Category Archives: Weeklies

The Efficient Cowbell Hypothesis

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Let’s get back to the music, shall we? After all, it’s been several weeks, and I don’t know about you, but as for myself, I’m Ready 2 Rock. Today’s subject (though perhaps not its direct object) is Blue Oyster Cult: in my judgment one of the finest and most overlooked bands in rock’s pantheon. They are comprised of a bunch of erudite New Yorkers, most of whom attended fancy private colleges in the region. They burst onto the scene in the early ‘70s, when rock most needed the boost, and released 4 killer albums (self-titled debut, Secret Treaties, Tyranny and Mutation and Agents of Fortune), featuring wicked riffs, cerebral lyrics and tasty hooks, at a time when our heroes were fading into mediocrity, and it was becoming increasingly clear that the next generation didn’t have the goods to do the job.

Like many such outfits, they captured a following, rode a modest crest of fame, lost their composition touch and have been mailing it in, under various lineups, for most of the past four decades. However, for better or worse, the apex of their awareness in the public eye came in the form of an SNL skit called “More Cowbell”. In it, a fictional lineup of cast members takes to the studio and do a fantastic job of replicating the band’s sound with respect to their biggest hit: the accessible but on balance forgettable Don’t Fear the Reaper. The punchline derives from the perfect casting of Will Ferrell as the band’s cowbell artiste, and Christopher (Bruce Dickenson, aka The Bruce Dickenson) Walken as the record’s producer. Walken is so enchanted by Ferrell’s cowbell work that he forces it into an overwhelming domination of the arrangement (“I really want you to explore the space of the studio” Walken declares to Ferrell). Ferrell is magnificent as the clueless percussionist, and Walken is at his sleazy best in his role as the grease ball, know-it-all producer. The band at first is skeptical that the cowbell should take the lead, and the affable, sheepish Ferrell offers to stand down, but in the end everyone agrees that Will should take center stage, and, as the scene fades to black, he’s blissfully banging away (maybe still is to this day).

As a result, the term “More Cowbell” has entered, perhaps for all time, the cultural lexicon of this great nation. As a public service to my uninitiated readers, I offer a link to the full sketch, below (courtesy of the National Broadcasting Company; all rights reserved, natch):

http://www.nbc.com/saturday-night-live/video/more-cowbell-with-will-ferrell-on-snl-video-saturday-night-live-nbc/3506001?snl=1

The whole thing is beyond silly, and (though the band gracefully and even enthusiastically embraced its incremental 5 minutes of SNL fame) doesn’t give a great ensemble its props, but I believe it captures the American ethos about as well as anything that comes to mind on this warm, mid-summer weekend.

But perhaps more importantly for our purposes, it begs the following question: does any corner of the investment universe need more cowbell? 

Now, here, in trademark mashup fashion, I must loop in my University of Chicago roots. It is there that I learned (from Nobel Laureate Eugene Fama, no less) of the Efficient Markets Hypothesis, which avers that markets, and, by extension, all economic factors, are oriented to point-in-time perfection, based upon available information and sentiment. From this perspective, one can argue that markets must be “cowbell efficient” as well, featuring precisely the amount of cowbell that conditions demand, and that any incremental additions or dilution of current cowbell quantities would only serve to diminish the mix.

Well, maybe, but even Fama himself has admitted that markets are not at all points perfectly efficient, so perhaps we’ve got some wiggle-room, cowbell-wise. If so, we can probably first turn our vision to the equity markets, which few would argue at the moment are cowbell-deficient in any sense of the term. The SHAZAM effect referenced in the preceding edition was in full force in the early part of last week, catapulting markets yet again to new record highs (both here and across the globe) before ending the cycle in flat-line mode. The main driver here once again appears to be Q2 earnings, which are now nearly 1/5th in the books. On balance, they’re strong, but while there are a number of Netflixian-like triumphs to celebrate, there were also some General Electrician disappointments.

Perhaps more pertinently for our purposes, it is clear that the expectations bar has risen. As reported across the wires, “beats” are being welcomed this quarter, but perhaps with slightly less valuation enthusiasm than in past cycles, “meets” are facing disdain, and misses, as always, are suffering merciless punishment. Indices continue to rise to the heavens, but the breadth is putrid. Moreover, in messaging that would be more difficult to miss than Ferrell’s percussive whacks, equity investors continue to shrug off darkening macro and political clouds. As a case and point, ask yourself whether, in the middle of a brutally serious investigation of potential criminal activity at the top, with members of his administration facing one subpoena after another, a President insults the Attorney General and practically begs him to resign, would you want to load up on stocks or lighten the cargo?

Investors have responded with a resounding “Buy ‘Em”! Ergo, we can conclude, at minimum that no additional cowbell is required in equity-land.

But how about other asset classes? Well, it appears that Mr. Ferrell might very well consider pointing his solitary drumstick at the U.S. yield curve, which, due to a fairly dramatic end of week selloff of 3 Month T-Bills, actually inverted at the short-term end:

There was a good deal written about this over the past few days, and the stock explanation is concern about a Washington throw-down over the debt ceiling – due to expire on 10/1. If you own October T-Bills and Uncle Sam defaults, you may be left holding the bag, or so the argument goes. But as for me, I think we’ve got more important concerns to vex us.

If any feature component of the global risk factor combo could use some bell, it may be the USD, which took a pretty significant beat-down over the latter part of the week, and is now, on a weighted basis, sitting on >2.5 year lows:

 

US Dollar Index: 

It is said in financial circles that while sunblind equity investors remain unconcerned about Investigations, Legislative agenda breakdowns and the like, these matters do tend to get under the skin of those who bang around in the Fixed Income/FX complex, and who knows? They may have a point.

My most abiding belief at present is that while smarter guys and gals than me may justifiably debate the appropriateness of current asset values, I will stand by the following precept: whatever their other merits may be, said valuations fail to fully reflect the risks embedded in both the political and capital economy. I don’t in my travels run across too many souls who are unmindful of the hazards looming on our collective horizons, but in terms of voting with their trading accounts, they have for the most part chosen to ignore the warning signs. Evidence of this ostrich dip abounds everywhere the eye meets, including the collapse of short interest mentioned in last week’s installment, and the widely discussed weakness in risk measures such as the VIX, now hovering at fractions of basis-points above all-time lows:

As such, and channeling my inner Bruce Dickenson, if I was to add more cowbell, I would apply it perhaps exclusively to measures of the risk premium, including the above-displayed VIX, realized index volatility, and other, similar dynamics.

Unfortunately, however, there’s only one Bruce Dickenson, The Bruce Dickenson, and he alone carries the vibe to take us to the Promised Land. But Good Sir: Oh Keeper of the Controls, Oh Captain of the Cowbell, please consider its wider application, Pete Seeger-like, to ring out danger, to ring out a warning to all our brothers and sisters, all over this land. For, from my vantage-point, the Efficient Cowbell Hypothesis is sorely in need of the type of recalibration that you and you alone can provide.

TIMSHEL

SHAZAM!!

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Like most of my Paleolithic peers, a large portion of my youth was informed by comic books. Doesn’t seem like today’s young bloods have followed this example – perhaps too many other forms of mindless entertainment are available to them. My information in this regard is entirely anecdotal, but if I’m correct, it’s sort of a shame. There’s something transcendent about lying on a bunk bed, perhaps head upside down, and thumbing through the type of publication that requires perhaps the least mental energy of anything on the planet. That something may now be lost.

Back in the dizzle, though, I had the guilty pleasure of favoring the more effete of these periodicals – Archie, Richie Rich, Nancy and (personal fave) Family Circus – over the brawnier superhero publications preferred by most of my crew.

There was, however, one exception: though I’m not sure why, while I was often bored with such eternal Y-chromosome driven classics as Superman, the Fantastic Four, etc., I had a real soft spot for Captain Marvel. Perhaps the main reason for this is the clever backstory. CM’s true identity is 12-that of year-old Billy Batson, a fraudulently disinherited, homeless boy who finds himself able to transform into the good Captain (and though I never figured out why he’d ever do so, back to Billy), with massive attendant superpowers, by simply uttering our title phrase: SHAZAM.

Further investigation reveals that SHAZAM is an acronym for various gods of antiquity (“the immortal elders”), from whom Billy draws his powers: Solomon for Wisdom; Hercules for Strength; Atlas for Stamina, Zues for Power (Billy is even able to summon Zeus’s thunderbolts at will); Achilles for Courage and Mercury for (what else?) Speed. Of course, he used these powers exclusively to fight evil, and, over the course of his magnificent but relatively brief initial run (155 skinny editions, released between 1939 and 1955), he routinely encounters, and bests, not only his nemesis: Doctor Thaddeus Bodog Sivana, but also Nazis, mass murderers and the IRS (OK; not the IRS).

From Left to Right: Captain Marvel, Billy Batson and Dr. Thadddeus Sivana

 

Lately I’ve been searching for Captain Marvel, not on his home turf: the streets of fictional Fawcett City, but through the windy caverns of Lower Manhattan, locus of the entirely nonfictional Wall Street that occupies so much of the attentions of my readership.

I do so because the markets appear to be in SHAZAM mode, and, if so, then Captain Marvel must be lurking about somewhere. It’s of vital importance that we find him, because, if, purposely or by accident, he happens to re-utter the word SHAZAM, the thunderbolts disappear, and we will once again be operating under the care of the affable, good-hearted, but likely ineffectual for our purposes Billy Batson.

This, my loves, we cannot abide, so if I do see Captain Marvel, I’ll hazard everything to duck-tape1 his mouth shut.

1 Now, before you persnickety pains in the rear jump all over me for incorrect nomenclature,

you should know that what is now commonly referred to as duct tape was actually first called

duck tape, so named by the army because water rolled off of it like on a duck’s back.

Powered, apparently, by Q2 earnings, the SPX and Dow steamrolled their ways to yet another set of what is becoming a somewhat tiring new all-time highs. They may have justification for doing so, as the 6% of the precincts reporting thus far (Goldman pre-announcement laid aside) are sharing glad tidings indeed. Moreover, their vigor, albeit on a small sample, is widespread, and applicable to both earnings and revenues:

 

Notably, by one measure, the rally catapulted valuations to elevations not seen since the yuck-filled days of 2007. To wit: he aggregate capitalization of worldwide equity securities has once again exceed 100% of global GDP:

 

Part of me is inclined to give all the credit to Captain Marvel’s SHAZAM effect, but the fact is his efforts in this regard received a welcome assist from his trusty financial manager, Chairwoman Yellen (aka Janet Marvelous), who over the course of her two-day/midweek Humphrey Hawkins testimony, warbled out Panglossian (best of all possible worlds) arias that spoke of benign but constructive economic conditions across this fair land. And investors cooed with delight.

But from my vantage-point, troubles persist on the periphery of this Eden. As foretold in these pages, macro numbers are decidedly mixed. Friday’s CPI print clocked in at 1.6%: a figure which, if my math is correct, falls visibly short of the 2% target. Contemporaneously, Retail Sales figures dropped, and looked like this:

In addition to the foregoing, we’ve got the North Koreans, the Chinese, Health Care Legislation (or lack thereof), the meddlesome Russians (who, if the mainstream press is to be believed, are now acting in such a way as to induce our citizenry to wax nostalgic for Stalin’s U.S.S.R.), Investigations and a host of other demons lurking about — all of which should serve to keep Captain Marvel sufficiently busy for the rest of the decade, should he choose to continue to fight our battles. Any and all of these should put some pressure on valuations, but you wouldn’t know it by reading the tape. As one example of this, consider the fact that as the Gallant 500 soars to the heavens, short interest in their affairs has hit a low point not witnessed since (you guessed it) 2007:

I’m also keeping an eye on Friday’s somewhat unexpected power run by the Aussie Dollar, which came seemingly out of nowhere in the last 4 hours of the trading week:

AUD 1 Month: 

In light of all of the above, I will cop to being somewhat confused. Something about this tape just doesn’t feel right, and, while I am not inclined to prophesy a major reversal of market fortunes, I would offer the following bit of risk management advice:

The low vol/benign conditions cannot last forever, and again, when the inexorable forces of human uncertainty manifest in the markets, it’s likely to be at a point designed to inflect maximum pain on the collective P/L of my constituency. You may see me repeat this message to the point of annoyance: there’s more risk in your portfolios than your reports are showing, and I’d advise everyone to act accordingly. This doesn’t mean heading for the exits, but it does impel an extra measure of caution with respect to your investment activities.

If all else fails, of course, we can always channel our inner Billy Batson, and rely on SHAZAM to save us. But even this course is potentially hazardous; the sacred phrase is reserved exclusively for the battle against evil, and may not work to the same effect outside this context. Case and point; approximately a decade after Captain Marvel’s original run, the phrase was resurrected by Gomer Pyle, first in the sublime Andy Griffith Show, and then across his eponymous spinoff series.

To the best of my recollection, Gomer was indeed something of a comic book savant, but his use of the phrase brought about no extraordinary super-powers beyond a reliable laugh line. As such, it perhaps proved the truism that even the most divine of mankind’s conceptual powers are subject to erosion through the forces of time and overuse: a reality that my investment family would also do well to remember in these confusing times.

TIMSHEL

Prairie Dogs

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Illinois: Where Our Governors Make Our License Plates
— Bumper Sticker/T-Shirt Mostly Available West of Indiana and East of Iowa

I’m sorry (again), but I have developed an obsession with the Land of Lincoln, also known as the Prairie State, also known as Illinois, so I’m compelled to take you on a little journey to the heartland. And why not? I lived there during junior high, high school, and ten years of my adult life. I met my wife (a native) there, and my children were born there.

In many ways, Illinois, or Chicago in any event, is my home turf. The mayor is my old school chum. My mother lived there her whole life, and now spends her eternal rest in a memorial park near a busy intersection in suburban Arlington Heights.

Though it pains me to admit it, I still root for their professional sports teams.

I was born in California, got my undergrad degree in Wisconsin (after kicking it, Freshman year, in NOLA) and have spent the second half of my existence to date in New York, but when I speak of “home”, almost invariably, I’m referencing Chicago and its broader metropolitan area.

Illinois has been much in the news lately, mostly for a financial crisis so dire that it came within several hours of claiming the honor of being the first state to see ratings agencies downgrade its debentures to a status referred to in the academic financial nomenclature as “junk”. The ratings agencies’ beef? For the 3rd consecutive year, it faced the prospect of running its, er, operations without a budget. Heroically, and at the 11th hour, the State Legislature not only rammed through a budget: on the back of a $5B tax increase, but managed to gather itself sufficiently to override a veto of the bill — issuing forth from the office of its financially gifted, right minded but politically misanthropic Governor, one Bruce Rauner.

One can only react more in sorrow than in anger to these tidings. The state sports unpaid bills to the tune of $15B, and growing, unfunded pension liabilities of $150B. It is losing population at a more rapid rate than any star on the flag, and the 2016 census reveals that the population of once-mighty Chicago has now reached the lowest level since 1910. Based upon the latest estimates, the state will spend fully 35% of its now tax hike fattened revenue stream on a combination of debt service and pension distributions.

While you can certainly count me among those with undying respect for enterprises including Moody’s, Standard and Poors and Fitch (we’ll overlook that bad patch they went through last decade), one wonders how dropping an incremental $5B of levies on the already-beleaguered and fast-fleeing taxpayers of the state can possibly improve the credit quality of Illini debt. As events unfolded last week, Illinois also announced plans to issue $6B in new general obligation bonds, to which I respond: 1) anyone that goes anywhere near this paper needs his or her head examined; and 2) as I learned – at the University of Chicago of all places – borrowing more money is a dubious strategy for getting out of debt.

There’s blame aplenty to distribute for this sorry mess, but indisputably, the head of the dragon is longtime Illinois Strongman/Speaker of its House of Representatives: The Honorable Michael J. Madigan — a boss who wields power in his realms with an audacious force so inexorable as to give ideological forbears William Marcy (Boss) Tweed and Richard J. Daley a run for their money. When he’s not busy spending funds that the state he runs doesn’t have and cannot hope to obtain (mostly by applying the time-honored playbook of lighting up public employees and then directing them to vote in his minions), he runs a law firm that has a virtual monopoly on (you can’t make this stuff up) representing companies and individuals seeking to sue the government for tax relief. That he has made a maharajah’s fortune in this side endeavor is beyond dispute. But of course, in this great land of freedom, where the billionaire President of the United States can block the release of his tax returns, where the redistributionist House Minority Leader’s family can make (undisclosed) hundreds of millions in real estate development in the Congresswoman’s vagrancy-plagued home district, exact figures are not in the public domain.

So it was perhaps pre-ordained by the Gods that Familia Madigan would win this most recent showdown, pocketing a $5B tax increase in the U.S. jurisdiction that can perhaps least afford to take such a step, virtually ensuring a continued and perhaps accelerated exodos of individuals and businesses that must foot this bill – completely eschewing reform elements that, by everything that is economically holy, should’ve been part of any budget package, and placating the always pliant ratings agencies along the way. But this much is also certain: Illinois is as broke as broke can be, and will be defaulting on its debts in the very near future. This ought to be an interesting spectacle to observe – particularly given the reality that the U.S. bankruptcy code does not include provisions for a state to declare bankruptcy. More likely than not, these laws will have to change, so stay tuned.

We can, however, exercise this small bit of incremental clairvoyance: when Illinois stiffs its lenders and goes through a bankruptcy process upon which the overseers will probably bestow some other benign name, note holders will not only be lucky to receive pennies on their dollars, but will be publicly excoriated for having the temerity to seek repayment of funds lent in good faith, at the expense of all of those dedicated public servants who the system will place ahead of them in line.

It strikes me that these events may have more of a direct bearing on market fortunes than is currently reflected in valuation consensuses. If nothing else, the unfolding tragedy of Illinois should serve as a morality tale for both the nation and the world. To wit: when the $100 Trillion and growing unfunded Social Security and Medicaid obligations are added to the more widely disseminated budget deficit of ~$20 Trillion, one could argue that the entire country is teetering on the brink of insolvency. We could take a lesson from the rapidly unfolding Illinois tragedy in all of this, but we probably won’t because we never do.

But enough of all of this; the 2nd half of 2017 now begins in earnest, and it ought to be an interesting ride. During a holiday disrupted week, perhaps the symbolic launch of H2 began at 8:30 Eastern on Friday, with the release of the June Jobs Report, a document that on balance served to please the investment masses. The Big Engine that Could called the United States generated a “deuces wild” 222K private sector jobs. The Unemployment Rate ticked up by a rounding error, but, encouragingly, this appears to be mostly due and owing to a much-needed increase in the long-moribund Labor Participation Rate.

The Glass-Half Empty crowd did complain a bit about the lack of traction on Hourly Earnings, and they may have a point. (more about this below). But equity investors liked what they saw, and managed to bid the SPX into positive weekly territory by Friday’s close.
Bond investors weren’t as constructive, bidding up U.S. 10 year rates by about 1/4%. The deeply suppressed German Bund’s rate has doubled over the last couple of weeks, somehow British Gilts yields are also ascendant, and even JGB rates climbed to the indisputably usurious rate of 0.09%. The USD bounced around a bit, as did most Commodity markets.

Next week marks the beginning of the Q2 earnings season in earnest, and the projections are encouraging. Consensus is calling for a 6-7% year over year bump and a nearly 5% increase in revenues. But the banks are already partially in and the results there are decidedly mixed. Investors in that sector appear to be resting a good deal of their hopes on a continued normalization of the yield curve, and can take encouragement not only from the strong jobs report, but also from the contents of the latest FOMC minutes, released Wednesday, and suggesting a commitment to follow through on their promises (threats?) to begin trimming the Fed’s bloated $4.5T balance sheet around the time that the Autumn leaves begin to fall in Lincoln Park.

Well, maybe, but having found myself in pitched battle with the bond bears for most of the last 6 years I’m unable to reverse field now. Yes, rates have drifted up and this trend could indeed continue, but I firmly believe that this is a finite phenomenon, and that when it runs its course, yields are as likely as not – both here and abroad – to drift downward.

In particular, I continue to foresee a mixed muddle of macro data, under which for every boffo jobs report, there’s an offsetting flop. Consider, if you will, Q2 GDP (anticipating the real deal set for release on 7/28), which according to my crew in Atlanta, is now showing some gravitational pull.

 

Note that the latest results came after, and therefore incorporate, the big June jobs number.

As matters unfold, I see a domestic and global economy in transition, still feeling the effects of the now decade old credit disaster, featuring a great deal of risk aversion among primary deployers of capital, and still more cost conscious than would be ideal for either rate normalization or open field running in the Equity Complex. My biggest concern reverts back to the sluggish wage growth: embedded, among other places, in Friday’s Jobs Numbers. This metric and others corroborates an economic paradigm under which the combination of above-mentioned risk aversion, automation and other technological innovations are impeding the flow of economic bennies to the masses, who, like their paymasters, foresee an opaque financial future, and as such are being very parsimonious in their financial outlays.

If I’m right about this, then we may be in a 3 steps forward/2 ½ steps back trudge for the markets and the economy in general. This is of course a less-than-ideal construct, but I hasten to remind you that things could be a whole lot worse.

For example, we could all be living in Illinois, plagued with higher expenses, dwindling revenues, disappearing population, and a leadership that wants to squeeze the populous dry, while lining its pockets along the way. Four of its last seven governors (Otto Kerner, Dan Walker, George Ryan and the magnificent Rod Blagojevich – in the slammer for being caught in a scam to sell Obama’s Senate Seat) are convicted felons. I don’t think they have the goods on Rauner, but he may have the honor of presiding over the first disintegration of a state since the War of Independence.

The Land of Lincoln was granted Statehood in 1818, some 9 years after Abe was born, and 12 years before he set foot in the Prairie State. If my math is correct, next year will mark its Bicentennial, but I don’t anticipate much to celebrate out there – that is, if they make it at all: an outcome, which, at the point of this correspondence, is very much in doubt.

TIMSHEL

A 3 Orange Payout

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Oranges and lemons, Say the bells of St. Clement’s.
You owe me five farthings, Say the bells of St. Martin’s.
When will you pay me? Say the bells of Old Bailey.
When I grow rich, Say the bells of Shoreditch.
When will that be? Say the bells of Stepney.
I do not know, Says the great bell of Bow.
— Old English Nursery Rhyme

We begin on this sleepy pre-holiday weekend with a (may God strike me down if it’s not) true story. So there I was this past Wednesday, kind of dawdling between meetings, when a cheerful looking gentleman of Sub-Continental extraction approached me and told me that he wanted to speak because he thought I had a kind face. The encounter took place on the corner of Madison and 54th: not a location where being accosted by a stranger is likely to lead to wildly enriching outcomes. But I had a little time to kill and thought I could handle myself, so I hung with him for a bit. And he shared with me the following insights: 1) that he could tell I’d been going through some hard times these past few years; 2) that my greatest, er, fault was too much good-hearted generosity; and 3) that I was on the brink of a major positive reversal of fortune — due to arrive at some point this summer. He then informed me he was a psychic (no duh!) and started asking me random questions. He talked me into trying a little experiment, where he scribbled a few words on a small purple piece of paper, and then crushed it into my hand. He continued to hit me with random queries, including my favorite country (being polite and, as he said, good-hearted, I named India – a country I’ve never visited). Next he asked me my favorite color. I told him “orange”, which was a lie. I heard somewhere that as a matter of settled science, virtually everyone’s favorite color is blue. This is more or less true for me (and at any rate, orange is certainly not my fave), so I thought I’d try a bit of sneak to trip him up.

Finally, he asked me my favorite number and I replied “3”. Now, while I’ve nothing against ”3”, over the course of a lifetime I have NOT singled it out as my preferred digit. I reckon, though, I’ll take “3” about as much as any other integer at the lower end of the counting range (I’m particularly into the bit about how the components of every multiple of 3 adds up to 3 or a multiple thereof). So gimme 3. All. Day. Long. He wrote down my answers, in my full view, on another purple sheet and asked me to open up the paper still crumpled in my hand.

Well, naturally, the document read “Orange” and “3”, so it was time for him to hit me up for some cash. He told me average schmoes usually give him $50, but that fat cats (presumably like me) often lit him up with a double Benjamin. I reached into my pocket and handed him a fiver, and started to walk away. He didn’t follow me, but did call out his complaints as I left his presence. I turned around, looked at him and
said “I’m not that good-hearted”.

End of story.

Perhaps one or more members of my streetwise and erudite readership can enlighten me as to how he pulled this off, but I DO know it was a scam. I mean, after all, if a guy is REALLY that good at predicting in advance what some total stranger might say to him – true or not – about his favorite color and number, and said individual is in want of incremental funds, then he presumably has myriad opportunities at his disposal more lucrative than the bit of 3-Card Madison Avenue Monte described herein.

Perhaps, for instance, he could predict the path of the markets, or, more narrowly, the results of individual stock earnings in the looming reporting cycle ,and invest accordingly. I know that’s what I’d do if I was him, but then again, I’m not him.

So I don’t know what’s going to happen when the second half of 2017 opens for investment business tomorrow, then shuts down for our national Independence Day celebration, only to resume, in fits and starts, by Wednesday. I do suspect that we’re in for a fairly wild sequence of action, unfolding perhaps across the remainder of 2017. We enter these proceedings with a large number of potential market moving
catalysts, some of which began to come into play over the last several days, and across a week I expected to be pretty somnolent.

Perhaps most significant of these was Chairman Draghi’s unexpectedly hawkish commentary – issuing forth from Portugal of all places – and suggesting, ever so gently, that EQE might not last forever. His remarks sent Continental investors into a flurry of selling of debt instruments in the realms over which he lords, a dynamic that even spilled into this here jurisdiction. His minions subsequently attempted to offer some calming qualifications to his remarks, but, at least in the FX and Interest Rate corners of the investment universe, these did not have much of a soothing effect.

And Draghi has company. It seems over the last couple of weeks almost all of the world’s leading Central Bankers have turned hawkish. And one wonders why, because, as for me, I’m not seeing the moonshot that appears to be in everyone else’s field of vision with respect to the global capital economy. So I am kind of fading all of this brouhaha about rising interest rates. I think the U.S. could probably sustain a >4% rate on, say, it’s 10 year note, and lord knows this boy could use a little extra yield for that ocean full of liquidity upon which he rides. By but the path to a doubling of said rates would in my mind be a rocky one, chock full of collateral damage, and I simply don’t see the political will for any of that sort of thing. And if this is true in the U.S., it applies, in spades, to other jurisdictions.

But bonds were on offer across the globe last week, with attendant rising yields, and contemporaneously, perhaps not coincidentally, the moribund Energy Complex perked itself up, with Crude Oil rising nearly 10% over a handful of trading sessions. And within the Commodity Sector, Oil was not alone, or even the leader. Though perhaps largely ignored by most of the fancy pants trading universe, Grains were en fuego last week:

Corn:                                                                   Wheat:                                                          Soy Beans:

Meanwhile, with precisely half the year now in the books, the SPX is up about 8¼% and, across my long and storied career, I cannot remember such a solid semi-annual performance being so difficult to monetize. The weekend newswires are laden with despair about the 2nd half, and perhaps they’re onto something. Too many ratios are at 10+ year highs to enumerate in this space, and that sort of thing
obviously cannot go on forever. Presumably, the primary catalyst for the strong showing in Months One through Six was the anticipation of all of those blessings from an investor friendly set of policies emanating out of Washington. And let me ask you: how promising does that little theme look right now?

So I’ll cut the Debbie Downers a little slack here. But to whatever extent the equity markets will feel gravitational pull in the coming months, it sure doesn’t look or feel like it’s about to crash. I wouldn’t complain about a little give-back here, but NOTHING about our current conditions suggests to me that the bottom is about to fall out of the stock (or for that matter) bond markets.

I do however believe we’re in for an interesting summer, and that risk factors in every asset class could move in either direction. I hope this energizes everyone, because that is what makes this here game the great game it is.

My best risk advice is to stay on your toes here and shade towards the reactive. If you’ve got a strategy ,and compatible portfolio in place, by all means keep it and continue to do what you’re doing. But in terms of incremental, on-the-margin adjustments, I’d lay back a bit. I feel that come what may, market conditions are likely to look much different six weeks hence than they do today.

As for me, after my 3/Orange episode, and knowing that the slot machine payoff for such a combination is 600:1, I did the only rational thing I could think of. I loaded up on quarters, hightailed it to the open embrace of the one-armed bandits at my favorite casino: Foxwoods Resort in fabulous Ledyard, CT. I hit three triple oranges in a row, and now have enough to retire, so this will be my last column.

OK; I made that last bit up, but the Page 1 anecdote, on my immortal soul, is the plain truth. And I hope that my Punjabi friends’ proclamation of a run of luck does indeed come to pass for the kid. Stranger things have happened, you know, and my new bestie, among his myriad talents, is clearly an impeccable judge of character.

TIMSHEL

Teas for Twos

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I dedicate this edition to one George Herman (Babe) Ruth, on this, the 100th (plus two days) anniversary of his sale by the Boston Red Sox to the New York Yankees.  I’m not a huge baseball fan, and, to the extent I follow the sport at all, you can count me among the legion of Yankee detractors. This was always the case, but a decade or so back, when the House of Steinbrenner (amid a financial collapse about which you may have read) extorted about $2 Billion from New York taxpayers (of which I am one) to build that new shopping mall with a grassy diamond in its midst, my disdain hit full flower.

Call it the second great heist in Yankee history.  The first was their 1917 purchase of the Babe’s rights, from Red Sox owner (and New York denizen) Harry Herbert Frazee, for the relatively paltry sum of $100,000 ($2 Million, in round numbers, in today’s dollars).  For Frazee, baseball was something of an avocation; his principal profession was that of Broadway Producer, and he needed the hundred large to finance a then unknown/now classic musical called “No, No, Nanette”.

But again, I’m just not that into baseball.  Is anyone? Really? In fact, what got me on to the whole Bambino thing was my disgust at the Chicago Bulls giving away the sublime Jimmy Butler for little more than a bag of used basketballs.  To add insult to injury, they actually sold their 2nd round pick for $3.8M – about $190K in 1917 dollars – a move which further emphasizes the shocking one-sided nature of the original Yankee scam.  But an additional word about the Babe is perhaps in order. Sports fans, no matter what the sport, never tire of the GOAT (Greatest of All Time) debate, but that there is even a discussion of this with respect to what is anachronistically described as “our national pastime”, is almost beyond silly.  The answer is Ruth, hands down.  He set a passel of records, including for single season home runs, career home runs, career RBIs, slugging percentage, etc., some of which hold to this day.  He led teams to 7 World Series titles (can anyone name anyone else who can make this claim?).  He accomplished all of this in 154 game seasons, in an era long before the leagues started juicing balls and (later) when players started juicing themselves.  He played against superior competition, relative to modern times, as the entire MLB structure featured only a dozen teams, drawn from the country’s best athletes, in an epoch where the competing draw for skilled sportsman to football was in its formative state, and round ball was still being played with peach baskets.

Oh yeah, and he spent the first few years of his major league career as a pitcher, amassing a record that extrapolates to Hall of Fame credentials, winning 94 games, losing 46, with a beyond gaudy Earned Run Average of 2.28.  Had he started his career in the outfield, and conservatively assuming he could’ve “gone yard” 25 times a year, his tater total would be approximately 850, which would have left Barry (Mr. Asterisk) Bonds and, lest fortunately, the fabulous Henry Aaron, in the dust.  Had he remained a pitcher, his win total projects out to over 400; ‘nuff said.

So, 100 years ago, the Babe went on to create some of the most important chapters in the American storybook, and, though it took some time, Harry/Herbie Frazee eventually brought “No, No, Nanette” to a triumphant run on the Broadway stage.  Among its myriad charms, NNN is perhaps best remembered for its feature song: “Tea for Two”, the purloined theme of this column.

But as always, the eternal question abides: why do we care?  Well, as widely discussed in the financial press, it’s been a rough ride for those looking to capture return by owning the U.S. 2 Year Note (the “2s”), as hedged against the same debentures extended out to maturities of a decade.  It was indeed another down week for the 2s/10s crowd, albeit a modest one:

2s/10s: Another 10-Year Low.

Let’s be clear: from a macro perspective, that chart ain’t pretty.  But lo, and without warning, attention has shifted to the even more put upon 2s/30s spread:

2s/30s: Same Deal.                                           

Yield Curve Action Last Week:

Again, all of this begs the question as to why we should care. I mean, OK; so the yield curve is flattening.  Investors are rushing into the powerful arms of our long term debt securities, in part at the expense of those instruments with more fleeting life spans.

I did a turn in Grad School at an institution approximately 3 miles, as the crow flies, southwest of the House That Ruth Built, and one of the things they taught me (at least if I remember correctly) is that the flattening of a yield curve is an indication that a recession may be in the offing.  But that was 35 years ago, and a good deal has changed since then.  Computer programmers no longer are forced to enter code on punch cards and process them through noisy card readers.  Football helmets are no longer made of leather but now built out of materials designed to survive a nuclear explosion, and football has almost certainly replaced baseball as our national pastime. I think there’s something going on out there in the global capital economy which tempts me to unlearn everything those erudite professors at Columbia University attempted to teach me (or, more pertinently, the bare scraps that I managed to retain).

So I’ll go the whole route and offer the opinion that the chances of recession, based upon available information, are, at the moment, de minimus.  Yes, the macro picture is starting to look bleak, as illustrated by the following chart of hard data (Employment, Inflation, Retail Sales, etc.) and soft data (Confidence Measures, Sentiment Indicators):

I’d be remiss if I didn’t also mention the alarming collapse of the Energy Complex, which indeed merits close watching.  But the only noteworthy statistics released last week were some pretty encouraging data on home sales (new and existing).  Corporate profit projections, while slipping a bit, still appear to be shading towards a reaffirmation of the hypothesis that the earnings recession is behind us.

My biggest fears continue to emanate out of Washington.  For now, the Star Chamber Inquisition of the President does not look like it is close to taking down its target.  But these dynamics tend to change by the hour, and meanwhile the Trump policy portfolio, and all that it promises for the investor class, appears, at minimum, to be imperiled.  In addition to this probably messing with the Fed’s flow, one wonders if corporate economic models are, even as I type these words, suffering the indignities of a downward boot.

One way or another, I’m expecting a very quiet week, not in small part because of the holiday that looms shortly after it concludes.  Friday is the last day of what has turned out to be a crazy quarter.  Across the week ahead, it may be worth having a look at Wednesday’s Consumer Confidence Print and Friday morning’s GDP revision, but that’s about the sum total of interesting tidbits scheduled to cross the tape.

I am also more or less anticipating some quarter-end position marking, as all of the necessary ingredients are in place for the time-honored ritual to take place.  Investment pools need the performance.  Volatility is nowhere to be found.  Liquidity should be at a low ebb, so why not buy a little more of what you already own, just in case? A few extra basis points of self-generated love may or may not impact subscription/redemption flows, but that’s hardly the point.  What matters is that traders think it might.  This may not move the markets, but it could provide both some additional fuel for any climb to higher elevations, and supply a much-needed bid if the inexorable forces of gravity set in.

The week that follows should be sloppy, with a holiday interrupted liquidity vortex perhaps threatening to cause gratuitous violence.  The real action, of course, begins on the week of the 9th, and will carry interesting tidings for at least the subsequent few weeks.

So I will remain watchful, and use the extra time to try to get over my disgust at my team’s actions at the recently completed NBA Draft. Maybe Chairman Reinsdorf, channeling Mr. Frazee, needs this dough to finance some spectacular public entertainment. After all, NNN ran for an impressive 321 days, made millions for its sponsors, and of course launched the Yankees to their pre-eminent place in the sports franchise pantheon.  In that case, arguably, everybody won.  Everyone but the Red Sox fans, that is, who endured 8 ½ decades of the Curse of the Bambino.

I do fear the same fate awaits us Bulls supporters.  So, if Mr. Reinsdorf were ever inclined to invite me over for a warm, non-alcoholic beverage, I’m afraid he’ll have to settle for tea for one.

TIMSHEL

A Tale of Tutti Capis

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In the wee hours of the morning on October 15, 1976, Don Carlo died, peacefully, in his own bed. By that time, he had run his eponymous Gambino family like the Israeli Special Forces for a full generation. He had hundreds of soldiers, thousands of associates and fear-driven respect across the globe. He ran a multi-billion-dollar enterprise that could bring the captains of many industries down to their knees with little more than a sniff from his beak-like nose.

One of his secrets was that he lived modestly, kept his mouth shut and wielded his immense power with as little fanfare as possible. The cops knew all about him, and harassed him as they could, but never laid a single finger extended from the long arm of the law on him.

But Don Carlo made one final, fatal mistake. Knowing he was about to check out, he named his cousin – Big Paulie, the brother of his wife (and also a cousin) as his successor. As Boss, Big Paulie was a train wreck. Lived large, squeezed his crews, took up publicly with his Filipino housekeeper (a shameful insult to his wife), allowed his palatial Staten Island mansion to be bugged by the Feds, and ended up with a 50-count open and shut RICO indictment staring down his (also beak-like) nose. As everyone knows, it all ended when a bunch of guys in Russian sable hats (some of whom may very well have been Russians riddled his body with bullets, just before Christmas, 1985, in front of a well-known Midtown steakhouse.

His assassin, as it turns out, was also his successor. Let’s call him Don John, and begin with the premise that he was the antithesis of the Don Carlo ideal. He was big and flashy and couldn’t keep his mouth shut. He relished in publicity, coveted the fleeting and dubious adulation of his minions, and was quick to violently punish anyone responsible for slights – real or perceived. The Feds targeted him obsessively s, and he seemed to relish his battles with them. He actually won a few rounds with the government, and couldn’t resist the temptation to crow about it. Eventually, they got him, hoisted him on his own petard of blabbering and well-deserved treachery among his inner circle. They sent him away for good, and he died, rather meekly in prison, a few years later.

I recount these well-known tales of New York mob history, because we have, as a nation, as a world, our own Don John to contend with: one Donald John Trump, 45th President of the United States. Like his namesake Don John Gotti, he is the polar opposite of the Don Carlo ideal. You’d think, being President, he’d have enough of the spotlight to suit him, but by all accounts, nothing could be further from the truth. He makes everything about him, even when he’d be better off shoving someone else onto center stage. Many of the Federales hate him to the point of obsession, and it’s clear they’re out to get him. From my perspective, he’s doing his level best to accommodate the realization of their objectives.

It strikes me that he stands a substantial and increasing possibility of being taken down by his enemies, and while he is certainly justified in calling this episode a witch hunt, it’s clear that if he falls, he will largely have himself to blame.

I offer this progressively wearying bit of political prognostication because I think that this is the biggest risk facing the markets. It is literally (or figuratively if you prefer) not possible to spit in any corner of this world and not hit something tied to the current D.C. investigations. They have taken on an accelerating momentum, and will not be easily stopped — even at a point when the enemies of the current administration would logically declare victory. If they achieve impeachment and take our good Don down, feeling increasingly emboldened, they will paint Pence as the illicit spawn of Hitler and Stalin, and, being naturally weaker, he will be an easier mark. At that point, nominally, the mantle would pass to Congressman Ryan, but (please forgive, yet again, the grassy knoll vibe here) I think there may be a plan afoot here to drag this out until just after the mid-terms, at which point, if the stars align perfectly for them, the Dems will have taken back the House, and can install Nancy Pelosi in the Oval Office.

Nancy Pelosi? If this happens, I think I’ll take a cue from the unfulfilled rhetoric of Barbra, Rosie and the rest, and check out of my digs in the amber grain waves.

Now, I admit all of this is far-fetched, but the problem, to use a favorite expression of the Prog orthodoxy, is that the situation is “non-binary”. The, er, Resistance doesn’t need to achieve the full smash outlined above to do their bidding. Every day we’re stuck in this cloak and dagger muck is one more day that the important reforms which presumably catapulted the Republican Party into its current position of hegemony will be stymied. I suspect that if the snowflakes and tree huggers can’t impose unconditional surrender on the rest of us, they’ll settle for some battlefield wins that bring both land gains and prisoners home.

It seems that this dynamic is indeed dominating the investment proceedings. Case and point: the FOMC and the macro economy. The last round of economic releases was, by all accounts, depressing. On Wednesday, the very morning of the Fed’s latest rate announcement, we were served up a ghastly trifecta of a negative CPI print, as well as the weakest Retail Sales numbers in 2 ½ years, and an equally tepid performance in terms of Business Inventories:

The Fed, nonetheless, went forward with its long pre-ordained ¼ point rise, accompanied by some tough talk about the balance sheet boogie monster. Subsequent to the announcement, we were treated to the mushy oatmeal of weak Industrial Production (flat), insufficient Housing Starts and disappointing Consumer Sentiment (both down).

Also during the week, ECB Chair Draghi spoke soberly of tapering, and the minutes of the Bank of England’s latest Monetary Policy Committee meeting told of a somewhat surprising sentiment to raise rates in that troubled jurisdiction.

But I suspect that CBers all around the world are very nervous here. One could hardly blame them for building some Trump-catalyzed deregulation and tax reform into their growth models: a prospect that now looks pretty iffy at best – at least for the foreseeable future. I think Yellen and Company stuck to the script because if they’d done anything else, it might’ve spooked the markets: a prospect which, for better or worse (read: for worse), they cannot abide. They spoke of one more rate increase this year, targeted for the December meeting, but right now, investors aren’t buying it, as another hike at that time is currently being priced at a < 40% probability. Also, significantly, post FOMC, longer term rates, not only here but across the globe, actually declined.

There was a great deal of jabber this week about the tightening in the 2s/10s U.S. Treasury spread, which is now as narrow as it’s been since 2009 (remember that frolicking year?), and let me tell you, friends, this type of squeeze does not tend to occur when economies are clicking on all cylinders:

U.S. Treasury 2s/10s Spread

My fear is that all of the above is informed by what may only be the beginning of the hit job on our current Don John. If matters accelerate, as well they might, then there’s virtually NO chance that government policy will be accretive to the investment process, and if the guys in the Russian hats do in fact take them down, as an old boss of mine likes to say (borrowing from the 1894 John Whitcomb Riley poem) it will be “Katy, bar the door”.

Of course, the equity markets barely register a pulse respecting these concerns, with domestic and global indices still hovering around all-time highs. There is continued concern about the recent cold streak of our favorite tech darlings, but never fear: the feature story in this week’s Barron’s assures us that the trend is transient, and they may be onto something. I mean after all, Amazon, through its purchase of Whole Foods, now pretty much sells us everything we might care to buy.

Often-times, though, to reverse a well-trodden idiom, it’s always brightest before the dusk. After most of Don John I’s myriad acquittals, he would go forth with much pomp among his minions, typically accompanied by fireworks that he generously funded out of his own ill-gotten treasury.

But in the end, they got him. And he helped them do it. And he died of cancer at the relatively young age of 62, while incarcerated in a Federal Prison in Springfield, MO. And the Gambino family never recovered its mojo.

All of this should serve as an object lesson for our current Capo di Tutti Capi: Don John II. But it’s a matter of supreme doubt as to whether he will heed the warning. So I pass the admonishment on to you. Rather than preening in front of any audience you can find, ‘tis better to go about your business with quiet dignity. If you do this, you stand a fair chance of shedding your mortal coil, peacefully, largely untouched by your enemies, and this, my friends, is an end to which we should all aspire.

TIMSHEL

Busting Out All Under

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Just as May must follow April in her prime,

June will always find me, counting out time,

They buried Miss July, put her face down in the earth,

She called her baby “August” and died while giving birth

— Dave Rotheray

 

Well, my darlings, it is indeed June, but one hardly sees it busting all over. For one thing, the weather –at least in the Northeast, has pretty much sucked.  This here is shaping up to be a pretty nice weekend, and all I can say is it’s about time.

We just concluded the 6th month’s first full week, and for all of the dramatic promise it portended for those in the investment game, on the whole it was a yawner.

In fact, to date, I’d go so far as to state that from a trading perspective, June, thus far, is indeed busting out all under.

We can take last week’s big events in chronological order, beginning as late as Thursday with the widely anticipated, over-hyped Comey testimony.  With those on both sides of the political spectrum in pitched battle to outflank one another in hysteria, the end result was something of a disappointment.  To paraphrase Forest Gump’s mother, Comey is as Comey does, and Thursday’s turn at the microphone, in front of a group of glowering Senators, served to reinforce the point.  I found all of his responses to be lawyerly and self-serving.  When it suited his defensive interests to describe himself as a weak sister, he freely did so.  When, on the other hand, it behooved him to articulate his heroic support of his country, the government agency he recently ran, and his standing as a patriot, he did just that.

I do think there’s one under-analyzed thread in that whole sequence, deriving from his justification for contemporaneous note-taking as being driven by his agenda to see that a Special Counsel was named – to investigate the purportedly nefarious but as yet undefined Russian interference in the 2016 elections.  I suspect that this was indeed his game all along, and gosh all fishhooks if it didn’t work.  We’ve got us a Special Counsel, one Robert Mueller, former occupant of the seat from which Comey was so rudely dispatched, and longtime bestie of Comey himself (side note; Mueller was named FBI Director on September 4, 2001, so he must’ve had an interesting first few weeks in office).

Given that Comey was unwilling to answer any specific questions about the investigation, I suspect that there’s a long game afoot here, and one that continues to threaten the current administration.  Comey’s job was to get through the ordeal with as little mud splashed upon him as possible, and to punt any substantive queries to the SC. My guess is that this means, though we may not have to endure the redux for several months, that this thing ain’t over.

Investors: be forewarned.

As fates would have it, the Comey testimony came on the same day that the good citizens of the United Kingdom took to the polls, this time to deliver a rather unambiguous one finger salute to recently elected Prime Minister Theresa May.  The Brits stopped short of giving her the gate altogether, but the outcomes are such that she will have to struggle to retain her residence at 10 Downing Street, Westminster, London, SW1.   Perhaps as bad (or worse), the self-imposed ordeal (it was May herself that called for the elections) served to resurrect the political career of Labor Leader Jeremy Corbyn, a chap whose politics are often described as being to the left of Bernie’s, and who was, prior to Thursday, expected to fade into oblivion.  None of this of course, is an encouraging lead-in to the pending Brexit negotiations, which were going to be tricky under any circumstance, and may now devolve into a circus.

Some markets reacted to these tidings.  That the British Pound took an, er, pounding was perhaps to be expected, and, for what it’s worth, I can also see the framework for the rocky EUR ride:

 

Investors also served themselves up a hearty helping of government bonds, with most of the action, somewhat improbably, centered around the oft-beleaguered debentures of Southern Europe:

Spanish Yields:                                                 Italian Yields:                          

If one is looking for root causes here, the glibbest and most accessible justification is that the Continental unrest is likely to keep the ECB Ï printing machine running on all cylinders, and why not? Euro QE is humming along at about Ï90B/month, implying that Team Draghi has printed about $500B in 2017 alone, all directed to the purchase of member nation bonds.  With less transparency on Brexit, is a downshift likely? I think not.

I should also mention that my grain complex had quite a week, with the bulge bracket of Wheat, Corn and Soy Beans all enjoying bids across the cycle.

But as for the equity markets, they seemed to shrug off all external news flow.  In fact, most of Europe, including the U.K. gathered itself admirably by Friday.  Stateside, the SPX dropped 8 skinny handles for the week (> 0.25%), while the Dow actually closed at record highs.

Now, I know a lot has been written about Friday’s big puke of the power part of the U.S. equity lineup, with names such as Apple, Amazon, Alphabet, Microsoft and Facebook (which together, account for nearly half of the 2017 valuation gains in the S&P 500) all dropping 2% or more by the close.  This does indeed bear watching, but here, I can only go with my gut, which tells me that extrapolating out from this action is a dangerous construct.  There’s certainly a meaningful probability that investors view this selloff as a buying opportunity, and, gun to my head, if they don’t adopt this mindset now, they most certainly will at levels not much lower than Friday’s undignified close.

But what strikes me more directly is that there was a significant rebalancing of equity holdings across large capital pools late in the week, that it may not as yet be over, and that there may be more to this than the big whales being tired of making all of that FANG (or, if you will, FAAMG) money and deciding to ease back on that score alone.  I do expect other equities to be in play, and I don’t know how this will evolve, but the individual stock action early next week should be watched with careful eye.

Apart from that, we have a very low-drama FOMC announcement on Wednesday, where another quarter-point raise is a foregone conclusion.  However, by Thursday, we will have reached the midway point of June, and as mentioned in previous installments, I think that pricing action quiets down to almost inaudible levels from then till after the 4th of July holiday.

If I’m right about all of this, then, when all is said and done, June will indeed have spent its short life span busting all under, and then we’ll be on to July/August, during which time the action promises to pick up visibly.  In the meanwhile, perhaps we can take our cues from the song quote purloined above, and spend the last two weeks of the current month counting out the time.

I reckon there are worse fates than this.

TIMSHEL

With a Little Help From My Friends

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What would you think if I sang out of tune, would you stand up and walk out on me? — Billy Shears

For those not counted among the teeming millions that comprise my social media presence, allow me to formerly announce the arrival of my grandson, William Thomas Feller.  Further, as a public service of sorts, I offer the following glimpse at the little fellow, taken in the first hour of his existence:

Over the last few days, the looming specter of his arrival pressed the following problem on me: what on-line persona should I bestow on him? With my first grandson: James Alexander, the answer was easy.  From the moment of his birth he was, is, and will remain, The Dude.

But there’s only one Dude, right? (OK, so there are other dudes, but bear with me). Looking for something materially different, I (with the help of my wife) cast about for the catchy, the urbane, the relevant.  We first focused on the John Coltrane, whose birthday, so we believed, was shared by our newest bundle of joy, rendering the handle of ‘Trane a viable option.  But a quick check of the record books indicated that Coltrane was actually born in late September.  Not that this would’ve stopped us, but I won’t lie: it did give us pause.

Then it hit me, the iconic album: Sergeant Pepper’s Lonely Hearts Club Band was released on June 1, 1967, 50 years to the day prior to our blessed event.  Given that our little guy’s name is William, the answer came to me.  So let me introduce to you, the one and only Billy Shears….

(By the way, as my tragically constrained contributions to the future gene pool progress in a gratifying manner, it does strike me that I am being pushed further down the bench with respect to the birthing process.  I was in the Labor Room the night The Dude was born, but was perpetually plagued with “make work” assignments, such as walking the dog, in such a way that I suspect was driven by an agenda to get me out of the way.  Eventually, my wife and daughter ran out of pretexts and sent me home.  This time ‘round, I wasn’t even at the hospital.  But I am content, because, after all, what is life itself if not a process of making way for the new, while we the old fade to black?).

In any event, Billy Shears has indeed arrived, and from my vantage point, not a moment too soon, as it strikes me that the markets are in a paradigm that brings to mind the first lines that the original B.S. ever issued forth.  Something indeed seems out of tune, but are you, is anyone standing up and walking out?

They are not.

In fact, if anything, investors are rushing the stage.  U.S. equity indices hit a series of all-time highs this past week, and global markets are experiencing more or less the same paradigm:

Global Dow:

Bonds around the world are also in bid configuration.  There’s some bouncing around in FX-land, but other that some intervention-driven strength in the CNY, there’s not much to report from that corner of the universe.  Other than visible downward pressure on Crude Oil (proving, above all, that all the “smart” long speculation into the 5/25 OPEC meeting was, as I suspected, so much Dixie-whistling), the Commodity Complex is in strong bid configuration.  Consider, if you will, the oft-overlooked but sentimental fave Cotton tape:

More than Dixie Whistling in the Land of Cotton:

Defying reverse gravity, the VIX actually managed to trade modestly down from last week’s record lows.

Through 5-and-a-stub months, the Gallant 500 is up 9%.  So why is everyone so angry and nervous? Again, I think a good deal of the blame can be laid at the doorstep of the White House, or if not, blame, then at least root cause of agita.  At this point, one simply does not know what next to expect, either from the President or from his well-funded, well-organized and increasingly unhinged enemies.  I do indeed worry about this, my darlings, because never in our collective lifetimes (and perhaps not since the pre-secession Lincoln administration) have we witnessed such vitriolic hate of a sitting POTUS, nor, perhaps one so prone to fall into traps that empower and embolden his enemies.  He simply, from my perspective, cannot resist lunging at any bait that is placed in his field of vision and I increasingly worry that sooner or later, he will indeed be hooked once and for all.  Far be it from me to politically proselytize, but I don’t think that the organized resistance will be particularly pleased with any material success they achieve.  It is, from my perspective, a case of careful what you wish for.

I am troubled, in particular, by the growing chorus suggesting that anyone not outraged to their cores by the current government power structure is either stupid, immoral or (more likely) both.  The response from those on the winning side has been characteristically polite, muted and dignified, but if matters carry forward much further, this CANNOT last.  The tens of millions who not only voted in Trump, but also carried home both houses of Congress, 30+ governorships and 60+ state legislatures, have significant, but in the end finite patience for being trampled upon.  If pushed beyond their limits, they will respond by causing their own forms of trouble, and then, from a market perspective, it’s look out below.  Again, I’d feel less concerned here if I didn’t think that Trump is an ideal target for the traps being set for him, but he is such a target, and if/when he steps into it for good, I shudder to think what comes next.

I’ll offer one last case and point with respect to this.  The organized opposition has, by all accounts, crippled Fox News.  It kneecapped its founder (now dead), it chased away several of its most popular hosts, and hired away a number of others.  Those that remain are in the cross-hairs of the opposition and may not last out the summer.  Its ratings are, inevitably, dropping.

But let’s extrapolate and imagine that they take down the organization entirely.  This will leave the free TV networks, along with MSNBC and CNN to tell us what to think, and I believe that it would be a matter of microseconds before a right-oriented replacement sprung up, unconstrained by the opposition’s destructive playbook. At that point, the Kathy Griffin contingent may wax nostalgic for the happier days of the Ailes/O’Reilly/Hannity/Kelly/Van Susteren Fox News.

And no one will win.  And the markets won’t like it.  And this, I feel, is the biggest risk we face: a full-scale political unravelling that I believe is more probable than what is reflected in current valuations.      As June busts out, and after the Fed raises rates next week, there won’t be much else upon which to focus, at least until after our Independence Day festivities are complete.

So take care out there everyone.  You’re all my friends, I can’t get by without you, and neither, can, for that matter, the newly born Billy Shears.  As for the original, he’s doing just fine.  I read yesterday, with interest, that after spending the last 28 weeks on the Billboard 100, the original SPLHCB actually hit Number One this past week, some 50 years after Billy I first warbled his way into our collective consciousness. His words are as fresh and as true today as they were during the Summer of Love, and if I have anything to say about it, they will indeed inform the experiences of my progeny, for as long as the (Lonely Hearts Club) band plays.

TIMSHEL

CamelNOT

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 OK, a quick word about Greg: a man for his time and place. Loved the music, the persistence, the reinvention. And I forgive you for the folly: for letting your road manager take the fall for your cocaine bust, for that nonsense with Cher, for firing Dickie. You proved, as much as anyone this side of Dylan, that the road does indeed go on forever…. 

I dedicate this Memorial Day edition to John Fitzgerald Kennedy, the 35th President of the United States, on this, the 100th Anniversary of his birth. 

His record on this earth (well, what is publicly known at any rate), is beyond the stuff of legend. It is so indelibly burned into the brain of Americans as to almost transcend its own historical context, which, significant as it was, should’ve been bloody good been enough. To recap briefly, 35 was the scion of a powerful family whose wealth may have derived from dubious, ill-gotten sources. He matriculated (where else?) at Harvard, joined the Navy during WWII, got his PT boat rammed by the Japs, and organized a 3-mile swim to relative safety, dragging an injured crewman that entire distance with his ‘effin teeth! He then entered politics, copping a Congressional Seat, knocking the entrenched Henry Cabot Lodge out of the Senate, blowing by Johnson and Stevenson in the 1960 Democratic Primary, and then winning a (perhaps Daley enabled) squeaker over Richie (aka #37) Nixon in the General. Like Nixon (who established detente with the Soviets and the Chinese, and instituted Wage and Price Controls), his (albeit brief) stay in the White House was marked by astonishing divergences from his party’s play book. He cut taxes, and presided over an economy that was growing at 5% with 1% inflation and did not engage in deficit spending. He took on the Red Scare on two separate occasions in 1962 – first an unsuccessful invasion of Cuba’s Bay of Pigs and then a triumphant showdown with Khrushchev, the end of which featured the dismantling of Soviet missiles on Castro’s turf. 

He sowed the seeds for the Vietnam War (which didn’t turn out so good), but also established the Peace Corps and the American Space Program. Finally, though he didn’t live to see it, he was the visionary behind the Civil Rights Act of 1964, a milestone that your humble correspondent believes may have been the last useful piece of legislation ever enacted by the World’s Greatest Deliberative Body. 

Of course, just as he was cranking up his re-election campaign machine, someone (and, being a grassy knoll kind of guy, I’m not convinced we know the full story) blew his head off. Like Jim Morrison, John Lennon, Roberto Clemente, Abe Lincoln and so many others, his untimely demise only added to his status at as an historical icon. 

His is, and will presumably remain, among the most recognizable visages in history. But what strikes me most about him is this: he was a man. A real man. Of course, part of this is is his well-documented status as a world-class horn-dog, whose bedroom exploits might give contemporaneous superstar Wilt Chamberlain a run for his money. But there was more than that to consider, more, even than his military record, more than his political record, more than his movie star demeanor and epic life story. If you get a minute, listen to some of his speeches: his acceptance speech at the 1960 Convention, his Inaugural Address, his remarks in Berlin (and for the truly obsessed) his Commencement Speech to the (presumably hated) Yale University Graduating Class of 1962 (The Peace Speech). There and elsewhere, his stood tall, articulated clearly and spoke (for the most part) what was on his mind. 

Shortly after his death, his fetching, accomplished widow, Jacqueline Bouvier Kennedy Onassis, described his fleeting time in the White House with a single, sublime term: Camelot. 

I got to thinking about this, on 35’s 100th B’Day, from the perspective of the stark contrast to the current paradigms in Washington. Yes, my friends, Camelot appears, for the time being, to be transformed into CamelNOT. 

Here, I write not to disparage the current administration, many of whose efforts I applaud, and for whose success I am ardently rooting. No, my friends, the problem goes deeper than that, and it says here that the situation from this perspective would be no less dismal had the outcome of the 2016 gone the other way. If you doubt this, give a listen to Hillary’s recent commencement address at, her alma mater, Wellesley College, in which, conveniently and characteristically forgetting her lifetime of serial dissembling, chose to lecture the graduates about the importance of truth telling. 

But one way or another, for the time being, our biggest challenges continue to emanate (or so it would seem) from Washington. Last week’s pre-holiday action featured the nebulous content of the Fed Minutes, the release of a Presidential Budget Plan that seemed to please no one and anger many, the micro-analysis of Our Leader’s first overseas capitol hop, and of course, the drip-drip-drip of leakage about collusion with the Russians. 

But for now, choosing not to obsess over these matters, the markets instead ignored them entirely. Domestic Equity Indices rallied, unimpeded, to new all-time highs. Rates, both domestically and globally, drifted downward. The VIX, after showing signs of life last week, actually managed to submerge, yet again, to all-time lows of 9.81: 

(By the way, while I LOVE the WSJ, I ask them PLEASE to stop writing about how robots are going to displace all humans in the investment profession. Guys: you’re really starting to depress me).

 Meanwhile, economic and financial statistics have been, of late, encouraging – at least on balance. Friday’s poorly attended trading session featured a modest upward revision to the heretofore dismal Q1 GDP Report. True, we only came up to a dismal 1.2%, but that’s a clear sight better than the original print of 0.7%. Durable Goods and New Home Sales came in on the light side, but PMI and Weekly Jobless Claims told a happier story. 

Perhaps most encouraging of all is the final (or near-final) tally on Q1 earnings, which evidenced a 14% rise. Arguably as important is the firming/convergence of top-down and bottom up estimates for Q2: 

It occurs to me, on the whole, that we’re at something of an inflection point here. The markets, as I suggested a couple of weeks ago, and then (so it must be admitted), I retracted last week, are showing signs of wanting to break out. The technical are strong and a flight to the upside is certainly possible. My best guess is that the main gravitational pull derives from the high-probability series of new tape bombs emanating out of the White House, a dwelling that at present is clearly occupied by persons other than Arthur, Lancelot, Galahad and Guinevere, or for that matter, John, Jacqueline, Lyndon, Lady Bird or Everett (McKinley Dirksen, that is). 

In any event, I don’t think that valuations stay where they are, come what may. The SPX breaking through 2,400 was impressive, but current levels strike me as being nothing more than a weigh station between more heavenly elevations or a reversion to that wearisome 23-land. It’s of course a holiday shortened week, and June, other than a few important tidbits like next Friday’s Jobs Report and Chair Yell’s Flag Day (6/14) turn at the FOMC podium, will be relatively bereft of pertinent information flow. 

The tape, in short, will be tricky, even if everyone in Washington behaves themselves. We’ve been here before, my loves, but that may be of little comfort. We are all of and in our times, and clearly, there’s no Knights of the Round Table, nor even inspiring figures like JFK to shore up our fortitude. 

So, let’s take a moment today to celebrate 35, whose final resting place is on the sacred burial grounds of Arlington National Cemetery, which was once the estate of last week’s anti-protagonist, R.E. Lee. After that, it’s back to the grind, and, CamelNOT or not, we have no choice but to strive to prevail. 

TIMSHEL 

I Don’t Know Why The Caged Bird Sings

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I begin by taking care of an essential item of business: Happy Mother’s Day, everyone.  Today is my first motherless Mother’s Day, which is sad, but, on a happier note, my daughter (a mother of nearly two year’s standing herself) is due any day. So there’s that.

In addition, it’s true: I don’t know why the caged bird sings.  I have never read Maya Angelou’s magnum opus, and I don’t expect I ever will.  What’s more (though I’m not particularly proud of this), in terms of the motivations for the warbling of the captive orinth, I have never particularly cared to find out.

That is, perhaps, until now.  And here, of course, though reluctantly, painfully, I refer to the recent doings in the White House.  Indisputably, the Presidential Manse is something of a cage, and its current occupant is certainly capable of both flying and singing, or, more pertinent for our purposes, tweeting, which is, after all, the type of singing in which your typical winged tree denizen engages.

I wish he’d just shut his big fat beak.  His electronic croonings, long since tiresome, have now become dangerous.  Case and Point: this Comey thing (sorry).  When I’d heard that he canned that dissembling, misanthropic domestic law enforcement czar, I was pleased.  The guy should’ve been shown the door a long time ago.  Upon further immediate reflection, I decided it was a sublime political move.  I mean, his recently vanquished political opponent had just emerged, in rather unseemly fashion, to inform a sequence of enraptured audiences that, but for Comey, those new curtains she picked out would be dangling from the broad windows of 1600 PA Avenue as she spoke.  Of course, the other half of her rationalizations dealt with some nefarious, improbable linkage between the WikiLeaks DNC leakage, the Russians, and the Trump Campaign.  I’ll go on record as opining that this is hogwash, well, part of it any way.  Did the Russians hack the DNC? Probably. But so did everyone else.  Were they seeking to influence our elections? Of course they were. But boys and girls, it’s time to grow up.  Major nations have been messing with each other’s elections since mankind was still sporting tails, and I suspect that the most enthusiastic and effective perpetrator, for most of the last couple of centuries, is the good old U S of A.

But were the Trumpsters actively working with the Ruskies on this one? I highly doubt it.  What was the nature of the alleged collusion?  No one has said.  And what form could it have assumed? Did Team Trump pay Putin to do this? Please.  First off, Putin is, almost inarguably, through purloined riches, the wealthiest man on the planet, and the DNC Server was such a sitting duck that it couldn’t have cost very much.  Did the Russians feed the data to the Campaign, for them to leak? It would seem unlikely, and one way or another, the information would’ve gotten out.

Also, it may be worth remembering that as late as dusk on November 8, 2016, the probability of a Trump victory was placed, at best, in the low double digits.  The HRC triumph bash, replete with shattered glass and riverside fireworks, was all teed up.  And how long do you think, after, she took her hand off the bible on January 20th, would she have instructed the Bureau to put cement shoes on her hated opponent? Not very long, I imagine. Trump’s people weren’t stupid (they won an unwinnable election after all), and I doubt they were taking any undue risks of this nature with the perfidious Russians.  Plus, there was a great deal of roadkill on the President’s journey to the White House.  By my count, he deep sixed at least a dozen campaign managers alone.  Are there no disgruntled former insiders ready to sing a Russian ballad as a means of score evening? If so, they have yet to emerge.

But the Russian interference story lingers, used by Progressives like the drunk uses the proverbial lamp post: more for support than illumination.  And, with the Dems complaining that the FBI Director who was incentivized to push this narrative was to blame for their loss, how beautiful was it to have sacked him? Had it been handled correctly, it would’ve left the, er, left, with little fodder to use against their political foes (lest they demonstrate, yet again, their seemingly insatiable acumen for hypocrisy), and, as such, might’ve disappeared from our capacity-addled attentions quicker than a Snapchat photo (or, for that matter, the valuation of the device’s corporate owner).

But then came the tweets, including perhaps the most idiotic one in an ocean of moronic 140-character brain fluffs: the one warning Comey about the potential presence of taped conversations. Now, I hate to agree with the millions that are seeking to undermine the current government at every turn, but this stunt was completely out of bounds.  Just as (as pointed out by Deputy AG Rosenstein) FBI Directors do not comment on the decision factors on a case they’ve tried to drop, presidents don’t issue veiled threats at deposed FBI Directors.  And now, I think everyone’s got some reason to worry.  There is literally no telling what may next be issuing forth from the Presidential keyboard, and, if it gets much worse, Trump’s enemies may actually have a legal case against him.

But what offends me most is that this sequence more or less destroyed last week’s confident call for a breakout of the U.S. equity complex.  These ornithological discharges made me look like a simian, and I’m not one to sit idly by in consequence.  Yes, there were other contributing factors.  The late reporting Consumer Discretionary Sector dropped some pretty nasty waste — at a point contemporaneous to a rather tepid Retail Sales print.  There was some sort of global cyber-attack that hit about 900 countries on Friday, crippling enterprises ranging from Fed-Ex to the British National Health System.  The Energy Complex is bouncing around like a billiard ball.  L’il Kim lobbed another one into regional waters this weekend.

Still and all, Q1 manifested a 13.5% increase in earnings and a 6.5% jump in sales.  According to the published genius of the investment class, affairs are even rosier in portions of the investment universe ranging from Europe to the Emerging Markets.  Rates are low and showing no signs of busting out.  Most economic models are projecting back-loaded acceleration in economic statistics.  I’ve seen worse backdrops for loading up on stocks – Washingtonian nonsense notwithstanding.

But a couple of points bear mention here.  First, I’m really skeptical about all this Europe love.  I’ve seen the analyses that suggest the Continent is cheap relative to our own valuations, but I advise those who care to proceed to do so at their own caution.  It strikes me that Europe remains the same geriatric, declining economic beast with which we’ve been contending for most of our adult lives, with high unemployment, widespread credit issues, an unworkable fiscal matrix and a measurable disposition towards redistributive socialism.  Some of you pros may be well positioned to take advantage of transient upswings, but as for me, I think I’d rather keep my risk capital moored on these here shores.

On the other hand, I don’t, as a matter of policy, invest in the markets.

But even domestically, I’d be careful about where I place my bets.  That a perversely disproportionate segment of gains derive from a small handful of names is a widely analyzed phenomenon that need not be rehashed in this space.  For the mere mortal tickers in the stock trading universe, it’s really all about earnings, and, creeping into the dynamic, is the age-old problem of disappointers being punished more severely than delighters have been rewarded:

 

But with quarterly earnings substantially behind us, this is something that we arguably can ignore for a few weeks.  In the meantime, it may be worth remembering that tomorrow marks the 45-day window for hedge fund redemptions, and this may perhaps cause some gratuitously violent price action, as catalyzed by an 11th hour wave of unexpected redemptions.

The latter would be particularly true if the Washington bird flu, rather than subsiding, spreads to epidemic proportions: a scenario that one can now neither rule out nor discount.  As I have reviewed this wearying sequence of events, I cannot help but fear that Trump may have made the same type of early-term mistake as his two predecessors: taking a constructive action too precipitously, and with inadequate understanding of deferred consequences.  W. Bush invaded Iraq at a point of maximum post-9/11 goodwill, and we’re still stuck there.  Few rational folks would argue that deposing Saddam Hussein was an unholy objective.  But at the time we had more pressing geopolitical problems with which to contend, he failed to form the type of broad coalition that worked well for his father in Gulf War 1, and the W presidency arguably declined in a more or less linear fashion from there.

Then there’s Obama, who rammed through a massive, poorly framed and ineptly executed re-engineering of the Health Care system at a moment when our post-crash capital economy itself was just emerging from the critical care unit.  Unemployment at the time was peaking at 7.5%, and of course, he passed the bill through a reconciliation process that removed all transparency from the drafting of the final provisions (recall the Pelosi line).  At that point, the Health Care system was broken and needed fixing, but the timing was terrible, and, like the Iraq War fiasco, the coalition behind the reform was self-servingly narrow.  Of course, the economy slowly regained its footing in subsequent years, but ultimately, the framework at least partially imploded, and, as I’ve stated previously, I believe that the sticker shock of 2017 premium increases (disclosed in October of 2016) was, more than WikiLeaks, more than Comey, what turned the last election’s tide against his preferred successor.

As for Trump, though it’s impossible to know at the moment, it may be that he has fallen into the same trap.  Comey is indeed a showboat, more interested in his own agenda/standing than in doing his job appropriately.  He was not capable of running the FBI effectively and needed to be fired.  Had Hillary won, I suspect she would have taken this step herself.  But the timing may have been too precipitous.  Like his predecessors, he might’ve been better served by waiting, maybe getting the Republican Congressional Caucus together to pass some legislation, before putting two to the head of his target.  And the execution was terribly, well, executed.  Why not follow the Clintonian Friday afternoon news dump and then announce something constructive to change the subject?

But no, he did this on a Tuesday and then made matters worse with his messaging.  As a result, not only may he have bought himself a whole passel of problems, but also, as everyone has stated, he has rendered the path to delivering on key parts of his agenda much more problematic.

But the world is full of such improbable contradictions.  Take Maya Angelou for example.  She wrote (I’m told) profoundly of racism, sexual abuse and other horrors of growing up as a black female in the postbellum South.  Yet she freely admitted to operating as a madam in her young adult years.  Then, she settled down to accept an endowed professorship at Wake Forest University, which, though a fine academic institution, was founded and resides on a tobacco plantation that relied for centuries on slave labor.

So I’m gonna stop wondering why the caged bird sings, and can only, for the moment, pray for the sound of crickets emanating from such locales as the White House, Trump Tower and Mar-a-Lago.

TIMSHEL