Yes, my friends, the eternal debate (is it “Pathos” or is it “Bathos”?) rages on. Moreover, the question applies not only with respect to individual events, but to human existence writ large. In this installment, we will focus on the former, because, in terms of the latter, how can we possibly arrive at a conclusion other than through impact-weighted aggregation of individual experience?

Noah Webster’s Arc (OK; dictionary) defines Pathos as “an element in experience or in artistic representation evoking pity or compassion”. Its usage, however, dates back to Aristotle’s Rhetoric (soon to be made into a major motion picture), and rightly so, because those Ancient Greeks – what with their wars, sacrifices political intrigue and endless, droning debate, seem to have been bathed in the stuff.

Bathos, by contrast has more recent origins, and is perhaps as a result, more ubiquitous in our usages and in our imaginings. After all, are we not all intimately familiar with its original source, the 1727 Alexander Pope essay Peri Bathous, or The Art of Sinking Poetry, which many of my readers can recite, word for word, from memory? However, for the less erudite among us, let’s simply define it as a humorous shift in the contours of an enterprise – to the common/vulgar, from the sublime.

Both pathos and bathos are indelible components of the human equation, carried with us as we first crawled out of the primordial ooze, and are almost certain to be present when our species’ grand purpose has fully run its course, when, presumably, back into the ooze we will sink. Moreover, each concept bleeds into the other – in both visible and opaque fashion – often in the process obscuring the lines of demarcation between the two. This has always been the case, but at various points in our history, said lines become even more blurred.

It appears, my friends, that this is one of those times, and I’d like to take this opportunity to offer some opinions as to which side of the line certain pertinent events predominately fall.

I start on a personal note, wishing a heavenly rest for my friend Tony Glickman, who died suddenly this past Monday. I called Tony “Rabbi” because: a) everybody called him Rabbi; and b) that’s what he was: an ordained minister to the Children of Israel. He went on to attain the lofty position of Rosh Yeshiva (aka, the rabbinical equivalent of capi di tutti capo) at Yeshiva University. For my money, Rosh Yeshiva at Yeshiva is about high on the foothills of Mount Sinai as any mere mortal can hope to climb.

But for all of that, the Rabbi spent most of his career in Finance. Across his storied professional experience, he served as Treasurer of Canadian Imperial Bank for Commerce, Head of Risk Services at both Globe-Op and Northern Trust, and, most recently as a Senior Advisor to the global consulting firm Oliver Wyman. He was a prolific writer and thinker, and though I only jammed with him a couple of times, I can attest that he had some legit chops on the keyboard. He could sometimes overwhelm you with his presence, not everyone “got” him, and I don’t think he’d quibble with me for stating that if you wanted Rabbi Glickman, you got all of him; no partial or smaller serving of Glickman was available on the menu. He and I grew quite fond of one another, and I will miss him. But what saddens me most is that he wasn’t done. Not by a long shot. He remained fully engaged across his wide spectrum of interests and activities until the very minute that the Good Lord took him. So, to the Rabbi I offer a heartfelt “aleha ha-shalom” (may peace be upon you) and render, for the purposes of this installment, the following verdict: 100% Pathos. 

Moving on to (though not entirely) less personal (and entirely more uplifting) realms, I wish to share my satisfaction with U.S. News and World Report Magazine, which, for the first time since it got into the academic rankings game, has listed my alma mater: The Booth School of Finance at the University of Chicago, as the nation’s top MBA program. Yes, I’m pleased about this, but must offer a couple of caveats. First, the paleoanthropic era during which I studied at Chi-U began and ended many years before David Booth stroked in a maharajah’s ransom for naming rights to the program, so, technically, I attended not Booth, but U of C GSB. Second, us Maroon finance types had to swallow the indignities associated with the reality that listings actually showed a first-place tie with our intellectual enemies at Harvard. But I’m going to do my best to forget that part of the story, and offer the judgment that this development is bereft of both Pathos and Bathos.

In the wider world, I note that on Friday, the United States Congress passed its 2018 Budget Bill, and that the President (with a show of trademark bluster) promptly signed it into law. Its record $1.3T of projected outlays implies an incremental annual budget deficit contribution on the order of $300B to $400B, but hey, we’ve got children and (in my case) grandchildren to deal with that, right? The consensus among the talking heads is that the Democrats took their opposite numbers to the cleaners here, shoving in a cornucopia of discretionary bling in exchange for a much-needed increase in military spending. It seems, though, and as stated by others, that the outcome is a win for everybody – except of course American taxpayers. Still, I suppose we needed a budget, and, while I suspect that some of what has transpired will come back to haunt America and its well-wishers, I will shade this towards Bathos, while reserving the right to revisit the call at a later date.

Earlier in the week, and just for additional yucks, the Administration laid about $60B of tariffs on China and the latter has responded in kind. The markets didn’t particularly like this stunt, and for what it’s worth, neither did I. I have read widely the encouraging reassurances that this is all part of a grand negotiation strategy that will ultimately redound to our unilateral benefit. Well, maybe, but I say it’s a risky approach. This thing could spin out of control, in what I fear could be a financial redux of the events that started WWI. There, a rather obscure Archduke from a back-benching, dying empire gets assassinated in Sarajevo, treaties are triggered in domino-like fashion, and the next thing you know, the Western World’s military spends years blowing each other to bits in trenches dug not 100 meters away from each other. That conflict led to a stalemate; the Russians bolted and became the Soviet Union, the free world suffered a crippling depression, and the whole thing had to be settled yet again on the same battlefields, a generation later. I’m not saying that we’re in store for anything so dramatic with respect to this here episode, but then again I’m not saying we’re not, and I am in any event going to give the nod here to Pathos.

Last week’s other earth-shattering event involved the revelation that the Heavenly Walls of Almighty Facebook had been breached by nefarious forces, in the process violating the personal electronic space of 50 million users (including, presumably, yours truly). I was under the mistaken impression that everyone knew, or should’ve known, that this was coming. The core premise of Facebook is that it lets you communicate, creatively and effectively, at no charge, in exchange for allowing them to hoover up your private information and sell it to the highest bidder. This type of thing runs much deeper than what has been reported, and extends well beyond Facebook. I, for one, shudder to think of what type of data mining is taking place in the 3rd sub-basement of Google’s sprawling corporate campus in Mountain View, CA. To whom the content is being distributed, and for what purpose, is a matter I prefer not to contemplate at all. Further, I suspect that although the tying of this episode to the endless stream of nonsense about 2016 election interference was inevitable (not to mention ridiculous), it is instead best interpreted as the first salvo in an unfolding battle that will attack the galactic and accelerating power of a handful of U.S. Tech companies over virtually every aspect of our lives. I won’t elaborate here, but if I’m right, then the action will be both fascinating and terrifying to observe. For now, though, I think the FB thing a pig in a poke, and am going to place the sequence squarely in the camp of Bathos.

Investors, however, found little amusing in the episode, and were dumping FB shares – to the tune of about 15% loss – all the way up to Friday’s close. Between this and our burgeoning Trade War, it was a tough week for the Galant 500, which, largely through a sequence of angry closes, ended the week down a round 6%. The Facebook-heavy NAZ fared worse, down 7.3%. All broad-based indices are now in negative territory for the year.

Please know that I weep at anyone’s financial reverses, most notably those accruing to the holders of the common stock of this nation’s great corporate enterprises. That these losses are manifesting at a particularly inopportune moment – the quarter’s penultimate week (and therefore a matter of mere days before CEOs and fund manager must report results to what we can confidently expect to be a wavering group of investors) – only adds to the pathos I’m feeling. However, I’m not ready – just yet – to call the election and hand the victory to the P camp.

For one thing, I view the latest selloff as being driven more by risk reduction prerogatives than by an emerging consensus about valuation levels. Investors are nervous here, and one can hardly blame them. The non-stop assault on our sensibilities emanating from the shores of the Potomac are enough to un-nerve even the steadiest among us. Here, I blame Trump. He may not have started the infantile set of quarrels in which he is perpetually engaged, but it is he who sets the tone. And now, one never knows, from one minute to the next, whether the government is going to shut down, who is running what department, and whether we will go to war first with Russia, China, Iran or North Korea (just to name a few). The preceding administration was headed up by a guy they liked to call No Drama Obama, and I thought of this as an offensive misnomer. However, 14 months into the Trump Administration, #44 is starting to look like Tom Landry on the sidelines at Texas Stadium.

And if you’re an investor, it’s kind of tough to load the boat under these conditions. But I hasten to remind my minions that economic conditions have not changed dramatically from where they were in late January, when our friend Mr. Spoo was sitting some 285 handles and precisely 10% higher than the levels that prevail as this publication went to press. I see very few signs that the earnings harvest has been cancelled or even deferred. Borrowing costs remain stubbornly low, and we’re in the earliest of innings with respect to the widely hailed bennies from regulatory reform and tax cuts.

None of this is to say that the selloff was in any way irrational, or that it won’t continue. I just think that we’re basically looking at substantially the same world that we inhabited a couple of months ago, when it seemed like the “down” button on the equity elevator was damaged beyond repair. As such, somewhere in here, buyers should re-emerge, and I recommend that, at minimum, investors prepare for such an unthinkable contingency. As for now, I’ll deem the equity election too close to call.

However, there is one development which could decide the outcome at any minute. The SPX is now perched directly on its 200-day Moving Average, and I promised you that it would hold this threshold:

If it breaks through on the downside, from a technical perspective, it has some good ways more it can fall. But that’s not really what’s at issue; I’m much more concerned about this chart making a monkey out of me.

As you know, this is something I cannot abide, even during the wild and wooly days of March Madness. Right now, my bracket reads Pathos and Bathos tied at 2, one withdrawal and one contest undecided.

Given the way the NCAA Basketball Tournament has unfolded, I suspect I could have done a lot worse. Since Round 1, I’ve been warning anyone who would listen not to sleep on my Loyola Ramblers, but almost everyone did. And now they’re on their way to the Big Dance in San Antone. And now I’m advising this same crowd not to sleep on equities, at least not yet, but I fear many of you will. To ease my frustration, I keep telling myself, March ain’t over, and Madness is likely to outlast this and many subsequent turns of the calendar.

There’s both Pathos and Bathos in this, so stay on your toes.

TIMSHEL

“He’s a good man. And thorough”. That’s what Maude said. And she must have believed it because she said it twice.

But as is widely understood, she wasn’t talking about the Dude; in fact, she is speaking to the Dude. We’ll get to that later.

But first back to the Dude. Most of us agree he is indeed a good man, but is he thorough? The jury is out on that one. He tried – and failed — to stop Walter from flashing his piece on the lanes. He tossed the ringer in the wrong location and then lost the actual package. No, they never did “kill that poor woman”, but hey, she kidnapped herself, right? He has devoted his life to Thai Sticks and bowling, but while we bear witness to his consuming several Sticks, we never actually see him roll.

He went to see Marty’s dance cycle, but he left early, and was at least two weeks late with the rent, which, for all we know, he never bothered to pay it at all. And if he didn’t it’s now 20 years (240 months) overdue.

I mention all this because this past week marked the 20-year anniversary of the release of Coen Brother’s cult masterpiece “The Big Lebowski”. And all I can say is that if you’ve seen it, you no doubt get the references I’ve laid down, and if you haven’t, odds are you never will.

But we celebrated more than the TBL’s China (20th) Jubilee last week. Nine years ago this past Friday (March 9th), the Spoo (aka the SPX Index) closed at a crash-induced and previously unimaginable low of 676.53. Some 8 years and 10 ½ months later (January 26, 2018) it reached its most recent zenith of 2872.76 – an impressive gain of 337% and change over the period. We’ve given back a little bit since then, but not much. And now, since that dark day in 2009, the valuation recovery has survived 9 full trips around the sun. Tradition equates a 9th Anniversary with Copper in the U.S. and Pottery in the U.K. But the Chicago Public Library – which somehow has designated itself as a primary source for these protocols – has established that gifts for a 9th Anniversary should be Leather Goods.

Those Keepers of the Dewey Decimal Cards at the Harold Washington Library Center at 400 South State Street may be on to something here, so we’ll designate this date of celebration as The Rally’s Leather Goods Jubilee, because, among other reasons, it just feels right.

Yes, my loves, it’s been a good rally, but is it thorough?

Here, we should all bear in mind that thoroughness is an ideal, akin to, say, the Golden Rule: – something which we all should rightly aspire, but which mere mortals are less than likely to achieve in totality. Still and all, the closer we get to thoroughness (as is the case with treating others in a manner we would wish them to treat us ourselves) the better off we are. So I propose we settle for a standard of near-thoroughness and see where we stand.

At the moment, while, as indicated above, the Spoo has yielded a modest amount from high ground, its current valuation levels come at a point of negligible financing costs, (if the published statistics can be believed) begin inflation, and strong corporate performance.

But here is where The Dude and The Spoo part company, because, as also has been well established, the former has both a biological and behavioral disposition against employment. His longest recorded, compensated tenure with any organization appears to be his stint as a roadie for Metallica (buncha @ssholes). So I’m not sure that he is burning a Celebratory J in the wake of Friday’s surprisingly robust Jobs Report. Therein, our fabulous employment engine ginned up a gratifying >300K new February gigs, and the Report also featured a modest-but-sustained upward push in Hourly earnings, positive revisions for the two prior months, and (problematically for the Dude) an increase of >800,000 able bodied citizens to our Labor Participation Rolls. Perhaps the good news, here, is that of all the forces likely to impel the Duder to dust off the old resume, peer pressure may be bottom on the list.

As others have pointed out, and in perverse contrast to our experience a month ago, investors reacted positively to these tidings. As recently as Groundhog Day, a strong January Employment summary evolved into a catalyst for the first double digit Spoo retrenchment in a number of years. As such, I believe that anyone at their posts at 8:30 a.m. EST on Friday, who might’ve feared that a strong showing by the BLS would be met with an angry market response would’ve been justified in these fears.

But they would’ve been wrong. Investors swooned at the strong jobs showing, taking our titular index up nearly 50 points, and driving it to within striking distance out of that dangerous 27 handle. This topped off a giddy week that added ~3.6% to valuations. It perhaps also bears mention that these uplifting trends took place over a 5-day sequence where the markets were also compelled to absorb a number of theoretical threats, including this tariff nonsense, the contemporaneous resignation of Economic Advisor/Adult in the Room Gary Cohn, and ECB Chair Draghi’s (albeit ambiguously worded) announcement that European Quantitative Easing (EQE) is certain to end in this calendar year.

So why is all of this now good news, when a scant four weeks ago, the markets took such a dim view of similar tidings? Well, at the top of my list is that nothing under the sun seems to carry sufficient fortitude to actually lift yields on the Treasury Curve. A month ago, the strongest signs in many a month that the long-sought-after wage inflation might be emerging acted to move the interest rate (and, for that matter, equity) needle a titch. But 10-year yields have actually backed off since their end-of-January highs, and one now wonders if even merciful Allah himself can normalize the yield curve. It therefore stands to reason that whatever fear exhibited by the capital markets respecting higher inflation and more elevated rates has abated considerably.

But in the broader universe of Fixed Income, there are indeed some concerns that might serve to kill the collective buzz of anyone less chill than the Dude. Investment Grade bonds are feeling some gravitational pull (higher borrowing costs), as are, to a lesser extent, their poor relations in Junk-land:

Investment Grade and High Yield: Name Your Junk

In addition, when all was said and done, Q4 earnings failed to evoke the anticipated reaction of Pavlovian purchases. Earnings growth clocked in at an eye-opening 14.8%, and Revenues expanded by a respectable, arguably impressive 8.2%. Somehow, though, investors appear to have expected more – particularly on the Revenue side, as evidenced by the following metric – purloined from FactSet:

If this confuses you, suffice to say that Spoo companies that reported upside revenue surprises actually experienced counterintuitive price declines of 0.4%, as compared to an average historical gain of 1.3%.

Disappointers got hurt as well, but according to the metric by amounts roughly equal to the historical average recorded with respect to such transgressions.

But if I’m right, not much of this will matter across the three weeks left to the month of March. There are a few odd data streams to which we should adhere as the quarter winds down, including Inflation, Retail Sales, and Industrial Production – all set to drop next week. The following week features a modestly anticipated FOMC statement – where the Committee’s intention to raise rates another quarter point is all but a forgone conclusion.

However, all of this is fairly low drama – particularly in comparison to what begins to transpire once the calendar turns to April. I won’t reiterate what I believe is riding on the performance of the public and private economies with respect to these data streams; suffice to say it’s substantial.

One might even go so far as to suggest that by the end of April, we may know a great deal more about whether Spoo, good though he almost certainly is, can be appropriately characterized as thorough.

However, TBL fans will tell you that the “good and thorough” man to whom Maude alluding was in fact a doctor that Maude referred to the Dude — after her goons clumped him in the head. Though he had to be pushed, the Dude eventually went to see him, and this man of medicine, after checking out the dudely noggin, asked him to drop his pants.

Though it compels me to offer an un-dudely Spoiler Alert, Maude wanted to ensure that the Dude’s

reproductive parts were in sufficiently sound working order to enable him to assist her in her procreation objectives. History shows that everything checked out fine, and, presumably, their shared progeny (no doubt, if God’s Will were done, a masculine one) will be celebrating his 20th birthday later this year.

Here’s hoping a similar fate is in store for the Spoo. To be sure, he’s likely to throw both strikes and gutters as events unfold, but we can certainly wish him Godspeed. And so we will. Spoo: I like your style. May your rally abide for another decade or more, and may we all do the same, perhaps enduring long enough to tell the tale to the Dude’s grandson.

But between then and now there are a lotta ins, a lotta outs, a lotta what have yous… …lotta strands to keep in the old duder’s head. So I reckon we’ll just have to find out for ourselves.

TIMSHEL

Or AWS vs. AWS vs. AWS? As matters have unfolded, this seemingly innocuous acronym now perfectly captures the pitched battle raging between the new and old economies, and (if you will) the new and old markets.

Now, if you’re like me (i.e. the romantic type) what first comes to mind with respect to the acronym AWS is the American Welding Society, the organization that carries the proud banner for those merger agents of metallic units, those soldiers of the solder, those forgers of the functional fires — the welders of this great nation. I suggest, at this questionable pass, we take this opportunity to offer an energetic tip of the hat — to both the Society and its constituents. I mean, after all, if welders bugger things up, it can cause the rest of us untold aggravation or — worse. But they don’t bugger things up. Or at least they do so only on rare occasion. So I’ll say this: to those about to weld, I salute you.

That welders built our fair landscape – from the Empire State Building to the Golden Gate Bridge, is a matter almost beyond dispute. But, as time passed, and until recently, the most visible use of the AWS acronym might very well have been “Attention Walmart Shoppers” – that cry from the loudspeaker of the world’s largest retail outfit, alerting patrons that something special is happening in Aisle 5.

However, by all accounts, this acronym application, too, has been superseded by its progeny. Under current paradigms, the initials AWS almost unilaterally refer to Amazon Web Services – the cloud computing division of the conglomerate most likely to devour the world.

But the Wally Pipped retailers from down south are not, shall we say, taking this lying down. It now appears that the 2 latter day forms of AWS are pitted in a death match against one another; it’s Walmart vs. Amazon – corpo a’ corpo, and may the best capitalistic colossus win. While we all have borne witness to the latter eating the formers’ figurative lunch in recent years, in 2017, Walmart started pushing back. It bought itself an on-line retailer or two: most notably Jet.com (for a paltry $3.3B) and set its wonder boy/founder to the formidable task of storming the e-commerce fortress, and establishing an electronic beach-head on Amazon’s dangerous shores. As part of this effort, the much-feared clan from Arkansas issued the following warning to its legion of vendors: we’re all for your moving your data to the cloud, but in doing so, you might wish to consider using a solution not tied to any company named after a river in South America.

The message was no more nuanced than it needed to be. What Walmart wants, Walmart gets (at least until recently), and one can certainly empathize with their desire to protect proprietary data, upon which Bezos and his crew might, albeit accidentally, otherwise stumble. It was as if the Corporate Gods had convened on Mount Olympus and one was heard saying to aloud: “Attention Walmart Shoppers: nothing in your carts is manufactured or distributed by a company using Amazon Web Services”.

The whole on-line ploy worked for a while, and the ticker WMT responded accordingly, but recently, and as reported in last week’s quarterly earnings statement, the “House that Sam Built’s” fortunes in the ionosphere have flagged considerably.

As a result, while the seemingly unstoppable AMZN rocket continued its inexorable climb to the heavens, reaching by Friday’s close the lofty (and improbably round) threshold of 1500.00, the holders of WMT, as illustrated in the following graph, were not so fortunate:

Now, you should know that while Bezos continues to trounce his frenemies on the Forbes 400, and is now the world’s richest man (at least this side of Putin) by a wide margin, the Walton family (presumably including both Deadhead Bill and John-Boy himself), as holders of >1.5B shares, yielded, in excess of $2 Billion of collective net worth in the debacle. Here’s hoping (and expecting) that they will survive the blow.

But there are other, perhaps more relevant issues for us to consider. To the best of my ability to determine these matters, this may be largest earnings-related price drop of a Top 10 (until last week, when it suffered an ignominious fall to #14) market cap firm, since at least the big crash of a decade ago.

And here’s the thing: WMT earnings weren’t even that bad. In fact, they beat on most of the metrics upon which we are trained to focus, including profits, revenues, same store sales, margins, etc.

So what in the Sam Hill is going on here? Well, I’ll quickly dispatch with a couple of what I believe to be relevant, but secondary root causes. WMT soared through the stratosphere on this whole e-commerce play, but what the Web Gods giveth, the Web Gods can surely take away. If one can debate whether 92 is (forgive me here) an “Attention Walmart Shoppers” bargain, the 110 peak, manifested in those giddy days of late January, might’ve been, by the same argument, more of a Tiffany pricing metric for the name than a company that sells more Swiffer Wet Jets than diamond pendants, than it might’ve earned. I’ll also make short work of the premise that just as in the heady days of the dot.com bubble, all that should matter about a name is the strength of its web presence.

Instead, I will make the aggressive leap of logic that for the first time in several quarters at any rate, large, arguably over-owned securities have found themselves subject to the formidable forces of gravity. This does not preclude them from rising, but now, if the WMT episode can be extrapolated, they are subject to potential merciless punishment for any disappointments issuing forth from their C-Suites. There are of course exceptions, most notably the now indisputably AMZN-led tech cabal, but one wonders if even these widely adored capitalist juggernauts might not one day face a reckoning of their own.

At present, however, it appears that market participants view these enterprises as being infallible. In fact, I’d go so far as to opine that investors somehow view buying FAAAAANG shares as being their best option for risk reduction, and I hardly need to convey – to this audience in particular – how deeply this offends my sensibilities.

But that’s where our affairs stand for the moment, and I reckon we’ll have to live with the consequences. We’re now entering the quiet period of the quarter. Earnings are nearly all posted, and, as we’ve been tracking, they were highly gratifying to observe in their unfolding. Last week’s galactically gargantuan and potentially petrifying Treasury auction came and went without doing gratuitous violence to the yield curve. Yes, we’ve got Feb macro numbers to crunch, and Fed Chair Powell makes his maiden address to both houses of Congress next week. In addition, at some unspecified point in March we will have to endure yet another of those wearying debt ceiling dramas. Shortly after St. Paddy’s Day, Chair Pow will take to the FOMC podium for the first time – in all probability to announce another hike in overnight rates. But aside from that, and after a rollicking first seven weeks to the year, we may perhaps have cause to give thanks to the dearth of data set to assault our senses – at least till early April, when the information flow will again be fast and furious.

In the meantime, perhaps as a harbinger of our immediate fortunes, the technicals associated with the Gallant 500 are behaving in such a way as to bring a smile to the faces of the Tom DeMarks and Louise Yamatas in our midst. The selloff earlier in the month (remember that?) unfolded in such a way that not only did the Citadel of the 200-day Moving Average hold strong, but the index bounced jauntily as it touched this threshold:

Friday’s rally took the SPX above its more forgiving 50-day Moving Average, and perhaps this indicates that equities can do some open field running here. But I doubt it.

I am more inclined to think that we may trade between the yellow and the purple lines displayed on the left. But I’d be remiss if I failed to mention that Spoo has now slipped back into that dangerous 27 Club: the one which claimed the lives of Jimi, Jim and Janis. This time round, the climb to 28 may be less of a cake walk.

From a broader, longer-term perspective, 2018 is shaping up to be pretty interesting. As indicated above, investors are starting to punish even former favorites who fail to meet their hopes.

Further, and as also discussed in last week’s installment, the ingredients for the Inflation Pie, and for higher rates across the curve, are all on the table, and how they bubble in the oven will go a long way towards determining our near-term fortunes.

I also believe, though I won’t hit this one too hard for now, that the next 3-5 months are enormously important from a political perspective. With: a) the average mid-term House gain by the minority party clocking in at about 30 seats: b) the Republicans now holding only a 24 seat edge; c) the near-certainty that if the lower chamber flips, they will bring articles of impeachment against Trump; and d) the empirically demonstrated high correlation between mid-year performance and mid-term elections firmly in view, a lot is riding on both economic and market fortunes between now and, say, Labor Day. Both sides know this, and what I see is a pitched battle between parties, with one of them seeking to gun the economy, while the other seeks to stifle it. One thing is certain: the markets will react to these skirmishes.

But pitched battles, as indicated above, are part of the human condition, as is our propensity to endure. In the end, history shows that the honors devolve to the most stalwart among us. If the pattern holds, then the American Welding Society may well outlast either Walmart or Amazon, and if so, we might do well to take some joy in this outcome. Next year marks their 100th of glorious operation, and I’ve been looking around for details about their Centennial Jubilee. Their headquarters, somewhat improbably, are in Miami, FL, and come what may, I’m going to try to attend the festivities.

For reasons that should be all too clear, I hope to see you there.

TIMSHEL

Yes, Alpha-Beta City; not Alphabet City, but perhaps we’ll begin with a word about the latter. For the under-initiated, it is a term generally associated with an area on the Lower East Side (bounded on the North by 14th Street and on the South by Houston) of Manhattan, where the Avenues are bestowed alpha, as opposed to (as is the case with most of the rest of the borough) numeric, monikers. The marvelous conveyance of Google Maps offers the following illustration:

Sorry; Couldn’t Resist Throwing in The Satellite Image Next to the Regular Map:

For eons, the neighborhood has had the rep of being one of NYC’s grittiest (and thus the hippest), and knowledge of the area (to say nothing of actual residency) has always been a goal to which locals seeking Street Cred have aspired.

It is comprised of 4 (more or less) North/South thoroughfares, named in ascending order – from West to East — as Avenues A through D. I was discussing this hood with a very close friend (with whom I was having lunch at a quaint restaurant in the anti-Street Cred locus of Fairfield County, CT), and he informed (or perhaps reminded) me that, back in the douce, hipsters hung the pseudonyms Aware, Beware, Caution and Death on these roads.

Perhaps those handles remain in place to the present day. I don’t know, because, on the Street Cred scale, I cannot at present rate myself anything higher than a Gentlemen’s 5.

As I never lived in Alphabet City, I might not even place myself at that lofty threshold if it were not that for a few months in 82/83, I dated a girl: Laura, who was actually a resident. She was a cute, lively little thing, and one of the main points of mutual attraction was the fact that we shared identical dates of birth (11/04/59). She also graduated from the University of Wisconsin at the same time I did, but I didn’t know her there. We were introduced by mutual post-graduation eastbound Badger acquaintances. At the time, she was pursuing a dream of being a punk photo journalist, and her career had progressed to the state that she worked the counter at Grand Central Camera – adjacent to the eponymous train station. I, of course, was cooling my heels Uptown, and slogging forlornly through the first semester of the Graduate School of Economics at Columbia University.

Still and all, there was something about her. She never came to me, but a couple of times a week, I’d take the Lexington Avenue Line down to St. Marks, and trudge up the six flights of stairs to the cold water, two-bedroom flat that she happily shared with about a half a dozen strangers who had become her roommates.

The entire setting was not, shall we say, conducive to the bloom of romance, and I’m not gonna lie: the street in front of her building was an open shooting gallery that frightened the living daylights out of me. But there she was, all 95 pounds of her, entering and exiting at a whim all hours of the day and night.

In the end, if memory serves, she dumped me. And who could blame her? What was a could, a big, goofy L7 grad student offer to a hip downtown chick such as herself?

But I didn’t come here to write about Alphabet City. I’m much more interested in the topic of Alpha-Beta City, that psychic purgatory where most of my clients spend nearly all of their waking moments.

As this remarkable January comes to a close, I hear a crescendoing chorus of self-flagulation from a number of investment quarters that, year-to-date, their portfolios are generating negative Alpha. Again for the under-initiated, this refers to a condition when performance falls short of the returns of the market, as adjusted by the net Beta configuration of a basket of securities. To further illustrate, with the SPX having thus far generating a gain of ~7.5%, a portfolio with a Beta of, say, 50% would’ve had to have produced year-to-date performance of >3.75% to be on the sunny side of the Alpha Street (not, for what it’s worth, located in Alphabet City). If your year-to-date gains only rise to the dignity of, say, 3.0%, it implies a cumulative 2018 Alpha of – 0.75%.

Kind of a kick in the head, no?

I’d like to take this opportunity to implore those in this position to temper their self imposed-negative judgment with the higher quality of mercy. Because, you see, this is NOT an Alpha-generating tape. By my reasoning, it would have taken a combination of nearly unachievable clairvoyance and imprudent position concentration to have gotten north of the Alpha Mendoza Line thus far in 2018. I have a few clients who have reached this Nirvana, but even they are skeptical as to how it happened. To the rest I say, cheer up. By way of perspective, you might’ve traded at a -50% Beta this month and produced a loss of 2.0%, and, under the perverse protocols that govern Alpha-Beta City, you’d have generated a positive Alpha of -1.75%.

Would you have been happier under these circumstances?

My point here is that when the broader market is turbo-charged to the upside, it’s wise to dial down your Alpha expectations; capturing a meaningful portion of the Beta ride should be sufficient for your purposes. As mentioned last week, with the Gallant 500 annualizing thus far in ’18 at well over 100%, one needs to make some allowances, as further described below.

First, let’s all agree, once again, that Mr. Spoo is highly unlikely to do a double or better this year, and if we’re correct on that score, then we’re in for, best case, some leveling of valuations in the coming months. The good news here is that while a flatter or (heaven help us) more two-way tape will likely to be dilutive to benchmark returns, all other factors being equal, it should give some lift to that infernal Alpha metric. So cheer up.

Perhaps more importantly, and as has been the case for quite some time now, the extraordinary upside skew of the markets carries the unfortunate but undeniable consequence of causing nearly all standard risk models to to understate forward looking investment loss ranges. As a long-tenured risk manager, allow me to be the first to state that our (on balance) poorly calibrated exposure estimates are littered with extrapolations that the near future will resemble the immediate/recent past. We apologize for this, but for now, I fear, it’s the best we can do. As a case and point, somehow, some way, the year-to-date Downside Deviation of the S&P 500 has managed to undercut last year’s microscopic thresholds, and now clocks in at a barely pulse-registering ~4.0%. This lack of negative price action works its way into our analytics in both direct and stealth fashion. And as long as this suppression continues, well, again, your Vols, Implied Vols, VaRs, Betas, Gammas, Deltas and such, are all distorted to the downside.

On the other hand, and as I’ve conveyed to many of you personally, I don’t necessarily see any signs on the imminent horizon of risk normalization. True, some of the macro numbers (GDP, New Home Sales) are coming in a little squishy, but earnings have been nothing short of a blowout. With 24% of SPX Companies reporting Factset is showing record Upside Revenue surprises:

Earnings are on a similar trajectory. A quarter of the way in, we’re looking at +12%. All 11 Industry Sectors are participating, and even those few laggards that are missing estiments are showing on average no worse than flat prices over the next couple of trading sessions.

This is not a tape, lofty valuations notwithstanding, that I’d wish to be short.

Yes, there’s other weird doings about which to concern ourselves, none perhaps so perplexing as the apparent gravitational pull of the earth on the USD. We all bore witness to our Treasury Secretary’s perhaps ill-advised (though unambiguously misinterpreted) comments about the relationship between FX levels and trade, and let’s just agree they weren’t helpful. But I don’t worry too much on that score. Nobody wins if the dollar collapses, and my guess is that it not only stabilizes, but perhaps regains some of its vigor in the coming months.

The big action this coming week will divide itself between earnings and a good deal of information to process in domestic Fixed Income markets. With respect to the latter, there’s the odd chance that bonds may move on whatever the Trumpster has to say at his (prematurely vilified) State of the Union Address. The following morning, our Treasury will announce its near-term funding plans, with the expectation of plans to dump an unusually large supply of new paper on the markets. That afternoon’s (Wednesday’s) FOMC meeting does not portend (at least according to the consensus) another rate hike, but it will mark the passing of the gavel from Chair Yell to Chair Pow, and will bear watching on that score alone. By Friday morning (Groundhog Day) we’ll not only learn how much winter we have left, but will also get our first look at the January Jobs picture.

That’s an awful lot of bond news to digest in a single week.

And on the whole, there’s no denying that here in Alpha-Beta City, strange days have found us. My best advice is to filter out the noise, make your trades based on your best, if necessarily fallible, judgment, and let the Alpha chips fall where they may. I would perhaps size things a little bit smaller – if nothing else as a nod to the above-mentioned current tendency of risk models to understate potential loss. But please don’t try to predict a turn (I promise you that you have no edge there), and while we’re at it, it would also be wise to dampen expectations with respect to the efficacy of hedges.

I mean, from what I understand at any rate, even Alphabet City has fallen victim to inexorable gentrification. The shooting galleries are gone. Entrepreneurs have renovated the walk ups (and jacked up the rents), and on the whole, the neighborhood now looks indistinguishable from virtually every other posh and largely unaffordable section of Manhattan.

And as for Laura, I never caught up with her again. About a year after the above-mentioned dumpage, I do recall walking in to Grand Central Camera and asking for her. She was nowhere to be found. Perhaps she realized her dreams, and I certainly hope she did), but probably not.

Maybe, on November 4, 2019, we’ll rendezvous one last time to celebrate our 60th.

After all, stranger things – inside and outside of Alpha-Beta City — have happened.

TIMSHEL