to rely exclusively upon qualitative measures, so let’s start with the personal, and move out, concentrically, from there. I myself am contributing to species-wide discomfort, by going Cold Turkey on one of my least appealing habits. I won’t go into great detail here, though it might surprise you to learn that the behavioral cycle I’m trying to break is entirely legal. But it is one I’m finding difficult to discontinue in one full stop. I’ve already relapsed once, earlier this month, but think I now have a better handle on this sucker. And one way or another, if I’m to succeed, I can’t allow myself to worry much about the sufferings of our above-referenced flightless fowls.

More broadly, it could be that our gobblers are in for a shelterless summer and chilly winter, as New York City is poised to join a list of jurisdictions that already includes both Malibu and San Luis Obispo, CA, Seattle, WA and Fort Meyers, FL, in banning the materials that comprise the Thanksgiving Bird’s favorite habitat: straws. This may be a simplistic argument, but it strikes me that the following relationship is likely to hold: NO STRAWS -> NO TURKEYS IN THE STRAW

But moving on to global affairs, the nation that bears the name of our zaftig orinth is experiencing a downward economic spiral that is worth monitoring, and perhaps filing under the heading of “there but for the grace of god go I”. The Turkish Lira is in free fall, the fact that its central bank raised overnight rates from 13% to 16% this past week notwithstanding:

Now, there’s a bunch going on in this ancient locale –which once housed the capitals of both the Byzantine and Holy Roman Empires.

However, as the Emperor Constantine once ruled over these realms, bordering, as they do, on both the Mediterranean and Black Seas, with God as his guide, the guys that are currently in charge appear to be taking less divine counsels. They’ve got a strongman there with an unpronounceable name, who is clamping down on his peeps in a manner more reminiscent of Caligula.

After demonizing the mere concept of high interest rates, he went and jacked them up midweek anyway, and the flight out of Turkish Lira only accelerated. They’ve got parliamentary elections coming up in about four weeks, but I kind of expect that the fix is in on that one.

Perhaps some of the problem is a contagion from events in Italy, just a short boat ride (or a desperate battle with Athenians and Spartans) away, and the country that sported the other, eponymous capital of the Holy Roman Empire. Over in Italia, a couple of unhinged political parties, ominously named The League and The Five Star Movement, have been unable to form a coalition sufficiently unhinged to satisfy their increasingly unhinged constituents, and the country may be headed for a snap election over the next few weeks. If the Italian Lira was still around, it would no doubt, like its Turkish counterpart, be selling off hard, but the Italian Lira does NOT any longer exist, so investors are forced to take their ire out in credit markets. Witness, for instance, the anger manifested in the spread between Italian debt and that issued by its former Axis pal Germany:

In raw terms, the still-to-be-formed Italian Government must now borrow out 10 years at the usurious rate of 2.20%, which may sound like a lot of vig, unless, of course you reside in the United States, where the same borrowing terms cost our government 73 additional basis points (2.93%). But even the Shylockian American rate is 20 bp cheaper than our boys could borrow at just a couple of weeks ago.

Perhaps we should all just move to Switzerland, whose 10 year government yields quietly slipped (yet again) into negative territory last week.

As these matters go, a lot of folks bailing out of, say, Italian Bonds are transferring the proceeds to their American equivalents, leaving local Bond Bears disappointed for yet another day. Their time may come, but perhaps not until a lot more turkeys are forced to bite the dust.

The Southern European Political Shenanigans also took the wind out of the sails of what had been a pretty fly rally in the Continental Equity Complex of late:

But the attendant love did not transfer to the Gallant 500. On the other hand, after several quarters of comatose behavior, it appears that the Russell 2000 has awoken from its slumbers:

It’s up an energetic 5.95% this year, and why not? Weren’t the small cap companies supposed to be the disproportionate beneficiaries of the tax cut? If so, you wouldn’t know it, that is, until recently.

But as for the 500, a disturbing trend has emerged. With 97% of earnings precincts having reported, the subsequent price action for those companies exceeding expectations has been, well, below expectations:

By my count, Q1 was the 5th straight such cycle of disappointment, and Q1 was a heck of a quarter. And I wonder if it might be necessary for Mr. Spoo to find another rabbit to pull out of his hat to move his troops out of the narrow channel in which he has wedged them.

But I just don’t see it happening until at least July, because why should it? The upcoming week features only four trading days, and about all I can see of import scheduled for release is next Friday’s Jobs Report.

And June itself, for what it’s worth may, not hold much drama either. Feel free, if you will to wring your hands about the on-again/off-again Singapore Summit, the latest polls for the Mid-Term Elections and the confusing psychodrama of our trade negotiations with China.

Just don’t expect any of these matters to provide much edge.

It might be the case that the volatility gods will join me in an extended cycle of Cold Turkey, with no straw in which to repose. This won’t be pleasant, and, truth be told, I’m starting to get the shakes. I’m told that the GRA TaR models won’t be available for at least another couple of weeks, and the wait is likely to tell upon me.

Perhaps I should go take a Turkish Bath, of which there are several in my area. Fortunately, they all accept local currency, because I just swapped out an entire safe full of Turkish Lira for one of those small cigars they make in Istanbul – one that I’m committed to never smoke. So, on this extended holiday weekend, I can only take my leave and offer you a sincere but non-seasonal gobble gobble.

TIMSHEL

All That You Dream

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“I’ve been down, but not like this before”

— Lowell George

As matters have evolved, I’m forced to make good on my threat to continue down the track list from Little Feat’s “Waiting for Columbus”. But not for reasons indicated in last week’s installment. There, I’d warned of such an outcome if I didn’t see a bunch of you birds hitting my twitter account. And it’s true that the response to this plea continues to be less than overwhelming.

But that’s not why I’m moving on to “All That You Dream.” The plain truth is that on Wednesday night, I actually had a dream – and I’m not kidding here – about Value at Risk (VaR).

I’ll spare you some of the more gruesome details of the fantastic journey upon which I entered while slumbering on 17 May, 2018. But a brief summary is perhaps in order. It involved an accusation of an incorrect calibration of the stepdown factor in the exponential decay function, causing an over-estimation of the 99th Confidence Interval estimate, and (as would be the inevitable outcome of such a misadventure) the loss of untold sums of wealth.

In the dream, I served as a bystander to these proceedings, which is only rational. I mean, after all, the mere prospect of someone such as myself committing such an amateurish blunder is beyond even the scope of slumbering fantasy. Rest assured, though, that I was in close enough proximity to understand that feelings ran high on both sides, and that matters were rapidly trending towards violence.

Then I woke up.

Perhaps I can ascribe some blame for the above-described fit of madness on the fact that it was Blockchain Week in New York (also known, alliteratively, as the CoinDesk Consensus Conference). Here, 8,000 delegates, along with their crews and side-pieces, descended upon the New York Hilton to pay obeisance to this newfangled techno-theology. Lamborghinis buzzed 6th Avenue on a ‘round the clock basis. Tchotchke bags of bling state not witnessed since the dot.com bubble littered the landscape. Parties, to which I was not invited. raged until dawn, and while I can’t say for sure, my guess is that many participants managed to make good on any short-term romantic escapades they were seeking.

The nerd revolution, like Douglas MacArthur to the Philippines in WWII, has returned.

Does it all mean anything, I mean, besides being: a) one swell party and b) an opportunity for some slick operators to stuff their pockets full of money and then exit stage left while the rest of us hang around to clean up the mess? Well, I reckon it does. Beyond all the blather, what we’re talking about is using newly available technologies to upgrade the manner in which commerce is conducted, and I believe that such concepts inevitably succeed. There’ll be some pushback, yes – particularly in the United States where economic rent-seeking agents living off the status quo will do all in their power to postpone their day of reckoning. But come it will. Perhaps more rapidly in regions such as Asia-Pacific, where, in the regions less developed nations, fewer than a quarter of the populous have bank accounts but All God’s Children have a smart phone, and will use it to conduct crypto finance.

Recent published reports suggest, for instance, that commercial agents in the People’s Republic of China are even at this moment developing a blockchain framework for the purchase and sale of tea. If they’re successful, it might create one of the most scalable business opportunities of all time, because, you know (and forgive me here) there’s a lot of tea in China.

But for the present, the masses are forced to contend with longstanding traditional markets, such as those for stocks, bonds, commodities and Foreign Exchange instruments. And it was indeed an interesting week in these old-school realms. To my considerable surprise, the US 10-Year Note not only traded above 3%, but retained that lofty threshold throughout. Its big sister, the 30 Year Bond, breached the unthinkably usurious level of 3.25% on Thursday, a 4-year high. Presumably in delighted solidarity, USD continued on the upward slope of a recently formed V-bottom and that rally looks like it has legs. Brent Crude hit $80/bbl – also a multi-year high — before backing off some on Friday.

It appear, in summary, that these most critical non-equity market factors have breached technical thresholds, and if the chartists have their day, will continue to run in similar directions for some time before they pause for a well-earned rest. But one never knows.

Fundamentals are also lending a hand. This past week, Industrial Production, the Empire State Manufacturing Survey, the Philadelphia Fed’s Business Outlook Survey and the National Association of Home Builders Housing Index all clocked in above expectations. The Atlanta Fed’s GDPNow tracker surged past 4% for Q2. New Jobless Claims – particularly population-adjusted — are tracking at an all-time low, and Continuing Clams are disappearing at an astonishing rate:

I’ll throw one more in for you – the above-mentioned Chinese are in a frenzied quest for the ownership of apples – apparently at the expense of their equity holdings:

If I didn’t know better, I’d say that the upward movements in the USD and domestic yields are rationally attributable to an exceptionally rosy economic outlook, which portends higher rates and a more attractive case for the conversion of other forms of fiat currency into Dead Prez. But one lurking question continues to vex me:

Why now?

The stone cold ballers with whom I roll have been anticipating just such a paradigm for many months, and, until just this week, have been more or less disappointed. And I’m just not yet convinced that we’ve suddenly entered a sweet spot, where the trends they teach in economic text books, ignored for so long, are suddenly to be followed.

Then there’s the equity market. I’m sentimental enough to believe that the narrative set forth above would carry forward to the stock-trading universe, but if so, I’d have been disappointed. Equities remain stuck in the narrow channel first formed after the recovery from the February debacle.

There are any number of reasons why the guys and gals on the stock desks are refusing to follow the script. They include justifiable worries that we’ve hit peak earnings, that the energy rally creates considerable negative offsets to Tax Reform, that Emerging Markets – particularly in the Americas, are showing signs of economic collapse, and that all of this trade brinksmanship is an ill wind that blows no good to any investors.

My personal favorite argument is the one that suggests the U.S. economy will quiver and perhaps crumble under the weight of > 3.5% yields on the 10-year note. The disappearance of “easy money” will cripple innumerable debt-sensitive enterprises, and the irresistible allure of higher returns on U.S. Treasuries will crowd out flows to the stock market. OK; I get it, but I’m a little leery of this hypothesis as well. We’re all in pretty bad shape if the economy can’t support nominally higher borrowing costs, but suppose we can’t? Well, then, stocks are likely to tumble, and, if the plot holds, investors will rush into the warm embrace of Good Old American Debt. If so, then yields will come back to earth, taking borrowing costs down with them, and giving a boost to equities. Then it will be lather, rinse repeat.

I suspect what ails the equity markets falls more under the heading of political risk – both here and abroad – and that there simply is very little justification for an upward surge (or, for that matter, a nasty reversal) at this moment. But I’ve been warned off getting too political here, so I won’t (get too political, that is). Suffice to say that equity investors are in “show me” mode, and the next opportunity to respond to the Missouri crowd won’t come until after the quarter is over, so I reckon we’ll just have to wait, and I’ll retain my call that the indices will hold to their narrow ranges for now.

Who knows? The wait might actually pay off. If so “all that you dream will come through shining/silver lining…”

But as for me, all that I dream about these days is VaR. And I’m doing something about it. In honor of my somnolent hallucinations, and given the fact that they transpired during Blockchain Week, I’ve asked my guys to develop a Value at Risk Module for Blockchain and crypto, and they haven’t disappointed.

We’d be delighted to show it to you if you’re so inclined.

It might come in handy – sooner than you think.

TIMSHEL

Fat Man in the Bathtub

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“Spotcheck Billy got down on his hands and knees

He said “Hey mama, hey let me check your oil all right?”

She said “No, no honey, not tonight.

Come back Monday, come back Tuesday, and then I might”

— Lowell George

Any of y’all remember a few weeks back when I invited my readers to be a good rascal and join the band? Course you do. But not many of you followed through. I guess being a good rascal, never an easily attainable objective, is now barely worth aspiring to. No musical knowledge was even required; only that you follow me on Twitter @KenGrantGRA, where my numbers are indeed up, mostly as populated by Bots. They have handles like @JonitaDouwood (Daffy Duck Avatar) and @YaniessyCruff (Homer Simpson/Tighty-Whitey Avatar) and their accounts were created in May of 2018.

Anybody know these cats? Didn’t think so. On the other hand, though I looked carefully, I did NOT see @InsertYourName/TwitterHandle on my roster. But it’s OK; I forgive you. Again. And now all I can do is carry on like the band that I am. That’s right. I. Am. A. Band. Just like the Black Eyed Peas, or, more pertinently for our purposes, just like Little Feat.

So, if it’s all the same to you, I think I’ll just go ahead and join myself.

But before I do, I must encourage you to give LF’s seminal live album “Waiting for Columbus” a listen, because: a) it pretty much captures to perfection the Feat sound; and b) it came out early in 1978 — just 6 short months before the release of the film adaptation of “Sgt. Pepper’s Lonely Hearts Club Band” starring Peter Frampton and the Bee Gees.

Historians, wherever else they may differ, are generally in agreement that the film version of “Pepper” marks the low point in the ~3,500 years of organized human civilization. And, to add insult to injury, it was produced by the magnificent George Martin, and featured performances from such legit rockers as Jeff Beck, Alice Cooper, Billy Preston and Earth Wind and Fire.

It came out that July, and is now mostly known for setting the Siskel/Ebert Thumbs Down Speed Record. But back in February, when “Columbus” dropped, we were blissfully ignorant of what fate had in store for us. So we popped on Side One, which opens with the “Join the Band” chant and then folds into an energetic “Fat Man in the Bathtub”.

And I have decided to follow the same sequence.

I’ll begin like Spotcheck Billy, getting down on my hands and knees and asking: hey mama hey let me check your oil, alright?

Because there is indeed a fat man in the bathtub, with the blues. If you listen carefully, you can hear him moan.

What ails thee, fat man? As one like you, I’d say that things are perking up for us adult males of formidable gravitational force. The large contingent of us who are investors can rejoice in the reality that our already-corpulent holdings are expanding further. The equity securities we own – and I mean anywhere in the world – experienced a noticeable valuation swelling about the belt this past week, and what’s bluesy about that?

Some of us pudgy types might even go so far as to take a victory lap, in celebration of the heroic recovery of some of our favorite names — each of which, including Facebook (attacked for cynically selling our data), Amazon (Trump Tweet victim) and Apple (myriad naysayers taking shots) suffered under recent threat by a series of diverse and nefarious forces.

How do you like ‘em now?

Fat Cat FB                                                                 Ample-Bellied AMZN 

Anti-Newtonian AAPL

Heck, even Tesla, the most hated enterprise this side of Enron, has recovered a good measure of its valuation equanimity:

Notably, this is a company that burned through a cool $1 Billion that it didn’t have in the first quarter, whose CEO refused to answer questions about incremental funding sources on the earnings call – because he found them boring, and who, on the same call, practically begged investors NOT to buy his stock.

But who could resist such a pitch? Not us fat men for sure. So, while my In-Box is assaulted on a daily basis by articles suggesting the that the Company will not, CANNOT survive, the stock that simply HAS to go to zero (and soon) has risen a cool 20% in Q2 alone. And we’re only half way through the quarter.

All of this action contributed to an increasingly rotund Mr. Spoo’s breakout — to ranges above it’s 50, 100 and 200 Day Moving Averages. He’s been fatter before (say, in January), and it’s now anybody’s guess whether he continues to gorge himself or backs away from the table and/or mixes in a salad now and then.

There’s a similar story to be told about zaftig bond holders, who, after suffering the early week indignities of a selloff into 3% yield territory, could not but be pleased about the subsequent rebound. Notably, these markets were able to incorporate the issuance of $75B of new paper and live to tell the tale.

3% on the 10-year still looks like an unbreachable wall, but Fixed Income bears could at least take some comfort in the continued selling activity on shorter-duration instruments, perhaps in part catalyzed by some truly tepid inflation statistics issuing from the Commerce Department this past week. These and other factors wedged the yield curve into increasingly narrow, and likely unsustainable “skinny jean” territories:

2s/10s – Looking Increasingly Scrawny:

Of course, even us obese gentlemen occasionally look beyond the financial pages as we digest our Grand Slam Breakfasts, and were not slow to notice that the U.S. is now out of the dubious Iran Nuclear Deal and gearing up for a potentially dubious summit with one of our own: Little Fat Man Kim Jung Un. These things mean something, but I’ll be switched if I can put my finger on what that might be.

One might hazard a guess that the risk premium has dropped in recent sessions, but I wouldn’t necessarily bank on its continued suppression. Trust me on this: just like everyone else, Mr. Risk likes to eat, and if we don’t feed him appropriately, he’s perfectly capable of gorging himself – at our expense.

But the plain truth is that across the back half of Q2, there’s just not that much to write, much less write home about, in risk-land. I’ve predicted quiet, and I reckon I’ll stick with that prediction.

And to my fellow fatties out there I say this: if the action bores you, go take a bath. And, for what it’s worth, I don’t see much reason for you to cry the blues. Spotcheck Billy is going to take another crack at that whole oil-checking thing — as soon as Monday, and, if you clean yourselves up and stop your moaning, perhaps you can do the same.

Alternatively, you can still join the band @KenGrantGRA. And be forewarned: if you don’t, then within a short period of time, I’ll be forced to continue down the “Columbus” track sequence and lay a little “All That You Dream” on everyone.

The opening line of that song says it all: “I’ve been down, but not like this before”.

Let’s not go there, OK?

TIMSHEL

Flying V Bottoms

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I hope everyone is recovering satisfactorily from a raucous Saturday: one that featured not only the Kentucky Derby, and Cinco de Mayo, but also the annual Ridgefield (CT) Gone Country Festival (replete with its BBQed Rib Contest and the 70s rock stylings of the local high school band).

But as for me, I’m still trying to gather myself from the shock we all received earlier in the week.

Specifically, on Tuesday, and in violation of virtually everything I consider holy in this world, Nashville-based Gibson Guitar Corporation, which has been pumping out its one-of-a-kind axes for approximately 5 generations, filed for protection under Chapter 11 of the United States Bankruptcy Code.

Though the blow was staggering, I hasten to remind my minions that all hope is not lost. Gibson did NOT opt for the full-smash Chapter 7 shutdown; it instead chose the Chapter 11 reorganization alternative. Statements from the Company suggests it took this action in order to protect its signature guitar line, by raising some capital and scrapping a few offshoot businesses in which they never should have been involved in the first place.

I’m praying for the kids down in Nash Vegas, because life on the planet will be unilaterally diminished if that shred machine factory ever goes dark.

No one should be surprised that the guitar business ain’t what it once was. Anecdotal evidence suggests that each year, fewer hormonal, acne-battling teenage males squirrel their lawn mowing money away to plunk down on a 6-string razor and appropriately distorted amp. And who can blame them? It’s not like that sort of thing gets you laid like it did in the old days (on the other hand – and trust me here – it never did). And this is to say nothing of the blow the Company received when Pete Townsend discontinued the practice of ending each show by smashing his instrument (almost always a Gibson) into smithereens.

But the Company’s real troubles began in 2011, when gun-wielding thugs from the Environmental Protection Administration (EPA) rudely busted in on their production facilities – as part of an enforcement action – and you can’t make this up – against violations not of United States environmental laws, but of those of the great nation of Madagascar.

So the trend has hardly been Gibson’s friend these past few years, and though I haven’t done much to support the enterprise lately, you should be made aware that my first legit guitar purchase was a Gibson SG, acquired from my much more talented high school mate (one John Zucker) in 1976. In elegant, bookend fashion, my most recent such acquisition took place in 2008 – about a month before Lehman went down – when, at long last, I managed to get my hands on the Companies signature product: the Les Paul.

I must point out though that I bought both of these axes used, so it’s not like I’ve done all that much to support the company myself. I am, however, dedicating this weekly to them and that’s something, right? In addition, I actually tweeted my outrage on the same topic earlier this week, which brings us to another topic: would it kill you guys to follow me and maybe tweet back once in a while? Didn’t think so.

Perhaps the only Gibson item remaining on my musical bucket list is the Flying V, a model that derives its name from its shape, a sample of which I offer below. I have thus far resisted the temptation to pick one of these up, because – let’s face it – If you’re going to rock a V, you’d better be ready to bring it all with you, and even after 45 years, I’m not sure I have it all to bring.

Again, for now, the Company will continue to pump out these bad boys, but it may need some help – both from its creditors and perhaps even from other enlightened souls on Wall Street. And I certainly encourage all of the fat cats within my range of influence to take a look here.

Surely the money is there. I mean, take, for example, the recent Spotify IPO, in which musically inclined investors shelled out sufficiently to manifest a $26.5B market cap. Due in part to a disappointing earnings release, it had a bad week, but is still holding a valuation of $1B above its IPO price.

And I ask: what are the users of Spotify listening to? Well, a goodly number of them, including yours truly, are cranking out Zep, Cream and other similar recordings positively driven by Gibson products and the Gibson sound. It would therefore make logical sense for Spotify’s underwriters to protect their investments by ensuring that the musicians that produce the sounds that stream across the program are adequately supplied with appropriate instrumentation.

Fortunately, there are at least symbolic indications that investors may be inclined to come to the rescue of the beleaguered brand. Here, I refer to the impressive V bottom registered by the Gallant 500 over the last couple of trading days. After a pretty lousy Thursday session, and factoring in some time for the markets to digest what on the whole was an encouraging April Jobs Report, the SPX three-day chart looks something like this:

Sharp-eyed observes – particularly rockers – are likely to notice not one, but two Flying V formations, in the chart. And I ask you, what can this possibly be but a financial tip to the hat to the Gibson Guitar Corporation of Nashville, TN?

It perhaps also is important to bear in mind that Thursday’s lows and subsequent recovery represent, by my count, the 4th time in the rolling quarter that the SPX touched the depths of its 200 day Moving Average, only to bounce enthusiastically in the immediate aftermath. All of which reinforces the notion that stocks want to remain in a narrow range. Intraday volatility is on the high end of what we’re used to, but at the end of the day, we’re ending up pretty much where we started. It does strike me that this stasis is likely to continue for most of the rest of the quarter. Earnings continue to wind down, and the numbers keep getting better and better. Forward-looking P/E Ratios have drifted back to their five-year averages, and, while projections call for some deceleration across the rest of the year, the prognostications remain highly encouraging. But the best that the market appears to be able to muster is a bounce-back from a nasty puke.

In addition to a Jobs number that fits tightly with the narrative (stable but short of Bonzo job creation, coupled with a similar dynamic on Hourly Earnings – all supporting the notion that the economy is doing pretty well, but is in no particular need of rude rate increases to cool it down), investors swooned over a marginally strong earnings report from Apple. Presumably this is due in part due to the Company’s buyback announcements and even more so that the Omaha Buffet now features an even larger supply of the biblical orb on the tray tables.

Yet naysayers persist on the stock, and to them I pose the following question. Best estimates call for 5G telecommunications protocols to roll out, in round numbers, within about a year. If this new network configuration follows the trajectory of its predecessors, then everyone will want 5G, and this will compel everyone to buy a new smart phone to avail themselves of its wondrous benefits. Does this not portend marvelous things for the world’s leading smart phone provider?

But while Apple, as has been the case across its long history, is given the benefit of the doubt by the markets, the same cannot be said about the broader array of large cap companies. As a record earnings growth season winds to a close, investors are reacting with what can be described only through generous interpretation as a collective yawn:

This, my friends, looks to me to be the financial expression of tough love. There seems to be little appetite to push broad-based valuations higher, but at the same time, the picture is encouraging enough to suggest that selloffs are socializing some bargains.

So equities as a risk factor aren’t doing much, and probably won’t for the next few weeks. Why? Well, there’s some continued concern that higher rates will crowd out equity returns, but these higher rates are nowhere to be found – at least as expressed in longer dated government securities.

Pretty much all developed jurisdictions are enjoying bids on their paper, and, while the short bond crowd may ultimately win the war, it appears to me that it will only be by attrition. They have many bloody skirmishes ahead of them on their righteous road to rate normalization. What my eyes see is continued evidence of an improbable shortage of government debentures, but I’ll leave that often-covered topic aside for the present.

I will continue to reiterate my belief that no much action is likely to transpire at the factor level – for the rest of the month – and perhaps bleeding into June. The Washingtonian Circus could change this with one snap of the high-wire, but otherwise, I’m kind of thinking we’re stuck in neutral.

All of this gives rise to the old adage “Sell in May and go away”. But I’m not sure that there’s much benefit to be had in doing this, or for that matter, in taking the opposite tack. I think instead I’ll stay right here, and maybe spark up that Gibson SG I’ve owned for more than 4 decades. It sounds sweeter than ever, perhaps because it’s just possible that my chops have improved; more likely because those Gibson guitars are just so well-made that once you own one, you can enjoy it for a lifetime.

I take my leave with the fondest wish that the Nashville Cats are successful in their reorganization efforts, and, to my minions: if you can’t float a few shekels in the form of capital, the least you could do is head down to your local guitar store and pick up a Flying V. Failing that, you can perhaps, at minimum, follow me, and therefore the saga @KenGrantGRA. Unless I’ve missed something, it’ll do you no harm.

TIMSHEL

Through the Looking GLASS

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Ladies and gentlemen, you have my apology, because somehow I missed it. Maybe it was the Cosby Trial, the NFL Draft, or the weather.

On further reflection, I’d have to say yes, it was the weather.

Given my borderline obsession with celebrating milestones, I am deeply ashamed of myself that I missed a big one: the 20-year anniversary of the functional end of the four segments of the Banking Act of 1933 – sections that are widely referred to as the Glass-Steagall Act. As most are aware, the key provisions of Glass-Steagall forced the legal separation of financial enterprises that accept deposits and issue loans (i.e. Commercial Banks) from those that engage in trickier activities such as stock/bond issuance, proprietary trading and the like (i.e. Investment Banks). The idea was to put a wall of sobriety around those institutions charged with the responsibility of holding customer cash balances and writing mortgages, while allowing the more energetic and creative among the Wall Street crowd to do pretty much anything else that they wished. At the time, it could be argued that this was a wise move – particularly given the widespread failure of nearly every bank this side of the Bailey Building and Loan in the wake of the ’29 Crash and subsequent Great Depression, and the valid concerns that their failures could be traced to their excessive enthusiasm for more speculative activities.

And for 65 years, it was the law of the land. But it was a pain in the caboose for those forced to comply. Investment Banks such as Goldman Sachs and Morgan Stanley suffered the indignities of needing separate subsidiaries just to compete in the frigging swaps markets, and banks had to jump through hoops if they wished to even approach sacred realms where stocks and bonds were issued and traded.

The legislative repeal of Glass-Steagall didn’t transpire until mid-1999 (giving me another year to pay obeisance to the 20th), but Sandy couldn’t wait that long. To wit: Sanford I. Weil, then in the midst of converting the prole-like American Can Corporation into the World’s Biggest Financial Colossus – one that just a decade later required taxpayer support to the tune of nearly $0.5 Trillion – was in a great hurry to add an Investment Bank to his portfolio, and wasn’t inclined to wait for the Wheels of Legislation to turn in his favor. So, in April of 1998, he went ahead and purchased venerable I-Bank Salomon Brothers, and that was it. GSS was dead and everyone went about his or her business. The regulatory wall between Commercial and Investment Banking had been shattered by Sandy’s Golden Hammer, and it was game on – even if it took another year to codify the removal of the restriction into the national legal register.

Of course, Sandy had some help. He was a Friend of Bill (Clinton), and, presumably, as homage to this alliance, he likely gave the guy tasked with executing the nation’s laws an amiable heads-up about his intentions (which I’m sure the latter appreciated). In addition, there was Treasury Secretary Robert Rubin, who, shortly after he greenlighted Sandy’s power move, landed at Citi’s Co-Chairman seat.

But everything ended up for the best, right? At least for most of the subsequent decade, after which, if memory serves, there were a few problems.

And this type of game of “Inside Baseball” is exactly the type of thing that I believe ails us most: a world where different rules apply to entities with different positioning on the Financial Food Chain.

It was ever thus, and perhaps ever it will be. At present, taxpayers support the whims and predispositions of corporate faves such wonder-boy owned electric car manufacturer, a Farming Industry in which the overalls crowd have long ceded ownership to the folks in Brooks Brothers suits, our gargantuan Energy Companies, and yes, our brilliantly run and ethically unimpeachable Banking Sector.

It seems that our system is generous to everyone but consumer/taxpayers, and recent data suggests that, while they shoulder on, they are arguably losing energy. This week brought a first look at Q1 GDP, which brought tidings of marginal weakness, as did the more obtuse Chicago Fed Index of National Activity:

Perhaps owing to these and other little glitches, the U.S 10 Year Note Yield, after having placed a trepid toe into 3% territory the prior week, has backed off to just under 2.96%. Ags were en fuego, and the USD lifted itself off the carpet a titch.

Most of the investor focus, however was on earnings, and here, somehow, my nearly impeccable prognostications failed me. Far from tanking the quarter, The Big Tech Dogs – particularly the two with the biggest targets on their backs (Facebook and Amazon) absolutely blew the roof off the joint. They also declined to heed my suggestion about the possible benefits of issuing muted guidance. Across the Kingdom of the Gallant 500, with more than half of loyal subjects now having dutifully reported, the blended earnings growth is beating even the rosiest of estimates at a somewhat astonishing >23%.

However, for all of that, it was a flat week for the indices, as investors neglected by and large to embrace the enthusiasm issuing forth from Silicon Valley and elsewhere. Maybe they should teleport themselves to the Continent, where (for reasons unknown to this reporter) a post-Lent rally continues unabated:

European Equities: The Destination of Choice This Spring:

But within these here borders, we’ll be through earnings for all intents and purposes, within two weeks. And all we’ve seen for the last month is a narrowing of the SPX channel to a skinny 100 Index Points:

So let’s for the moment dispatch with the notion that the barking volatility dogs have taken over the junkyard, shall we? Once the Retailers report, we’ll have nothing left to anticipate but some always dodgy macro numbers.

We get a taste of this next Friday, when the April Jobs report drops. It might be well to recall that March was something of a dud – so much so that many economists were forced to resort to the shameful ploy of suggesting we focus on the three-month moving average. As of now, this will require adding the fly 313K Feb number to March’s dismal 103K and whatever comes out Friday, and dividing the whole thing by 3 (glad I could help).

By that time, the Fed will have mailed in its latest Policy Statement (i.e. no Presser), and is not expected to have moved. But at the long end of the curve, hope for a price selloff/yield rise springs eternal, with the volume of speculative shorts in U.S. 10-Year Futures currently resting at record levels.

Maybe they’re right this time, but as I’ve written before, the mighty 10-Year Note has been a tough nut to crack. I reckon that some of these days, we will see higher borrowing costs at the long end of the duration spectrum. After all, I’ve lived through cycles when rates were off the charts and there seemed to be nothing under the sun that could move them in a downward direction. I do suspect, however, that for now,influential politicians who must go back to their districts to beg for money this summer would prefer to not have to explain away a sharp rise in interest rates, and you can place me squarely in the camp of those that believe said politicians have an important say in these matters.

But one way or another, what goes ‘round, come ‘round, and to paraphrase Jerry Garcia/Robert Hunter: “If your Glass was full, may it be again”.

Who knows? Someday they may even re-instate Glass Steagall, and if they do, they can perhaps count on the support of Sandy, who in 2012 said this: “What we should probably do is go and split up investment banking from banking, have banks be deposit takers, have banks make commercial loans and real estate loans, have banks do something that’s not going to risk the taxpayer dollars, that’s not too big to fail,” Sounds like he’s now in favor of a reinstated GS, but, having made his money and gotten out of town before the bad hombres arrived, one can hardly blame him. Surely, he maintains substantial holdings in accounts at large financial institutions, and would be justified in wanting to ensure that they are not engaging in monkey business. As for the rest of us, I reckon we’ll have to take pot luck.

TIMSHEL

Mondo Fugazi

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Welcome to Mondo Fugazi, my friends, where Fugazis abound – so much so that some of the Fugazis are actually Fugazi Fugazis, and are thus actually the real thing. Look around. Stay as long as you like. Stay forever if you will. But stay on your toes, because in Mondo Fugazi, the bona fide and the implausible blend into a dizzying vortex, which, if you’re not careful, could suck you dry.

Fugazi, of course, is the Italian vernacular word for Fake. However, in general, I prefer the former, mostly because of the way it trips off the tongue. Try it yourself: say Fugazi out loud a few times. My guess is that you will never use the word Fake again.

We’re all tired of the English word anyway, right? Let’s begin, for instance, with the wearisome, dubious and oxymoronic concept of Fake News. I’m just sick of hearing about it, and, if pushed I’d go so far as to state my belief that Fake News is itself a Fugazi. Using the full-on Italian phrase: Notiza Fugazi – helps, but only a little. Besides, we’ve got Fugazi issues that extend well beyond Notazi. So let’s start to unpack them, shall we?

I wish to begin with Fake IDs, or, if you will, Identificaziones Fugazi. A long time ago, I was something of an expert on this topic. Wishing, around age 16, to prematurely join the adult world in those most meaningful of ways – purchasing alcohol and patronizing bars — my friends and I all thought it would be a swell idea to obtain identification suggesting we were older than we were. Our first sojourns in this realm took us to the iconic Maxwell Street, the open air marketplace on Chicago’s Near South Side (For the uninitiated, please refer to the Aretha Franklin sequence in “The Blues Brothers”). There, after making discreet inquiries, we were ushered to a beat up trailer, owned by a middle aged African American gentleman who had suffered severe burn damage across his face. He snapped our pictures and typed some information (including changing our birthdates) on to orange cards, ran them through a laminating machine, and charged each of us 10 big ones for the service.

We were ecstatic, but, predictably, the ruse didn’t work very well. A lot of bouncers laughed at us, and one actually confiscated our cards. So we were forced to move to Plan B. This took the form of surgically altering our driver’s licenses, by flipping the 9 (we were all born in 1959) into a 6. The strategy worked for a while, but eventually the bouncers got wise. They’d shine a flashlight on our official IL DLs, see the holes, and send us away to raid our fathers’ liquor cabinets.

At that point, there seemed to to do but wait out the unforgiving calendar. But then the unthinkable happened. Just as my 18th birthday was approaching, Illinois raised its drinking age to 21, adding 3 years to my hiatus. I took this very personally, and it was time for all-out war. I’m not particularly proud of this, but I was forced to resort to bona fide identity theft. Somehow, I was able, in addition to my restored driver’s license, to obtain an Official State ID (with my mug in the upper right hand corner) in the name of one Kenneth Costigan, a real guy whose birthday was sometime in September of 1956. Here, not only had I solved my most vexing longstanding problem, but I gained the added benefit of being able to walk into bars in my college turf of Madison, WI, and demand a free drink on my Fake ID birthdays. One Mad Town bartender was a bit stingy, and didn’t want to come across, but I insisted. So he poured me a shot of what I thought was standard (if bottom shelf) Vodka, which turned out to be 190-proof Pure Grain Alcohol.

I fell immediately ill and stayed in bed for the following week. And this, my friends, cured me of such proclivities. I have NOT turned back since, and had not even thought of the concept for many years. But recently, I have found myself the victim of a new form of Fake ID chicanery. Specifically, through the marvelous conveyance of CALLER ID (for which Verizon hits me for an extra couple of bucks), I can see, at the point of first ring, who’s trying to reach me. Unfortunately, a depressingly large number of my incoming calls are unwanted solicitations for such products as extended warranties on cars I don’t own, refinancing plans on outstanding student loan debt that I managed somehow to retire in 1992, and instant access lines of credit. OK; fine. I get it. I’m a capitalist through and through, and believe (albeit with some caveats) in the principles of caveat emptor. However, many recent calls show IDs clearly intended to deceive. Just in the last couple of weeks, my phone has been lit up with caller identifications that have included Fox News, New York Presbyterian Hospital, Music Mogul Clive Davis (who still owes me a major label recording contract) and even actor Lloyd Bridges (who died in 1998).

With respect to the last of these, when the phone rang, instead of Lloyd’s golden pipes, my ears were assaulted by the recording of a female voice speaking rapidly in what I am assuming was Spanish, but can’t be sure. I tested my theory by shouting Fugazi, but her only response was to hang up on me.

So Identificazione Fugazi has clearly entered the information age, and it strikes me that there’s too much of this type of thing going on lately.

***********

I returned from dinner on Friday night to a phone notification that the North Koreans had suspended large portions of their nuclear testing programs. Was this Notazi Fugazi? Only time will tell, I suppose. All the news outlets confirmed the report, so perhaps there’s something there. But I recognize that the next time a welcoming proclamation issues forth from L’il Kim or his forebears is followed up with constructive action will be the first, so I’m a l’il skeptical on that score.

I am wondering how the markets will react to these tidings, but it’s the weekend so I really don’t know. Certainly it shades towards the accretive, but in Mondo Fugazi, one never knows.

As we retired on Friday, the Equity Complex had bounced around over the preceding week with little to show for its efforts:

But one element, of the action, the technicals, has a strong ring of non-Fugazi authenticity. Over the past several weeks, the Gallant 500 has dropped twice to the menacing breach of the 200 Day Moving Average, only to bounce jauntily in the aftermath. Conversely, the index has clawed back towards the 50 and 100 Day thresholds, it has been beaten back like a little you know what.

This here looks like a tough channel to break. Equity Markets appear to like the 2650 – 2700 range, and despite the somewhat Fugazi-like concerns about excessive volatility, it’s unclear to me that it is likely to break out in either direction any time soon. On the other hand, we’re in the middle of a content-rich information cycle, so stay tuned.

After a long hiatus, however, there appears to finally be some action in other Asset Classes. Over the last several sessions, yields on the U.S 30 Year Note careened past the 3% threshold, and even those precious Swiss Bonds sold off back into positive rate territory. The USD enjoyed its strongest week of the year, and commodities remain in play – mostly on upside.

Seemingly out of nowhere, All God’s Children are now concerned about the slope of the Yield Curve, which indeed have flattened to Olive Oyl thresholds, at both the short and long end of the maturity spectrum:

The Long Short and Flat of It: 2s/10s: 

10s/30s:

Textbook economic analysis suggests that such trends are indicators of weaker economic conditions on the near-term horizon. However, here in Mondo Fugazi, I believe we may need to throw out the textbooks, and look to a new roadmap. Specifically, I feel that the relationship between short and long-term Treasury debt has decoupled, and that as such, we must look to each component separately.

It strikes me that with respect to the faster-approaching maturities, a number of factors should work to suppress prices and place upward pressure on yields. We begin of course with stated Fed policy to lift rates, and even they would tell you that all of their juice is on the short end. In addition, as the Fed goes about the righteous path of reducing its gargantuan Balance Sheet, its main tool is allowing shorter term notes to mature without repurchase, in the process removing perhaps the most important buyer from the near-term equation. Heroic efforts have been made in this respect over the last year, with the value of the Fed’s Holdings plunging from $4.48T to the current $4.38T. That may not look like much in percentage terms, and in fact it’s not; it’s just a little over 2%. But it is a divestiture to the tune of $100B, and to yet again paraphrase the late, great Everett McKinley Dirksen (R, IL): $100 Billion here, $100 Billion there and it all starts to add up to real money.

Almost all of this reduction has transpired at the short end, and, of course, we still have a long way to go, because, even those 30 year bonds whose maturities look like dots in the distance will someday become short-dated notes.

Finally, with respect to near term Treasury obligations, you should be made aware that Mnuchin and Company are planning to auction off $275B of freshly minted obligations this week – almost all of them with maturities of two years or less. By my count this will bring total 2018 issuance to the threshold of $1 Trillion, and we’re not even 1/3rd of the way through this infernal year yet.

If this bothers you, I suggest you write your Congressman or President who green-lighted our monstrosity of a budget, and, in doing so, if you invoke the memory of the fiscally conservative Senator Dirksen, you’ll get no complaint from me.

Moving on to the longer-dated end of the curve, we face something of a stickier wicket. Most believe that on balance, the economy would benefit from higher extended rates, but it has been nearly impossible to effect this in the markets. Reasonable minds can disagree over root causes, but clearly the opacity of inflation trends are a contributing factor. In addition, it is my belief that all of that global QE has created a financial dynamic where there’s more money sloshing around than low-risk places to put it. Thus, for what seems like eons, no matter how much long-term debt a given developed country wishes to issue, it gets hoovered up in ravenous fashion.

So I think there are divergent dynamics at play across the yield maturity spectrum, with multiple factors causing upward yield pressure on shorter term securities, while improbable supply shortages bring gravitational pull to bear at the longer end.

For what it’s worth, I also continue believe that, at 50,000 feet, there’s a shortage of stocks as well, but I’ve backed off on mentioning this in light of the heightened volatility manifested over the last rolling quarter. Stocks can be risky (or so I’m told), and therefore subject to more capricious pricing patterns. For now, the risk premium remains sufficiently elevated to counter the supply/demand imbalance. But imagine a world where our two political parties were not intent on blowing each other up, where our two historical adversaries (Russia and China) were not causing us untold aggravation and perhaps worse, where everybody minded their business and tried to do the best they could. Now take a look at the following charts:

Yes, Profit Margins are accelerating while P/E ratios are reverting to normalized levels. I dream of opportunity in these images, and I’m not the only one.

But unfortunately we must operate in the real world, which at least at present is a Mondo Fugazi. So take care. And now, if you’ll excuse me, I must take my leave. The phone is ringing and my screen says it’s Kenneth Costigan. I suspect that he wants his identity back, and, having no more use for it personally, I’d be happy to comply.

If only I could be sure that it was really him on the line.

TIMSHEL

The Ten Commandments of Risk Management, Updated Edition

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During the heady days of 2013, I published a piece called the Ten Commandments of Risk Management.  As always, it was meant to entertain along with enlighten.  Now, five years later, I am putting the piece out in slightly modified and enhanced form.  I hope you don’t think this makes me a bad person.  If I remember correctly, after all, Moses himself received the tablets from God – not once but twice, so perhaps my readers will grant me a similar mulligan.

Much has changed since the original publication of this document, but more remains the same.  Most of The Commandments, are in fact, timeless.  But context, always context, changes with the very cells in our bodies.  So I think it’s time to take another look.

The Ten Commandments of Risk Management

The subject of risk management, while increasingly topical in the modern financial universe, is often abused through over-analysis, over-complication and hubris among purported experts.  As a longtime risk manager, I think the Number One goal of risk management as a professional discipline, is to take complex, content-rich concepts such as transactions and portfolios, and simplify them down – for the purpose of making clear-headed decisions.  Do I want to do this trade or not? Am I comfortable with the amount of money I could lose in my current portfolio, based upon available information? What changes can I make if I’m not comfortable?

These are the questions that “true” risk management seeks to answer, but too often, these simple objectives are obscured by the very human tendency to meet challenges with complexity versus simplicity, derive nuanced solutions, and, when this works, to pat our own backs in wonderment at the clever people we are.

Do you want to be the smartest guy in the room or the richest?  Most would choose the second option, and, while risk management can be of enormous assistance in achieving this objective, it is only one tool in the trading/portfolio management arsenal, and the simpler it is to use the better.

Trends towards simplification of objectives and ease of interpretation are beginning to work their way into the murky field of risk management, and the purpose of this piece is to provide you with some basic guidelines in a familiar form – The 10 Commandments – which, if you follow them, will give you a sustained edge over many market participants who routinely violate them.

It may or may not surprise you to learn that my 10 commandments, like the ones that came down from the biblical Mount Sinai, read as mostly blindingly simple rules of common sense.  Yet even the most sophisticated portfolio managers routinely abuse them.  However, this is also true of Moses’ tablets, as, even the most righteous among us will occasionally lie, covet our neighbor’s wife, or fail to honor our fathers and mothers.

So I offer the following set of simple rules, with the forewarning that, like biblical teachings, the enumerating of them is a much easier task than that of living by them.

Commandment I:  Establish/Understand Market Participation Objectives

In terms of sound risk management, forming a clear understanding of the forces driving your market participation is as good a place as any to start.  After all, if you don’t know why you’re trading or investing, you are placing extra burdens on yourself in terms of the already-difficult-enough-as-it-is challenge of actually making money in the markets.  Some of you are professional investors; other participants are in this game for more personal reasons.

Let’s start with this latter, more diverse group.  If you’re not paid professionally for your toil and sweat with research reports, lazy, know-nothing brokers and flashing screens, you should take a moment to determine what you’re hoping to accomplish by being in the markets at all.  Here, the answers might run the gamut – from very active market participants who actually trade their own capital for perpetual income generation, to those who dabble occasionally and hope for the best, to those who own stocks, bonds and commodities simply because they believe they are critical tools for wealth preservation and enhancement.

It’s best then to determine exactly what drives your own market participation, and setting objectives accordingly.  If trading is more than an avocation, and occupies significant portions of your time, then managing how you use this time is a tool to address one of the most binding constraints to performance success.  Alternatively, if you are a routine, occasional dabbler, then the constraints shift: from time, to market information and access to resources, and it behooves you to make sure these are best in class.  Finally, if you’re simply a passive investor, then your success is largely a function, at least on a relative basis, of the quality of your advisors.  Whichever category you call home, it is certainly in your interest to have identified it, as this will drive many actions and choices set forth in the remaining 9 commandments.

If you are a professional investor, a similar, but far from identical, exercise is in order.  Presumably, you’re working for some institution, and, while you can clearly identify a personal goal of making the highest return possible in the shortest period of time, and getting paid as much as possible, these objectives may not align with precision to those of the organization for which you work.

So it is absolutely in your interest to understand the investment mission of your employer.  But go deeper than that.  Understand how it gets paid, how it achieves growth and enterprise value, and this, in turn, may require a look-through to the types of clients that fund your institution, and an associated understanding of their investment goals and objectives.

You’d think these things are obvious, but in my experience, many market participants, both professional and amateur, fail to undertake this simple exercise, and, without doing so, almost certainly set themselves up for failure, or, at minimum, sub-optimal success.

As a last point regarding this new-age self-analysis, for both professional and personal investors, the objectives of the investment process may change over time, so my further advice is to go through this exercise, at minimum, once every couple of years.

Commandment II:  Establish an Investment Approach that is Consistent with Commandment I Outcomes

Once you’ve determined where you fit into the market mosaic, you can and should make a detailed study of the various roadmaps to success.  For full-time traders (professional or personal) this involves determining what markets in which you wish to participate, and what resources you need at hand to be at your best while navigating these markets.  Even for less active investors, a similar path is recommended.  You should, for your own benefit, determine what markets you will focus on – based upon what advice and information – and how much personal attention is required.

Virtually all investors should establish look-back methodologies for measuring their relative success, on a routine, periodic basis, with an eye towards understanding clearly what they did well, where they under-performed, and what steps they can take to learn from past experience, and achieve improvement in future cycles.

I’d like nothing better than to discuss this with you privately (it is, after all, a highly personal matter), so if the spirit moves, shout me a holler.

Commandment III:  Establish Financial Objectives and Constraints

No matter what your market orientation, you are likely constrained, in gravity-like fashion, by one unshakeable reality: there is a finite amount of money that you are able to lose and still remain in the game.  This will vary by the type of market participant you are or wish to be (in adherence with Commandment I), but even within any given participant class, it will shift and evolve along with market conditions, performance, the sources of your funding and other factors.

So it behooves every market participant to determine, periodically, how much money they can comfortably lose, and in order to do so rationally, this impels them to set return targets as well.  Except under very narrow circumstances, no clear-thinking market participant would set a maximum loss level, at, say, 25% if his or her target return was in the low single digits.  So, entering every period (and for many, most importantly at the beginning of each year), effective portfolio management implies a comprehensive analysis of the range of likely outcomes, which yields the simple, declarative outcome of identifying with clarity the variables in the following statement: “My objective is to generate a return of X, and am willing to lose up to Y to achieve this goal.”

The most visible objectives of this exercise are to create focused parameters for success and failure, but there are indirect benefits to be gained as well.  In my experience, it is impossible to derive an honestly formed estimate for X and/or Y without undertaking an analysis of general concepts such as market conditions and resources at your disposal, down to more granular details of what instruments you intend to trade/invest in, and why.  Trust me: you only stand to benefit from routinely performing this exercise, and, at various points, looking in the rearview mirror to see what went right, what went wrong, and why this was the case.

For professional investors, these “mission critical” parameters may be set by your capital providers and not by you personally, but sorry, Mr. Wall Street, this doesn’t let you off the hook; if anything, it places extra burdens on you with respect to Commandment III.  In a highly constructive work environment, you will have a say in these matters, and even if your return budget and loss limit is set at levels with which you fail to agree, you’ll be doing yourself a world of good by making your arguments on an informed basis.

Perhaps, if proven right with enough consistency, your bosses may eventually start listening to you, or you will find a professional home wise enough to take your input into their decision-making process.

Commandment IV:  Stick to Your Methodology

These commandments, at least the ones set forth thus far, are sequential and path-dependent in nature, and if you follow the course, by now you’ve figured out why you’re in the markets, developed a methodology consistent with this first commandment, and have parameterized your return objectives and maximum loss thresholds.

It’s now time to go get them out there, and it will serve you in good stead to operate by the precepts of Commandment II.  You may be a superstar at your investment approach, or you may simply be a legend in your own mind.  But one thing I’ve learned from experience is as follows: if you deviate substantially from your methodological disciplines, you stand almost no chance of succeeding in the markets.  Heck, it’s hard enough to succeed even when you are rigidly sticking to your approach.

This means keeping to a list of tradeable instruments with which you are comfortable, knowing the ranges of your investment sizes and holding periods, and, ideally, both having tools and self-awareness to know when you’ve gotten it wrong, as well as the discipline to act upon mistake identification – ideally by wiping the slate clean and starting over again.

If this happens, and you find yourself compelled to retrench, I implore, nay command you to stick to your knitting.  For the personal investors among you this means resisting the temptation to rush into some hot stock tip you heard about at the country club bar, or a complex structure that your broker/advisor is very keen to stick in your portfolio.  These transactions are indeed money-makers, but for others (e.g. your broker/advisor); not you.

The same dynamic applies to you fabulous pros.  Sell-side folks of every stripe will try to sell you on clever angles that seldom, in my experience, provide benefit to those to whom they are pitched.  So if you crawl down the rabbit hole, start climbing, and use the path of your descent, as it is the clearest way back towards high ground.

Commandment V:  Understand the Profitability Dynamics of Your Portfolio

The sum total of your trading and investing activities create something we risk geniuses refer to as a portfolio.  It contains, in most cases, a mix of financial instruments, and, in some instances, may include short bets and derivatives.

It is worth your while to understand what drives this aggregation of your market activity: what conditions will cause it to make money and what dynamics will be either dilutive to returns, or generate outright losses.  For both pros and amateurs, it behooves you to review these hypotheses with routine frequency.

A word, here, to most of the personal investors and a few of the professional ones as well: many of you have multiple accounts, often held at different financial institutions.  But your financial fortunes are tied to what happens to the totality of your holdings, so, in order to adhere to the 5th Commandment, it may be necessary to find a way to aggregate your holdings across investment accounts, possibly held at multiple financial institutions.

We are now half-way through the entire exercise, and can move from the left tablet to the right one.  Nothing too painful has happened to us yet, right? But fair warning, we’re about to enter the murkier ground where risk analytics cannot be entirely avoided.  I am confident, though, that you can handle this.

Commandment VI:  Understand the Volatility Dynamics of Your Portfolio

Each individual financial instrument that you own has its own unique volatility characteristics, which, to further cloud matters, will change over time and market conditions.  Your favorite Canadian Oil Exploration company or Bio-Tech concern is more volatile, and therefore, all things being equal, riskier, than, say, your money market holdings or your dividend yielding stakes in, say, Consolidated Edison.  You should understand these dynamics, using such tools as Beta and volatility (the standard deviation of returns).

Of course, the volatility of your portfolio will not be equal to the sum of its individual risks, but here I have good news: the portfolio as a whole will almost certainly be less risky than the sum of its parts – due to the impacts of diversification.  Individual instruments will not likely move in lock step with one another for extended periods, and this means that under most circumstances, when you are taking noticeable pain on individual positions, others will provide some relative comfort, and even more so if you add hedges or long/short balance to the mix.

In any event, there are tools available that enable all of you to measure the volatility of their portfolios as though they were single, individual instruments.  These are extremely useful – particularly in today’s environment, under which external events can change volatility profiles dramatically, and without notice.  To provide one recent example, after a positively sail on the somnolent, forgiving market seas of 2017, in February of ’18, the becalmed waters began to churn angrily.

If you held a static portfolio and didn’t do a single trade since the vol picked up, then it is likely that your volatility doubled, tripled or more — relative again to ’17.

These trends of instability of risk across market cycles are likely to continue well into the future, so, in order to manage in a clinical manner, the risks you are assuming, it is necessary to understand over dynamic investment cycles, the overall market risk profile, and its incremental impacts on your portfolio.

Commandment VII:  You Are Able to Risk More When You’re Up than When You’re Down

Though buried in the middle of the second tablet, Commandment VII is as important a rule as exists of the ten.  If you’re p/l is positive and rising, you are essentially playing with “house money,” and can take risks that are not wise to assume when the opposite condition exists.  However, I hasten to add that these concepts are asymmetric in nature.  Just because you happen to be making money doesn’t mean you should increase your risk-taking; being up is thus a necessary but not sufficient condition for opening up the throttle.  The other prerequisite is that you like the forward-looking opportunities you see on the horizon.  If you don’t, then either stand pat or take chips off the table, as no rational risk-taker should increase his or her bets if they don’t like the forward-looking feel of the markets.

Conversely, if you’re losing money, your viewpoints on the market become largely irrelevant to us risk managers, and we will encourage you to remove risks from your portfolio no matter how much money this may cost you in terms of future returns.  Here, we revert back to the third Commandment: the one where I have instructed you to set a maximum aggregate loss for your trading and investment.  The closer you get to this stop-out level, the less firepower you have, and, if you want to stay in the game, it really doesn’t matter how much you like the markets.  After a bad spell, you should reduce risk.  If you’re proactive about this, you can still nail your best ideas – albeit in smaller sizes.  But if you do the opposite – double down, and subsequently happen to be wrong, I suspect we won’t have much to talk about in the future.  The professionals among you may be looking for new lines of work, while personal investors might be too occupied with mundane matters such as how to pay the mortgage to devote much time to the markets.

I have some simple formulas we can share with you that will provide you with an adherence roadmap for Commandment VII.  In the meantime, I will conclude thoughts on the seventh with the following truism: the risk more when you’re up/less when you’re down thing works in all endeavors of chance.  It’ll perform just as well in Las Vegas as it does on Wall Street.  Trust me on this one.

Commandment VIII:  Set Targets for All Individual Positions/Themes and Stick to Them

Before buying or selling short a stock, bond or option, you should determine the price which you seek to achieve, the one on the negative side that will cause you to admit the folly of your ways and exit the position, and some idea of the timeframe over which you intend to hold these positions.  Keep a spreadsheet of these Objectives, Stops and Dates and update them frequently.  It will also do you a world of good to keep a close eye on positions that have reached or exceeded your positive and negative targets.  Here, you have two choices: either change your target, or exit the position.  There’s simply no reason to hang around in themes that have already played out, positively or negatively, according to your expectations.

Adhering to Commandment Eight may cause you, fair warning, to deviate from the long-standing, but in my view fallacious risk management platitude that you should sell your losers and let your winners ride.  Call it blasphemy if you will; I call it common sense.  More often than not, and particularly if you truly have an “edge” in your area of market focus, your risk-reducing activities should more productively be shaded towards getting out of positions that have already done their work for you, while holding on to losers that, if you’re right, will pay off in spades.

The best means of achieving risk reduction on a name-by-name basis, in my view, is to go through what I call the “Vince Lombardi/Gentlemen, this is a football” exercise.  Review each individual position, and forget whether they’ve made or lost you money in recent innings.  Pick the positions that you believe offer the best value at current prices, and discard the rest.

Empirically speaking, I promise you that this process will lead you to shed more of your winners than your losers.

Commandment IX:  Fear Not Options, Including Their Short Sale

Without getting into great detail, changing market conditions wreak havoc on options pricing, and these markets often give away some of the best opportunities you’re ever likely to see.  Moreover, if you buy into this, combined options positions, including bull spreads, bear spreads, straddles, strangles and butterflies, can, if properly timed, be had for a song.  I also believe strongly, particularly in high-volatility markets, in using covered write strategies, as a means of reducing exposure to individual names, and for yield enhancement purposes.

To further express risk management sacrilege in this otherwise holy document, I believe that those who believe that selling options is riskier than buying them are deeply misinformed.  Empirical evidence suggests that well over 90% of options expire worthless, so who’s making money/taking more risk: the buyers or the sellers? This is not to say that I countenance the unconstrained selling of premium; quite to the contrary.  My main philosophy with options is to seek to apply the basic strategy of buy low/sell high to this instrument class.  If options are cheap, buy them.  If they are expensive, sell them.  Quite often, you can find both conditions within the framework of an individual underlier, and, if you do, you can benefit from arbitrage opportunities that much of the market seems to routinely ignore.

Commandment X:  Obey the 10 Commandments 

I feel compelled to inform you that in the revised set of tablets, I was sorely tempted to move Number 10 up to Number 1.  One way or another, I think that adherence to the actual laws handed down from on high, are for our unilateral benefit. They represent the core precepts of righteous human behavior, and in the 3,500 years since their original, well, publication, no one, to the best of my knowledge, has ever even legitimately questioned them.  While observing to them with perfection is perhaps beyond the abilities of individual members of the human race, attempting to do so will do you a world of good, including in terms of portfolio returns.  Remember: our universe was created by the Lord, while markets are entirely the creation of Man.  When we seemingly needed it the most, He gave us the Law, as embodied in the Commandments.  Following them just might give you, divinely speaking, a little extra edge.

Similarly, following the Golden Rule will also do neither you, nor your portfolio, any harm.

In these troubled times, I can’t emphasize how strongly I feel about #10.  So stop lying, stealing, committing adultery, coveting your neighbor’s wife and taking the Lord’s Name in vain.  Some good will come of this, I promise you.

There’s a lot more to be said about all of the above, but we can only do so much with the written word, right?  If the spirit moves, contact me and we’ll talk.

Trust me my brothers and sisters, it’ll do you no harm.

TIMSHEL

Joining the Band

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Join The Band

Hey Lordy… (join the band, be good rascal…)

Hey join the band, be good rascal and join the band

Hey Lordy…

Join the band, be a good rascal and join the band

Oh huh oh ho ho ho

— Little Feat

Don’t you think the moment has come? To join the band, I mean? There are worse ways to spend your time, you know, and when Little Feat’s late and lightly lamented Lowell George asks, I believe we owe it to him to respond favorably – even four decades after the initial request.

So, even at this late date, I am inclined to take up Lowell’s invitation. However, one problem remains: which band should I join? It’s not as though I am flooded with offers; the plain truth is that I have had none. And believe me, this hurts, because these days I can really shred. In fact, I’d go so far as to say that I’d be a major asset to any ensemble fixated on the rolling decade between 1965 and 1974, and, in the right group (i.e. one that: a) narrowed its focus to 1968 through 1972; and b) let me do exactly what I wanted), I could be great.

But at my advanced age, I have learned that delusion is risky and even sometimes fatal, and this forces me to face the possibility that no rock and roll outfit will have me. However, there’s more than one kind of band to join, so I’ve chosen to take a different course, affiliating more assertively with that band of brothers and sisters that form the global financial blogosphere. It’s not as though I haven’t contributed to their catalogue; the consistent production of these weeklies, and subsequent posting to the web is, in itself a testament to my longstanding affiliation with the blog bros. But, my friends, like so many other matters, it comes down to a matter of degree. I’m going to be doing more with them, and whether I become a full-fledged member of the group, or, like Darryl Jones, who has ably managed the base lines for the Rolling Stones for a period longer than founder Bill Wyman but has never achieved full membership, linger as a side man, remains out of my hands.

Please know that I don’t take this step without due consideration. I am solemnly aware that, over the baker’s dozen years that I’ve been pumping out these weeklies, missing nary a one, through sickness and health, triumph and tragedy, that you (the reader) and me (the scribe) have developed a sacred, unshakeable bond. It would nauseate me beyond measure to think that any step I could possibly take would weaken, let alone sever, these ties. Please know that you will continue to receive these missives, under the same timelines, and based upon the identical format – one that as you know, features my often futile efforts to gather what remains of my wandering wits.

That being stated, the chattering voices inside my head have convinced me that a wider audience beckons, and that I must answer the call. So if you observe me blogging, tweeting (under the rather generic handle of @KenGrantGRA) you will have two choices. You can consider this an unacceptable betrayal on my part (I will love you no less if you do), or you can give me a pass.

Oh yeah, there is one other alternative available to you: you can join the band, the @KenGrantGRA Band, accompanying me on my virtual journey through soaring arena anthems, destroyed hotel rooms, mud sharks and other such delights.

There’s room for you (and any friends you might wish to invite) on the @KenGrantGRA Tour Bus, and Cowboy Neil (at the wheel) will pull over and let you off at any point of your own choosing. Do me a favor and think about it, OK?

*******************

Whether you believe me or not, the plain truth is that I hate to write about politics. I find it an unproductive, loser’s game. I tell myself that I have held more or less to the discipline of only doing so through the filter of political impacts on risk conditions. But you’ll have to make your own judgments as to how well I’ve actually adhered to this protocol, and how rigidly I’ll stick to the discipline going forward.

One way or another, I believe that politics hover over current market conditions in a highly menacing fashion, so this week, and perhaps for a spell going forward, I must at least move towards the borderlands of my pledge. By my judgement, Trump had by far his worst political week since he put his hand on that bible, amid so much protest, almost exactly five quarters ago. Let’s dispatch with the easily analyzed events first. Paul Ryan announced he’s stepping down at the end of his term, and, any way you look at it, this is not a positive development for the Administration. I’ve always liked my Janesville boy, and think he was one of the very few competent members of Congress. He did his homework, did his work, and, through a number of hits and misses, actually got things done. And I ask this to anyone in favor of any part of Trump’s legislative agenda: where we’d be now without his steady hand? But he’s riding off, taking the certified Republican House Majority down to a slim 22. Also, and, ominously (at least in a symbolic fashion), his departure means that nearly half (10 out of 21) Congressional Committee Chairs have now stepped down, and, given that it’s only April, that number could rise.

More chilling was the raid on Trump lawyer Michael Cohen’s office and home by those fluffy fellows from the Office of the United States Attorney Southern District of New York. Acting on a referral from Special Counsel Robert Mueller, they forced their way into Attorney Cohen’s private professional and personal lairs, and seized pretty much anything that wasn’t nailed down. Subsequent reports indicate that he’d been under investigation by the Southern District for criminal activity for several months, but the timing and the methods turn my blood to ice. Federal prosecutors have many methods to procure information from investigation targets, most notably their subpoena powers, and raids are the most aggressive of these tools. Typically, this type of thing is only justified when the target is either a flight risk (which Cohen clearly was not), or information suggests he was committing serious crimes on an on-going basis. So I hope for all our sakes, that whatever impelled the G-Men to give Cohen the Manafort Treatment be disclosed in short order. And it better be good.

Because, and I state this more in sorrow than in anger, attorney client privilege is so embedded in basic human rights as to not even require inclusion in the Constitution. It dates back to the Elizabethan Era, and is a core part of British Common law upon which our Constitution is based. We are now headed down a very slippery slope on the treacherous terrain of civil liberties, and however much you may be enraged by Trump, I urge you to bear in mind that someday, you yourself might need a good lawyer, who, if we’re not careful, may have his professional materials seized. At which point they won’t be of any use to you. If this ever happens (and I pray that it doesn’t), it’ll probably be lights out for your case. Of course, this won’t apply to everyone. If you happen to be very rich, powerful and aligned with the appropriate forces, not only will your private realms not be raided, but you will have the prerogative to respond to subpoenas by simply decided what, of the information demanded, you choose to share.

The deal struck between the Southern District and the Special Counsel is such that anything the former uncovers that might be useful to the latter will be referred back to them. And here’s where I can at least plausibly make my case of tying the political to the financial. Anyone who had a shadow of a doubt that Mueller is going for the jugular should disabuse themselves of this fantasy at the earliest convenient opportunity. There’s an end game afoot here, set to play out over the immediate months ahead, and I believe it behooves the risk sensitive to bear this in mind as they seek to navigate through these choppy market waters. Because I don’t think the markets will much like the action, however it turns out.

But equities, notwithstanding these and other worrisome events, gathered themselves in gratifying fashion this past week, with the SPX bouncing jauntily off of its 200-Day Moving Average yet again, and now resting in the friendlier confines of its 50 and 100 day equivalents. One might be tempted to ascribe the bounce to giddiness about earnings, and I’ve seen estimates of growth rise to the dignity of ~20%. But I’d be careful here. A large contingent of big banks reported on Friday (JPM, Citi, Wells, PNC) and despite ALL of them beating both profit and revenue estimates by a comfortable margin, EACH sold off in the wake of their announcements by >2%. This suggests that the bar is very high for a paradigm involving strong earnings being followed by shares being bid up.

Volatility has indeed risen in the equity markets, but perhaps a little perspective here is in order. The combination of renewed price action after the vol paralysis of last year, and a rally that has increased the denominators associated with percentage moves, may be creating the illusion that the Equity Complex is in hyper-volatility mode. However, statistics offer a different story. While February and April brought some truly noteworthy action, across the course of 2018, we’re still only looking at a standard deviation of SPX returns in the mid to high teens, which is about the norm in the modern market era. So the equity market has become more volatile, but not alarmingly so, and while it is likely to continue to rise, in percentage terms, it’s important to remember that we’re pretty much at historical norms. And in terms of options volatility, last week’s selloff in the VIX took this benchmark to under 17.5 – right about its median for the lifetime of this eccentric index.

However, in a continuation of a highly vexing pattern, non-equity asset classes remain stuck in the volatility mud. The following chart, coming to you through the courtesy of those dedicated public servants at Goldman Sachs, Inc., illustrates what it looks like when one asset class awakes from a winters-long hibernation, while others remain in blissful slumber:

I’m not entirely sure what this correlation drop implies, but it doesn’t strike me as the kind of breakdown that the ghost of Tom Petty could reasonably describe as being “alright”.

Meanwhile, as cross-asset class correlations have migrated to decade plus lows, the story is quite different within the equity complex. Here, correlations, have spiked dramatically, again as illustrated by those talented graphic artists in residence at Goldman:

Among other things, one might wish to review other periods when stock correlations took an abrupt leap forward, and the intrepid among you might choose to superimpose equity index graphs on the image. I myself am either to frightened or have too much sensitivity for my readers to connect the dots here.

It may be the case that the jump in stock correlations is more easily explained than the drop in the cross-asset class correlation metric.

To wit: there’s a great deal to worry us in current affairs that has little to do with the relative fortunes of individual companies. For one thing, us Yanks got together with the French and Brits to lob some bombs into Syria this weekend. I don’t know what impact this will have on the markets, and won’t know till at least Sunday night, so I won’t opine upon this development.

More visible is the trade war of words currently under way. No one knows how this will resolve itself, but let’s just agree that it’s a risky proposition. Certainly, the Energy Markets have taken notice, bidding up Brent Crude to a 3-year high, and even the long-suffering, ag-heavy Continuous Commodity index has shown indications of higher pricing:

Strong Trade Winds: Crude And Commodities

Thus, as anticipated, we are in what I believe to be the early innings of a high impact information cycle. My best advice is to temper your investment enthusiasm and add a healthy measure of reactivity. There are opportunities developing, but they will require all of your talents and energies to capture them. You may also wish to place an extra focus on risk management.

So maybe it’s as good a time as any for me to step up my whole blogging game. Lowell George asked for our participation, but he’s been dead for nearly 40 years, and we need to make use of the tools that are at our current disposal. Please, in any event, don’t judge me too harshly for my expanded electronic footprint. And, if the spirit moves you, be a good rascal and join my band.

TIMSHEL

Zook Suit

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I’m the hippiest number in town and I’ll tell you why

I’m the snappiest dresser right down to my inch-wide tie

And to get you wise I’ll explain it to you

A few of the things that a FACE is supposed to do

I wear zoot suit jacket with side vents five inches long

I have two-tone brogues yeah you know this is wrong

But the main thing is unless you’re a fool

Ah you know you gotta know, yeah you know, yeah you gotta be cool

So all you tickets I just want you to dig me

With my striped zoot jacket that the sods can plainly see

So the action lies with all of you guys

Is how you look in the other, the other, yeah, the other cat’s eye

— Peter Townsend

Plainly, and as anticipated, there is a great deal going down at the moment, so we might as well start with the most important developments. Topping the list is Zuck’s Capitol Hill testimony, scheduled to take place, not once, but twice, this coming week. On Tuesday, he will sit in front of a committee of the World’s Greatest Deliberative Body, and, given the latter’s historic and never-breached protocols of decorum, I don’t expect much drama. A better show is likely to take place on Wednesday, when he faces the wilder and woolier Lower Chamber. But on the whole I don’t see much intrigue in the pending exchange between our duly elected representatives and the world’s most high-profile Hipster/Nerd. Committee Members will look menacing, issue superficially difficult queries, and appear less than fully satisfied with the responses. And Zuck is sure to stick to the well-scripted, obsequious and cloying replies which, even as I type these words, his legion of overpaid lawyers is preparing on his behalf. I have a hunch that not much more will transpire after that, and that at least for a time, the entire episode will be dispatched to the level of focus now drawn by, say, the Las Vegas shooter investigation.

But all of this begs the most important question: what will he wear? I can’t remember an event with so much sartorial suspense this side of the Academy Awards. Surely he will shed his trademark vaguely blue/grey tee and chinos getup; in all likelihood he will shoehorn his way into a suit. But which suit?

One option will be to bust out his Bar Mitzvah ensemble, images of which I have helpfully sourced through a search from FB Frenemy enterprise Google:

Zuck’s looking pretty sharp here, but I find this choice unlikely for a couple of reasons. For one, he’s probably not going to be able to roll jacketless. Beyond this, it’s entirely possible that either: a) Mrs. Zuck (nee’ Priscilla Chan) has done the wifely thing and thrown these threads out; and/or b) trim as he may remain, he may no longer be able to comfortably wedge himself into this holy, historic outfit.

Thus, in all probability, he will have to bust out some new, or, at minimum, seldom seen, garments. And as someone who wishes him well in his astonishingly successful quest for global hegemony, I humbly suggest that he consider showing up in a wide-lapelled, high waisted Zoot Suit, the uniform of choice for the hep cats of the Roaring ‘20s. As many of my readers are too young to remember much of this high-flying decade, the getup looks something like this:

In addition to I believe setting the proper tone for his grilling, such a choice might help effect greater political balance — away from the measurably left-leaning vibe that Zuck has long exuded. To wit, careful pic observers will note the prominent presence of pinstripes that clearly bring to mind the wardrobe stylings of newly-appointed Director of the National Economic Council: former Cable TV sensation Larry Kudlow.

So formidable and terrifying are the Zuck’s powers of influence (or were, until at least a couple of weeks ago) that should he adopt my advice, he could set off a global fashion sensation. Soon, everyone from Paris Hilton to the Dalai Lama might be compelled to rock the Zoot, and that, at least from my vantage-point, would be pretty cool.

However, as important as this high-drama debate may be, we must move on, leaving the outcomes to Zuck and his tailor. Across our last couple of installments, I made the proclamation that the market’s already expanded volatility bands would further widen, and in a very real sense I was correct. Unfortunately, though, said widening has applied, well, quite narrowly, to the Equity Complex. Not much else is moving at all. The U.S. Treasury Curve does little but flatten, albeit at a glacial pace. In the wake of a somewhat garish late January selloff, The U.S. Dollar Index has wedged itself into a depressing/suppressed 3% band. Similar somnolent patterns have plagued the Energy Markets.

With brouhahas of varying configuration raging everywhere one cares to cast an eye, the question is: why? I met with one of the smartest and most successful macro traders of my wide acquaintance on Friday, and he was ready to pull his hair out at the stasis he observes across the risk factors upon which he is most focused.

And his beefs were not just limited to the price action in underlying instruments; he notes an absolute obliteration of options volatilities in this realm. He asked me what I thought, and I didn’t have a good answer for him. I did, however, agree that given the opacity that plagues the global capital economy and the rapid-fire stream of news bits (many blindingly irrelevant; others not so much), that: a) prices outside of equities should be more migratory; and b) some of these here non-equity options, instead of operating under fire-sale conditions, should actually be being bid up. I told him I’d look into it and revert back to him.

Anybody have any ideas for me? I am desperate to look smart and well-informed to this guy.

Still and all, there are some developments outside of the obsession-inducing world of individual stocks and associated indices that have caught my eye. One was that, with trademark anonymity, the Swiss 10-Year Note managed to slip below the Maginot Line of 0.0%, and now trades, somewhat improbably, at a negative yield:

Thus, a country which produces cheese, chocolate, watches and little else, an economy which is dominated by a deeply impaired, arguably insolvent banking industry, is actually paid by market participants for the privilege of lending to them. And the trend towards easy financing has spread to the neighbors they refused to fight – with or against — in either of last century’s world wars: yields in France, Germany, Italy and even freaking Sweden have declined materially over the last couple of weeks.

But if you’re hunting somewhere outside of equities for volatility, you may want to take a look at the Agricultural Complex, which has anyway shown something of a pulse this year:

As the graph’s caption explains, a good deal of this action is probably catalyzed by the Trump Administration’s well-thought-out, nuanced and impeccably executed trade skirmishes. I am supposed to be something of an expert in these markets, and, to the best I can discern is that the Chinese import a lot of Soy Beans from us, and feed them to their similarly imported Hogs. So the escalating tariff rhetoric is good/bad for Soy Beans/Hogs, as is reflected in the price action. I hope that I’ve made myself clear.

One way or another, the continued war of words on international trade and other pertinent matters is clearly driving investors somewhat batty. I truly wish that this cycle would end, but hold out little hope for this miracle any time in the foreseeable future. After all, it’s not as though we don’t have a great deal of other information to process and seek to monetize. Case and point, just this past Friday, after a somewhat surprisingly tepid March Jobs Report dropped, and just as investors were catching their collective breaths and maybe even trying to look on the bright side, Chair Pow took some questions from a reporter, and his answers offered scant comfort to anyone seeking it in that quarter. Perhaps owing to this end-of-week double whammy, the Atlanta Fed’s GDPNow tracker exhibited some renewed gravitational pull:

On the whole, however, I am inclined to believe that equities will continue to drive the risk pricing train. Last week, they rallied hard early and then sold off even harder, and Q1 earnings have not even begun yet. They start in earnest next week with the banks, which, in eerie consistency with the bizarre paradigms currently vexing us, have all scheduled their releases for Friday the 13th. I will be watching these tidings with a careful eye, and in particular for any hint of what Lloyd, Jamie, James and the rest have to convey about prospects for the rest of the year. The action will be fast and furious from that point onward, and here there is some good news to report. Not only have growth estimates retained a lofty 17% handle, but according to the infallible FactSet, positive pre-announcements have clocked in at a record high:

The chart further shows the skew of these happy tidings towards the recently beleaguered Tech Sector, but I have my doubts about the final outcomes there. Soon after Zuck gasses up his smoke and bids goodbye to Washington, he, Bezos, Serge/Larry and TCook and the others must face their own investors. If I were any of them, I might check in with my CFOs and see if I could possibly defer some revenues and/or accelerate some expenses. Given the horrific P.R. onslaught that has assaulted each of them lately, I think it’s a sound strategy for them to sandbag their numbers. Their stocks will sell off further, to be sure, but they can catch up later, and I just don’t think this is a good time for them to announce earnings moonshots.

One way or another, I expect their guidance to be particularly unpretentious. It’s just hard to imagine someone like Bezos stepping up to the podium and saying something akin to “me and the boys were poolside in Pacific Heights and we’re feeling pretty strongly that we can take our share of the NDX valuations from 50% to 90% this year”.

Guidance beyond San Jose will be especially important – given the looming and growing political risk — about which I have been expounding for the last several weeks. I continue to believe that these matters loom large on the horizon, and our fearless leader does nothing but fan the flames of his potential demise – through his trade tantrums, his attacks on companies like Amazon and – perhaps even worse – his more recent tweeting down of the markets in general. Again, all of the above portends a continued upward trajectory of volatility for the foreseeable future – at least for equities.

As for the other components that comprise the broader market, I reckon we’ll just have to see. My guess is that vol will spill over into the other asset classes; perhaps soon, but one thing is certain: until it does, it won’t.

But all of this is small potatoes. When all said and done, the only thing that truly matters is that you follow my example and make sure at all times that you look fabulous. I expect Zuck to act accordingly, and, my dear readers, you could do worse than bearing this mind yourselves.

TIMSHEL