Category Archives: Weeklies

Squeezing Out Sparks

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Now if I think, I might break even,

I might go home and quietly,

I’ll marry a rich girl, but otherwise

I’m going to raise hell and rightly

— Graham Parker

A decent bit of ground to cover here, but first an update from last week’s installment. On Wednesday, the U.S. Supremes issued a reversal that now allows states to tax on-line sales for transactions outside their borders. However, the good news is that the internet has not yet began to recover from the crippling blow of the repeal of Net Neutrality, so it shouldn’t matter much.

With that out of the way, I’m able to inform you that our title is identical of that of a seminal 1979 album by the deeply under-appreciated Graham Parker and the Rumor. This record has a special place in my memory, because it shook me and my crew from the lethargy that had set in from too much focus on psychedelia. It was aggressive, punchy and not overly cerebral. Most importantly, you could dance to it. So my friends and I got off the couch, put aside whatever materials were sitting on the coffee table, and set forth to shake things up with the ladies (albeit with mixed results).

But in the interest of full disclosure (and its attendant easy discoverability), I must inform you that “Back to School Days” – the actual song from which our lyrics are purloined — was not on “Sparks”; in fact, it predated “Sparks” by a couple of years. Chalk it up, yet again, to poetic license.

One way or another, my observation is that over the past several sessions, and in the equity markets at any rate, there has indeed been a whole of squeezing going on, and that if one looked closely, there were some sparks flying as a result.

Of the former assertion, there is little to debate:

But while the accompanying chart, coming courtesy of ZeroHedge, shows an unmistakable melt-up, a couple of caveats in order. First, I’m not sure how the “Most Shorted” Stocks index is compiled, what names it contains and at what weights. Here, I’m willing to take ZH’s word for it. In addition, however, what is labeled as a “Record Squeeze” derives from the Relative Strength Index (RSI) measure, which I’ve never understood, can’t define, and tend to ignore.

But why quibble with technicalities? Those looking for corroboration in less obtuse metrics may wish to consider the recent relative performance of the SPX and the Russell 2000 benchmark index of small cap stocks:

SPX vs. RTY: A Reversal of Relative Fortune

Now, one can clearly observe that, with few exceptions, over the past rolling year, the Gallant 500 has routinely outperformed its lower paygrade comrade, Ensign Russell. But something changed dramatically in the first half of Q2. The good Ensign started to leave the better fortified 500 in the dust. And, as matters now stand, while the latter has turned out a rather pedestrian year-to-date performance of ~3.07%, the former is knocking on the door of a double-digit return.

Please understand: it’s not my view that Russell stocks are more apt to accumulate short interest than those listed in in the S&P 500, but that squeezes hit small caps harder than large caps.

Mostly this is due to liquidity considerations. For small caps, the volume is lower, the borrow more difficult to source, and, in general, the covering of a short more problematic. So when small caps shoot the lights out against the big dogs – particularly on what can otherwise be described as a flattish tape, one can be pretty certain that the squeeze is ascendant, and one should arrange one’s investment affairs accordingly.

Of course, a short squeeze, as is the case with any other technical (and for that matter, most fundamental) conditions, is a phenomenon that must run its course. But herein lies a further problem: I’m not sure that this here squeeze is over.

Because, you see, my strong hunch is that the overall market is poised to rally over the next several weeks. I hinted at this conviction last week, and so hinting did me no favors in terms of street-cred, but now, as is my prerogative, I’m doubling down. Everywhere I look, I see indications of a vigorous set of economic conditions, and this evidence notwithstanding, longer term global rates are either frozen or trending downward. Earnings look to be pretty solid, and I suspect that on balance they should surprise to the upside. In the meantime, with only 5 trading days left in this crazy quarter, I suspect – on a tape that is likely to feature diminished liquidity — that investors will do what they can to defend their positions.

In addition to the forgoing, and at the risk of laying some overly heavy philosophy on y’all, I believe that a trading year sets up as a series of hypothesis-testing cycles. Investors typically emerge from their New Year’s stupor with some sort of a consensus as to what kind of year they are about to face, and, for the first several weeks, stay true to this trend. Contrarians inevitably step in at some point, and then the battle is joined, with either the naysayers prevailing or the consensus being reaffirmed. There are typically between 3 and 5 such sequences across a given year.

Entering 2018, the consensus was evident. It was game on, and January was nothing short of a giddy market month. Then the cold winds of February began to blow, we experienced that VIX debacle, and everyone felt the chill. By the end of that month, the markets had regained a measure of equanimity, and since that time, the SPX has traded in an historically narrow, single digit range. With Q2 coming to a close, it bears mention that the index is up all of 14 handles, or one half of one percent, from where it began.

My sense is that it’s time for risk takers to test a new hypothesis, and the one that seems most likely is a rally in stocks and a selloff in government bonds. Of course, the opposite paradigm may emerge, with hypothesis-testing assuming much darker hues, but I feel that if the market takes a visible fall here, it will socialize bargains that are likely to be too tempting for many capital pools to pass upon.

There are a couple of wild cards here, the most prominent one being the trade war psychodrama unfolding before our very eyes — at social media warp speed. I take these matters very seriously, and, for what it’s worth, believe that the rhetorical brinksmanship emanating from Washington is, at best, counterproductive. It may prove to be the winning strategy, but any number of events beyond direct human control could cause it to derail, with consequences I care not to contemplate. But a few other points are in order.

First, because we’re referencing politicians here, the overwhelming incentive on all sides is to seek a solution that will allow both (all?) parties to declare rhetorical victory, and I think that’s what’s going on behind the scenes. In the mean-time the tweets and statements of the principals here strike me as being nothing but gamesmanship: government power players spooning out messages for public consumption alone: ones that have little to do with the true state of play. This thing may be going well; it may be going poorly, but I don’t think anyone outside of the circle of trust has the first clue either way.

Meanwhile, the markets are reacting, unwisely in my judgment, to every single tweet.

So, if Trump holds to pattern, and after tiring of sending genius or mindless streams of vitriolic rhetoric towards Chair Xi, he enters Kumbaya mode (and even more so if, as I believe is likely, an accord is actually reached), the markets are likely to melt up, and those who have been squeezed recently may feel the squeeze yet again. Moreover, said squeeze may very well expand to hit the credit markets, where short sellers have won recent innings by widening out spreads a pretty good amount in recent weeks.

In case you had any doubts, this chart does not paint a particularly encouraging picture, particularly given that it fails to take into account the interest rate component of credit costs. If rates, at long last, rise, and spreads continue to widen, then we’re looking at a less rosy financial funding picture for everyone from Olympia to Key West.

But even here, I’d encourage my minions to take heart. There’s always Switzerland (still negative) and Germany to look to for funding sources. And, of course (sorry, I can’t resist), we’ll always have Paris.

One last thing, my loves: if I’m right about the next material move in the equity markets being to the upside, I don’t know how long it lasts.

However, I know that the answer is not “forever”, because that option does not devolve to humanity. Back in the day, we were able, for a few months, to bang our heads a bit by “Squeezing Out Sparks”, and for a while, the girls even paid attention. I did raise a bit of hell, but never married a rich girl; only a lovely one from a good family. As most of you know, I’ve not had a minute’s cause to regret this.

But that was later. Once the sparks were all squeezed out, for me and my buds, it was back to the couch, the 4-footer, and yet another spin of “Electric Ladyland” on the turntable.

TIMSHEL

Ah Yes, I Remember It Well

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“We met at nine”, “We met at eight”, “I was on time”, “No, you were late”

“Ah, yes, I remember it well”

“We dined with friends”, “We dined alone”, “A tenor sang”, “A baritone”

“Ah, yes, I remember it well”

“That dazzling April moon”, “There was none that night”

“And the month was June”, “That’s right, that’s right

It warms my heart to know that you remember still the way you do

Ah, yes, I remember it well”

— Alan Jay Lerner/Frederick Loewe

First, I hope that this note has somehow found its way to at least a portion of its intended recipients, because, you see, with little fanfare, an absolute catastrophe befell the internet this last week. Lost in all of the hubbub about the Singapore Summit, IG reports, Big 3 Central Bank Policy Statements and the like, the Federal Communications Commission (FCC) enacted the repeal of the 2015 Net Neutrality Act, an action which had placed federal oversight of the Internet under the jurisdiction of the Telecommunications Act of 1940. Remember the days before the FCC decided to treat the web in a manner engineered to oversee AT&T’s mid-20th Century monopoly on phone service?

Ah yes, I remember it well.

What I remember most is that before net neutrality, the web was a sleepy, dreary place. Scant content was available, and to even access the tool, one needed to attach a landline to a modem, and pray for the appearance of the flashing lightning bolt icon/ accompanying squeal sound as confirmation that a connection had been made. Then one prayed that one’s sister didn’t try to make a call or that some other disruption would take place, forcing one to start the process again.

Can you even imagine a world where the FCC cops weren’t on the job? No Twitter, no Facebook, no $%*#@!! Netflix! Luckily, back in 2014 and before, we still had our washing machine sized radios to listen to FDR’s latest Fireside Chats; otherwise, we wouldn’t have the vaguest idea what was going on in Washington, let alone more remote ports of call.

But now the evil FCC is off the case, allowing (among other things) the providers of bandwidth to charge market prices for the use of their resources. No wonder Bezos, Serge, Larry and Reed Hastings and others of their ilk — champions of the common man one and all — were crying in their soup. After all, the three companies they control (Amazon, Alphabet Google/YouTube and Netflix, respectively) currently account for more than 50% of all bandwidth usage in the world, and desperately need Uncle Sam to ensure that wicked, competitive pricing doesn’t hurt their bottom lines. Each have shareholders to whom they must answer, and since there’s an infinite amount of bandwidth available, why should they let its corporate providers cut in on their margins?

Except there isn’t. An infinite amount of bandwidth available that is. Either in any given location or across the globe. And what is available is being consumed growth rate of >50% a year. The clear answer is technology innovation, by companies like AT&T and Verizon, but it is entirely shocking that these enterprises would be allowed, as they are now, to set spectrum prices on the entities that hoover it up — in accordance with their usage, in order to underwrite capital investment.

However, as suggested in our thematic quote, the month is not April but June, placing me in something of an amorous mood. So it pleased me, speaking of AT&T, that it was allowed to consummate its star-crossed romance with Time Warner, by virtue of a Federal Court rejecting a poorly thought out Justice Department lawsuit seeking to block the marriage. Now Bugs and Ma Bell are one in the eyes of God and Investors. Here’s hoping they are fruitful and make lots of anthropomorphic rabbits, because, during this, its most important season, love is indeed in the air. Twentieth Century Fox now has not one, but two formal suitors (Disney and Comcast) for her hand. And who’s to say that it stops there?

In fact, it doesn’t. Big Don and L’il Kim were able to advance their dalliance, departing last week’s rendezvous with evidence of their intentions to expand their triste. Unfortunately, however, details of their plans to set up housekeeping were not particularly forthcoming. Elsewhere, however, amore, toujours amore, was a more uneven affair. We’re still in a tiff with Canada (though I don’t believe it will last), and the lovers’ quarrel between America and China ratcheted up a bit, with each side extorting the other to the tune of $50B of tariffs – so far. Of course, it will be us Joe Bag of Donuts types that will foot the bill, so this one may get worse before it gets better.

Of these Affairs de Coeur, markets took mixed notice. Commodity markets tumbled, as well they might’ve, with Energy, Metals, Ags and Softs all feeling the gravitational pull, and (more improbably) the USD reached its highest level in nearly a year:

This is a Commodity Index

This is a Dollar Index

Perhaps in a nod to the passion of the season, government borrowing rates dropped across the board (yes, Switzerland is again negative out 10 years), the fact that U.S Fed Chair Pow raised rates and signaled 2 more hikes this year, and that Super Mario announced the ending of euro QE notwithstanding.

But the Equity Complex continues to play hard to get. It was a flat week – at least for the Gallant 500 and his wingman, Major Dow. Captain Naz and Ensign Russell fared better, though, with both indices now resting at all-time highs.

I’d take this opportunity however, to encourage Mr. Spoo to persist in his ardor, based in part on the fact that he has a great deal to offer:

SPX P/E Hovering at 5-Year Averages:

Factset in fact(set) has Q2 earnings clocking in at +19%, and this after a similar performance in Q1.

If they’re right, then it doesn’t look to me like a 16 P/E is an extraordinary amount to pay. Plus, in light of the Judicial Ruling on Time- Warner/AT&T, still-benign financial conditions and a number of other factors, it strikes me that merger mania should persist through the next quarter at least.

However, if these arguments fail to reinforce the intestinal fortitude of my favorite index, I’d hasten to remind it of that ancient truism: faint heart never won fair lady:

In addition, it may bear mention that the VIX breached down into an 11 handle and is close to ytd lows, that the Atlanta Fed’s prediction for Q2 GDP has risen yet again to nearly 5%, and that in addition to the sublime sound of wedding bells in churchyards across this fair land, the second half of June is seasonally known for its trademark tape painting rituals.

So on the whole, I think this here market may indeed be setting itself up for a nice rally.

I wouldn’t anticipate anything particularly dramatic just yet, but the SPX does remain nearly 100 handles below its January highs, and I see no reason why it can’t gather itself to test that threshold, or even breach it, over the coming weeks.

Of course, it would be helpful if we can get that darned internet up and running again, because financial transactors have come to rely upon it (or so I’m told), and buying frenzies fueled by paper orders phoned in and transmitted through pneumatic tubes will be a highly annoying exercise. I will, however, predict that, one way or another, the markets and its participants will survive. And, in closing I hasten to remind my readers that the stock market became a global sensation while operating for more than a century with men in top hats and overcoats conducting business orally, under the shade of a buttonwood tree in Lower Manhattan.

Most of you are too young to have experienced that era, though I was only a young shaver for most of it, I can assure you that it was a magnificent time to be alive.

And yes, I remember it well.

TIMSHEL

The L7 G7

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OK; let me say it for you: my, my, Kenny G, we’re getting a bit obtuse with our mash ups, aren’t we?

Well, yes we are, but to revert back to a pretext upon which I’ve relied perhaps too often, it’s not easy pumping out these masterpieces every weekend, so please bear this in mind. I began this insane exercise in early 2006, missing, in the intervening years, (almost) nary a one. By my count, I am now approaching my 700th ~1,500-word column. I’m also pretty sure that within the last year, I’ve crossed the one million-word threshold. One. Million. Words. I guess my only regret is that I wasn’t doing this in the 19th Century, when guys like Charles Dickens and George Eliot (who was actually a girl) got paid according to the number of nouns, verbs, prepositions and the like they produced.

On the other hand, I don’t get paid for doing this at all.

Sometimes these notes write themselves; sometimes I am forced to pull them from biological recesses I’d prefer not to name. I reckon this week’s installment falls somewhere in the middle.

One indisputably problematic element of this week’s epistle is that it requires some definitions, so let’s begin, shall we? L7 is synonymous with the word “Square”, or unhip, specifically describing an individual or dynamic that lacks fashionable sensibility. Its origins are unclear, but: a) I remember it from my Hippie childhood; and b) it reflects the reality that the L and the 7, when placed in close proximity to one another, form something that looks like a square. This works especially well if one uses one’s fingers to create the combination, as illustrated below:

I’d be remiss if I also failed to mention that L7 is also the name of an all-female LA punk band, whose records I don’t own and never have listened to. They are probably pretty good, but undoubtedly are most famous for a rather vulgar incident that took place at the 1992 Reading Festival, when, in response to some mud-throwing hecklers, lead singer Donita Sparks did something astonishingly rude.

Her action is clearly not suitable for precise description in this family publication, but you can Google it if you want. In the meantime, let’s just say L7 means Square, and leave it at that, OK?

Presumably, most of my readers are familiar with the G7 (short for Group of 7), seeing as how: a) it’s probably the most important annual conference among the leaders of the free world; b) it’s just ended in the L7 Canadian Province of Quebec; and c) let’s face it: most of you are pretty L7 anyway, right?

So the critical question I pose to my readers is as follows: how L7 is this year’s G7?

My own answer is this: pretty L7. But before you castigate me, please know I have my reasons. First, the G7 is actually an outgrowth of the G6, which began in 1975 and remained unaltered for a couple of years until Canada was added to the list, turning the 6 into a 7. Then, in the mid-90’s, Russia muscled its way into the mix, forcing a renaming of the proceedings to the G8. However, following the latter’s 2014 annexation of the Crimea, Russia was given the gate, so we’re back, for the time being, to the G7.

It should also be noted that the 1975 G6 Meetings took place in the entirely non-L7 environs of the Chateau De Rambouillet in France (about the hippest locale on the planet) and were hosted by French President Valery Giscard d’Estaing, whose name alone removes him for all time from any L7 designation. Other attendees included the Teutonic Helmut Schmidt (Germany), long-forgotten Italian Prime Minister Aldo Moro, Japan’s Takeo Miki, and Harold Wilson and Gerald Ford, from the UK and US, respectively.

Now, admittedly, this group was never destined to set the Thames on fire, and we can perhaps all agree that it was probably too Square to headline Woodstock, or, for that matter, even the Reading Festival. But do yourself a favor and compare that list to this year’s roster of attendees – Trump, May, Merkel, Trudeau, Abe, Macron and whoever they decided to send from the politically dysfunctional Italy.

Now I want to be fair here. Trudeau gets some Street Cred, if nothing else, for being the son of Studio 54 Queen Margaret Trudeau, and Macron deserves the same for marrying his nanny – 25 years his senior. Other than that, though, we’re talking about a bunch of school marms, and here I include not only May and Merkel but also Abe and our own Chieftain, the Leader of the Free world.

Beyond this, we are confronted with the buzz-killing reality that most of the meeting was devoted to rhetorical attempts to avert a trade war, and that the entire event was upstaged by next week’s big cha cha cha between the Trumpster and L’il Kim. So, on the whole I’d say I’m on solid ground by deeming the current sit-down The L7 G7. And, lest there be any residual doubt on the subject, in an L7 move that perhaps only the inimitable Ms. Donita Sparks could appreciate, the Trumpster, in trademark Trumpster fashion, stole everyone’s thunder – before the conference even started – by suggesting that seeing as how things are going so well in that quarter of the world, what we should really do is invite the Russians to rejoin the party.

But when it’s mid-June in an information-bereft capital markets universe, no matter how lame the G7 party is, it’s probably the one we’re going to watch. And here I encourage my comrades to take heart – at least insofar as things could be worse: I could’ve been forced to cover Davos. Or Jackson Hole.

However, it is my unfortunate duty to remind you not only that both Davos and JHole beckon down the road, but also that this upcoming week features one of those rare, but joyous L7 happenstances when not one, not two, but all three big dog central banks will offer policy statements to the somnolent masses. The Fed kicks things off on Wednesday, when they are said to be sure to jack up overnight rates another two bits, and offer clues as to their plans for the second half of the year. Thursday is Flag Day, and therefore ECB Chair Draghi’s turn at the podium. Here, there is at least a nominal effort to gin up some suspense as to whether or not Super Mario will provide explicit or implicit guidance as to when his outfit plans to stop printing s. The BOJ’s Kuroda brings up the rear, Friday U.S. time, but is expected to say little of any import.

It would be difficult to look at the images and bios of any of the Big 3 Central Bank honchos, and not come away with a distinctly L7 vibe. Moreover, like the G7 itself, all three monetary chieftains are likely to be upstaged by the contemporaneous Singapore Summit, which, if it produces anything actionable in the markets, will render me surprised.

There are, in addition, a number of secondary matters with which to concern ourselves. Quietly last week, iconic Japanese electronics manufacturer Cannon Corporation announced that it will stop producing cameras that actually use film, and I reckon there’s no turning back from that. Here in the States we were probably too busy to mourn an era gone by too soon as we were celebrated the just-revealed fact that domestic Household Wealth surpassed $100 Trillion for the first time ever. The strictly L7 among us (yours truly included) will also this week be forced to keep an eye on whether, in this land of free enterprise, our government will indeed allow AT&T and Time Warner to merge. I’m rooting for the home teams here, because it’s clear that uber-L7 Ma Bell could use the type of hipness upgrade which only the likes of Bugs, Porky and Daffy can provide.

Meanwhile, as predicted, the markets are for the most part quiet. Domestic equity indices are showing signs of breaking out, but I have some doubt that they will – yet. Our 10-year note is knocking on the 3% door-handle again, and I think will break on through – albeit modestly. The Swiss must now again pay – though not much – for any funds they borrow.

The dollar has flattened out – at least for the time being, and in general, one could describe this market as being stuck at the intersection between L Street and 7th Avenue. If you’re looking for some action, though, I’d point you in the direction of Cotton:

I’ve got some friends who ought to know who tell me that this here thing ain’t done yet. But fair warning to anyone who either caught the >15% rally, and/or may benefit from incremental upswings: this sort of action is not likely to buy you a ticket out of L7-Land.

If you doubt this, try the following experiment. Head out to the Hamptons and find somebody bragging about their crypto exploits. Then tell them that you absolutely nailed the Texas drought in the Cotton Market, and are going to double down on the prospects for inadequate crop rotation in the Missouri Valley. Your listener(s) may respond politely, but my guess is that, any plans to the contrary notwithstanding, you’re going home alone.

It is perhaps a sign of the times that during an opaque, rhetorical, but nonetheless raging trade war, with all three Central Banks set to make policy statements this week, and possibility (nay, certainty) of the most elegant round of diplomacy since the Roosevelt/Churchill/Stalin Yalta Confernece, there’s really nothing out there to trade but Cotton.

However, I’d look on the bright side: we did manage to survive the G7. Yes, it was a pretty dull affair, and yes, Trump looked like he’d rather be anywhere but the Northern Bank of the St. Lawrence River, on the Canadian side of the border. Lord knows, he got out of there at the first opportunity, but not without first undertaking an infantile exchange with the typically chill Justin Trudeau. It says here that this pique, like so many others of recent vintage, will pass.

On the whole, an L7 event indeed the G7 was. But with the lovely Ms. Merkel and the charming Ms. May in primary attendance, at least it wasn’t the total sausage fest experienced, in, say, ’75. And one can only dream of what might had been: Had Hillary been elected, we’d have had a matched party of Merkel/May/Clinton paired up with Trudeau/Macron/Abe.

This would’ve left out the Italian representative, who I’ve since managed to identify as recently-named Prime Minister Giuseppe Conte. But I don’t think he’d have minded much. His country’s bond markets are imploding again, and it’s doubtful that he’d have had much bandwidth for Amori – and perhaps should speed his way back to Roma – if he has not done so already – at the first opportunity.

TIMSHEL

Rules 1a and 1b

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

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

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

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

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

— P.D. Heaton

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

TIMSHEL

Turkey(s) at Risk (TaR)

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

TIMSHEL

All That You Dream

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

— Lowell George

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

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

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

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

Then I woke up.

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

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

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

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

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

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

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

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

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

Why now?

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

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

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

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

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

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

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

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

It might come in handy – sooner than you think.

TIMSHEL

Fat Man in the Bathtub

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“Spotcheck Billy got down on his hands and knees

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

She said “No, no honey, not tonight.

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

— Lowell George

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

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

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

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

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

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

And I have decided to follow the same sequence.

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

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

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

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

How do you like ‘em now?

Fat Cat FB                                                                 Ample-Bellied AMZN 

Anti-Newtonian AAPL

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

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

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

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

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

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

2s/10s – Looking Increasingly Scrawny:

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

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

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

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

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

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

Let’s not go there, OK?

TIMSHEL

Flying V Bottoms

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

TIMSHEL

Through the Looking GLASS

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

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

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

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

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

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

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

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

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

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

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

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

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

European Equities: The Destination of Choice This Spring:

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

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

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

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

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

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

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

TIMSHEL

Mondo Fugazi

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

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

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

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

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

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

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

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

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

***********

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

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

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

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

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

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

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

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

10s/30s:

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

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

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

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

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

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

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

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

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

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

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

TIMSHEL