Category Archives: Weeklies

Ooh La La

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Poor young grandson, there’s nothing I can say,

You’ll have to learn just like me, and that’s the hardest way,

Ooh La La…

The Faces

Full disclosure: I’ve written about Ooh La La before. It was back in the days of “The Left Tail Report” – a publication I put out every quarter, the content of which was so “out there that”, by comparison, my current weekly musings look more like the Editor’s Note in Readers Digest.

Anyone out there remember “The Left Tail Report”?

For those that do, I freely acknowledge that I once dedicated an entire installment to O-L-L. The song – title track from the Faces last album –is an interchange between a grandfather and grandson about the mysterious ways of women. It was written and sung by Ronnie (Woody) Wood, and I think he did a fine job. By the time of its release, his bandmate Rod the Mod was flaking off to a solo career, whence we began to bear witness to his steady, horrifying, 45-year decline into a caricature of what he once was. From a commercial perspective, the Faces couldn’t survive his departure. Woody soon bailed, of course, to the Stones, and even here I was disappointed. I think they could’ve done better. When Mick Taylor split suddenly, I took great interest in his replacement, hoping for someone like Jeff Beck or even Mick Ronson. But they hired Keith-clone Woody, and I knew then and there they were going to settle into a comfortable middle age. And history proved me right; post Woody’s arrival, they seldom, if ever, challenged themselves musically. For the most part, they have simply mailed it in, writing boring songs, basking in their monumental, unshakeable legacy, and, of course, banking scads of cash along the way.

So Woody’s mid-70’s move arguably ruined two great bands. And it is the demise of the Faces that I particularly lament. So spontaneous, so delightfully under-rehearsed. For years, I’ve offered the following warning to my clients: the only development that could impel a hiatus from my professional toils would be a reunion of the Faces, because I’d have no choice other than to accompany the band on the road. This warning, for the record, still applies.

So it is with all of this in mind that I address the unavoidable the astonishing facial that those modern-day Faces: social media behemoth Facebook, delivered to their investors. Admittedly, nobody can shut up about this, but there’s something strange going on here, and duty calls me to weigh in. Let’s just say that the episode was so catastrophic that it’s causing me to rethink my general approach to financial advisory. Loyal readers will recall that earlier this year, and in advance of Zuck’s much-anticipated testimony on Capitol Hill, I advised him to eschew his trademark tee in favor of his Bar Mitzvah suit. I think he tried to comply, but presumably finding it a poor fit, he at least rocked a reasonable facsimile thereof. And he managed to endure the episode without emerging much worse for the wear. I further predicted that the markets would soon forget the incident, and I was proved right on that score – at least insofar as FB not only recovered, from a valuation perspective, everything it had lost from the grilling, but added another >20% to its historical highs – all within what amounted to about three months. I don’t know if the Zuck Suit did all of the heavy lifting in this respect; let’s just agree it didn’t hurt.

But perhaps thus feeling himself able to fully accept my counsel, he might’ve taken too literally my sentiments that the Q2 earnings cycle was logically setting up for downward guidance. Because boy did he guide down. And he had help. In fact, the earnings call evolved in such a way as hasn’t been seen in these realms, well, in forever. It all began innocently enough. Zuck took to the podium with chipper demeanor. It was a good quarter, he said. Just a tad light on revenues, but gosh almighty aren’t people loving Insty and Snapchat? He then turned the mic over to the redoubtable Sheryl, who put a damper on the festivities by fretting about such matters as currency impacts and ad revenues.

Here, the stock started to waver, but still, we were not in red flag configuration. That is, until 5:20 PM – EDT, when Sheryl punted to CFO Dave (Dr. Doom) Wehner, who not only punctured the sagging balloon, but burned down the all of the party favors, the house and the entire block. He didn’t simply guide down for Q3, or even just for the back half of 2018. He suggested that growth rates would be on a downward trajectory for years. We all know what happened after that.

FB shares plummeted to generate the biggest one day/single stock valuation destruction in market history. Again, a great deal has been written about this, but for our purposes, a number of factors merit our further attention. First, I don’t ever recall a company in such fine shape overall guiding down anywhere near that far into the future. Second, while I am not as laser-focused on earnings as some of my readers, it is my experience that when a CEO brings bad news to the podium, he or she usually drops it in the first five minutes of a call. But the Faces waited nearly an hour and a half before cluing in the investment community their fears that their fabulous innings in the sun are winding down.

I’m puzzled, here, about a number of things. Most of all, there’s no reason on this earth that a company generating > $10B annually in free cash flow, which has 2.5 Billion users (competing, at these levels, with Air and Water as the most ubiquitous product on the planet), and which clearly has resources and reach to continue to achieve astonishing consumer technology breakthroughs, should be talking about topping out on its growth. And for me, there is only one possible explanation: management tanked the stock, wanted it to go down. And hard. The obvious question follows: why?

But whatever the true explanation, I feel it behooves me to now be much more careful in offering my counsel about such matters as earnings guidance, because, if my sentiments are over-interpreted, the consequences can apparently be dire.

There were other hits (Googlers, Amazonians) and misses (beyond FB: Twitterers and Netflixers) across the rest of the week’s earnings extravaganza, but on the whole, we’re still looking at a >20% quarter. We’re now past half-time in this here contest, and I think we can safely assume that the last three months will be shown to have been kind to the bottom lines of public companies. Investors appear, on balance, to be mildly impressed, but pockets of doubt clearly remain, and maybe rightfully so.

The week’s other quarterly tidings feature our first glimpse at Q2 GDP, which clocked in at a robust 4.1%. The media-politic stuck to the script, with the current holders of power not slow to grab all of the credit, while their detractors groped about to tell the other side of the story. By any standard, 4.1 is a pretty solid number, but now, less than 48 hours after its revelation, it already feels like old news. In addition, after months of trade war brinksmanship, there appears to be some sort of détente in place between America and Europe, and this, my loves, if authentic, is unilaterally good news. Among other matters, it caused Commodities to move modestly off the schneid:

Commodities Off the Schneid

But the news isn’t all rosy. Virtually every metric associated with the domestic housing market is on it (the Schneid, that is). And the timing for its underperformance is arguably less than ideal. Bear in mind that ALL macro statistics are backward looking, but Housing particularly so. Right now, we’re getting our first insight into May numbers – a point in the calendar that represents the peak of the selling season. Not much buying (and hence selling) activity is in evidence.

One can identify numerous causes here. Mortgage rates are higher; inventory is low. Some areas in this country are just plain unaffordable.

However, in perhaps the unkindest cut of all, the ubiquitous website www.mansionglobal.com reports that the purchase of American terra firma by non-Americans has suffered a 20% drop. Leading the way are the two biggest sources of historic demand: the Chinese and the Canadians. At the risk of stating the obvious, it’s just possible that their feelings are hurt.

So I’d check any instincts I might otherwise have to ascend to giddiness about the GDP report. Among other matters, as we remain in a turbo-charged information release cycle, it might behoove the rational to be a bit reactive here. Next week brings a number of noteworthy earnings reports. First, of course, there’s Apple, and if that’s not 2018 enough for you, Tesla reports, in characteristic fashion, after the bell on Friday. Also, while admittedly a stretch for some of you, I personally have my eyes on the Pride of Peoria, IL: the Caterpillar Corporation. CAT’s been guiding up but getting no love for their troubles. If the numbers are bad/or and they guide down for the future, it’ll be look out below. I also think their briefing will be greatly informative for such topics as the strength of the overall economy and the potential impacts of trade wars.

Lest we forget, there’s plenty of data love for left out non-equity types as well. Tuesday/Wednesday is the next FOMC meeting, where no action is expected, but for which the accompanying policy statement will be parsed down to the letter. Also meeting – under high-drama conditions – are the Banks of England and Japan, respectively. There’s a good deal riding on these transoceanic monetary policy statement exercises – particularly in Japan, which is showing signs of getting tired of issuing debt at 0% interest rates:

And once we’re through all of that, we can point our peepers to the July Jobs Report, scheduled for release at its regular time next Friday. Everyone expects the number to be a pretty strong one: ~200K in new gigs; maybe a drop in the base rate and a rise in the Labor Force Participation level.

However, in familiar refrain, it is likely that all eyes will be trained towards the Average Hourly Earnings print; perhaps (but not likely) to solve the vexing mystery of why an economy humping along as ours is, that is known to have a labor shortage, cannot seem to gin up the wage inflation that would bring tears of joy across the great wide way.

I’ll be watching closely all week – unless, of course, the Faces reunite and decide to go on tour, at which point matters will be out of my hands. I’m not expecting this, so I wouldn’t worry overmuch on that score. In fact, it may never happen. Rod is working the Casino circuit, no doubt enjoying the swoons of females from ages 8 to 80. I’ll give him a pass on that one. Woody is scheduled to play to crowds in excess of > 100,000 across the globe for the next several months, so he’s presumably unavailable. Ronnie Laine and Ian McLagan have shed their mortal coils, leaving only drummer Kenney Jones to carry on. If so, then the Faces become the Face, and I’m less interested.

The band, no doubt, passes into finite history, but a few of us fans remember, and will try to pay it forward. I did manage to make my son and his friends hip to the Faces, and perhaps one or two of them are carrying on.

Now’s not the right time, but when it comes, I’ll share these gifts with my grandsons. But I won’t overdo this. I’ll play the records, tell the story and leave it at that. From there, we know what to expect: they’ll have to learn just like me, and that’s the hardest way. And now we can conclude this week’s business, as there’s only one more thing to say, and I hope you’ll say (or sing it) with me:

Ooh La La…

TIMSHEL

Here’s the Story

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I read, with mixed regret and a great deal of interest, that a certain residence: 11222 Dilling Street in Studio City, CA, is up for sale. More pertinently, this 2,500 square foot, 2 bedroom/3 bath dwelling, has been since time immemorial, the home of the Bradys.

My first reaction (a logical one I feel) was to scream “Fake News!” After all, everyone knows that whatever else its appeal (sliding doors, eat in kitchen, etc.), 11222 Dill contains NO bathrooms. I think there was a closet with a mirror and a sink, where those whacky kids used to fight from time to time for sufficient space to brush their unilaterally, impossibly white teeth. But a bathroom? No.

However, I’ve checked and it’s true, Casa Brady is indeed on the market, and for the bargain price of $1.85 mil. And part of me feels that we’re all worse off for the prospective transaction. I developed an early fascination with the Bradys, perhaps in part because the Bunch are my chronological peers. I’m a little younger than Jan; a little older than and Bobby.

So when the series was in Prime Time, I never missed an episode, realizing even at a young age, that it offered a perfect caricature of life in 1970s America at its campiest and blandest. That it did so in contemporaneous time, and without any intended irony, is a marvel for the ages. It ran for about 6 seasons, but was eventually cancelled because the kids got too old. And neither Mike and Bobby’s dubious perms, nor the arrival of the ill-matched, misanthropic Cousin Oliver, could salvage it. But as the saying goes, Old Bradys die hard. A couple of years later, the cast convened through a variety series, which, somehow, and against all odds, managed to outdo even the Brady Bunch in Brady-ness. The same could be said of a spinoff called The Brady Brides, in which newly betrothed Marcia and Jan seek to economize by moving in together with husbands that hated each other. Trust me on this one: hilarity did indeed ensue.

Lingering, still, is the Marcia/Jan debate, and, to me, despite having a soft spot for Jan (easily the most unhinged of the Brady scions), in terms of romantic appeal, it’s no contest. It’s Marcia, Marcia, Marcia. Even with her banged up nose. But I do have one further matter to get off my chest: once, in a fit of sheer boredom, I took a BuzzFeed quiz to determine whether I was more Marcia or Jan, and I came up unambiguously as Jan. I posted the results Facebook.

But as Mick once sang (on a record that was released, as it happens, about the time that the Bradys kids hit their aggregate hormonal peak) “Time waits for no one”. Not even a Brady. Mike and Carol are both dead. Alice is dead, as is Sam the Butcher. Mangy mutt Tiger disappeared with no explanation after Season 1, and, nearly 5 decades later, we can perhaps safely conclude that he too has gathered to the dust of his forebears. Greg rocks a weave/dye job, and croons the borscht belt circuit. Marcia is born again, and no longer speaks to Jan. Peter turns up on the telly here and there. Cindy, I believe, is a radio DJ with pretty solid rock sensibilities. Bobby, improbably, sells decorative concrete on his home turf near Salt Lake City.

So maybe it was indeed time to sacrifice 11222 Dill, but I felt it my responsibility to not allow this milestone to pass unremarked.

So that’s the story. At least that story. But meanwhile, what’s ours?

Well, I’ve nothing to relate that rises to the dignity of the Johnny Bravo episode (or the one where Marcia resorts to cross-dressing, in her hot pursuit of the adorable Davy Jones), but it’s not like we don’t have some ground to cover, so let’s get to it, shall we?

In simpler times (say, suburban L.A. – circa 1972), market participants might’ve casted their collective focus on the many salient data points coming our way,: the acceleration of the earnings calendar, Fed Chair Powell’s testimony on Capitol Hill, and other information flows directly tied to the fortunes of the global capital economy. However, these are anything but simple times, because among other things, our fearless leader accomplished the nigh-impossible, drawing incremental attention to himself – at a point when his face had already become more ubiquitous than that of Orwell’s Big Brother.

More specifically, he’s fighting with everyone, and in doing so, is channeling his inner Jan: always at risk of descending into phantasmagoric delusion (the wig episode, the made up boyfriend, etc.) One time, she even decided, and was accommodated in this wish, to disown the entire Brady crew. And Trump is acting out in similar fashion. He’s brawling, of course, with China, with Europe, and even with Canada for God’s Sake. In his own way (though the superficial narrative runs in the other direction), he’s circling in menacing fashion around Russia. Moreover,, in addition to his longstanding beefs with the FBI, CIA and Justice Department, he’s now picking bones with the supposed-to-be-independent Federal Reserve Bank of the United States.

These are serious matters, but the markets, like the Bradys did to Jan in the aforementioned episode, have chosen to to pretend he’s not there. Thus, just as Jan’s brothers and sisters simply hopped around her when she tried to disrupt a backyard sack race, investors ignored such matters as threats to up the Chinese tariff ante to a cool $500B, and shade throwing at our Central Bank, and went about their business.

They didn’t have much to show for their efforts, but they did manage to gather themselves sufficiently to push the Gallant 500 up about 9 handles for the week (0.27%), and a similar tale can be told about our other favorite indices. Treasuries sold off a bit, pushing yields from ~2.82 to ~2.89, but continue to trade in the narrowest ranges witnessed for more than a decade. The Bloomberg Commodity Index was able to register a pulse, with my victimized grains catching a small bid, but other components – particularly the whole metals complex – continuing their descent into the netherworld. Thus, if nowhere else, we see the trade war risk premium rising in the mundane world of commodities.

Earnings, thus far, have been a mixed bag, with winners such as Bank of America, Morgan Stanley and Microsoft being offset by disappointers including eBay, NetFlix (improbably) and (of course) General Electric. Howver, with 17% of the SPX clocking in, the market is still on pace to reach its socialized target of >20% earnings growth, and if the trend continues, no one should complain.

Casting our eyes towards the VIX, we note benign volatility conditions, but again, that’s not the whole story on vol. As we’ve discussed, the VIX is a rolling measure of at-the-money SPX implied volatility, and it is indeed low by any relative/historical standard. But if one looks out at the tails of the volatility plain – i.e. the realms where investors actually purchase portfolio protection, we see that they are evidencing a willingness to pay up – substantially:

Now, just like the rest of you, having always been a bit leery of the VIX, my inclination is to evaluate an index of skew thereto with a particularly jaundiced eye. But the way this thing is calculated, a value of 100 implies that investors expect a normal distribution of SPX returns, and now we’re at 160 (record levels by a wide margin), which suggests an increase in the options-projected probability of a multi standard deviation crash to statistically meaningful levels.

On the other hand, I mentioned this to a couple of clients and they usefully pointed out to me that all of the implied overpayment for portfolio protection is as strong an indicator that this here bull market has yet to run its course as any we’re likely to find in these troubled times.

I reckon we’ll see. Next week, after all, brings another big series of earnings, including the Googlers and Facebook. Beyond this, on Friday morning, we’ll get our first glimpse at Q2 GDP, and, for what it’s worth, those crazy cats at the Atlanta Fed are up to their old tricks again, turbo-charging their projections back up to a big, fat 4.5%.

Part of me wishes that they’d just make up their minds, but then again, this would be a futile gesture. The Commerce Department will make minds up for them on Friday, and that is the number that will go into the history books.

Until, of course, it is revised. And then revised again. But pretty much everyone who’s cared to look into these matters expects an exceedingly rich quarter, and here it bears remembering, because > 4% prints on GDP don’t last forever.

On the other hand, nothing does. Last forever that is. And if you doubt this, just ask the Bradys. Given that for many of us (myself included of course) they will forever remain the perpetually perky, wellscrubbed teens and pre-teens that they always have been, it must be very upsetting for them to have their childhood home sold right out from underneath their feet. Here’s hoping that the buyer(s) whoever they may be, understand that they are not purchasing a house, but rather, a shrine.

And yes, I’ve considered bidding myself. But it’s a stretch. I can probably scrape together the 1.85 large asking price, but with little margin for error. More importantly, this would leave me with almost no financial resources to undertake certain structural adjustments that I feel are just nigh essential.

I probably don’t need to elaborate here other than to state that, at my advanced age, an upgrade in the plumbing arrangements at 11222 Dilling Street, Studio City, CA is among the most effective risk management actions of which I possibly can conceive.

If I were to take this step, it would be important for me to remind myself that my life in Studio City would not fit into tidy 22 minute segments, resolving themselves in crescendos of happy endings and lessons learnt. This is particularly true 45 years after the demise of the Brady Bunch, and even moreso in today’s markets. It’s tricky out there; not much edge to be found anywhere. Be forewarned.

TIMSHEL

Right Place / Wrong Time (POTUS Edition)

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I been in the right place but it must have been the wrong time

I’d have said the right thing but I must have used the wrong line

I been in the right trip but I must have used the wrong car

My head was in a bad place and I’m wondering what it’s good for

— Dr. John (the Night Tripper)

I reckon I’ll begin by getting a little unfortunate but vital business out of the way. My deepest apologies about the whole Corn thing last week, because it seems that my heartfelt salute to the stalky grain may have done more harm than good:

On the other hand, while I enthusiastically celebrated Corn’s comeback, I never intimated that it would continue. In fact it didn’t. Instead, it reversed itself and managed to record multi-year lows.

And, based upon this train wreck of a chart, I will promise never to write about Corn again. Well, OK; maybe not never. But at least not often.

Let us not forget – the situation, as it currently stands, could be worse. After all, I could’ve also pointed my admiring keyboard at Soy Beans. Or Sugar:

Cain: 

Beans:

In fairness, I probably bear some responsibility for the Sugar slaughter as well. After all, last week’s note did include a reference to candy corn, which requires at least a Spoonful of Sugar to make the market go down.

But it’s not just Ags; last week, the whole Commodity Complex acted in consort to put on a flop seldom seen since the likes of of “Springtime for Hitler”. And here, I’m talking Precious Metals, Industrial Metals, Softs; even Energy. In fact, the whole smash. All of which is captured succinctly in the trajectory of the Bloomberg Commodity Index:

Now, presumably, not many people care about the Commodity Complex, because, let’s face it: nobody cares about the Commodity Complex. I mean, it’s not like anybody is impacted by the price of such quaint but uninteresting products as Copper, Natural Gas, Cotton or the like.

There are, presumably, some guys (with bad haircuts) and gals that must concern themselves with these matters, but I suggest that us Sophisticates move on.

So how about we give it up for my man, Dr. John the Night Tripper, born, bred and still pumping his 88 key ax in New Orleans? Our titular theme references his biggest hit, but there’s a lot more to the Night Tripper than one early 70’s FM Radio extravaganza. Meanwhile, I got to thinking about the Good Doctor’s main lyrical hook (a timeless lamentation if ever there was one) with respect to the current geopolitical situation.

More specifically, it occurs to me that we Americans have been plagued by a string of Chief Executives who have undertaken arguably justifiable strategic initiatives (i.e. been in the right place), with supremely sub-optimal timing. I’ll start with Bush 43, who squandered a galaxy of post-9/11 goodwill by turning our military towards the task of removing Saddam Hussein. Yes, Hussain was a bad guy, arguably a bull goose sociopath. But couldn’t we have tried to finish taking out the incrementally odious Bin Laden before committing to a quagmire that: a) cost untold blood and treasure; b) produced dubious strategic gains; and c) still remains somewhat unresolved, some 15 years later?

Treading carefully into more controversial ground, we come to Obama. It is indisputable that, for eons, the U.S. Health Care system has been a hot mess, and yes, he had pledged to reform it. However, whatever side of the Obamacare issue one may reside, it was deeply ill-timed to re-engineer a vital sector’s economics, one representing approximately ~18% of U.S. GDP, at a point when our economy had not formally checked out of the critical care unit. Had he waited a few more quarters, we might’ve all been better off.

All of which brings us to our current situation, unfolding under the steady(?) hands of 45. Yes, the Chinese have been gaming us in trade for many decades. Yes, they steal our intellectual property. And yes, the lovely Canadians, our besties, can probably justifiably be tweaked for their 3x tariffs on our dairy products, while we buy their cheese at no mark up. But, for crying out loud, couldn’t it have waited until after the Mid-terms? History shows that the current rhetorical path is a risky one. Trump may have the perfect strategy, but if his timing is off even by minute orders of magnitude, it could take a big bite out of the economy, and, consequentially, deeply impact the outcomes of the Midterms. I don’t know that this is where we’re headed, but consider, if you will, the obverse. I posit that absent the trade issue, equity indices would’ve ripped through new highs, economic indicators would’ve been much jauntier, and the political calculus (as a result) much more favorable for the fortunes of the investor class. But instead, he bulls on ahead, and creates what I believe to be the biggest risk overhang on what otherwise looks to me like a fundamentally strong environment that is poised to take valuations to higher realms.

Before taking leave of the POTUS component of the Right Place/Wrong Time thing, I must present the exception that proves the rule. If not thrilled about Trump’s Monday meeting with Vlad (the Impaler) Putin, I’m not sure it will do any particular harm. And, if these two statesmen for the ages are to convene, now may be as good a time as any. But Helsinki? Why hold the summit at that remote outpost, which by the way, fell on the Soviet side of the Molotov-Ribbentrop Pact of 1939, under which the entire sovereign nation of Finland, lock stock and barrel – was handed to Stalin? Wrong Place/Right Time. Check.

All of this notwithstanding, the private capital markets are in fairly perky configuration these days. As was the case with my Corn call, I was arguably in Right Place/Wrong Time mode when suggesting caution on equities in last week’s epistle. Instead of wobbling, the Gallant 500 managed to bust through to a 28 handle, while Captain Naz piloted his rocket ship to new all-time highs. Q2 earnings, though with only 5% of the precincts having reported, are coming in within the margin of error relative to lofty expectations. As suspected, forward guidance shades to the cautious, but in mild surprise (at least to me), CEOs don’t seem particularly concerned about tariffs, which thus far has clocked in as the 8th biggest concern among them with respect to their forward-looking prospects.

But we’ve only just begun this here cycle, which picks up a bit next week with the remainder of the Banks and a couple of high fliers like NetFlix and Microsoft taking their turns in the star chamber.

And investors seem to be conditioned at the moment to both receive good news and react favorably to it. I hadn’t expected such equanimity at this point, but then again there’s that whole wisdom of the crowd thing, etc. On the other hand, there may be some turbulence beneath the calm top-waters.

Specifically, while index volatility has dropped mercifully over the last several months, the same cannot perhaps be said about dispersion at the individual security level. Consider, if you will, the following chart:

Apparently, in other words, not everyone is buying into the rosy scenarios. Yet, history shows that the increase in the magnitude of short-sided individual stock positioning is perhaps the most consistently valid reason to own these stocks as any that can be imagined.

The most important objective, of course, is to be in the right place at the right time – one of life’s most difficult challenges. Investors who achieve this make billions, of course, while the rest of us take pot luck.

For politicians, on the other hand, it is nearly impossible, as a simple matter of odds, to avoid finding themselves in Night Tripper configuration, at least some of the time. We’ve already covered our last three Presidents, and, before that there was Bush 41, who probably would’ve been re-elected had he not raised taxes at an inopportune moment. For Carter and Ford, nearly all of their actions were ill-timed, and before that we have Nixon (Watergate), Johnson (Vietnam), and Kennedy (Dallas), which covers the full range of Oval Office occupants across my lifetime.

Except for two. First there was Reagan, who, through either dumb luck or improbable skill, seemed to time everything to perfection. And last, we turn to Bubba, and here I’ll leave his time/place mismatches to your own collective imaginations.

TIMSHEL

 

Morning Corn

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Woke up one morning, ‘round San Francisco Bay,

She lay beside me, and this was our last day,

No tears were shed, though our hearts would soon be torn,

We just started smiling, laughing, rolling in the morning corn,

Morning corn, morning corn, the blues ain’t gonna getcha, when you’re rolling in the morning corn

— Corky Seigel

I’m guessing that few of you are familiar with this week’s featured artist (named above), who, along with his former Roosevelt University school chum Jim Schwall, lit the scene on fire a bit 50 years ago, under the eponymous moniker of the Seigel Schwall Blues Band. Give a listen if the spirit moves, and start with our title song, perhaps the band’s best.

Yes, I love “Morning Corn” but the truth is, I love all kinds of corn. Because (you’ve got to admit) corn is pretty cool. No matter what form it may take. And there’s lots. For example, there’s corn on the cob, popcorn, corn flakes, corn dogs, canned corn, creamed corn, corn syrup, corn bread and (of course) Jimmy crack corn, and I don’t care.

Corn is sometimes also called maize, but mostly only by either the indigenous peoples of this continent, or those affiliated with my deadly sports enemies at the University of Michigan.

Speaking of indigenous peoples, the European Settlers of the 17th Century first bonded with them guys, over, you guessed it, corn. Corn is also a main food staple — not only for humans, but also for the domesticated animals we breed to slaughter and convert into other culinary delights. Though highly inefficient, corn can, in addition, also be used as fuel for internal combustion engines.

Plus, to paraphrase Dylan, some of these bootleggers can turn it into pretty good stuff.

Corn, though, is not without its controversies. However, I must take issue with my doppelganger Lewis Black in his assertions that: a) all of the candy corn that exists in the universe was created in 1911; and b) its un-consumed units are collected, washed and resold to the masses each subsequent Halloween. In addition, to the best of my knowledge, and contrary to the inferences embedded in our title song, there’s not much corn to be had in the general region of the San Francisco Bay, and almost certainly not enough to go rolling around in the stuff in the immediate post sunrise hours.

But mostly I feel that this is NoCal’s problem (one of many), and other than that, I wish to convey the happy news that of late, is making a nice comeback.

Yup: Making a Nice Comeback

The accompanying chart indicates a month-long, dizzying collapse from ~$4.20/bushel down to a rather pedestrian $3.60 (its lowest level in > 5 years) as of last week. But the good news is that corn’s now back on the charts with a bullet at $3.71¾. But I don’t want to get to jiggy here. After all, I grew up in the grain pits at the Board of Trade of the City of Chicago.

There, you learn early on that grain speculators will often manipulate prices based upon ultimately inconsequential shifts in Midwestern weather patterns, so maybe some of the recent recovery derives from rather parched conditions in America’s Corn Belt. But I think on the whole I’ll park myself in Missouri (ranked 9th in overall corn production as of 2016) on that one.

Then there’s the whole China thing. But China imports less than $1B/year of corn from the U.S. – the approximate equivalent of the value of finished ceramic figurines we sell over there, and a single digit percentage of overall domestic maize production, so I need some help with the math here as well.

But then again, pretty much all tradeable asset classes have me confused of late. Investors returned from the whole Independence Day in a patriotic mood, and took all our equity indices into positive territory for the week, socializing the first across the board first Mon-Fri gain since mid-June. This move catapulted the Gallant 500 above all of its pertinent Moving Averages, also for the first time in a month, and, in solidarity, the always mystifying VIX plunged to depths not seen in a similar dog’s age.

As suggested last week, one could argue that the official action of the quarter began on Friday, with the release of the June Jobs Report. Here, the numbers came in on the shady side of in-line, with solid job creation and increased Labor Participation causing a modest rise in the base rate.

But as everyone kind of feared, Hourly Earnings growth continues to disappoint, clocking in at a drearily repetitive +0.2%. As such, long sought-after wage inflation and its presumed shot in the arm to consumers continues to be little more than a utopian dream for economists of every stripe.

Perhaps in part for these reasons, financial conditions remain both over easy and sunny side up, with government bonds rallying across the globe last week, and the always-generous Swiss National Bank now willing to charge an annual rate of ~0.15% for the money it borrows. Japan is paying 0.02% for the same accommodations. All of which is consistent with my stated hypothesis that the equity complex wants to rally.

But now I’m not so sure it will. Yes, earnings, set to commence next week, appear to be a poised to tell a happy Q2 story. Consensus estimates are clocking in at >20% profit growth, and high single digit revenue expansion. Q1 will, of course, be a tough act to follow but it’s my belief that if corporate chieftains in aggregate do no better than meet these estimates, no one should be particularly inclined to complain.

And, for what it’s worth, I have a hunch that they will beat them. Consensus estimates, that is.

But, for a variety of reasons, I am beginning to worry about forward guidance. First, I hasten to remind y’all that when the C-Suite crowd guides, it will be guiding for Q3, also known as the Kitchen Sink Quarter, when, according to time-honored tradition, bigwig execs tend to sandbag numbers, so as to make them look all the more fabulous when Q4 comes around. And who can blame them? After all, if you were a bigwig exec, would you rather walk into the Compensation Committee on the upswing, or forced to explain away nefarious gravitational forces plaguing your financial statements?

And in addition to incentives that may drive more modest future estimates, the current situation offers ample fodder for this sort of thing. Of course, we can start with trade wars, now, if the wires can be believed, begun in earnest. It may get worst, and it may hit bottom lines, one can almost hear the tune whistling on the lips of CEOs even now.

Then there’s uncertainty about currency, higher energy costs, questionable credit conditions and the like. I may be wrong here, but I’m just kind of suspecting that the tone at the podiums will shade towards the subdued.

My overriding concern is that there’s just too much uncertainty pervading the ionosphere for confident investment – either implicitly, through the markets, or even directly, through such quaint exercises as research, development and capital expenditure. This, I fear, may tether the markets to their recent narrow ranges. I don’t think there’s much outright crash risk, but I do wonder whether investors have sufficiently digested their Corn Flakes or Wheaties to carry this here market into new frontiers – at least for now.

On the other hand, there are those among us who are convinced that the bull market is over, and while I don’t agree with them per se, I must also concede that they may be right. If so, my fondest advice for you is to wake up early, grab the one you love, and head to the nearest cornfield.

If you don’t know what to do from there, then please accept my apologies for wasting your time.

TIMSHEL

Pearl of the Quarter

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On the water down in New Orleans, my baby is the pearl of the quarter,

She’s a charmer like you never seen, singing voulez voulez voulez vous,

Where the sailor spends his hard-earned pay, red beans and rice for a quarter,

You can see her almost any day, singing voulez voulez voulez vous,

I walked alone down the Miracle Mile, I met my baby by the Shrine of the Martyr,

She stole my heart with her Cajun smile, singing voulez voulez voulez vous,

She loved the million dollar words I say, she loved the candy and the flowers that I bought her

She said she loved me and was on her way, singing voulez voulez voulez vous

— Donald Fagen/Walter Becker

A little Steely Dan on this hot, pre-holiday weekend? How ‘bout it kids? Well, anyway, it’s my call, and I say yes.

“Pearl of the Quarter” is merely one of the gem’s on the Dan boys’ 1973 “Countdown to Ecstasy” LP, the second in a string of remarkable albums, recorded over a 5-year period in the early ‘70s. The sequence begins with “Can’t Buy a Thrill”, continues on to “Ecstasy”, then soars through “Pretzel Logic”, “Katy Lied” and “The Royal Scam”. My own view is that the quality of the songwriting dropped from that point on. However, many disagree, feeling that the group’s subsequent release: “Aja”, was their finest work. But you can take that record, along with your Big Black Cow and Crimson Tide, and get out of here. There are a few sublime moments on “Aja’s” follow up: “Gaucho” (1980), but that’s about it. They didn’t hit the studio for the next 20 years, and the produced two forgettable albums around the turn of the century. Then, as I believe was a wise move on their part, they cashed in by touring for about a decade and a half (the only way even the Stones or McCartney make money these days). And now Walter Becker is dead. So it goes.

But oh those first five albums! We could’ve chosen to honor SD by featuring virtually any track contained therein. “Pearl” however, is among my faves, telling the age-old story of a loney guy falling head over ears for a Cajun prostitute in the French Quarter of the Crescent City. Her allure is irresistible, and yes, she loves him (or at least tells him so). But in her inscrutable way, she knows she must spread her love around. He knows it too.

Voulez, voulez voulez vous?

But of course, we have other reasons to home in on “POTC”. Friday, after all, marked the end of an interesting, but on the whole, frustrating, second quarter of 2018.

Across the three-month cycle, there weren’t many pearls about which to report, at least from an investment perspective. And I certainly have a personal beef with its swansong, which made hash out of a prediction of mine that the equity markets were poised for a rally.

But rally they did not. Yeah, after a horrific start, they threw me a small bone as the week wound down, picking up a skinny half a percent in the last two sessions. But their hearts weren’t in it. Friday morning, and on the back of a slight ratcheting down of the China thing, they gathered themselves for an energetic climb, but, as I suspected at the time, they lost their vitality in the afternoon. The Gallant 500 did manage to gin up a 0.3% gain for the April-June interval, and at least this is better than Q1, which socialized a loss of slightly smaller magnitude. Thus, despite an historic tax cut, an earnings cycle that has shattered records, and various other hope-inspiring catalysts, Mr. Spoo now tips the scales at +1.67%.

Of course, it could’ve been worse, and, in fact is — across most of the planet. To wit, of the ~20 indices tracked on Bloomberg’s ubiquitous World Equity Index (WEI) page, the SPX is the only one that has earned the right to paint its performance in green:

Sure, we could turn our attentions to happier environs, including those haunted by the indomitable Captain Naz (+8.79%) or Ensign Russell (+7.00% but falling fast). And certainly the news has, on balance, been positive for the holders of 10-year notes (and, lately) the USD, but I’m gonna go the whole route here and suggest to the Market Gods that, with half of the year now in the books, I’m just a tad bit disappointed.

But the Market Gods most certainly operate in mysterious ways, and who are us mere mortals to question these?

We’re entering what is likely to be a sloppy week, and I think I can speak for the market-obsessed masses when I suggest that Wednesday is the least productive day to celebrate American Independence. Most of us would prefer to either get it over with earlier, or postpone it to the end of the week so we can chop some wood before giving our shout-outs to the Stars and Stripes.

But the Julian Calendar was established well before most of you were even twinkles in the collective eyes of your forebears, so I reckon we’ll just have to live with that. Those of us who plan to return to our posts after the last Roman Candle has burned out will no doubt turn collective attention to next Friday’s Jobs Report, where the base rate is expected to hold steady at 3.8% and195K new private gigs are anticipated. The real action, though, is likely to revolve around Average Hourly Earnings, and the testing of the hypothesis of whether or not wage gain acceleration is, or ever can be, part of the picture.

This may be even more important than usual, because, as has been the case so often in recent years (and proven wrong each time), a big concern for us pointy-headed types is whether the indefatigable American Consumer might, at long last, be running out of steam. About the only interesting macro number that dropped last week was a surprising downward shift in Personal Consumption Expenditures, expected to clock in at +3.7%, but only managing to reach a tepid +2.7%. So alarming (to some at any rate) was this miss that it caused the recently high flying GDPNow Index to undertake an unsettling nosedive:

But what the Atlanta Fed taketh away, the Atlanta Fed can surely giveth back. And one thing that would almost surely invigorate both our domestic shoppers and give a boost to the broader measures of economic performance would be some evidence that pay raises, long promised, are actually manifesting.

There are indications, however, that the market doesn’t believe this to be the case – none more visible than the continued rally in global bonds, which also went against my recent call, and which now have tethered 10 year yields to a rather pedestrian 2.86%.

For those tracking such matters, yes, Generalissimo Francisco Franco is still dead, and 10 Year Swiss Notes are still offered at negative yields.

Once we get through the holiday and the Jobs Report, we can, the following week, turn our attention to highly anticipated Q2 earnings. The early returns have been good, but of course investors have not been overly impressed; otherwise the indices would have done what I ordered and rallied.

But c’mon, people.! Estimates for the quarter are the 2nd best (i.e. after Q1) since the crash, and have actually, been rising across the last three months. This, as indicated in the following chart, is something of an anomaly:

Current P/E’s, at 16.1, are below the 5-year average but above the 10-year mean. But please; the latter takes us back to the period covering the crash and the recovery, and are hardly reflective of what might be expected across today’s strong economic environment, with very favorable financing conditions, and an awful lot of companies putting up astonishing – and still expanding – bottom line performance.

So, though chastened by my misdeeds over the last couple of weeks, I continue to project the near-term balance of the risks in the equity markets to be shaded to the upside.

And, in closing, here’s hoping that Q3 generates more pearls than what was served up to us in Q2. However, this is most certainly out of our hands. After all, sometimes you walk alone down that Miracle Mile; sometimes you do so in the most pleasant of company. And sometimes the pearls we find are artifacts of God’s perfection, while other times they are Cajun women of easy virtue, singing “voulez voulez voulez vous”.

Either way, we take what we can get, because there’s really nothing else for us to do. So we carry our lovingly purchased flowers and candy, and utter our million dollar words, often to no avail. But we return, each day, to the Shrine of the Martyr, hoping for the best.

I reckon I’ll see you there, next week. In the meantime, I bid you a happy holiday, and, as always, a heartfelt…

TIMSHEL

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