Or should I ask “qui est Robespierre?”. We probably should start with the latter, asking who this Robespierre character is. Or was. And I must mention, by way of full disclosure, that I’m a pretty fanatical Robespierre groupie. His name, Robespierre, Maximillien de Robespierre – elegantly trips of the tongue. Save for the fact that he’s been dead for 9 generations, I’d probably drop all of my present affairs and follow him on tour.

Further, though he didn’t live into the 19th Century and the associated advent of photography, you’ve got to admit he takes a nice portrait, right?

The six or seven biographies and historical novels I’ve read about MdR suggest that he liked this sort of thing, being captured in portraiture that is. From this perspective (and not others) he was something of a late 18th Century Paris Hilton, and in fact rose to fame and infamy in the city named after America’s former favorite social butterfly.

He came from humble beginnings (the de in the middle of his sir-name notwithstanding), and even at the height of his power, he lived in a single room above the stables of a local carpenter. He held no official title greater than that of one of many deputies to the Third Estate, formed in hostile response to King Louis the 16th’s unfortunate decision to disband the senate a couple of years prior.

He never married, amassed no fortune, and in general had no worldly objective other than to advance the revolution he didn’t start, but led for a brief time. Back in turn-of-the-19th-century France, they had their reasons for revolting. The peasants were starving; the farms lay fallow; in the cities, there were almost no staple provisions and what foodstuffs could be secured were sold at obscenely high prices. More than anything, they wanted a Constitution, something akin to the document recently drafted across the Atlantic Ocean, in the United States whose own revolution they had financed.

Meanwhile, Louis XVI and his even more famous wife (Marie-Antoinette) partied it up in far flung locales such as Versailles, often with the uber-incestuous European Royalty (MA was the sister of the Emperor of Austria). Louis doesn’t seem on the whole like a bad fellow, but it appears that he was too occupied with his own grandeur to devote much attention to the welfare of his subjects.

In light of all of the above, the French Revolution wanted no fortune-seeking partiers, only zealots, to lead its cause, and Robespierre fit the bill perfectly. He worked day and night, fueled only by his obsessive commitment to the success of the movement.. For these reasons and others, they called him The Incorruptible. And, for about 18 months in the 1790s, his every utterance was the rule of law in France. One of his first major acts was to separate the King’s head from his carcass – without so much as a trial. It was Robespierre – The Incorruptible – who argued successfully against due process for Louis, suggesting that to hold a trial for the King was to imply that the entire French Revolution stood on shaky ground. The revolution was a war, he argued, and the Crown was the enemy. To submit the case to a court of justice was to unthinkably suggest that the Revolution itself might be founded on flawed premise. And after that speech, there wasn’t much left to do but lop of Louis’ head.

Not long after, through his guidance as a member of the ironically-named-but-indisputably-omnipotent Committee for Public Safety, it became a capital crime to take any action not deemed to advance the cause of the Revolution, or even for thinking counter-revolutionary thoughts.

The streets were soon awash in blood. Hunger and pestilence increased. Opportunistic foreign powers began dreaming of seizing France for their own, and moving their armies into a position to do so.

I’m not the first to suggest this, but with each passing day, the modern Progressive Movement appears to be more closely adhering to the script set forth by Robespierre and his cronies. The 116th Congress, in two short months, has introduced bills to impeach The President, is hitting its marks in admirable fashion, as just over the last several days, it has introduced legislation to, remove the health care system from the filthy claws of the private sector, eliminate the usage of fossil fuels, and to impose a redistributive wealth tax. All of these efforts have evolved in eerie reminiscence of the Jacobin Clubs where the modes of operation of the French Revolution were fomented. Late last week, published reports told of behind-the-scenes meetings where House Democratic Caucus members were instructed to either vote as they were told, or find themselves on THE LIST. Ah, THE LIST. Robespierre would be proud.

But the question remains: who is today’s Robespierre? I’m having a difficult time finding a suitable Progressive to fill his literally small but figuratively enormous shoes. Liz Warren had a chance but probably blew it by misrepresenting the racial origins of her forebears. Kam Harris will have to live down her rise to the pinnacle of California politics while being Willie Brown’s side piece. The more we learn about Bernie, the more his Incorruptible nature is given the lie (see the Burlington College closure episode for further details). Booker? Maybe, but I wouldn’t look too closely under the hood there. Pelosi? Married to an uber-wealthy SF developer. Gillibrand? A documented political opportunist. AOC? Probably the favorite at the moment, but she has a long distance to travel before one can place her in the pantheon violent revolutionaries. I will admit, however, to admiring her efforts to gain this status.

But the modern-day Jacobin engine roars forward, grinding up most everyone that dares to get in its way, and as for me, I am rather enjoying the spectacle. It’s certainly entertaining and enlightening to learn that all employees of organizations that perform such tasks as searching for, extracting, refining and distributing fossil fuels, developing, obtaining regulatory approval and dispensing pharmaceutical medicines, underwriting the health care costs of the populous (at considerable risk) are enemies of the people. Who knew? Progressive politicians who describe those with differing viewpoints (including the President) as racists, bigots, fascists, Nazis, etc. are contemporaneously bemoaning our loss of freedoms and issuing dire warnings about our rapid-fire transformation into a totalitarian state. The irony of their crescendo of verbal assault and descent from decency bearing no consequence to them (on balance it accrues to their benefit) is apparently lost upon them. Can’t you see? Trump is Hitler circa 1933? Wake up! Get Woke! Before it’s too late! But I doubt that Hitler would’ve allowed even the tiniest fraction of these sentiments to be expressed in any forum whatever, back in the ‘30s (to say nothing of the early ‘40s). Just the other day, former Vice President/presumed Presidential Candidate Joe Biden found himself castigated for his suggestion that his successor (Mike Pence) might be a decent guy. Joe wasn’t born yesterday. Or even the day before. He immediately walked back this pleasantry.

You can put me in the camp that believes that all of this is tantamount to a modern-day Progressive circular firing squad. And I can only hope it continues on for, say, the next 6 quarters. Because that’s about the only way to ensure that some of these nutty ideas, which would not enhance, but rather would destroy, freedoms, and which would certainly destroy the economy, can be properly vetted and rejected.

And I suspect that Mr. Market agrees with me. Our indices lurched forward to yet another in the longest string of weekly gains in more than a generation. And I think that we might owe a perverse debt of gratitude to the Progressive Caucus for these happy tidings. Had the left side of the political aisle acted with more discipline, patience and decorum, investors might have had more to fear, might’ve felt less sanguine. As a case and point, let’s wind the clock back to December, before the 116th Congress placed its collective hands on the bible. If we had awakened midweek to the spectacle of the President’s lawyer/fixer slinging as much mud as he could on his former boss (under oath in Congressional testimony), and contemporaneously learn that the President himself had abruptly walked out of a much heralded summit with a rogue nuclear nation, what would’ve happened in the markets? My guess is that they would’ve sold off and hard.

And I think we can in part thank lefty politicians who dominate the airwaves and are in an apparent frenzied struggle to outflank one another in terms of hysteria/ideas to destroy the fruits of our free society

So the markets rallied, albeit with reduced vigor from recent patterns. It is my sad duty to report that the Gallant 500 is currently annualizing at a beggarly 97%, and that it may even slow from here. Earnings are over, and the macro signals are mixed. Confidence measures are at all-time highs, and GDP revisions came in above estimate, but inflation is tepid, as is manufacturing, and housing is downright impaired. The Fed, however, remains in our corner, and all I can say is thank heaven for that.

Those searching around for something about which to fret should consider that the Atlanta Fed’s introductory Q1 GDP estimate has plunged to microscopic depths.

If you’re having a hard time seeing this figure, it’s the single point in the southeast corner of the graph, and it clocks in at 0.3% — a nosebleed-inducing drop from the ~3.0% registered across 2018.

But I reckon we’ll see. The estimate is likely to move around a bit before the Commerce Department weighs in officially at the end of April.

Among other benefits, by then that lonely dot in the lower left hand corner will have morphed into a more visually pleasing time series.

I still think this here market could use a breather, and, as a further indication of this, I note that the global bond prices have backed off a bit, with yields rising in virtually every jurisdiction. The U.S. 10 year is now at a robust 2.75%, JGB rates have risen almost back to the Mendoza Line of 0.0% and the Swiss now only want a skinny 14 basis points/year for the purposes of using our money. Rising yields in a slowing economy at the end of an extended and improbable rally, combine, at least in my judgment, to point the equity valuation arrows nominally downward.

Meanwhile the search for a modern-day Robespierre continues. The man himself, after ruling the roost with such violent panache in 1793, found himself escorted to the guillotine in the summer 1794. But then again, pretty much every member of the Committee for Public Safety met the same fate before the turn of the century. Let’s all agree on one thing, though, shall we? Max de Robe had one heck of a run for a while there, and the modern day Jacobins would do themselves no harm by studying his example – all the way to its violent conclusion.

TIMSHEL

This week, I’m going to start with a digression to my standard weekly digression and ask y’all to first give it up one time to Peter Tork: the Monkees, er, bassist that checked out this past week. Against all odds, Tork was actually a stone cold baller, the fact that he rose to fame as part of a made-for-TV bubble gum boy band notwithstanding. I won’t delve into the whole history, but let’s just say that Tork, as he proved over subsequent decades, could actually play. But Don Kirshner, the media impresario who brain-childed the band as a takeoff of the Beatles’ meandering, illogical, but commercially gargantuan feature film “Help”, had other ideas. Kirshner didn’t want the music Beatles; he wanted the goofy guys doing handstands on the beach. So he hired some photogenic lads to front for a group of uber-legit musicians and songwriters, the latter roster including the magnificent Carol King and Neil Diamond.

Actual band members, most notably Tork and Liquid Paper-scion Mike Nesmith, were aghast when they found out their musical contributions were not wanted. And, bravely, they broke away from Kirshner (who went on to form The Archies – famously stating his preference to deal with cartoon musicians that wouldn’t talk back to him), and gave it a go on their own. The results were a couple of records, which, while perhaps failing to rise to the heights of, say, Electric Ladyland, were legit contributions to the rock and roll catalogue. The best of these is probably “Head”, written and performed by the Monkees themselves, and, if you haven’t done so already, you’ll do yourself no harm in checking it out. Say what you will about the group, they did once headline a tour that also featured an ensemble fronted by a Seattle guitarist named Jimi Hendrix.

And now, ladies and gentlemen, let’s transition to our main digression. Americans who passed their elementary school years during the ‘60s were under a full-on assault by the Monkees. They were everywhere: on TV, on the radio, in magazines, and perhaps most ubiquitously of all, on lunchboxes. Now, I don’t want you to get the wrong idea; it would’ve been an unthinkable assault on burgeoning manhood for me or any of my male friends to bring a food container bearing the images of Davey, Mickey, Mike and Peter to school. We all actually shaded towards the equally popular Batman to carry our mid-day meal. But the contents were always the same: an Oscar Mayer bologna sandwich, topped off by one or more individually wrapped, single slices of Kraft American Cheese.

And if you’ve been paying attention, you know that it has been a bad week for Krafts of every stripe. And it’s their own fault. In order to understand this, we must traverse 30 years of history. In 1989, a then-still-somewhat independent Kraft Foods Corp acquired Oscar Mayer, and this made me believe that all was again right with the world. In a vertical integration move that even John D. Rockefeller Sr. would have admired, the contents of my favorite sandwich were now stacked on top of one another — under a single corporate umbrella. Good and Good. But now wind the clock forward a generation — to 2015, when Kraft Foods completed a merger with the H.J. Heinz Corporation, forming an unholy, unsavory cuisine corporation under the moniker of Kraft-Heinz, Inc.

I was beside myself; tried to warn Management against taking such a fatal step. Because the divine combination of Oscar Meyer bologna and Kraft individually wrapped single slices (provided you removed the latter’s wrapper), wanted nothing to enhance it, and certainly not the intrusion of a ketchup company. I viewed the very concept of bringing ketchup into the equation to be not only an assault on the senses, but an insult to humanity itself. Moreover, I feel that Kraft had missed perhaps the mother of all business opportunities by virtue of its failure to rescue Hostess Brands, which in 2012, was forced into bankruptcy. Had they taken this bolder, more god-like action, they would’ve completed the sweetest lunchtime symphony of all, because they would’ve then not only owned Wonder Bread (the preferred outer layer of the divine sandwich of my youth) but would also gained control of the Twinkie that provided the coda to my lunches of yore.

But instead, they went the ketchup route, and on Friday, Kraft Heinz announced a write-down to the tune of $16B on these assets. Investors reacted with justifiable wrath, selling down the Company’s shares by more than 25%. So bad was this news that it actually kneecapped the Q4 earnings of the mighty Berkshire Hathaway, the fact that the write-down not hitting the tape until Q1 notwithstanding.

Like I said, not a banner day for Kraft-Heinz.

And for Kraft in particular, because, on the same day that ticker KHC issued its tape bomb, a gentleman of the same name, and one who happens to be the owner of the Super Bowl LIII-winning New England Patriots, got busted on a prostitution solicitation rap that is, according to published reports, just in its embryonic stages, and which also snagged a guy who spent decades in the C-Suites of both Morgan Stanley and Citigroup.

But to all of these bad tidings market participants gave nary a second thought, as our indices roared to their 9th straight week of gains, the best such streak since 1964. For those following my annualized return tallies, the 2019 standings are: Gallant 500 +114%, Captain Naz +118% and Ensign Russ +214%. In other words, the great, giddy rally continues. But, one wonders, for how long?

I’m going to stick to my guns here and suggest that: a) at best, the engines are bound to slow down a bit; and b) for the good of investors, perhaps the sooner they do so the better. Like I mentioned last week, the best year that even the Naz has ever recorded was 89% in 1999, and like I also mentioned in that note, this ain’t 1999.

Heck, I don’t even think it’s 1998.

Absent a few stragglers, Q4 earnings and guidance are now fully in the books, and while they might have been good enough to induce some relief, they were hardly gonzo. And the rest of the year is looking pretty bleak from that standpoint as well. Full-year profit forecasts are now measurably below the socialized Mendoza Line of $170/SPX Share, but, as indicated in the following chart, the response has been “who cares?”:

Well, we may find out this coming week (who cares, that is), which will be an interesting one from an information flow perspective. Chair Pow is scheduled to riff off to the Senate Banking Committee on Tuesday, and here’s hoping that he doesn’t modulate – change keys – from his current, docile stylings, because that could mean real trouble. Particularly as, while the spotlight shines on him, the Treasury Department will be issuing another mindboggling $200B of paper across the maturity curve.

On balance, the macro data calendar is light; for reasons not entirely clear to me, the Feb Jobs Report drops on the second (3/8) rather than the first Friday of March. But I urge those thinking that the week will end on a quiet note to bear in mind that Friday ushers in two nominally important deadlines: the end of the suspension of the debt ceiling and the stated point at which, absent a deal (or significant progress thereto), the U.S. is scheduled to drop a pant-load of tariffs on the Chinese.

In terms of the former, there’s no particular reason to anticipate the date with any horror. Yes, the suspension of the ceiling will be lifted, but the consensus of the obtuse suggests we won’t actually breach the debt limit until later this Spring, at which point we can expect our elected officials to act in the spirit of sobriety and cooperation that has been the early hallmark of the 116th Congress.

And, in all likelihood, March 1 will come and go without any Sino-tariffs going into effect. Both sides appear to be itching to do a deal, and whatever else is going in in China, the anointed ones seem to be of a mindset to goose capitalistic economic activity:

If I’m reading this chart correctly, it was indeed one helluva January Jump. And to me, along with other steps taken in the Chinese Credit Markets, it suggests that Chair Xi is feeling some pressure to boost the recently flagging economic fortunes of the Peoples’ Republic.

It also suggests that we may catch wind of a broad framework for a trade deal even before the 3/1 deadline transpires, and that alone could give this here amazing rally a significant incremental boost.

However, on balance, I’d urge caution and prudence here. I have no particular objection to you’re playing around a bit, but would on the whole recommend that you embrace new risks in single slices, as opposed to going off whole hog.

And all of this is making me very hungry. And it’s nearly lunchtime. So I reckon you know what I’m about to do. The Oscar Meyer-Kraft-Wonder Bread trifecta awaits me, and if all goes well, I will indeed reward myself with a Twinkie for dessert: a step I can take due to the beneficence of two private companies: Flower Foods and Apollo Global Management, who rescued the baked goods portion of my culinary trip down memory lane from oblivion.

Finally, as might be expected, I’ve also got the Monkee’s “Head” teed up on Spotify. And as I listen and dine, I will hoist a whole-milk toast to my main man Peter Tork, who was not a clown, but a bona fide musician. I’m thus feeling very good about my next steps, and hope that with great care, you will place yourself in a position to feel the same about yours.

TIMSHEL

Runaway train, never coming back,

Wrong way on a one-way track,

Seems like I should be getting somewhere,

Somehow I’m neither here nor there

— David Primer (Soul Asylum)

Let’s begin with a brief as possible sojourn into passably edgy Early ‘Nineties Alt Rock, which, I tell you fairly, is not my particular jam. So let’s get this over with. Our title track comes to you by way of the Minny-based outfit Soul Asylum, amounting perhaps their only recognizable song and certainly their only hit. I’ve kind of cottoned to the riff on my guitar and think the boys did a good job here; that’s about it.

But that ethereal, eternal theme of a runaway train seemed like as good a place to begin as any, so let’s do it. Begin, that is.

I am delighted to report that after one ripper of a week, into which we entered through the dark tunnel of my published fears that our equity indices might be losing momentum and not even produce the low end of triple digit returns this year, we’re back on track. The Gallant 500 has re-fired its engines — up to an annualized rate of >124%, Captain Naz is revved up to 136%, and that often-overlooked super steamer powered by Ensign Russ churning at a rippling 224% rate.

On balance, we can therefore perhaps state that it was a good week for bullet trains, but not unilaterally so. Shortly after my CA high speed rail project screed, newly minted Governor Gavin Newsome announced a decision to scrap the effort – at least insofar as it aspired to connect by hyper-locomotion those quaint little villages of Los Angeles and San Francisco. All, however, is not lost. The initiative will shoulder on with its plans to build a bullet between the thriving metropolises of Merced and Bakersfield. As the Governor pointed out, this will be a major boon to the misanthropic residents of that corridor. Now, I’ve never had occasion to visit Merced, but I was born not too far from the field of bakers, and have kicked it more than once with my crew there. My biggest memories are of two dominating forces: auto racing and churches, big-a$$ churches. I take great comfort in the fact that sometime next decade, the residents of these two urban colossuses (and those of points in between) can speed their way to a NASCAR event or an old school revival rally. I think, once some track is laid and the engines mounted, ambitious Merceders may even be able to wake up on a Sunday morning, take in some old time religion, catch a race, and make it back home for family dinner.

The other signal event of the week, of course, was the decision by the Almighty Amazon Corporation to abandon plans to establish an HQ2 (or HQ2a) in the Long Island City Section of Queens County, NY. This, of course, was viewed as a great victory by the same political forces that envision a Shangri-La of high-speed electronically powered trains across this great land of amber grain waves — so effective, comprehensive and efficient that it will remove the blight of airplanes infecting our spacious skies. That some of this track may force its way through majestic purple mountains and dissect/disrupt fruited plains is a subject that has yet to be addressed, but I’m sure they’ll get to it sometime or another.

Now, I will cop to sharing prog-like squickiness about the whole AMZN HQ2 thing, which featured a lot of promises from Team Bezos, and caused at least a hundred cities to come begging with treasures to play host to the one-time bookselling concern — only to be forsaken in favor of the two municipalities where they were best positioned to expand their considerable power (NY and DC). As such, a certain feeling of sangfroid is nothing about which any of us should be ashamed. In fact, the whole thing reminds me of the wholesale heists pulled off by innumerable sports teams who have forced their towns to gift them glittering new stadiums and/or arenas, lest their capitalistic extorters, with crocodile tears in their eyes, follow through with their threats to pack up their squads and move them to the embracing arms of another jurisdiction. The worst of these offenders, at least to my knowledge, is the New York Yankees, owned of course by the billionaire shipbuilding Steinbrenner family. They demanded a cool $1B from us Empire State taxpayers, which of course turned in to more like $2B. Bear in mind that this was 2008, when NYC was awash in fear. I haven’t been to the New Yankee Stadium, and even resisted the temptation to turn up there when my Wisconsin Badgers put their 2nd straight beat-down on the Miami Hurricanes in the Pinstripe Bowl. I had already been hating on the Yankees anyway, and had been hating on them for quite some time but every time I drive by that stadium, the dubious gift to these fat cats (to which I contributed material amounts) reminds me why this is the case.

Still and all, I can’t completely fault Amazon for grabbing with both hands what was theirs for the taking. And New York would’ve in all likelihood seen a speedy return its $3B investment. But as I mentioned last week, we must render unto Bezos what belongs to Bezos, and it was a pretty easy and slick move on his part to convey the message that, deal notwithstanding, if you don’t Amazon to come, it will stay away. Some businesses and consumers in that forlorn section of Queens are of course left holding the bag, but hey, they’ve got the promises of the dream girl that represents a contiguous district in the Boro to carry them through.

Perhaps at greater issue is the potential joining of a battle whose time for action is, if anything, overdue. We have all watched with great discomfort the dubious alliance between America’s most powerful corporate concerns and the increasingly self-righteously empowered progressive left, and wondered about the elephant in the room. In an arrangement that, writ small, resembles the 1939 treaty of non-Aggression between Nazi Germany and the Soviet Union, both sides know that they must at some point do deadly battle, but both realize they’ll be better to defer hostilities to future points of their own choosing. So, as long as major TMT companies parrot the appropriate progressive orthodoxy, hire Chief Diversity Officers and the like, and underwrite progressive causes with their seemingly unlimited supply of capital, as long as prog groups (and I’m not referencing Emerson, Lake and Palmer) are recipients of these financings and can use the forums to advance their messages, the uneasy alliance sustains itself. But to my way of thinking, it only sets up for a bigger showdown between these forces down the road. Those Big Tech companies are capitalists with capitalistic agendas, capitalistic modes of operation, and as much power to advance their schemes as anyone this side of John D. Rockefeller, Sr. They are headed on a collision course with the redistributionist dreamers in green fairyland, and it will be quite a spectacle to observe.

So the CA bullet train goes from nowhere to nowhere, and Amazon, while clearly going somewhere, will not point its runaway train towards NYC, so no high speed train from Seattle to Long Island City is at the moment urgently required.

And meanwhile, the economic signs at the switching stations of the landscape are flashing not green, but yellow. Recent macro data (albeit likely skewed downward by that tragic, five-week partial shutdown that heartbreakingly imposed 5-week paid vacation on about 800,000 bureaucrats) has shaded toward the dismal. The delayed December Retail Sales number of -1.2% was so bad that it has many economists smelling some sort of fix. Of course, by now we should be already processing the January report, but that number is delayed till 2/25, placing those interested in the odd position of being compelled to review two monthly reporting cycles in the space of two weeks. And this time, there’s not even a survey (at least yet) by which to benchmark consensus. On the other hand, if the December bomb was indeed an empty payload, we’ll know by virtue of the contents of the January print.

Meanwhile, the Inflation numbers came in like zombies, and it looks like the GDP juggernaut is feeling some significant gravitational pull:

Maybe it’s a Super Bowl hangover, spurred on by embedded cranial images of Adam Levine’s ink, but the Atlanta Fed’s Q1 projection has dropped by some 40% in less than a week.

I intend to pay attention to these trends and believe it would do you no harm to do the same.

Investors, however, and as is their prerogative, are cheerfully ignoring these tidings. The Q4 earning season is entering its last innings, and, as indicated below, it’s been many a quarter since capital allocators have taken in bad news in such forgiving fashion:

The implied message from investors is this: don’t worry if you bitched up the quarter. We know you did your best and let’s go get ‘em for the rest of 2019 and beyond.

I must admit: this attitude of charity is a bit unique in my experience, and I have an uneasy feeling that it won’t last forever. My read is that there’s a good deal of pressure on CEOs to deliver over the reporting cycles that confront them in the near term.

And, much as we’ve enjoyed contemplating a set of equity benchmarks projecting a more than doubling over the full course of 2019, it may behoove us to look at the hard facts of the current rally. The best annual return ever recorded by the Gallant 500 was 46.6%. And that was in 1933, which few of you likely remember, but (trust me here) was not a particularly wise time to be fully invested. It has only exceeded returns of 30% a handful of times since then. The newer Naz clocked in at 85.6% in 1999. But whatever one can say about current conditions in the global capital economy, I think we can agree on one thing: this ain’t 1999. The party may not be over but it’s well past the point of its introductory surge.

So, best case, the near-certainty is that the equity complex bullet train will slow, stop, or even reverse across the next 10.5 months. It could still be a very good year for investors, but even now, I suggest y’all ask yourselves the following question: back on January 2nd, if you could have locked in a full-year 2019 return of 10.72% on the SPX, 12.62% on the NDX and 16.36% on the Russell 2000, would you have taken it? Thought so. Well, that’s where we are right now. And I ask you to take this into consideration in your determination of risk profiles on a going-forward basis.

But on this wintry weekend, let’s hail the bright side. The Fed is on ice, the Chinese appear willing to deal, and, wonder of wonders, the Federal Government is even funded. I recall that a couple of weeks back Pux Phil failed to see his shadow, foretelling of a short winter. And, from a market perspective, he may be right; the green shoots of February are indeed a welcome sight to these decaying eyes of mine.

And then of course we’ve got those trains coming. Big, beautiful trains, all painted in emerald hues. So let’s forget Soul Asylum, shall we? How could we possibly be going the wrong way on a one-way track? Yes, we should be getting somewhere, and if Team Bezos is any example, we may indeed be neither here nor there. But we’ve been there before, and will be again. It falls upon our lot to deal with all of it.

TIMSHEL

Come on, come on down, Sweet Virginia,

Come on, come on down, I beg of you,

Come on come on down, you got it in ya, uh huh,

Got to scrape the sh!t right of your shoes…

— Mick and Keith

Exile on Sane Street? Brain Street? Blame Street? Wall Street? It matters not. This week, we pay tribute to what is widely acknowledged to be one of the greatest records ever produced for public consumption: The Rolling Stones’ “Exile on Main Street”. Some, including yours truly, believe that this album marked the high point of “the world’s greatest rock and roll band”. Mick and Keith were at the height of their artistic powers, Charlie was in the pocket as always, and Mick Taylor had found a magnificent (if temporary) niche in the ensemble, as a replacement for the luminous but misanthropic Brian Jones. They had their moments after that. The follow-up: “Goat’s Head Soup” was almost as good. But from there, with the passage of time, with each new album release more banal than the last, their increasingly diminished edginess became more difficult to overlook. While I love the lads, I think it’s mostly fair to say that they’ve been mailing it in for the better part of 35 years.

We feature Exile for two reasons. First, the title derives in part from the reality is that it was recorded in the South of France, as band members, tired of paying 95% tax rates to Her Majesty’s government, and justifiably concerned about associated wealth seizure, decamped to more that more favorable financial jurisdiction. In other words, the Stones had become tax exiles, and, given the general tone of the fiscal debate in this country, I felt that a featuring of the topic was, shall we say, timely. As this note goes to press, the 116th Congress and other sub-legislative bodies are busy outflanking themselves as to who can catalyze the biggest cycle of tax exodus achievable. There are proposals to set the top income levies at 70%, only to be outdone by nostalgic souls who would like to revert back to the post-WWII top bracket of 90% (which no one paid due to myriad loopholes that no longer exist today). As referenced in recent posts, one truly energetic (though identity challenged) senator/presidential candidate has floated the idea of a wealth tax – one that is not likely to gladden the hearts of the paymasters that are needed to fund her desired move to 1600 PA Ave.

And there are lots of ideas as to how to use this gusher of new money that would presumably roll in — unimpeded from eager high earners/fat cats who never really cared about themselves (only wanted to help the less fortunate), and as managed, of course, by selfless public servant who have no private agendas and who would no doubt spend it with flawless efficiency. We can rebuild every structure in America! We can offer a nice little stipend to those unwilling to work! Best of all, we can replace fossil fuel- hoovering cars and airplanes with a network of high speed trains that will get anyone anywhere they want to go in a jiffy, at lower personal expenditure, and at great benefit to society and its component parts (i.e. humans).

What could possibly go wrong? Well, to begin with, the high-speed rail crew may want to take a look at the Cali bullet train project. 10 years into the effort, the Cali bulleters have burned through $10B, but here’s the good news: the first leg – that uber-dense, car-choked stretch of land between the thriving hubs of Madera and Bakersfield – may be ready to actually transport some passengers by 2025, some 17 years after the launch of the initiative. Yes, it may be ready, but here’s a risk management tip: I wouldn’t bet the ranch on it. If one cares to look even further back into history, to the construction of the Interstate Highway System in the 1950s, one sees many thousands, tens of thousands of homes and businesses being uprooted. Can you imagine what it would take to build a train system from any Point A to any Point B on the map today? In these troubled times, when a stray word, a questionable look, and any minor inconvenience spawns a pant-load of lawsuits, the only job creation I can envision associated in bullet train fairyland is an infinite amount of billable hours for the future attorneys of this great nation.

Oh, even now I can feel the flames.

All of which brings us to our second motivation for our Exile theme. Across the great divide, the rhetorical flames perhaps burn hottest in the Commonwealth of Virginia, Sweet Virginia, for whom the best song on the Stones’ best album was named. I won’t extrapolate overmuch here, other than to say that yes, you got it in ya, and that you GOT To scrape the sh!t right off your shoes.

But if investors are feeling the fires in terms of any of this, they’re not doing much to show it. Equity markets did indeed cool down a bit over the past few sessions. It was by and large a flat week for U.S. indices, and it saddens me to report that this stasis leaves the annualized return for the Gallant 500 at a beggarly 105%. On the whole, however, I find the price action encouraging, as, particularly late in the week, dark forces were clearly attacking it, with little to show for their efforts.

One asset class that remains en fuego, however, is the global bond market. It would seem that there is no amount of paper that sovereign jurisdictions are able to issue that is not immediately consumed by the fires of global demand. Just this past week, our own Treasury brought to auction an impressive $150B of debentures – across the curve – and it did nothing but socialize a rally at every maturity. The godforsaken Italians put out 30B and the issue was overbid by about 50%. Contemporaneously, JGB yields are again negative – this time out almost 30 years, German Bunds command an annualized return of 0.085%, while their neighbors: the always accommodating Swiss, now charge nearly 40 basis points for the privilege of lending to them. True, French rates are at a near-usurious half of a percent, but then again they do have that whole yellow vest thing to finance.

And the corporate buying binge continues apace. The week brought tidings of (regulatory approval, of course, pending) nuptials between two large southern banks: BBT and Suntrust. This would be the biggest bank merger since the crash, but across all sectors, more are likely to be forthcoming. In particular, I’d be keeping an eye on Big Tech and Big Pharma for revelations of items on their shopping lists.

And what’s all of this telling us? Well, like I been saying, there’s just too much cash sloshing around chasing too few securities. It’s probably true that the global economy is slowing, and, by way of corroboration, one need to look no further than the performance of the Baltic Dry Shipping Index, plunging like a mofo since the summer:

Now, tempting as it is, I won’t try to hold myself out as an expert on the Baltic Dry. Suffice to say that it is a measure of shipping activity and associated costs, and as such, is viewed by many smart folks as a leading indicator of the well-being of the global capital economy.

And right now, as of the end of the first full week of February, it is annualizing at -99%+, which I reckon ain’t so good.

So, with rates on a one way ride on the “down” escalator, and amid indications of an economic slowdown other than acquire market share and/or retire stock, what’s a CEO to do?

We’re most of the way through Q4 earnings and pretty much done with anything about which anyone should care. The projections for the full year of 2019 did drop below the socialized Mendoza Line of $170/share on the SPX this week, and the trend-lines aren’t pretty. But hey, it’s early in the year, and if nothing else, there’s always the above-mentioned acquisitions and buybacks upon which to fall back, now isn’t there?

In terms of the upcoming week, there are two important deadlines to consider, both of which happen to fall on Friday. First, the historic 3-week budget deal struck in January expires on that day. And, while the legislatures are at it, they may want to fold in something that also expands the debt ceiling – perhaps permanently – as our ever-voracious Treasury is expected to reach yet another limit of its statutory borrowing powers – the 10th such milestone this century – on or about March 2nd. The latest headlines indicate that the two sides are yet again at an impasse, but I’m not overly concerned. Because if there’s any topics upon which politicians can overcome otherwise intractable differences, it’s their pressing need to spend borrowed money.

Feb 15th also marks the 45-day hedge fund redemption window, and, like the market rally itself, it looks like perhaps my clients and their peers may dodge a 100-year flood. Absent the post-Christmas equity melt-up (in which most funds at least nominally participated), the deluge did appear to be in the offing. However, I suspect that the numbers now will be more benign, and, from a personal perspective, I will thank God for that.

There’s not much else on the immediate horizon that appears likely to either enchant us or vex us, so I’ll close with a couple of risk management warnings. First, Thursday is Saint Valentine’s Day, and I suggest that those who do not wish to be flamed by their flames take the trouble to adhere to prevailing protocols.

Because, with extreme negligence, they risk complete Exile from Flame Street. And as for the Stones, they remain tax exiles from their native United Kingdom. Mick Taylor is long gone, replaced by the accessible but uninspiring Ronnie Wood. Bassist Bill Wyman, now an octogenarian, also split the scene, replaced by Daryl Jones, who contributes much, but somehow has not been granted band membership status. My advice to them is that the clock is ticking, and that they should amend this oversight before it’s too late.

The band is now said to be working on a new album – their first containing original compositions since 2005, and will take the material out on their 1,223,407th World Tour. But in terms of the locus of the studio, you can bet your boots it will be outside of the reach of Inland Revenue. Mick spends a great deal of time in New York these days, and if he’s following the news, he may be aware that state tax revenues are sinking like, well, sinking like a stone, and that even Governor Cuomo has warned the masses that they can only tax the local fat cats so much before they pull their own en masse Exile from the Empire State.

For this reason and others, it may behoove us to watch them, and pick up some pointers to deal with what may be the menacing reach of our own revenuers – which may be coming to a venue near you, and sooner than you think.

TIMSHEL

I am told that our titular theme bears the same name as a song that evoked some controversy this past holiday season. In my distracted state, as I was watching with horror what amounted to a wholesale plunge in global equity valuations, I must’ve missed it. Yeah, I know the song; it doesn’t fill my pencil with lead, and part of me wonders what the fuss is all about. But lord knows, in this time of heightened sensitivities of every shape and size, where long-established idioms of communication can be transmogriphied into triggers and dog whistles, I don’t wish to offend anyone.

But Oh baby, it’s cold outside. Or was.

Midweek, my home turf of Chicago registered some of the lowest temperatures in recorded history. There’s been a great deal written, said and filmed on this topic, but to me, one fact captures the torturous physical reality of the arctic blast more than anything else. For the first time in its history of world class erudition and scholarship, The University of Chicago (one of my three alma maters), actually cancelled school. Ye Gods, they didn’t shut down during the Blizzard of 1967, and the only reason no classes were held in the wake of the Great Chicago Fire is that the University itself did not exist, would not be formed for another 20 years. Must have been pretty cold on the Midway last week.

And the mercury wasn’t the only thing plunging in the Windy City. The (somewhat) widely watched Chicago Purchasing Managers Index took a polar plunge on Thursday as well:

I really don’t want to make too much of a thing of this. After all, it is Winter, and drops of this nature (as well as those described above) are perhaps nothing more than what the Good Lord intended.

And yesterday was Groundhog Day, which, at least for me (along with Mardi Gras) is the point at which it becomes appropriate to begin the countdown to longer days, warmer temperatures and (dare I mention?) Green Shoots sprouting from the now bare trees and frozen ground.

Meanwhile, temperatures in the market have remained, well, temperate. Our equity indices put up an impressive run last week, to cap off the best January in, well, in quite a while. I must somewhat shamefully admit that after the previous week’s somewhat tepid performance, I was harboring fears that the triple digit annualization rate, so enthusiastically celebrated in these pages, was unthinkably at risk. But this past week renewed my faith, and I’m happy to report that all of our benchmarks regained sufficient vigor to suggest that their doubling or more this year is still in the cards. Winding the clock back to Christmas, each of them looks like a 3x. Or better.

And there’s still better news that I am able to share. Returning to our holiday theme of addition by subtraction, I feel that the miraculous rally is, at this point, justified by the underpinnings of the global capital economy. By way of elaboration, I must dwell yet another spell in the realms of the Ghosts of Christmas (Recently) Past. 5 weeks ago, as we all sipped upon our egg nog (or other strong waters), there was much on the investment horizon to disturb our seasonal tranquility. Earlier that week, the Fed had not only hiked rates, but done so with rude, aggressive accompanying language. The trade representatives of the United States and China were at long daggers. The economy was showing signs of deceleration, and all along the corridors of Wall Street, there was banter not of Peace on Earth and Goodwill to Men, but rather about Peak Earnings and Recession.

There was, in summary, a great deal to vex our troubled souls as we contemplated our return to our investment battles on January 2nd. And somehow, since that point, virtually every catalyst for short-term consternation has broken favorably.

As we entered the last week of the month, the tailwinds were already gathering. Fed rhetoric had softened, as had the dialogue between the Trump and Xi factions. But byy the 2nd full week of January, it was time to undertake the often-arduous task of hunkering down and dealing with what looked to be a very iffy earnings cycle.

All of which led up to the events of last week, by far the most important Monday-Friday series of this young year. And by god it was a good one. The major action began after Tuesday’s close, when Apple CEO Tim Cook took to the podium. His performance won’t go down as one of the Company’s finest, but in the wake of his January 2nd tape bomb letter, the consensus was relief that Apple was able to hit at least the low end of the socialized ranges, that trade-related slowdowns in China accounted for more than 100% of the revenue and earnings shortfall, and that its recently lauded service business had a blowout quarter. Apple, in other words, has yet to complete its Newtonian destiny and hit the ground full stop.

Investors breathed a collective sigh of relief, and girded their loins for a Wednesday session that would likely set the tone on a going-forward basis. It began with Chairman Powell’s FOMC testimony, which in addition to the happy and expected announcement of a “stand pat” on short-term rates, featured pledges to the masses that his crew would be patient in terms of its overall rate normalization objectives. Well, the markets swooned with delight, as well they might’ve, particularly given the cooing and wooing language emanating from the U.S. and China in the wake of Wednesday’s trade summit.

And, just as investors were catching their collective breath after some frenzied buying into the close, the stage was set for the quarterly reporting rituals of Microsoft and Facebook. In terms of the former, the Company generated better than expected results in its cloud and other business service units. Its guidance was similarly encouraging. However, in a perversely encouraging sign of higher expectations for U.S. companies, the response was tepid, and the stock has actually traded down since the announcement.

We now come to the quixotic case of Facebook, which endured about as difficult a 2018 as any of God’s favored should ever be forced to withstand. At the end of the their Q3 earnings call, in one of the most astonishing “oh-by-the-way” events in quarterly reporting history, their CFO actually guided down for the next three years. Well, what a difference a couple of quarters make. The Company announced blowout numbers and told of its gleeful optimism for the future. Investors, of course, responded with an unmitigated thumbs up, and the stock regained over 10% of ground it lost during the dark year of MMXVIII.

The final earnings bark of the week by the big tech dogs came from Amazon, after the close on Thursday. Team Bezos, too, beat every marker but suggested caution in terms of the remainder of MMXIX. But Amazon is Amazon, and we must render to Bezos what is Bezos’s (except, of course, what his soon-to-be ex-wife’s lawyers wrangle out of him). Investors weren’t impressed, but I was. Their macro-critical business unit: Amazon Web Services, in my mind a leading indicator of business sentiment, clocked in with a whopping 45% increase in sales; 61% in Operating Income. Let’s face it, guys and gals, it coulda been a lot worse.

Next week brings the Alphabet Googlers to the podium, and I don’t think they’ll disappoint – at least by much, and, by the time they’re done, most of what we care about in terms of earnings will be in the books. It has not been, by any measure, a blowout quarter, but the SPX looks poised to meet or beat the aggregate, full-year Mendoza Line of $170, and when I asked a number of investment warriors whether, back at Christmas, they would’ve been satisfied with corporate performance as it appears to us today, the answer was a resounding, unilateral yes.

The week ended with a highly gratifying January Jobs Report, which only the dowdiest of Debbie Downers could evaluate with a jaundiced eye. Non-Farm Payrolls blew through the partial government shutdown and spit out more than 300,000 new permanent gigs. Labor Force Participation increased, and even my acquaintance Debbie D was forced to admit that the figures showed no signs that the American economy is grinding to a halt.

So, as compared to all that Christmas agita, we are now operating in an environment where the Fed is on ice, America and China are converging in their trade dance, earnings are showing a stronger than expected pulse, and the domestic economy is chugging along in robust fashion. I feel, therefore and on balance, that the risk overhangs of the market have dissipated dramatically, and that the underpinnings of the V-bottom are by and large justified.

As to what happens next, well that’s another matter entirely. I kind of doubt that all of this good vibe news will catalyze an extended rocket ride; in fact, a strong argument can be made that stocks are at present fairly and fully valued. But I think that the winds have broken favorably in divine fashion and my main takeaway is as follows. Investors now have my blessing to put their full positions on for any name for which they have done the appropriate work and drawn constructive conclusions. Such a statement hardly puts me out on much of a limb; such a blessing, in a better world, should be the rule rather than the exception.

But I haven’t felt this comfortable since the summer. It’s been 6 long months since the macro risk overhangs have been this benign, so when I offer my blessing, it might be well to, well, count our blessings.

I’m also happy to note that temperatures in the Chicago have risen more than 50 degrees since that polar vortex blew threw town. To the best of my knowledge, classes have resumed at the city’s eponymous university. On the other hand, it’s still February, and the frigid gales may not have fully run their course.

The mercury and the index charts could always take a southbound turn. However, while it as always behooves me to urge caution, perhaps we can take a moment to enjoy the gentle breezes while they continue to blow.

TIMSHEL

Let’s begin with some Newtonian physics, and before y’all run for cover, I’m referring to the basic, arithmetically-driven laws of motion; not the calculus he is also purported to have invented. In terms of the latter, I myself (truth be told) have done more spit-balling than spitting mad game, but on the whole have few regrets. Calculus, like many God-given/human enabled tools, can be as complicated or as simple as one chooses to make it. With apologies to Robert Frost, I have taken the road (i.e. simpler) more travelled, and that indeed has made all the difference.

But more pertinent to our present concerns, it is with a mostly serene mind that I report to you that last week’s across-the-board rally notwithstanding, the SPX 2019 annualized return has dropped over the course of the week from 263% to 144%, the NDX’s from 308% to 177%, and Russell 2000’s from 582% to a beggarly 300%.

Annualized index returns, in other words, are adopting the path described by Newton’s proverbial Apple (as driven in part by the sad recent stock performance of the orb’s consumer electronics namesake). Still and all, with year-end gains projecting out well into the triple digits, where I come from, this is referred to as spitting mad game.

In fact, for my money, last week’s action across many markets was the most gratifying thus far this young year. After a pre-MLK Day interval of rocket rides, I believed that the stage had been set for perhaps a modest correction – one which never transpired. When trading resumed on Tuesday, they tried – and failed – to smack ‘em, and tried again on Wednesday morning. But by that afternoon, the Gallant 500 began a regathering cycle that was sufficiently robust as to enable it to end the week above its 50-Day Moving Average, and place it within a stone’s throw of the 100 Day and 200 Day equivalents. Moreover, all of the action transpired within a top-to-bottom range of barely 2.0%. Part of the gospel which I have so long preached to you is that sustained rallies require intervals of quietude – low volatility – to confirm their validity. So this past week’s dull action, ending as it did with indices at or their (holiday-shortened) weeklong highs, is just what was needed, validation-wise. In the (again) Newtonian world of investment, this is the functional equivalent of spitting mad game.

So my hats off to mad game spitting investors everywhere, who showed their cajones, among other ways, by shrugging off even weak performances at the earnings podium, and buying ‘em anyway:

That’s right, friends, even those CEOs who dropped tepid numbers and/or sheepishly suggested that their business outlooks required a downward expectations boot were rewarded, on balance, with heartwarming rounds of purchases.

However, I hasten to remind my readers that we’re not even a quarter of the way through this rather critical earnings season and that what has yet to be revealed is likely to be more pertinent than what has already been disclosed.

From this perspective, we’ve got an important week indeed coming up kids, with many of the stone cold ballers of the U.S. equity complex reporting, in frenzied sequence, midweek. The action starts in earnest Tuesday afternoon, with Apple’s Tim Cook hopefully atoning for that buzz-killing letter bomb on our collective @sses he dropped on January 2nd. Wednesday, we hear from Microsoft (and, for what it’s worth, Facebook), and Thursday brings tidings from the soon-to-be-single-and-less-wealthy Mr. Bezos. I am fervently hoping that these guys and gals are preparing to lay some irrational projectile saliva on the rest of us, particularly taking the form of uplifting forward guidance. I don’t much care how fat the bottom lines are, but will be paying particular attention to the prognosis for the growth of their business service units, as these will be highly instructive from a broader economic, mad game spitting perspective.

The Mad Games continue in other relevant dominions as well. Without much fanfare, the FOMC meets this week, but I expect Chairman Powell’s rate hiking mouth to be dry. To the extent, however, that he does hock one up, we can hope that it has the same viscosity/consistency as that of Friday’s WSJ reports that the Fed is rethinking its balance sheet reduction commitments, and may not engage in further sell downs at all – at least for the time being. I can’t emphasize enough how helpful this would be, so perhaps the following pictures will reinforce the point:

Ghost of CB Balance Sheet:

Past Future (?):

To synthesize, any way you look at it, over the past decade, whenever Central Banks have been net buyers of paper, it has created a rising tide for our Gallant 500. Conversely, as they have divested (to mix metaphors) it has created headwinds of problematic proportions. And, as to Wednesday’s FOMC presser, I will cop to being a bit nervous. It would appear that anytime the Fed changes its tone in either direction, the market overreacts. To the extent (as I’m fairly sure is the case) that Chair Pow would just as soon NOT be influencing pricing on a day-to-day basis, he may very well at least obtusely seek to refute published reports of a pause. By my count, he’s reversed himself 3 or 4 times since Thanksgiving alone, and the whole thing is getting to be rather wearisome, now, isn’t it?

Wednesday’s action is also graced by an important sit down between U.S. and Chinese trade representatives, and we have already covered in this space the vital impact of either positive or negative vibes emanating from those quarters. After all this, we can anticipate Friday’s Jobs Report, which will be released after all in the wake of our elected officials’ miraculous decision to set aside their intractable differences to re-open the Federal Government for a 3-week détente. Though it pains me to admit it, while both sides were clearly spitting, the Mad Game award for this round must be awarded to Speaker Pelosi. She didn’t budge an inch, and, after the LGA air traffic controllers began what was sure to be a widening and deepening job action (causing the one thing that no one can abide: inconvenience to NYC air travelers), Trump appears to have had no choice but to cave. No doubt, in the wake of all of this, he’s spitting something, but my guess is that it has the look and feel of metallic spikes typically embedded in wooden planks. This, in turn, bodes less than delightfully for those trying to invest across the backdrop of a political landscape that appears much more likely to heat up further before it begins to cool down. If I’m reading published reports correctly, Trump, Pelosi, McConnell and Schumer are now gonna take a well-earned blow, and leave the next round to a set of scrubs that – let’s face it – will be hard-pressed to bitch things up more than the first team has already done.

There is, in addition, lots of mad-game-spitting of the unhinged kind transpiring with respect to the 2020 Presidential Election in general, and the Democratic nomination in particular. For the first time in perhaps my adult lifetime, I’m actually enjoying the spectacle, and looking forward to watching it unfold. Perhaps as the best news of all, our boy Bernie announced on Friday, and thank god for that. My guess is he still sets the standard in terms of staking out the party’s core message. Namely, the position that much of America, and throughout its history, is little more than a criminal enterprise, and that the only path forward is for us to beg the world’s forgiveness and confiscate the assets of certain domestic socioeconomic classes, in order to distribute them to those are deemed to be more worthy. He faces at least 20 competitors, and I doubt that he will win (wrong age, wrong skin color, wrong gender), but anyone who wants to beat him is going to have to out-Bernie Bernie. Watching it all unfold ought to be quite a hoot, to say nothing of the bennies associated with the ultimate standard bearer being stuck with a policy agenda that only the editors of Mother Jones Magazine could love. In light of 45’s continuing and likely-to-continue string of errors – forced and unforced – for those like me who still have a soft spot for the blessings of free enterprise, this is nothing short of a miracle.

And it’s all starting to come to pass like Christmas in late January. The Mayor of New York (himself a White House wannabe) recently informed the world that the City has plenty of money, but it just needs to be confiscated from its owners and placed in different hands (presumably at his discretion). A newly elected Congresswoman from the same jurisdiction who shall remained unnamed but who sports the singular credential of an undergraduate degree in economics from the venerable Boston University has put forth a really swell idea to establish a “tippy top” tax rate of 70%. Both are outflanked in policy hysteria by the now Senior Senator from Massachusetts – who has achieved tenured professorship status at not one, but two, Ivy League institutions, and who is herself a declared candidate for the 2020 Presidential Election. In addition to having this past summer sponsored a bill that would put all forms of governance for large American corporations under a Washington scoring system with heavy weightings assigned to such factors as climate change policies, gender awareness and progressive sensibilities, she has topped herself by proposing a 2% annual wealth tax. My guess is that some of her paymasters may be a little less than fully enthusiastic on the prospects of sharing the love in such a manner. Still, in terms of spitting mad redistributionist game, it’ll be hard to top Professor Warren’s stunt.

In the meantime, equities roll along, and bonds continued to be hoovered up like there’s no tomorrow. Also, some late mad game spitting transpired in the often overlooked Gold market, which rocketed to highs last seen in June of ’18 – all during the afternoon of Friday’s session:

I’m really not sure what’s going on here, but if I find out, I’ll get back to you. However, I will state that the frenzied buying of gold typically portends an ill wind of some kind, blowing somewhere out on the horizon. And lord knows there are plenty of ill wind candidates from which to choose.

I’m not going to worry about this too much – yet.

Instead, I’ll just hope that the mad game spitting cycle continues, with one caveat. If you spit anything into an ill wind, it is likely to come back to you in unpleasant ways. And this mis amigos, is about all the useful risk management advice I can offer on this winter’s day.

TIMSHEL

Welcome, friends, to the show that never ends (but probably will anyway). Early in the cycle though it may be, I believe it’s time to throw a “rager” in celebration of the fabulous performance thus far generated by our favorite domestic equity indices.

So grab yourselves a brew and a slice (or if you prefer, some caviar and stronger waters), and raise your glass to our collective success. Through 13 skinny sessions this year, our Gallant 500 have thrown up an annualized gain of 263%. And, get this, the SPX’s half-a-league, half-a-league, half-a-league onward returns pale in comparison to those of other intrepid comrades, most notably Captain Naz (annualizing at 308%), and the stone cold biggest baller of them all: Ensign Russ (582%). Gentlemen, we salute you.

Yup, it’s been quite a run – not only thus far this year, but in fact since before the yuletide. Specifically, and while most of you are not likely to remember that far back, if we set our starting point to the close of that wretched Christmas Eve half session, the numbers are even more astonishing. From that point, the SPX return has annualized 543%, the NDX 670%, and the Russell 2000 a chunky 892%.

If investors keep buying them at this pace, 2019 will indeed be one heck of a year. But let’s cast our eyes back to that putrid Christmas Eve session, and let me ask you, with respect to the gaudy performance numbers inventoried above, who had the over? Well, I most certainly did not. In fact, as I was cooling my heels at my mother-in-law’s on the afternoon of December 24th, I was a’fearing we might be headed for an all-out crash. I’m not particularly proud of this, but as a scribe operating in a world where journalistic standards of adhesion to the truth are climbing to previously unimaginable thresholds, I feel honor-bound to record this history as it actually transpired.

Besides, I published the fears I had at the time far and wide, so, as a practical matter, there’s no escaping the historical record as to the divergence of my concerns from the pricing action that followed.

On the other hand, as I repeatedly remind myself and my readers, even a stopped clock is wrong 23 hours, 59 minutes and 58 seconds of each day, so there’s that. And now there’s nothing left to do but try to unpack what has happened, why it happened, and what may happen as a result. Moreover, at the risk of playing spoiler to my own article, I find that, while, at best, the pace of the rally is likely to slow considerably, some of the positive reversal has indeed been justified by subsequent events.

If I haven’t already lost you, let’s contextualize this by winding the clock back even further, all the way to mid-Summer ’18. During that time period, so I remind myself (perhaps as a balm to my bruised, soothsaying wounds) I correctly called for a big spike in volatility over the final trimester of the year. My justification for doing so was the myriad risk-enhancing catalysts that the global capital economy was confronting, including, in no particular order, a potentially investor-hostile mid-term election outcome, a burgeoning international trade war, an intransigently hawkish Fed, Brexit, a slowing global economic paradigm, a decelerating earnings outlook, etc.

I felt that, at best, many of these events could induce investors to pause for a moment of reflection, and might, in various combination, cause this here sweet 10-year rally to turn tits up at last. Well, we all know what happened after that. Market volatility did indeed accelerate like a particle collider, and most of the action was on the downside (something I did not predict). Nonetheless, and as I anticipated, the risk premium rose dramatically, implying that the cost of holding risk assets had increased, and inducing the more reserved among us to engage in some serious divestiture.

But knocking these off in chronological order, many of the risk-generating hazards that most vexed me have played themselves out in — if not in bliss-inducing ways, then at least in non-fatal ones. The election produced a split legislature, which has historically been a fairly favorable environment for securities. The Fed has spun itself around like a whirling dervish, but, presumably having been chastened by the market’s reaction to its 12/20 hawkish hike, has placed itself on ice in terms of its ability to aggressively normalize rates and reduce its balance sheet. With respect to the latter, the same can be said of other Central Banks, as, over the last several weeks, the aggregate holdings of these entities has reversed dramatically to the upside:

Much of this reinvestment is owing to Chinese purchases of their own paper, and appears to be part of a broader initiative to inject multiple forms of stimulus into their gravitationally challenged economy. They’re likely to take incremental simulative action from here, and, while purists may quibble, as for me, I’ll take it. With a visibility range of 0.0000%, the pundits nonetheless all agree that the numbers coming from China are looking weaker by the day, and, if the ruling cabal wants to use its unlimited powers, to reverse this trend, they have my blessing to do so.

Likely for similar reasons, the trade dialogue between the Chinese and the Americans has been almost unilaterally amorous in recent days.

So, we entered 2019, with reduction (call it subtraction) of the risk premium, and this, I believe, more than anything else, has catalyzed the maligned-in-this-space-but-ensuing-to-this-day V bottom, the back half of which began on Boxing Day, 2018. The market, I thus posit, is adding valuation by subtracting elements of risk concern that no longer seem as dire as they did a few weeks ago.

Obviously, we’re not out of the woods quite yet, but all we can do is knock off these risk annoyances one at a time. This past week, like a lot of folks, I was paying close attention to bank earnings, not only due to my perpetual, obsessive hope that bankers receive the largest bonuses that humankind can bestow upon them, but also for signs often found in those realms of accelerating problems in the broader economy. Well, it was hardly a blowout quarter; in fact, on the whole, it can only be described as a disappointment. By all accounts, the big dog trading desks were caught sideways on more than one occasion during Q4, but deal flow and loan growth held up acceptably, and, on the whole, there was nothing that any of them said that indicated a dropping off of the bottom of the great financial engines of the domestic economy. I therefore subtract, at least for the time being, the world of U.S.-based international finance as an outsize risk factor.

But the earnings season has barely begun, and the early returns fall well-short of divine status. By all accounts, it looks like Q4 will hit the 10% year-over-year bogie, but not by much. Moreover, the broad consensus is that the extended, magnificent profit run of U.S. corporations may have peaked out. As suggested in the following chart (purloined, in accordance with time-honored tradition from the folks at Factset), guidance for the next two quarters has dropped in a manner not seen since Paulson was begging Pelosi to bail out his former partners and colleagues:

Anyone with the intestinal fortitude to extrapolate these numbers forward is bound to conclude that the NDX is unlikely to rally the full > 300% which it now projects, but I don’t know that it makes much sense to worry our little heads off just yet on that score. My strong sense is that we’ll learn a great deal in waning days of January, when our betters: the leaders of Apple, Facebook, Amazon, Google, Microsoft, etc. take to the podium.

And when this transpires, I will be looking at the results through my thematic “addition by subtraction” lens. We should learn a great deal about how the economy is holding up by reading between the lines of business service flows at AMZN, GOOG, and MSFT in particular. If they continue to sell cloud services at heavenly clips, we can cross off another item currently prominent on our risk premium balance sheets. Alternatively, if the cloud outlook across the cloud is cloudy, it may again be time to worry.

Lord knows what February will bring. The reporting arm of the Federal Government may well still be shut down, but I’m fairly confident that the earnings cycle will continue on schedule (whether or not Pux Phil sees his shadow, I won’t hazard to speculate). But one way or another, March (not by a long shot my favorite month on the Julian Calendar) is certain to be a barn burner. It begins, as the fates would have it, with another episode (no one, somehow, can say for certain the date) of that great borrowing engine otherwise known as the United States Treasury Department hitting its statutory ceiling for debt issuance. Particularly if the current funding impasse has remains unresolved, this, of course, would be as good a time as any for the Thunder-dome showdown between Maxine (Mad Max) Waters and Donald (Nightrider) Trump (still, at the point of publication, President of the United States) to enter its final, fatal round. Two (wo)men enter, one (wo)man leaves, may not be the precise outcome, but you never know.

March 1 is also the pre-announced deadline for imposing 25% tariffs on hundreds of billions of goods imported from China. It’s hardly worth typing, but if that happens, look out below. If there’s a deal, though, then the biggest risk premium contributor on my list will vaporize exquisitely.

I remain worried also about the default implications of a hard selloff in the energy complex. And, as March performs its ritual “lion-to-lamb” transformation, we’ll be faced with a moment of truth respecting the Brexit Battle. March 29th is the date upon which Article 50 of the European Union Constitution calls for the Brits to exit, stage left (pursued by a bear?). I have absolutely no idea how this plays out or what it means. Besides, we’re running out of space and bandwidth on l’affaires des risqué, and I’ll leave off by stating my continued belief that the big risks of 2019 are concentrated, with these events, in Q1.

In the meantime, I hope you’ve enjoyed the party thus far, but as any polite guest is well-aware, the timing of a departure from a celebration is as important as that of an entrance. This, my friends, was never my strong suit, but it may be time to wind things down. It’s been a grand old time thus far, but the likelihood of indices continuing to annualize into the fat triple digits, is, in my judgment, slim. Moreover, if you find yourself the last partaker of the punchbowl, if you see your hostess lifting your feet from the floor next to the couch on which your slouching so she can run the vacuum, if the rice remaining on the sushi plate evidences discoloration, you’ve probably overstayed your welcome.

But we’re better than this, people! So, in closing, I suggest you don’t let your subtraction from this here wingding be viewed as an addition by your fellows, who will be only too glad to rest up and take your abandoned spot when the next party commences in earnest.

TIMSHEL

Lost amid our justifiably obsessive focus on such matters a 0.1% outlay for border security, the frantic search for someone – anyone – willing to host the Oscars, and other matters of vital importance, was a one-two punch, which, depending upon how it plays itself out, could make or break us. Early this past week, Softbank Inc. announced a slight revision to its funding plans for new-age commercial real estate venture We Work Inc. Oh, it still intends to invest, but at a lower magnitude. $16B has morphed into $2B. Apparently, according to published reports, a couple of players in the deal backed out, compelling Softbank to go it alone. And it decided, in so going, that it wasn’t going to go big.

In this, the world’s most powerful and prosperous nation, where government agencies spend $8T a year and where total unfunded liabilities (including such trivialities as Social Security and Medicare) exceed $120T, we might need a larger unit of account to measure these metrics. So, if a southern border wall is said to cost $5B, let’s just say that the We Work raise came in light by about 3 Walls. There’s the elegance of logic in this. After all, what would We Work be if not for its access to Walls?

For the uninitiated, We Work, over the last several years, has joined the ranks of millennial iconoclasm by – get this – securing huge swaths of urban commercial real estate, and leasing the space to business enterprises. And if this concept fails to sufficiently blow your mind, consider this. We Work doesn’t simply provide workspaces and office accessories, it actually offers a feel-good sensibility to these realms. No doubt the feng shui of each unit is meticulously calibrated, but there’s more – much more. Each office features such work/life balance essentials as ping pong tables, nerf guns, well-stocked beer taps and bean bag chairs. Thus, WW lessees are not just renting space, they’re investing in a business ethos – one that is almost guaranteed to facilitate their success.

Unfortunately, however, they have yet to solve one intractable challenge of commercial real estate – when you use debt to secure large commercial spaces and seek to amortize these obligations through short term revenue streams, you create what is known in the banking biz as a gap funding challenge. Even nerf marksmen with the deadliest aim might flake off – particularly during periods of economic difficulty, but your bankers will expect you to meet your repayment schedules with unfailing precision.

I’d long been wondering about how the Company would get around this, and will admit, in the wake of the previously announced $16B Softbank deal, to thinking that these guys and gals may just have mad skills that elude my cognitive capacities, honed, as they have been, over nearly six decades.

And this remains a possibility, because just when I thought that an 82.5% downsizing of a critical funding round might be problematic, Team WW pulled off a coup of which they perhaps alone are capable. On the heels of the Softbank doink, they announced that they are rebranding and expanding. What was once We Works is now The We Company, with plans to extend its feel-good vibe beyond the grubby world of office space, and into banking, hotels, residential real estate, social media, and the Big Enchilada: Yacht Charter (the last of these under the sublime moniker of We Sail).

What on earth could go wrong?

I think it’s time to give these guys their props, and expand their concept to the entire capital economy, which, for the purposes of this argument, I will rechristen The We Market.

Here in the We Market, financial conditions, business prospects and matters of supply and demand don’t much matter; it’s the lifestyle, people, don’t you get it? It’s time to unshackle ourselves from the oppressive restrictions of valuation, solvency and growth. After all, we only walk this earth for a short time, and if we can’t recognize that markets are nothing more than another way to connect people with people, then we’ve lost the opportunity of turning our daily struggles into something more meaningful.

I do have a hunch that rather than having created this concept, I am merely reflecting what has already transpired. The WM has started to form, having begun with the extension of a V-Bottom upon which I threw shade, but which has nonetheless managed to sustain itself through the first 7 trading days of 2019:

SPX, NDX, RTY, JNK: V’s Abound… … Even in Junk

Connecting the dots for the pattern-recognition impaired, a V is a half of a W, so, from a certain perspective, we’re 1/4th of the way through the formation of the WM construct, and who’s to say we won’t complete the sequence?

In fact, I’m more than optimistic that the next leg is coming to a theater near you. Unfortunately, however, in order to turn a V into a W, one is next required to travel a few flights on the down escalator. And, as I see it, over the next several weeks, there’s every opportunity for such a downward movement to transpire. At the conclusion of that wretched Christmas Eve half-session, the Gallant 500 resided at a putrid, almost unthinkable, 2351. We’ve since rallied more than 10% — nearly 250 handles, but get this – we haven’t even recovered half of the cumulative losses from September’s all-time highs. We still have a weary ~335 index points to scale to reach those lofty elevations, and this through treacherous terrain filled with enemy combatants behind every rock and tree.

The earnings season is now upon us, and it kicks into high gear this coming week, with a lot riding not only on the tellings of beleaguered banks, but also of such We Market-critical components as Netflix, which itself V-bottomed in impressive fashion off of giddiness over the release of something called Bird Box. Its stock is up over 30% in 3 weeks, re-enriching the faithful to the tune of about $50B. At the recaptured $150B capitalization threshold, Team Bird Box is worth twice the value of the entire U.S. Auto industry (Tesla, of course, excluded) and if that isn’t a re-affirmation of the We Market sensibility that has overtaken us, well, then, I just don’t know what.

Nominally, it is also an interesting week for economic data, with scheduled releases of the all-important December Retail Sales being of particular significance. Unfortunately, however, at the point of this correspondence, the odds-on likelihood is that Retail Sales data will not be released this week because the portion of the Federal Government that calculates this data – the Census Bureau – is currently shut down. Moreover, even if it were to magically re-open, the results are likely to be obscured by the diminished participation of the 800,000 poor souls who expected to collect taxpayer-funded checks, but didn’t – at least this week. The shutdown has now extended sufficiently to render this portion of the workforce unemployed by the standards of the Bureau of Labor Statistics, so even when/(if) the Jobs Report drops in a couple of weeks, the numbers will be off.

Did I mention that there’s a government shutdown underway? Well, if I didn’t, shame on me, because as of this weekend, it has entered the pantheon as the longest running incident of its kind since we decided that this was as good a tool as any to resolve legislative impasses, back during the Clinton Administration. I don’t know that we’ve been much harmed by it, but will stick to my long held call that it is illustrative of what I believe will be a full-on showdown over the next several weeks, as to whether or not Trump should be allowed to retain the office to which he was duly elected. I expect a lot of tape bombs on this topic, but if nothing of this sort transpires, we can at least look forward to Attorney Michael Cohen’s testimony on Capitol Hill during the first week of February. Here, it will only be a question of how much mud he can sling at the President, and how much the new Congress and the media can make stick.

But for me, as for everyone else, all roads lead to China. Almost unquestionably, the fortunes of the market (and, for that matter, the We Market) will turn on whether or not we can come to some sort of accommodation with them. There are virtually infinite numbers of outcome possibilities here, but one thing is certain: over the next 5-6 weeks, the two countries must come to some sort of accommodation that removes the threats of an escalating global trade war, and negates any possibility of the contingently scheduled tariff increases taking effect. I sense that if those tariff increases are indeed imposed: a) Trump won’t be living in the White House to see the cherry trees blossom; and b) the down leg of the W will take the markets to excruciatingly low levels.

On the other hand, if, as is entirely plausible, the two sides come to terms, then this here V could travel upwards a fair distance before it even begins to start transforming itself into a W. But we’ve got a lot of wood to chop between then and now, and if earnings disappoint, if the rhetoric between the Chinese and ourselves takes a nasty turn, if Mueller drops a damaging report and/or Trump Jr./Kushner are indicted, then that W will begin to form with a vengeance. I feel that any combination of these is plausible, I don’t think investor risk appetite is sufficient to absorb the blow, and I strongly suggest that the risk sensitive orient their portfolios accordingly.

For what it’s worth, I’m also rooting for the Crude Oil markets here. It’s not that I enjoy paying more at the pump, but given the widely discussed credit tsunami forming on the horizon, and the likelihood that energy company defaults could be the trigger for a game of default dominoes, higher prices strike me as a small price to pay to ensure that the crude cowboys are able to refinance their debt. If not, then the financial oil could spill into other asset classes, and pretty much negate any hopes we may have for P/L.

But there’s more to the markets, The We Markets, than risk-adjusted returns, now isn’t there? There’s the quality of the experience, which of course is more important. I close by advising my friends at the We Company to bear this in mind as they wend their way through the new world they are so heroically creating. They lost $1.2B through the first three quarters of 2018, and that was before the markets started to take in water. Their debt trades at levels currently consistent with a high default expectation, and they will need to borrow/refinance to beat the band if they are to sustain themselves, much less achieve their grand vision. I kind of like the sailing thing, but I’d advise them, as their grandstanding risk manager, to think again about the hospitals, banks and housing concepts. These things cost money, which I think is in shorter supply at The We Company, than, say, good vibes.

In the meantime, for the rest of us, while the WM remains a possibility, we can perhaps take comfort that it is not yet a reality. After all, by the time we finish the M, we’re much worse off than when we started. So forget about the life experience, and in God’s name be careful about your risks. Things are likely to get much tougher somewhere in here, and if you don’t proceed with due caution, those beanbag chairs will collapse, the beer will not quench your thirst, and all the nerf guns in the world will not protect you.

TIMSHEL

“Whoever double-crosses me and leaves me alive, he understands nothing about Tuco”.

— Tuco, from “The Good, The Bad and the Ugly”

Well, for better or for worse, the epic western drama of Good, Bad and Ugly, also known as the 2019 global capital markets showdown, is hard upon us. I will confess to waking up on Wednesday morning wondering whether or not I was up to the fight. I’ve been at this a long time, and there are elements of what I see on the horizon that rendered springing out of bed on 1/2/19 an iffy proposition at best.

But then I remembered Tuco; good old Tuco: The Ugly element of Sergio Leone’s 1966 masterwork. He was a stone-cold Mexican bad @aa, who, by my count, was murdered at least a half a dozen times in his unwavering and ultimately successful pursuit of The Gold. He paid a steep price, but in the end the prize was his. As a further element of inspiration, it should be noted that Tuco was portrayed by Eli Wallach – a Brooklyn-born Jew who lived to be nearly 100. He absolutely stole the show in TGTGaTU (nearly dying himself on three occasions during the filming), and then pretty much disappeared.

But he got The Gold; that’s the important thing. He. Got. The. Gold.

And as such, I reckon it is incumbent upon us to follow his example, marauding our way through the treacherous terrain of this market, whose main inhabitants are desperados, banditos, snakes and other vermin, and try to grab that stash at all costs.

It didn’t take long for the action to begin in earnest, and a good deal of it ties directly or indirectly to the concept of Jobs. So, in typical mash-up fashion, I have chosen to review the recent proceedings through a Jobs-inspired week that featured The Good, The Bad, and The Ugly.

Ideally, I’d prefer to follow the flowing sequence of the film’s title, but for a number of reasons feel more strongly compelled to track these events in chronological order.

We thus begin with The Bad. Sometime around the close on the first day of trading, Apple CEO Tim Cook dropped an astonishing negative pre-announcements on the market. Apple never does this, but chose, in this incident to top even that unfortunate incident last spring, when Facebook’s management decided that >$4B of free cash flow per quarter and an embedded user base of >1B souls notwithstanding, it had no visible means to re-energize itself, and guided down for the subsequent three years. I reckon Mr. Cook had no choice; by all accounts, the company has missed Q4 numbers and missed them badly. He was therefore duty-bound to share these tidings with the investment world. As was perhaps inevitable, he placed most of the blame on our burgeoning trade war with China. I’ve no doubts that all of this is legit. However, I cannot help but wonder if there wasn’t something of a political element in terms of the timing. If so, if he wanted to begin the New Year with a message to Washington that this whole tariff thing has real consequences for the glittering board rooms of the Silicon Valley, which will devolve into sufferings for the great unwashed, then I’m OK with this.

But the smart guys I talk to had been expecting Apple to receive Newtonian gravitational blow for the last several quarters. Their consensus is that the Company is out of tricks, and will need to come up with something not in its visible bag of tricks to regain its lost luster. And I can’t help wondering what Jobs, Steve Jobs would have made of all of this. After all, he was the wizard, and whether he might’ve been able to bring to market some bright shiny objects that would’ve changed the equation, we’ll never know.

Because he’s gone, he’s go-one and nothing’s gonna bring him back. So investors, already terrorized by factors too abundant and varied to inventory in this space, took for the hills. Global equity indices plunged in sympathy on Thursday, and at that precise moment, all the key elements needed for a real crash were in perfect configuration.

But then came The Good: a December Jobs Report that played to the unmixed delight of any objective observer in its orbit. Non-Farm Payrolls blew the doors off expectations, the previous two months were revised upward, the Labor Force Participation Rate rose by several hundred thousand, Average Hourly Earnings surprised to the upside as well. Investors everywhere sucked in a huge sigh of relief.

But if market participants were becalmed by the Jobs Report, they were rendered positively giddy by Fed Chair Powell’s remarks at that afternoon’s American Economic Association’s annual conference in Atlanta. As is widely known, Chair Pow used the opportunity to walk back the interpreted-to-be-hawkish comments that accompanied a rate hike at December’s FOMC meeting. Of course, we’re flexible here, he cooed, and, for the most thick-headed among you, this means that if the economy starts to take in water, we’re prepared to bail on both further rate hikes and balance sheet reduction.

Investors swooned like teenage girls at a Beebs concert. Equities surged, and suddenly, what began, after the first two days of trading, as the worst start to a new year this century, transformed to a point where all major indices are actually showing gains for the first partial week of ’19.

Well, I’m a little skeptical here. As prophesied in these pages, volatility surged in Q4, and I think that pattern continues for the next several weeks at minimum. In early December, and in the wake of a Bad/Ugly/Not Good rout this fall, our Fed Chair issued similar soothing set of comments, only to kill the buzz when the FOMC met later that month. Now he has reversed course yet again, and perhaps not, given the pattern he’s forming, for the last time.

I was unilaterally encouraged by one element of his comments though. When asked if he would resign if requested by the President to do so, he responded with a resounding “No”. Good on you, Jay! You’re the Big Dog of the Fed, as appointed by the Bigger Dog at the White House, and he cannot justifiably play you as a political football. You were appointed to do a job, and, absent some palpable malfeasance on your part, you should do all in your power to keep it. I may not agree with the steps you take (and didn’t when you raised rates in December), but with the wearying prospect of yet another presidential election now taking form, your unimpeded presence and focus is vital to our collective concerns.

And speaking of elections, it was hard to miss the fact that the 116th Congress took their oaths of office on Thursday, and wasted no time in (predictably) making spectacles of themselves. Within 36 hours, they had introduced bills for Impeachment and the elimination of the Electoral College. As indicated in recent columns, my biggest fear for the markets derives from the reality that of many of them believe that Job 1 for them is removing 45 from his current job. This, my friends, is The Ugly of this essay.

While the wizened heads that beat down the unhinged progressives for leadership positions are, wisely in my judgment, taking a wait and see attitude about how hard to attack The Prez, my guess is that they won’t be able to hold the discipline of their caucus. A lot of these folks were elected for the express purpose of taking Trump down, and one can forgive them any urgency they feel in starting the process. The time for them to attack, at least in my judgment, is now. If they don’t seek the removal initiative over, say, the next few weeks, then they may have lost their best opportunity to do so. Team Trump also wants to get the showdown under way, most probably as a better construct then allowing the removal forces to hold their fire until the 2020 election battle is fully joined.

Nobody can quibble over-much about the state of the economy, and the Trumpsters must use this to their advantage. But if Trump really wants to end this nonsense, he’ll move quickly and aggressively to cut a deal with China. This, in and of itself, will not solve intractable issues with them guys and gals; whatever we sign will likely be worth not much more than the paper on which it is printed. But it would be an enormous boon to the markets, offering the dual benefit of removing the specter of tariffs that have dampened down valuations, and tearing up key portions of the track on the Impeachment Train.

Conversely, if those tariffs, set tentatively to be implemented in mid-February, do become the law of the land, I think the markets will be in full panic mode. Prices will drop, companies will begin to shed Jobs, and the bonfires outside the White House will burn White Hot.

So I think the big risks for 2019 play out, in rather dramatic fashion, over the next several weeks. If we can get through to spring without having to deal with the Emoluments Clause, the 25th Amendment, or Impeachment proceedings taking form, if we cut a deal with the Chinese that has even optical teeth in it, then 2019 could be a very good year for the markets indeed. Stocks, against the backdrop of a strong economy with still-ridiculously low financing costs, are if anything cheap, as illustrated by the following chart, showing P/E’s below their 10-year averages for the first time since 2013:

Sharp-eyed readers will note that the last time these metrics resided at the 10-year Mendoza Line of ~14.5 it was on the way up; catalyzed by a recovery from the crash.

It doesn’t take the skills of a wizard technician to understand that piercing a 10-year time series average from below and above are very different constructs, and ones with polar opposite implications.

Again, I believe that if we can somehow muddle through this geopolitical mess, there are happy tidings for stock market gold hunters out there. And again, I’ll point to one of my core premises for believing that significant rallies are any rate, plausible: the alarming and increasing shortage of investable names to trade in the equity complex. Case and point: while it drew scant notice, this past week, Bristol Meyers Squibb announced a $74B purchase of Celgene, combining the world’s two biggest cancer drug companies under a single ticker. Now, in my experience, nobody has traded or invested in Bristol for a long time, it missed the biggest part of the Bull Market and resides at valuation levels of a 2014 vintage. By contrast, everyone trades Celgene – long and short – that is until now. It will soon join the likes of Red Hat as an innovative company that is subsumed into a mushy global conglomerate.

And those companies that aren’t in acquisition mode are likely to continue their buy-backing ways. Consider, if you will, the case of Apple. With no Jobs to pull new rabbits from the product hat, but still generating >$60B of free cash flow, they almost have a fiduciary obligation to continue to buy back and retire their inventory of free floating stock.

So I say that The Gold is out there, but we will likely be compelled to channel Tuco to harvest it. Yes, we will pay a price, as Tuco himself discovered. Fans of the movie will tell you that Blondie (Clint Eastwood) left him hanging by a rope over bags of it, and then liberated him with the unfailing aim of his bullet. Tuco didn’t like this, but presumably took The Gold anyway. Perhaps a slightly easier path will light our ways in 2019. But I doubt it will be so by much of a margin.

TIMSHEL

Sharp-eyed readers will note that for my last piece of this wretched year, I have borrowed liberally from the good folks on Sesame Street. I hereby apologize for any unseemly liberties that I have taken in this respect, because, let’s face it, everyone loves Sesame Street: a bona fide American Institution now in its 50th year of continuous production. Far be it from me to exploit its good name and good works.

As is the case with many transcending forms of children’s entertainment, what SS perhaps does best is to address its audience without talking down to them. Most every adult who has not yet reached 60 years of age has passed through its portal, and, for our current breed of adorable little shavers, the show, by all accounts, continues to inform and delight. It targets, of course, preschoolers, but there are also little bitties in there for their guardians – ones that extend beyond the divine blessings of distracting the young ones so that mommy, daddy, auntie or grannie can grab themselves a few minute’s rest.

It occurs to me, though, that in light of the many infantile doings that have abounded this rapidly expiring year, many of us past the age of majority could stand to benefit from a Sesame Street content refresher course. Hardcore fans are aware that most episodes are based upon alphanumeric themes, and I did think long and hard about starting at the beginning, with “A”. However, upon further consideration, I felt that such a return to the rudiments of would be overly insulting to my constituents.

So, as indicated by our title, I have chosen a single letter: “V” for this week’s sponsorship, and if you hang with me, you’ll soon know the reason why.

First and foremost, my selection is a tribute to the near-miraculous V-bottom registered by the indices in the three-day sprint that took us from Boxing Day to the point of this correspondence. For the nonchartists among us, and focusing on the S&P 500, it looked something like this:

OK; so as V’s go, this is hardly the most elegant representation of the 22nd member of the King’s 26- letter arsenal. Moreover, Linguistic purists, noting the double dip, might even justifiably call it a W, and could also further quibble with the modest descent socialized in Friday’s session.

But for me (and, I suspect, other market-obsessed participants) this is unambiguously a V as I’d ever hope to see. And boy was it ever timely in its arrival. As everyone knows, after an abbreviated, horrific Christmas Eve session, the SPX was experiencing its worst December in about 70 years, capping off the worst quarter of the worst year in a decade.

So the ~7% rally from the pre-Saint Nicholas ride lows, hard won as it was, evoked an enormous sigh of relief for most every professional investor and associated paymaster in my wide acquaintance. Unless Monday’s New Year’s Eve session generates a never-even-contemplated single day rally, it won’t save December. Or the 4th Quarter. Or the entire year of 2018. But it may have breathed renewed life into any number of presumed-to-be-toe-tagged portfolios, so I reckon we’ll take it nonetheless.

And now for the bad news. Particularly insofar as it applies to their abilities to generate sustained rallies, I’m not much of a believer in V-bottoms. They tend to work over shorter periods of time, but in my varied experience, they peter out rather quickly. Sustained recoveries, as I have long lectured, do not often materialize until the wide price dispersion has dissipated, large capital pools are able to examine at the carnage, come to the conclusion that price levels are compelling, and start shopping in earnest.

And this particular V-bottom strikes me as being especially transient. Regarding the regathering of buying forces towards the end of last week, I believe we should take note of a number of technical tail winds that indisputably aided our cause, but which will probably run their course rather quickly. First, it generally agreed that Monday’s half-day puke took equities into deeply oversold territory, which, from a forward-looking perspective is always a good thing. Next, as had been widely reported (including in this space), the ~20% correction in the equity complex forced pension funds with fixed allocation targets (e.g. 60% stocks/40% bonds) to purchase tens of billions of dollars of stocks before year end. Further, I’ve no doubt that there were any number of short sellers out there who got their nuts squeezed and had to cover when the buying began to materialize on Wednesday. Finally, and as always, we can (as a matter of convenience if nothing else) be pretty well-assured that buy signals of the algos, long in hibernation, arose from their slumbers to lend their always helpful assistance to the cause.

Well, if the markets were oversold on the morning of 12/26, they are less so now. I’m not sure whether or not the pension fund rebalance is yet complete, but you can bet your boots it will be over by Monday’s close, because that’s the deadline. If you’re long, short squeezes provide the dual benefit of positive returns accompanied by a measure sangfroid, but once the covering is over, there is, by definition, no more squeezing to be done. Finally, what algos giveth, algos, of course, can taketh way.

So I think whatever happens Monday, we will usher in the new year with the slate will be, so to speak, wiped clean. Which brings us to our next V in this -themed note. Volatility has been ascendant for several months, and it says here that Volatility will continue to make its formidable presence felt once the calendar turns. In fact, as we enter 2019, about the only thing which I can predict with any confidence is that sustained Volatility will prevail. I can’t remember the last time that I felt we were entering a new year with as much opacity as that which confronts us as 2018 winds down, and I’m not gonna lie: it’s not exactly giving me a warm, fuzzy feeling at the moment.

We’ve covered the problems confronting the global capital economy in the coming months, so I won’t tax your patience with a reiterated, detailed inventory of same. But some contextualization is necessary. The odds-on likelihood is that the world will experience an economic slowdown. Most jurisdictions are feeling the bite, and important ones such as Germany are already in recession. Whatever is or is not happening in Japan, it bears mention that 10-year JGBs actually went negative on Friday, and that our friends in Switzerland now want ~25 basis points for the privilege of using our money for a decade:

Now, with the Land of the Rising Son’s rate rising ambitions yet again failing, when the Swiss extort investors into paying them for stashing cash in Zurich, it hardly portends glad tidings for the global economy. But that’s not all. Draghi is on the hook with his pledge to turn off his money-printing machines – at a time when all member nations are feeling the pinch, and while the U.K. dithers about how – or if – to turn in its membership card. Meanwhile, in this here monetary jurisdiction, the psychodrama catalyzed by a skinny little 25 bp Fed Funds hike has generated more Central Bank agita than any time perhaps since Andy Jackson shuttered an earlier version of the outfit back in eighteen hundred and thirtythree (ah yes, I remember it well). As mentioned over the last couple of editions, I think the Fed made a mistake with its latest stunt, but it wasn’t, and shouldn’t have been that big a deal. The real damage was done in my view by virtue of the President attacking an institution which of course is political, but must avoid publicized political battles if it is to do its job competently.

Oh yeah, and there’s a government shutdown unfolding at the moment. And the point of dispute is so infantile that even newly-minted Sesame Street watchers might turn away in disgust. While it shouldn’t affect most of my readers overmuch, its optics of it are unilaterally bad. I don’t expect it to be resolved in the foreseeable future. And the 116th Congress will be sworn in early Thursday afternoon. And they will be out for blood. And they are likely to draw some.

On the other hand… …by all accounts, the U.S. economy does not appear to be evidencing any signs of rolling over. News reports over the last week have brought forward a gusher of glad tidings respecting holiday sales. Earnings will almost certainly fail to match ’18 out-performance, but I suspect when Q4 numbers start dropping, they’ll shade positive relative to expectations, perhaps significantly so. And, for what it’s worth, absent some unforeseen catastrophe in the economy, while one can claim that our final V-word: Valuations, are rich, they are much less so than they were a few weeks ago. There’s also happy talk about settling matters with China, which I would discount excepting the significant reality that the incentives are high for both parties to fix this thing. Gun to my head, I think they will, and it will help.

So maybe we can skate through what is bound to be an emotionally overwrought January, and get back to normal. I think a good deal of this turns on how hard Mueller and Congress hit Trump in the new year. I’m highly convinced that he will be compelled to absorb a body blow the likes of which he has yet to experience, and it is far from a sure thing that he can withstand it. At this point, few would much lament his absence, if the script holds, if he does go down, he won’t go alone. If so, it could be look out below.

But on balance, I think I’ll hold to my faith in private enterprise to prevail. Yes, the V-bottom may be winding down, while Volatility is likely to sustain itself for at least a few more weeks. But Valuations are now within reasonable ranges, and know this, my children: there’s hope in that.

And so ends our Sesame Street lecture, brought to you by the Letter V. And I’ll leave you with this. After nearly five decades of being owned and operated by Public Broadcasting, in 2016, the rights to the show were acquired by HBO, which itself is a subsidiary of AT&T’s Warner Media. In a more perfect world, its corporate ownership would be that of Verizon or Viacom, thus completing the symmetry of my analysis.

Unfortunately, boys and girls, the realms we occupy are seldom as tidy as we wish, and yet we carry on. My kids of course watched Sesame Street, as do, now, my grandsons. There’s some comfort in this (among other things, HBO/AT&T/Warner do not appear to have bitched up the show). So, if you’ve nothing else to do, and if the meaning of my rantings has escaped you, it may behoove you to download the episode dedicated to the Letter V. I suspect it’ll do you no harm. In the meantime, Happy New Year and, as always…

TIMSHEL