Category Archives: Weeklies

The Ebert Principle

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For the second consecutive week, I find myself positively impelled to weigh in on a tangential topic that has gone both global and viral. In our previous installment, I attempted, with only partial success, to unpack Gresham’s Law, in the process putting my imprimatur on Goodie’s Law, a construct which no one (as yet) has had the temerity to dispute.

I was hoping to leave it at that, but then, unbeknownst to me, another web-exploding debate emerged, resurrecting a long-established but by-and-large dormant concept called the Ebert Principle. For the uninitiated, the Principle, named after its Discoverer: the late Chicago Sun Times film critic (and possessor of the two of the four most feared thumbs in Hollywood) Roger Ebert, reads as follows:

An anthropomorphic cartoon character suspended in mid-air will remain in said state until being made aware of same. 

Let’s use the obvious example to illustrate. When Wile E. Coyote chases the Roadrunner toward a cliff, and then the latter (with trademark sh*t-eating grin) side-steps the former and allows him to barrel off the precipice, Mr. Coyote does not immediately fall earthbound. Instead, he remains at his peak elevation expressive incredulity affixed on his face, until he looks down. At that point, recognizing the realities of his situation, the inexorable force of gravity over overcomes his state of confusion, and down he goes.

For those among you that remain confused, the following illustration should remove any lingering doubts:

 

I hadn’t thought about this phenomenon in many years, but that respite was about to end abruptly. Just as we were past this Gresham’s Law throw-down; just as we were drying off from Harvey and Irma, the blogosphere exploded on the subject.

So many wise souls opined on this that I can’t catalogue them all, but a small sample of the Ebert Principal response is provided below:

The Mooch issued a formal statement accusing the Roadrunner of cuckolding him, and filed a paternity suit in Federal Court. The Roadrunner’s legal team responded with a motion to dismiss, denying any liaison with Mrs. Mooch, and pointing out that given he and Mrs. M are two different species, the paternity claims were, at best, frivolous. The Judge sided with the Roadrunner in Summary Judgment, and ordered Team Mooch to pay court costs. Team Roadrunner threatened Mooch with a Defamation Suit, but indicated that it would drop the matter if the latter made a formal apology.

Mooch tweeted out a tepid apology, to which The Roadrunner responded in kind: “@Mooch: Beep Beep You”.

Hillary Clinton took general responsibility for the incident, and then proceeded to assign blame to Comey, Sanders, Obama, Putin, Biden, the DNC, the RNC, the Mainstream Media and others.

Former Vice President Albert S. Gore blamed global warming.

LeBron sent out a formal $50M Hang Time Challenge to the Coyote, stating that if victorious, he would donate the proceeds to (Flightless) Bird Lives Matter.

Black Sabbath Bassist Terrence Michael Joseph (Geezer) Butler thought it was all pretty cool, and former British Prime Minister Benjamin Disraeli could not be reached for comment.

Actually, that’s about all the flow generated by the Ebert Principle, but isn’t it enough? Couldn’t I just leave well enough alone? Well, maybe, but it did strike me that I had an obligation to investigate and report upon whether or not there was an investment universe analogue to this construct, and, on first glance, the positive case is fairly compelling. Pretty much every time the market has reached an unsustainably elevated threshold, it did not come careening down until everyone realized that there was nothing but air beneath it. Of course, the most glaring example of this is the ’08 crash. Yes, Casandra Chorus admonished us about a housing bubble and a looming credit crisis. But until borrowers started defaulting in droves and the FDIC began closing banks, nobody was paying much attention to these warnings. Similarly, prior to the bursting of the dot.com bubble, investors were buying up worthless web companies like they were 16th Century Dutch tulips. I could go further back in history, but I think you’ve caught my drift.

But perhaps the more important issue is whether the market has currently run off the cliff, and resides in a Coyote-eqsue state of suspended denial. Again, there is anecdotal evidence supporting this assertion. To wit: equity valuations, by many standard metrics, offer some back up:

 

Then there’s this handy little graph which I unearthed, suggesting that every market, with the ironic exception of Housing, is in bubble configuration:

 

Don’t ask me to explain this psychedelic spaghetti bowl, which I don’t understand at all. Suffice to say that it’s as scary a piece of Microsoft Excel Charting Function handiwork as one would care to see. Further, we can impute that if this guy is on to something, then we’re truly in Coyote Configuration, so whatever else you do, I’d advise you, from a risk management perspective, not to look down.

All of this resides against an economic backdrop that features multiple crosswinds. The macro picture is mixed. On the positive side of the equation, for the first time in history, all 46 countries in what is defined as the developed world are sporting ISM scores above 50. But Retail Sales and Industrial Production came in weak. The former metric does not feature a geographic breakdown, but the latter figure does, and was clearly diluted by all that nasty weather down south. As a result of nature’s wrath, both the NY and Atlanta Fed’s GDP Estimates took a turn for the worse:

 

No doubt here the economy will be issued a Mulligan after the double storm wallop. But we’ll all probably feel the GDP gap nonetheless.

In addition, like it or not, this coming week, we will be forced to endure yet another FOMC meeting, the expectations for which involve the Fed holding rates steady, but announcing some concrete plans for the divestiture of portions of their >$4T Balance Sheet.

I suspect that the dynamics around this may at least partially answer our questions, based upon the following theory that has crystalized for me in recent days: QE has reached a state where it has created a chronic supply/demand imbalance for marketable securities. There simply aren’t enough of them out there to satisfy investor needs, because Central Banks have Hoovered them all up. As long as this persists, then as a matter of pure market technicals, downside volatility – particularly in Stocks and Bonds — has been dramatically suppressed. Perhaps if the Fed really puts some of its inventory on sale, it will break the logjam, but I’m not counting on it – just yet.

So, to answer our key question, I do think we’ve got some of investment version of the Ebert Principle at play here. The Market Coyote is indeed over a cliff, but on the other hand, he shows no signs of looking down. Someday in this fair land he will cast his eyes towards terra firma, and at that point all of us will feel some gravitational pull. I don’t think he’s up nearly as high as he was, say, in late ’07, but neither, for the moment, do his feet appear to be touching any solid surface. Moreover, there’s every chance he’ll climb to more dangerous elevations before the “Aha Moment” reaches his cranium.

On a happier, closing note, while the good folks at the Looney Toons Division of Warner Brothers, producers of The Roadrunner Show (and therefore indirect creators of the Ebert Principle) have only done partial violence to Newton’s Laws of Motion, they have absolutely obliterated core tenets of Biological Science. No matter how far Mr. C. falls, no matter how much it hurts, he gathers himself and begins the struggle anew. For this, he deserves, if not our praise, then at least our sympathy. Moreover, I suspect this is true for us all, so take heart, and, as always…

TIMSHEL

 

Goodie’s Law

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We’ll get to our title subject anon, but first I must weigh in on the frenzied global debate respecting one of its forbears: Gresham’s Law, which as every schoolboy knows, posits that in an environment with which multiple forms of legal tender of varying soundness, the “bad” money eventually push the “good” stuff out of circulation.

Does it apply at present? We may soon find out. On the other hand, we may not.

But first, a little context. The Law was named after Sir Thomas (no relation to John) Gresham, 16th Century British Financier, hired to look after the economic affairs of King Edward VI (the long sought after male heir to Henry VIII, who was crowned at the tender age of 10, but shed this veil of tears at the tenderer age of 15, to be replaced by the indestructible Elizabeth I, who also availed herself of Sir Thomas’s services -up till the point of his death), and founder of the still-extant Royal Exchange.

Notably, Sir Thomas, modest fellow that he was, never took placing his personal imprimatur on his now eponymous law. Nay, the task was deferred for 3 full centuries, and undertaken by a rather anonymous chap, in remembrance of Gresham’s pushback on the debasement of Pound Sterling during Henry VIII’s time. Perhaps Gresham demurred because he knew that the idea did not originate with him; its origins tracing back at least (and somewhat improbably) to 15th Century stargazer Nicholas Copernicus. However, I suspect our forebears were openly availed themselves of this expedient-but-unfortunate habit, dating back to points when they were still living in caves and sporting tails.

But back to Sir Thomas for a minute; in addition to his sobriety, modesty and unmistakable clairvoyance, wherever else we might differ, perhaps we can all agree that in his day, he cut a rather dashing figure.

Sir Thomas w an Unidentified Skull: 

 

Moreover, in my judgment, he was doing the lord’s work in his tireless efforts to ensure a sound currency. And history shows he was successful. But across the ages, it was perhaps inevitable that there would be periods of backsliding. Consider, for instance, the post-WWI replacement of Germany’s Papiermark with the misanthropic Reichsmark – at an introductory rate of 1 PM = 1 Trillion RM. Of course, this was a one-finger salute from the Germans to the French for imposing-impossible-to-meet reparations at the end of the “War to End All Wars”. But as Sir Thomas foretold, the Papiermark soon disappeared from German commerce, and the Reichsmark quickly fell victim to a 21% per day inflation rate.

What followed: the 1929 Market Crash, the Great Depression and WWII, is well-documented.

 

Fast forward to the present day, where, while “bad” money is arguably available in galactic over-abundance, “good” money is an elusive designation. If the current flow in FX land is to be believed, then our own greenback is certainly falling out of favor.

The exchange rate deteriorated all week long, closing at a > 2-year low:

Gresham’s Bad Boy: The USD 

 

And notwithstanding Chairman Draghi’s difficult to assess comments (apparently, he’s prepared to increase or decrease Euro QE, as conditions demand), EURUSD breached 120 for the first time since late 2014. Perhaps our Dead Presidents are seeking to be the bad money beneficiaries of Gresham’s Law. If this is indeed their intent, they’re doing a pretty good job of achieving their objective.

But they have company. This month, the amount of fiat currency printed by Central Banks in 2017 will cross over $2 Trillion, and the total amount created out of thin air since the crash is knocking on the door of $20T. One could argue that for the time being, Gresham’s Law applied in spades, because all of the “good” money appears to have been chased out of the economy over the last few years.

Making a gallant bid for the opposite side of The Law are a number of blockchain/virtual currencies, as led of course by Bitcoin. It was a tough, volatile week for these wannabes, and the trend is likely to continue. Ultimately, as stated previously, I think there’s about as much chance of developed countries ceding any measure of control over their currencies and interest rates to entrepreneurial ventures as there is the U.S. Defense Department sanctioning the development of private sector armies and allowing citizens to choose which military enterprise they wish to defend their rights and property. But in the meantime, the virtual circus rolls along, showing no signs of folding its collective tents. I don’t know whether virtual currencies are bad money or good, but it bears remembering that the more we see of them, the lesser the set of qualities they are likely to possess – at least according to Gresham.

Meanwhile, it was a modestly negative week for equities, a strong one for bonds and a mixed one for commodities. Our justifiable and overwhelming focus has been on the sequence of natural disasters plaguing our southern reaches, and, at the point of this correspondence, the toll, in terms of blood and treasure, cannot even be estimated. Less noticed, as a result, was the détente between Trump and the Dems, who have come together, forsaking those on the opposite side of the aisle, to effect a 3-month extension of the budget – debt ceiling positioning notwithstanding. For the markets, this is probably a good thing. While the rebuild in Texas, Florida and their neighbors will generate some incremental demand, left unfettered, the overall impact of the storms is highly deflationary. As a modest example, consider the current dynamics in Natural Gas. One might assume that the worst flood ever recorded, with its epicenter right smack dab in the geographical core of the energy industry, would take out more supply than demand, and that prices would increase.

One would be wrong on that score:

Natural Gas: Knocking on the Door of Quarterly Lows: 

My friends in the biz tell me that the storm has completely removed significant pools of demand emanating from Mexico, and that demand disruptions from Irma will make matters worse. Overall, one can safely assume that this double wallop from the fist of God will cost at least 1 GDP point to repair, and this is reflected, among other factors, in our favorite GDPNow estimates:

 

So one at any rate can understand the economics of Trump’s deal with his sworn political enemies. Nobody can afford the bite that will be taken out by these storms, and I am therefore OK with this bilaterally cynical deal. But I offer the following but of advice for our Commander in Chief. If you think that you can form new political alliances here, think again. Schumer and Pelosi wish you no more good fortune than Hitler and Stalin did each other when they split Finland between them. If you politically compromise House members of your party, and they lose their majority in the next election, then the first official act of the reinstated Pelosi Congress will be to issue articles of impeachment. As usual, Trump is being too clever by half here, and the act is getting very tiresome.

For what it’s worth, I also remain no less concerned about Korea this stormy weekend than I was last stormy weekend. My belief is that by escalating their nuclear activity amid global demands for reduction, the NK bunch has declared de facto war on the United States and its allies. There is simply no way that the current status quo holds. L’il Kim will continue to build his arsenal until his enemies act to reduce it. This could happen at any time, and we probably won’t hear about it until after the fact. The equity markets don’t care about this, of course, but it explains a good deal about the selloff of the dollar, the rally in bonds and the strength of certain commodities.

So these, mes amis, are my immediate loci of concern: Florida, Texas, Korea and Washington. It is a small list, but in my judgment a content-rich one. There are a few macro data releases next week, but it is an otherwise quiet one in that corner of the universe.

So let’s turn to the corporate side, where everyone will hold their breath till Tuesday, 1 pm Eastern Time, when Tim Cook steps up to the podium for the first time in Apple’s newly opened corporate HQ, to introduce the iPhone 8. It ought to be a mind-blowing affair, but the real drama will unfold over the next few months, as the world evaluates whether or not company can meet expectations.

 

The bar here is high. The A Team are contemporaneously releasing 3 phones. Do they cannibalize each other? Can they overcome widely reported components shortages? Will consumers really pay 1,000 US for the fully loaded 8? Particularly in China: a) which now generates half of all IPhone sale revenues; and b) where suitable substitutes can be purchased for less than 10% of this price?

We won’t know for several weeks, but on Friday I was speaking to my friend Goodie, who unlike me, actually knows something about this subject. We both agreed that this single set of imponderables alone may go a long way towards determining the path of equity valuations in what remains of 2017. If Apple nails it, investors will swoon and perhaps buy everything in sight. If not, the markets may well ignore any technical rationalizations and issue that the cartel of west coast companies bent on taking over the world – the so-called FANGS (and by extension, the overall market) — a much-needed claw trimming.

I will close by designating the importance of the I-Phone 8 to the overall equity market valuations to be Goodie’s Law. It is intended to work in conjunction, rather than supplant, Gresham’s Law. So my risk advice is as follows: if you wish to monitor the potential impact of psychodramas around the world, keep an eye on the USD; if you want to focus on U.S. equities, watch Apple.

If you follow this course, I see no reason why the two edicts cannot achieve harmonious co-existence.

TIMSHEL

 

Labor Day’s Love Lost

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 Well, kids, this is it. The Summer of Love +50 is in the books, and here’s hoping you made the most of it. Because, whatever (presumably mixed) blessings it bestowed upon us: a) they are now consigned to the past; and b) our affairs are likely to take on soberer complexion – starting tomorrow. 

Meantime, it’s Labor Day. I truly hope you enjoy it. But I won’t lie: I never liked Labor Day. In fact, in a very real sense, Labor Day sucks. The origins of today’s holiday date back to the late 19th Century, when organized workers became force with which to be reckoned, and took to violence to obtain better terms from their bosses. Bravo to them, I say, for the Industrial Revolution had indeed dealt them a bad hand. Working conditions were abysmal, with unilaterally empowered corporations sending young children into mines for 12 hour shifts. The Labor Movement brought some much needed balance to the equation. But a great deal has changed since that era. Globalization, Automation and (it must be said) widespread, sustained corruption, diluted the leverage of the union paradigm. Members and (more particularly) their reps grew complacent. And they overplayed their hands. And the membership took notice. And they have voted with their feet: 

But of course, there is a portion of the union-verse that is thriving, and that, as is well-known, is the organized segment of working stiffs on public payrolls. Their participation rate, according to the Bureau of Labor Statistics, is more than 5 times that of their private economy counterparts. A strong argument can be made that the only unions with any juice left are consortiums of government employees, who bargain aggressively against other government representatives to determine how deeply they will reach into taxpayers’ pockets. My vague recollections about the Supply/Demand curves I drew in college offer hints of an inefficiency here, and it’s no wonder we are plagued with the troubles we face. 

Thus, whatever it’s noble origins, the organized labor movement is now only in it for themselves, and I have a hard time celebrating the patriotic triumphs of AFL-CIO, the American Federation of Teachers, the NFLPA or the Screen Actors Guild. For these reasons alone, I have always looked at Labor Day with something of a jaundiced eye. But my issues transverse my petty political perspective. Though many years have passed since I was sending my own darlings off to school, a part of me feels sad this time a year, when I drive by bus stops and see the backpacked little fellers with their long faces, trudging off to their essential but decidedly grim organized educational facilities.

And there’s more. Even for us grownups, the end of summer ritual brings about a feeling of both sadness and nausea. I work hard during the summer, as do, presumably, most of you. But as June melts into July, which melts into August, I will admit to allowing my mind to relax a bit. “It’s summer” I tells myself “take it a little bit easy”. 

But that particular crutch expires today, and what lies beyond, on balance, every year but this year in particular, causes my blood pressure to rise. Both Management and Labor will have to resume their toils at full throttle, with outcomes that appear to be decidedly uncertain. 

In a perverse turn of the calendar, the lead up to the holiday I’m abusing offered some insights into the condition of the latter, eponymous class. On Friday of all days, the BLS dropped the August Jobs Report, and presumably y’all know it was a yawner. Private Payrolls came in light. June and July were revised down. Hours worked and hourly earnings barely budged. The base rate actually ticked up a titch. 

But our always-intrepid working stiffs continue to gather themselves on the spending side, more often than not, with funds sourced from origins other than their own personal wealth. According to the latest figures produced by the NY Fed, Consumer Credit hit an all-time high last month: 

That’s a passel of debt to pay back, and it would therefore follow that Management and Labor alike should be highly motivated to knuckle down in the final trimester of ’17. But actually accomplishing anything may be easier said than done. Among other factors, while the rhetoric has cooled a bit in Washington, bond investors are showing increasing concern about the possibility of a government shut down this month, specifically by shedding obligations that will come due over the next few weeks:

In addition, there’s those pesky Northern Koreans, whose leader seems intent on sending what’s left of his long beleaguered country into Kingdom Come. I hesitate to weigh in professionally here, but it does strike me that: a) the presence of deployable ICBMs in the hands of L’il Kim will be deemed immediately unacceptable for the U.S. and its allies; and b) whatever steps are taken to eradicate this threat will be volatility enhancing and valuation dilutive. 

Through it all, though, the Gallant 500, chugs on, half-a-league, half-a-league, half-a-league onward. Factoring in dividend/reinvestment, August marked the 18th month out of the last 19 where the index generated positive returns, and that, my friends, has only has happened one other time in history – in the heady days of ‘95/96: the infancy of the dot.com bubble. In putting up this performance, it stands in firm solidarity with the VIX, which again is bumping down against single digit thresholds: 

VIX Vertigo: 

Kind of strange from my perspective. I would’ve thought that investment pools might be marginal buyers of options going into the long weekend, but apparently they were otherwise occupied. 

In general, I’d say we enter this last, performance-critical third of the year in something of a jump ball configuration. Risky assets appear to be nothing if not fully valued, but are they overvalued? I’m not prepared to state that they are. I will, as has been my habit, offer the following observation though: there’s nothing on the horizon which would particularly incline me to be short any asset class: not stocks, not bonds, not commodities and not credit. 

I’d like to predict that volatility will normalize over the near term, but I’m not even sure on this score. 

So about all I can offer on this sucky Labor Day is an admonishment to remain on your toes. Something’s likely to happen – sooner. Or later. Or never. 

Come what may, I’m girding myself for battle. But all of that starts tomorrow. In the meantime, you must forgive me as I take my leave. The burgers need flipping, and that critical task devolves to me, and as I perform this vital task, I’ll be thinking, more in sorrow than in anger about Mother Jones. 

TIMSHEL 

Viva La VV’s

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Fair warning to those have somehow failed to notice: as the rings embedded in my tree stump increase to uncountable magnitudes (i.e. as I grow older), I find my expository focus increasingly centered on eulogies, elegies and other forms of tribute to the dearly departed.  I don’t think I can stop this trend, because (let’s face it), the passage of time only increases the inventory people and things that went before, while my interest in everything else inexorably wanes.

So I noted with unmixed regret last week’s announcement by owner Peter Barbey (among other things the heir to the North Face/Timberland/Lee Jeans outdoor clothing dynasty) his intention to discontinue the printing and physical distribution of the venerable “Village Voice”.  Oh, the publication will forge on in the crowded and complex ionosphere, competing for what used to be called “mindshare” with a bajillion other on-line periodicals, but soon, those accustomed to the ritual of grabbing a copy of The Voice outside their favorite bodega, will find their routines rudely disappointed, and for all time.

Volumes can and will be written about the periodical: how it was founded in 1955 by Norman Mailer and a couple of his pals out of an apartment located in the neighborhood for which it is named, how it became a portal of passage for writers and artists, ranging from Literary Giants Alan Ginsberg, Ezra Pond, Henry Miller, James Baldwin and E.E. Cummings, to Music Critics Lester Bangs and Nat Hentoff, to cartoonists Jules Feiffer, R. Crumb, Matt Groening and Lynda J. Barry.  How it chronicled the cutting edge sensibilities of the Beat Generation, the Flower Power era, Punk and post-Punk.  And how, above all, and against significant odds, it endured for decades as the bible for local popular culture; its reach, extending well beyond Bleeker Street, well beyond Manhattan, well beyond America’s borders, extending, at least for a time, around the world.

The Voice, of course, has always been free in New York, but I actually used to plunk down the hefty sum of 5 clams to pick up a copy from time to time in Chicago.  It was the late ‘70s, and I was already casting my eyes eastward.  When I finally reached the, er, Promised Land of Gotham, I never missed an edition.  I eagerly checked the live show listings (chock full of formatted ads from venues long shuttered, including the Bottom Line, the Ritz, the Felt Forum, the Lone Star Café and, of course, CBGBs), sneaked a peek at the Personals, and read what articles captured my interest.

It was in the Village Voice, for instance, that I first read of an epidemic of untreatable viruses that were plaguing the neighborhood: a problem that a few months later rose to the dignity of a full blown global crisis: the spread of Acquired Immunodeficiency Syndrome – otherwise known as AIDS.

But in the end, The Voice almost certainly fell victim to the inexorable forces of what transpires at the intersection of cultural change and technological advancement.  The music clubs shut down.  Those looking for hookups found more efficient means of sourcing them.  Its (dubious in my judgment) progressive sensibilities got lost in an interminable stream of such doggerel – made available every microsecond on the web.  In sum, it might be fair to state that The Voice lost its voice, and this is hardly cause for celebration.

I reckon, though, we’ll survive, but I don’t think we’d doing ourselves any harm by taking a moment to mark the changing of the guard downtown.

Anyway, I’ve got a suggestion for moving on from our lamentations, for a new VV has emerged.  SaVVy investors already know this, but for the last couple of years, those looking to trade in the nooks and crannies of what is known as Volatility can avail themselves of something called the VVIX.  It measures the implied volatility embedded in options on the VIX index, which in turn measures the implied volatility priced into options on the S&P 500.

Got that?

Good.  Because unlike the VIX, which aside from the odd palpitation, has been a sleepy ride down a Local (i.e. as opposed to an Express) elevator, the VVIX has been quite lively of late:

 

VIX:                                                                           VVIX:

 

If you’re a bit confused here, I suspect you’ve got company.  But trust me, the VVIX is where the action appears to be.  To wit: while the VIX graph indicates that the implied vol of the SPX is a dreary, high-single/low-double digit affair, the VVIX rises and plunges to levels routinely around (and sometimes above) 100%!

Now, back in the days when Mailer and Co were cranking out The Voice on an inky, noisy, hand-operated printing press (i.e. when I first studied options theory), I was taught that an implied volatility of > 100% is, shall we say, problematic.  It implies that the underlying instrument, with significant one-standard deviation probability, can manifest a price change equal to or greater than its entire value. I can see how this is possible on the upside, but if my increasingly waning arithmetic skills have any juice at all left, this suggests that a single, high probability move will take the underlying instrument (in this case the VIX) into negative territory.

Somebody wake me up if the VIX goes negative, because it suggests that there are investors out there who will pay me for the privilege of holding options, and under the circumstances, I’ll take all I can get.

In fact, such a trade might be about the only low hanging fruit left in the entire global market complex, which continues to show very little sign of reaction to stimulus (positive or negative).  Last week featured some interesting news flow, but many markets barely budged.  The SPX did in fact manage to break a 3-week losing streak, but only to the tune of about 60 bp.  For all of the talk of equity strength, our favorite index has traded inside a 24 handle since just before Memorial Day, and, as I hardly need to tell you, Labor Day is just around the corner! Mathematically, the entire summer season range is under 4%, and at the moment, the SPX is below its midpoint. So perhaps we should be-calm ourselves as to the strength of this market.

Selected other asset classes are showing a little less sloth, perhaps as led by the decline to YTD lows of the US Dollar Index, and the impressive climb of Gold:

 

US $ Index:                                                     Gold:

 

Now, I should inform you that us stone cold ballers think of Gold as a currency, so the yellow rock rally can at least in part be viewed as yet another forearm shiver to our beloved green paper.

The main beneficiary, apart from Gold, of the dollar’s poor performance, was the Euro, which gained over 1% on Friday, most of which it copped in the afternoon, subsequent to the Central Bank speechifying at Jackson Hole.  It does appear to me that as is consistent with the urban myth, FX traders are displaying more sensitivities to global affairs than are stock jockeys.

I think, again, they may be on to something.  While next week, if there’s a God in heaven, should be quiet, we’ll have to burst out, from a standing start, come Labor Day Tuesday.  Perhaps top on the agenda will be untangling a brewing budget crisis, and who among us is brimming with confidence that we can avoid turning this routine exercise into a clown rodeo? Data will start streaming in, and the market action could come from any corner of our awareness, from Washington to Pyongyang, from Corporate C-Suites to the mean streets of Berkley.  We’ll be well-advised to remain on our toes.

I also want to reiterate (in part because I believe I was the first to record this thought) my belief that if investors want anything out of this congressional session, they bloody well better gin off some sort of selloff.  If bad behavior from the White House to Capitol Hill is met with nothing more than a collective market shrug, accompanied by a sustained unwillingness to part with favored holdings, then said bad behavior is rendered politically inconsequential, and will continue.  By contrast, if the market took a dive, I believe you’d see them pols busting their collective humps not only to pass a budget, but also to do something useful on Health Care, Tax Reform and Infrastructure.

I reckon, though, we’ll just have to see how that plays out.  In the meantime, if the spirit moves, I think you should pick up a print copy of the Village Voice – while you still can.  Put it aside for your progeny.  Let them know how we used to do it.  It will do them less damage than obsessing about the latest moves in the VVIX.  And, for those who were wondering, yes you can trade options on this index, raising the likelihood that, ere long, we’ll have the opportunity to turn our attentions to the VVVIX.

Good luck with that one, kids. Because, like James Baldwin, Alan Ginsberg, Norman Mailer, the Bottom Line and (soon) the Venerable Village Voice itself, I hope by then I’ll be out.

TIMSHEL

Eclipse/Brain Damage

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All that is now, and all that is gone, and all that’s to come, 

And everything under the sun is in tune, 

But the sun is eclipsed by the moon 

— Roger (#%&%$) Waters

I don’t know about you, but a part of me is eager for this madcap summer to end. Oh, I’ve had some seasonally pleasing moments – playing with my grandsons, working in a little shuffleboard, and engaging in other age-appropriate behaviors. But a review of doings outside my increasingly narrowing personal sphere, the interval allotted to denizens of the Northern Hemisphere to bask in bright skies and warm temperatures is starting to grow long in the tooth. I won’t waste much space reviewing the events that led us to this pass; I choose, rather, to focus on the present and even more so on the immediate future.

This week’s note draws reference from one of the all-time-top moments in rock and roll history: the sequence of Brain Damage/Eclipse that marks the end of Pink Floyd’s astonishing magnum opus: “Dark Side of the Moon”. Now, hard-core Floyd-heads might argue the point – placing efforts like “Atom Heart Mother”, “Piper at the Gates of Dawn” or even, dubiously, “The Division Bell” at the top of the Pink Catalogue. From some perspectives, I might even agree with them. But what is (or should be) true for all concerned is the following: “Dark Side of the Moon” is a perfect record. Not. A. Wasted. Note. So even if you’d rather listen to “Meddle”, “The Wall”, “Wish You Were Here” or “Animals” it’s important that everyone gives “Moon” its props.

For the purposes of this presentation, I have plucked out the final two songs of DSOTM, due to their relevance to our current conundrums. Moreover, I have reversed them, for reasons to be made clear below. So let’s get to it, shall we?

While reasonable minds can debate whether the collective id of our visible community is suffering from Brain Damage, it is a matter of near-certainty that an Eclipse – a mother of an eclipse, is headed our way. Tomorrow, in fact. Astronomers are describing it as a once-in-a-century event. It is expected to cast us into temporary darkness as it makes its way along the jet stream, arriving in Oregon mid-morning and reaching the East Coast around tea time – all before, presumably, continuing its celestial path over the Atlantic Ocean. I’m not an expert on these matters, but as a risk manager, it is my obligation to warn you, as it passes overhead, not to look at the sun. I’m willing to cop to being a bit nervous about this, because: 1) I’d very much like to take a peek myself; and 2) I’m utterly incapable of constructing one of those makeshift devices that offer a safe visual image. And it’s not as though I haven’t tried. Several of my grade school teachers tried to assist me, with sorrow, horror and amusement, as they reviewed the many cereal boxes I destroyed in the effort. These weren’t among my finest academic moments. In fact, they rank among my worst, surpassed only by my solo attempt (others were in groups, but no group would have me) to dissect a starfish in high school. After inspecting my, er, handiwork, my elderly Greek biology teacher saw fit to pick up the smallest corner of my misanthropic sea creature with thumb and forefinger, and shriek, multiple times, and to the entire class, that I had mutilated the poor thing.

 

And that’s all I have to say about eclipses. Just don’t look at them directly, OK? Let’s turn to the topic of Brain Damage, and here we must start with the author of the piece: one George Roger Waters. Nominally, he’s one of my favorite musicians. And now I must avoid him. Almost never in the history of popular culture has an artist lived such a charmed life and ended up so nasty and so angry. In addition to bearing witness to the timeless genius of his output being proved across the decades, he’s made perhaps more money over the last few years than maybe any performer this side of J and Bey. His wandering Wall tour brought in a cool $450 Million (eclipsed only by U2 and the Stones, each of which who had to split their boodle, while Roger grabbed the entire gate). And now he’s back at it. Again.

But he’s very angry. At the establishment in general and at Israel in particular. In fact, he’s outraged, so much so that he has spent some of his hard won ticket proceeds to construct floating pigs with the Star of David affixed on their shanks. Classy, Roger. He bullies other musicians into boycotting Israel, and, while some have caved, others have told him to pound sand. The Stones, for instance, reacted to his demands by adding extra shows in Tel Aviv. Bravo, Mick and Keith. Seldom in my awareness has a more elegant message been sent from one artist to another to respect his betters.

So I’m here to confirm what Roger so beautifully conveyed to us in 1973: yes, Roger, the lunatic is in your head.

But there are other lunatics out there. For instance, there are, indeed, lunatics on the grass. Witness the insanity taking place at statues residing in parks across this vast national expanse. Much, of course, has been made of these episodes, and I’ve got little to add to the discourse. Undoubtedly, those involved are remembering games and daisy chains and laughs, but for heaven’s sakes, let’s take Roger’s advice and keep these loonies on the path.

The lunatic, in fact the lunatics, are also, by all accounts, in the hall. In fact, in our hall. One only has to peruse the corridors of the White House, Congress and the Court System to verify this reality. In this electronic age, the paper no longer holds their folded faces to the floor, but now it’s not every day, but every minute, that whatever passes for the paperboy brings us more.

All of which brings us back to the lunatics in our head. Oh they’re there alright, including, specifically, the lunatics of the investor class. But the past couple of weeks appear to have brought brief episodes of lucidity to their thoughts and actions. Improbably given recent market paradigms, they are actually reacting to troubling news with rational sequences of risk reduction. These cycles have been most evident on each of the previous two Thursdays, and I believe they portend some much needed incremental volatility in the coming weeks and months. This past week began with almost a full recovery of the preceding Thursday’s losses, but shortly thereafter, the recently suppressed but ultimately inexorable forces of gravity set in. By Friday’s close, equity indices had given back this recaptured ground, and a little bit more for good measure. And, while it is likely that the ten-odd trading sessions that remain to us between now and Labor Day will be characterized by a lack of liquidity, I see the following signs of a risk normalization cycle on the horizon:

  • Earnings season is substantially over and cannot provide further tailwinds.

 

  • On a related note, in the back half of the quarter, the data skews towards macro, and this is not necessarily accretive.

 

  • August ranks 12th in terms of historical equity performance; September ranks 11th; October is 10th.

 

 

  • Though bonds still catch a bid, there were some palpable holes in demand in recent auctions.

 

  • For the first time in many months, investors seem to be reacting to negative news, be it domestic unrest, international terrorism, Washingtonian dysfunction, or other buzz killing dynamics that seem to come our way in never-ending sequences.

 

  • I’m watching some of this Bitcoin nonsense, and while I don’t think that these types of instruments can withstand the inevitable political onslaught they face (hard for me to believe that the world’s leading countries and central banks will cede one of their most powerful governance tools to the private institutions that seek to compete with them), I do think that recent surges are in part driven by an increasing disgust with fiat currency regimes.

 

Post Labor Day and particularly in September, we’ve got a bunch of catalysts coming down the pipe, the balance of which, in my judgment, skew negative. The upcoming budget and debt ceiling standoff is beginning to look menacing. The likelihood is that Special Counsel Mueller will stir the pot further at some point in the next few weeks. While one can perhaps take some comfort in the arrival of General Kelly and the departure of Mr. Bannon, the Trump Administration has little time to get its act together and a lot of rope with which to hang itself. If any of the core senior appointees that retain a shred of credibility (Cohn, Mattis, McMaster, Tillerson, Hayley and very few others) decide they’ve had enough: a) it would be a dire political setback; and b) the markets – unlike the case over the last several months – are likely to react. We’ve had a blissfully (on a relative basis) quiet week with respect to the Korean Peninsula, but with our annual joint military exercises with South Korea set to begin on Monday, there is also considerable hazard in that quarter of the world.

Beyond all of this, we face the entirely wearying prospect of the annual Jackson Hole gabfest beginning later in the week. I will not elaborate here, but may have more to say about it in next week’s installment. Given the lunacy epidemic that is plaguing the entire planet, I’d prefer that they cancel this year’s tribute to the brilliance of the glib and powerful, but they don’t listen to me, so the event is likely to take place as planned. There’s not much accretive that can come out of this, and a reasonably likely set of outcomes that will be bothersome or worse. But like its Alpine equivalent (the possibly more wretched Davos confab, held each January) the show, high in the Teton Mountain range, will go on.

In light of it all, I end this piece by begging someone to raise the blade, to make the change, to rearrange me till I’m sane. Further, I wouldn’t mind if that same person or persons locked the door and threw away the key, because there’s someone in my head and it’s not me.

Roger first wrote these words about his much-lamented bandmate/mentor: Syd Barrett, who went certifiably crazy early on, and never regained his sanity. The band that Syd formed and for a time led did indeed start playing different tunes, and reached global superstar status, while Syd faded away and died. So maybe Syd’s on the dark side of the moon. But if so, we won’t see him, at least not tomorrow.

There’s this eclipse thing coming, don’t ya know?

TIMSHEL

The Summer of Love?

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This ain’t the Garden of Eden,
There ain’t no angels above
And things ain’t like what they used to be
And this ain’t the summer of love
— Blue Oyster Cult

Following, with some ambivalence, on the worldwide BOC sensation I created a couple of weeks ago, I reach back into to their catalogue, for inspiration in these troubled times. I love the Cult; always have/always will, but with the band blowing up all forms of social media after I wrote about them in late July, I wonder if I should continue to enable this somewhat perverse global obsession.

Alas, though, duty calls, and I must answer. So here, we reference the first song from the band’s last flirtation with greatness: 1976’s “Agents of Fortune”. The record opens with our title track, which deals with the obvious: 1976 wasn’t the Summer of Love. Nine years had passed since the phrase came into being, the tragic end to the poorly conceived and horribly executed Viet Nam War. There were race riots, the murders of MLK/RFK, the violent Democratic National Convention. Nixon was elected and re-elected, and then came Watergate. The clumsy, misanthropic Gerald R. Ford took his place, and (though it was unambiguously the right decision) disgusted everyone by pardoning Tricky Dick. In ’73, OPEC laid down an oil embargo, and the world was introduced, perhaps for the first time ever, to the concept of an Energy Crisis. The economy was in the doldrums, and in general, everyone was in a sour frame of mind. It was indeed a sorry contrast to the fabled, sunny months of 67: the original Summer of Love.

This year, as it happens, marks SOL’s 50th anniversary, bringing forth galaxies of happy reminiscences of an era that began and ended much too quickly. And now, with students beginning their dreary mark back to school and Labor Day fast approaching, we are perhaps in a better position to draw comparisons between the summer season of 50 years ago, and the one rapidly fading before our eyes.
It strikes me that the comparison is more of a mixed bag than one would nominally suppose.

On the one hand, music has taken a dramatic turn for the worse. ’67 brought us the peak of the Beatles, and the emergence of Hendrix, the Dead, the Airplane and Janis. Coltrane died in July, but Miles Davis and Ornette Coleman were in full flower. Even the Bubble Gum stylings of the Monkees, the Strawberry Alarm Clock and Paul Revere were of a higher quality than they had a right to be. The Monterey Pop Festival blew everybody’s mind and set the stage for the epic music jubilees that followed.

Fast forward to the present day. The (admittedly fabulous) Biebs holds two spots in the Billboard Top 10, which also features DJ Khaled, Childish Gambino and Cardi B (Cardi B?). Movies were also better back then, as ’67 produced The Graduate, Cool Hand Luke, In the Heat of the Night, The Dirty Dozen and too many others to name. This year, we are plagued with the 397th releases in the Planet of the Apes, Guardians of the Galaxy and Spiderman series.

TV news featured titan journalists Cronkite, Chancellor, Huntly and Brinkley. Now, were served up (name your poison) Rachael Maddow, Sean Hannity, Mika and Joe.

But there are also similarities. Race relations were at a low ebb, and (improbably) about to get worse. In Washington, a single party held the presidency and both houses of Congress, and managed to pass no bills of import that year. A lewd, blunt President was quickly losing the confidence of the electorate, so much so that a year later he decided not to run for a re-election bid that should’ve been a cake walk. We were immersed in conflicts in remote parts of Asia, and we faced burgeoning nuclear threats and were standing nose to nose in rhetorical conflict with both Russia and China.

And what about the markets? Well, they were ascendant after a rough patch in ’66, which itself had been preceded by an uneven run up that had transpired for across much of the first half of the decade. The economy was growing, and both unemployment and inflation were low:

 

But two trends dominated the American psyche: 1) increasing doubts about the country’s place in the global pecking order, and 2) social issues. With respect to the latter, angry mobs held violent protests in every major city, rudely expressing their, er, displeasure with matters ranging from race relations, police brutality, sexual freedom and wealth/income inequality.

Unrest notwithstanding, U.S. equity indices were pushing to all-time highs, on the heels of a 3 decade upward climb.
Does all of this have a ring of familiarity? I thought it might.

Indeed, I think it might be fair to assert that there more similarities between the Summer of Love and present conditions than meet the superficial eye. Moreover, if history repeats (or, in any event, rhymes), then the next few years are likely to offer a rocky ride.

Meanwhile, it was an interesting week in the markets. U.S. and indeed global indices experienced their worst interval of the year, and, on balance, I believe this was a welcome development. Of course, the headline catalyst was brinksmanship rhetoric issuing forth from two historically infantile national chieftains: L’il Kim and Don John. But the pricing dynamic/trajectory was instructive. It’s difficult to determine which of these players on the world stage outflanked the other in terms of undignified demeanor, but until Wednesday, equity investors, as has been their wont, barely took notice.

Then, on Thursday, the Gallant 500’s Maginot Line of support began to show some cracks. It opened down about 100 bps and closed on its lows – some 50 basis points below this threshold. It was the equity complex’s worst single day showing since the election.

I spent some time trying to discern what had changed between Wednesday and Thursday, and pretty much came up empty. As had been the cycle for days, Trump tweeted and Kimmy-boy blustered. But this time, equity investors blinked. I am not in a position to offer useful insights as to how serious this crisis really is, but I will state one strong opinion in this regard: it is highly irregular for the commander of an army to telegraph to the whole world the precise locus of his intended attack. As such, come what may, it is my belief that, on balance and for the moment, there are probably fewer safer places on the planet than the U.S. Protectorate of Guam.

But as for the markets, it occurred to me after Thursday’s close that the equity complex had reached an inflection point: either this inexorably giddy corner of the investment universe had finally effected a much-needed upward adjustment in the Risk Premium, or investors would view Thursday’s nominal but shocking 1.5% correction as a buying opportunity, and we’d be off to the races again. But Friday’s session brought little in the way of clarity. The SPX actually rallied a titch, while, contemporaneously, the VIX managed to retain the lion’s share of Thursday’s > 40% jump.

 

In addition, the USD remained under pressure, with its weighted index residing at the lowest levels in a year:

 

Rates around the globe were also hard pressed, presumably as the Kim/Trump show causes a global flight to the relative safety of government bonds. And even High Yield investors got in on the risk aversion act, showing some long suppressed and much needed signs of happy feet:

 

Thus, while the market gods were not so forgiving as to provide us with any clear messaging: a) they never do; and b) the preponderance of cross asset class price action suggests that two-way volatility of a more dramatic nature is in the offing. Further to the point, and as widely reiterated across the financial press, the historically worst performing month for equity indices is August, and that the second worst is September.

So I think we may be coming close to a rationalization of the volatility paradigm, and will certainly overshoot the mark if the leader of either the Democratic People’s Republic of Korea or the United States of America finds himself unable to resist using the weaponry dubiously placed at his disposal.

But as to the larger question of whether or not this is the Summer of Love, I can only state my own views, noting that when the season that brought us the phrase took place, I was all of 7 years old. 50 summers have since come and gone, and while I can’t rightly figure out at what age this places me, it’s a fair bet that it puts me pretty far along. I don’t mind stating I feel the years in my bones.

Thus, as always, I yield to the wisdom of BOC. No, this ain’t the Summer of Love, and perhaps it’s just as well that it’s not. After all, with respect to certain historical intervals, no matter how much we enjoyed them, it is wise to “sit so patiently, waiting to find out what price, you have to pay to get out of, going through all these things twice”.

TIMSHEL

Redemption

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“Full count; runner on 2nd, 1 out. Cubs lead 3-0 in the top of the 8th. Prior delivers. Castillo swings. High fly drifting towards the left field wall. Alou reaches over. But wait! A fan knocks the ball out of his hand”.

The rest, of course, is history. It was the 8th inning of the 2003 NL Championship Series between the Cubs and the Marlins. Marlin Castillo drew a walk, Prior (who up to that point had been delivering a 3-hit shutout gem) fell apart, and when the dust settled for the inning, the Cubs (who were seeking to clinch the Pennant that night) were down 8-3. They lost the game, and then booted Game 7. The Billy Goat Curse, which had kept them out of the World Series since 1945 and denied them the Championship since 1908, remained intact.

Everyone blamed the misanthropic, over-reaching fan: one Steve Bartman. And he was an easy target, sitting in the front row, committing the unpardonable (for purists at any rate) sin of wearing big, honking head phones to a playoff game, and, through his unwitting actions, denying the Cubs their destiny. He became a pariah in Chicago – so much so that the Governor at the time: Philosopher/Moralist Rod Blagojevich, suggested he enter the Witness Protection Program. It would take another Baker’s Dozen-13 years, and 3 changes of ownership, before The Curse ended and the Cubs grabbed their rings. Bartman was persona non grata for the entire intervening period, but then, last week, the Chicago National League team did something classy: it awarded him a World Series ring.

Across these troubled times, the gesture was nothing if not a welcome act of Redemption, but it wasn’t the only one. Contemporaneously, a Nevada Parole Board granted to inmate 1027820: one Orenthal James Simpson, and I want everyone to be aware that I am OK with this. I mean, we all know that did Goldman and Brown, but way he was set up for the 8 year stretch he served was nothing short of epic. Some Vegas players take his memorabilia and let him know that the boodle is lying in an adjacent hotel room. They get him drunk, put a gun in his hand and break in. Within a matter of minutes, the cops arrive on the scene, and whammo! Open and shut case for armed robbery.

So Juice did his time, and now he can reorient his self-proclaimed “conflict-free life” to his solemn quest to find the “real” killer of his wife and the signally unlucky Goldman. Who knows? Maybe he’ll succeed. But one way or another, it’s time to move on. So let’s remember the Juice for his singular exploits on the gridiron.

Oh yeah, and for one more thing: in a very real sense, we owe O.J. a deep debt of gratitude for inadvertently giving us the Kardashians.
On the whole, we’re on something of a feel-good run, and nowhere is this more evident than in the investment universe. Our equity indices continue their climb to heretofore un-breached elevations, Q2 earnings have been, on balance, a blowout affair, and I’m assuming y’all saw (or in any event, read Trump’s Triumphant Tweets about) Friday’s Jobs Report. If one casts an eye beyond the Equity Complex, what is visible is a global bid on bonds, and even some love of the recently forsaken USD:

 

The recently “en fuego” grain markets have backed off, but let me ask you this: how bad is it if you pay a little bit less for that corn on the cob scheduled to grace the BBQs teed up as summer winds down?

However, in a widely reported and indisputably odd turn of events, perhaps the biggest recipient of heavenly and earthly Redemption is European High Yield debt complex. Continental “Junk” (apologies for descending into the decorum of the vernacular) bonds have been bid so strongly that somehow, improbably, they are trading at identical yields to those of the 10 year notes issued from our own gallant Treasury Department, for many generations considered the world’s most reliable borrower:

 

I will admit to having stared at this chart to the point of obsession. Among other matters, so desperate for this paper have investors become that from a point contemporaneous to the teeth of the crash till the present day, Euro Junk yields have dropped by an astounding 90%. Call me crazy (it’s been done before) but I have just the most sneaking hunch that these securities are a tad, shall we say, overvalued. This decade, we’ve been treated to multiple handwringing cycles of speculation about the prospects for an Uncle Sam default, but I’m here to tell you that: a) such an outcome is unlikely; and b) as a final line of defense, our paper is backed up not only by the full faith and credit of our federal custodians, but the considerable firepower of our military machine. By contrast, I’m pretty sure that some of these Euro obligors are living on little more than time that they borrowed as part of the lending package, and that when this precious but fleeting asset runs out, their lenders are likely to be left holding little more than an empty bag.

That strange days have found us is a matter of scant dispute; however, during this transient interval of Redemption, I am hesitant to press the point. Yes, market multiple metrics continue to soar to the arguably unsustainable elevations. In Washington, new Grand Juries are being convened at a point when the World’s Greatest Deliberative Body has adjourned to meet angry constituents, with little or nothing to show for its efforts. Our potential foes in Eurasia continue to join us in the language of brinksmanship. The domestic legislative agenda is stuck in either neutral or reverse, and we’re hurtling next month towards a debt ceiling/budget showdown that – come what may, is likely to please no one.

In short, there are many imponderables out there that threaten to kill our current buzz, and again, I believe that conventional risk measures of virtually every stripe are understating the true exposure — from a market and an economic perspective.

But on this bucolic summer weekend, as the sunny seasons slips inexorably away from us, I choose to focus instead on our Redemption theme. I hope Juice uses his freedom wisely, and I’m glad that the Cubs and the City of Chicago have, at long last, let Bartman off the hook. After all, he presumably paid for his ticket, and going for a foul ball that appears to be within your grasp is part of the decidedly limited appeal associated with the price of admission to a baseball game. He wasn’t looking at the left fielder; his eyes were squarely on the souvenir that gravity was sending directly towards him.

And there’s one other sin associated with this incident that wants atonement. On the following February 26th, amid much national (and indeed global) hype, the team gathered at Harry Carey’s downtown restaurant to ritualize the destruction of the offending baseball. They kept their precise methods a solemn secret, so, like everyone else, I tuned in to watch the spectacle. I had envisioned the launching of it from a cannon, to explode in mid-air, its debris scattered into the icy waters of Lake Michigan. Instead, they stuck it in a transparent box, pushed a button and it disintegrated. I found this disappointingly anti-climactic. Further, published reports (I’m not making this up) indicate that the restaurant then took a portion of the particlized remains and mixed it into the evening’s pasta sauce. Helluva shame. To my thinking at any rate, the infamous ball plainly deserved a more spectacular exit.

But that’s the way it goes – in baseball and in life. In more cases that we would wish, our hopes, dreams and even our nightmares end up dissolving into dust. There’s a lesson in there somewhere for the investor class, but I’ll be damned if I’m going to expend my energy attempting to ferret it out. Instead…

…I’ll leave this task to you. Give it some thought. You may come up with a suitable answer, and the exercise itself will do you no harm.

TIMSHEL

Louise IV

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Ain’t it just like the night to play tricks when you’re tryin’ to be so quiet? 

We sit here stranded, though we’re all doin’ our best to deny it 

And Louise holds a handful of rain, temptin’ you to defy it, Lights flicker from the opposite loft, 

In this room the heat pipes just cough 

The country music station plays soft But there’s nothing, really nothing to turn off, 

Just Louise and her lover so entwined, And these visions of Johanna that conquer my mind 

In the empty lot where the ladies play blindman’s bluff with the key chain 

And the all-night girls they whisper of escapades out on the “D” train 

We can hear the night watchman click his flashlight, Ask himself if it’s him or them that’s insane 

Louise, she’s all right, she’s just near, She’s delicate and seems like veneer, 

But she just makes it all too concise and too clear, That Johanna’s not here 

The ghost of ‘lectricity howls in the bones of her face 

Where these visions of Johanna have now taken my place, 

— Bob Dylan 

They all said ‘Louise was not half bad’, 

It was written on the walls & window shades, And how she’d act a little girl 

The deceiver, don’t believe her, that’s her trade 

Sometimes a bottle of perfume, Flowers, and maybe some lace 

Men bought Louise ten cent trinkets, Their intentions were easily traced, 

Everybody thought it kind of sad, When they found Louise in her room 

They’d all put her down below their kind 

Still some cried when she died, that afternoon 

— Paul Siebel

For some reason, the “Louise” of the American songbook never seem to get her due. Take, for example, this week’s quotes. Dylan’s Louise plays a decidedly second fiddle to the ethereal Johanna. Call her Louise #1. Siebel’s Louise #2 (made famous by Linda Ronstadt, who sings the sad story of the life and death of a Louise of easy virtue). I assign the moniker of Louise #3 to the character played by Isabel Sanford: Louise Jefferson, who spend about a decade “Movin’ on Up” in the hit ‘70s Comedy “The Jeffersons” She certainly did better than her above-mentioned, epynomous sisters, and always held her own on the show, but the poor woman had to spend the rest of her life having stangers sing her that song, while referring to her, with a distinct lack of dignity, as ”Weezy”.

But lately, I got to thinking about another Louise, one who is not American but rather a Brit, who was once and is no more a worldwide sensation. Here, I refer to the long forgotten Louise Joy Mullinder (nee’ Brown), who came into this world by virtue of its first successful In Vitro fertilization.

 

For the purposes of this document (and for reasons that should be obvious to my sharp-eyed readers), she will be referred to as Louise IV. She was born in Oldham, U.K. in mid-1978, with the assistance of a doctor/developer of the procedure, who, in 2010, won a Nobel Prize for his efforts.

Nowadays, the practice is common. But at the time, the birth of Louise was a very big deal, reported on a blow by blow basis by every news organization in the world. I will also confess to the following: her arrival kind of freaked me out. I mean, the tens of billions of humanoids that preceded her, dating back, presumably, to the time when our first antecedents slithered out of the primordial ooze, all had in common the fact that they were conceived in an actual human womb. Yes, artificial insemination was a longstanding practice by the time she arrived, but still, prior to her arrival it took sperm meeting egg — inside a uterus, to make a baby. So I wondered about her: would she be like us? And I worried about her: would we treat her differently? And I even prayed for her: would messing with such time tested formulas anger the Almighty, and would he take it out on her?

But none of my concerns ended up amounting to much. Louise was born, taken home by her loving parents, and raised like anybody else. That same day, home country Argentina won the World Cup, and later that week, Bob Crane of Hogan’s Heroes fame was bludgeoned to death in a Scottsdale hotel. Nothing to see here, folks; please resume your normal activities.

I got to thinking about all of this as I pondered the accelerating rate at which longstanding protocols gather to the dust of their forbears, replaced by new, sometimes disturbing paradigms. And my conclusion is as follows: pretty much anything – good or bad– can transpire to upset our equilibria, and the heavens, as well as unaffected mortals, while perhaps marking the changes, will incorporate them mundanely into their affairs. 

So…this all kind of reminds me of current market conditions. A great deal of what presumably might pass for important events are taking place at warp speed, but investors are content to serenely go about their business as though this wasn’t the case. Equity markets came out of the gate in strong fashion early in the week, but then lost some of their upward mojo. The SPX actually closed down (~0.2%) for the cycle, proving that such a thing – a down week– is, at any rate, theoretically possible. The VIX broke the into the previously impregnable 8 handle – albeit briefly – on Tuesday. For about 12 hours midweek, and as widely reported by the press, bookseller Jeff Bezos was the world’s richest man (that its, if you ignore a few scammers like Putin), but saw his riches modestly diminished below this breakthrough level after a rather disappointing earnings report issuing forth from his bookstore.

But on the whole, earnings, now half-way through the sequence, are strong — projecting out at about 9% growth. We also bore witness to a cheery Q2 GDP estimate, bringing tidings of 2.6% expansion, and corroborating the glass half full hypotheses that abound among the investment masses.

The news was unilaterally accretive out of the Energy Complex, and rates were for the most part flat. Those that wish to cast their eyes on something more of a horror show, though, need look no further than the USD, which is now trading against the magnificent Euro at a diminished level last seen as 2014 was fading into 2015. Well, here’s to the jaunty Europeans (or at any rate holders of the continental currency) who are making even more of a killing in our shares than us Yankees are – at least if they are buying them with their native units of account.

And it’s not as though the holders of our private debentures, of whatever credit quality, are being left behind either:

 

Investment Grade:                                         High Yield: 

But, as has been the catatonically repetitive theme of these last few installments, it’s plain that for the moment at least, the investor class is unwilling to price the palpable risks that overhang the global capital economy into private security valuations. I can’t think this is an overly promising paradigm with respects to its implications for return prospects on a going forward basis.

Without regurgitating all of the soul-sapping elements of the news flow, it may nonetheless bear mention that Health Care Reform, solemnly promised by the ruling (?) party over the near-decade when it was in the minority, hit a brick wall, and that the coup de grace was executed by a senior senator who rose from his post-operative bed, first to authorize the vote, and then to cast the deciding “nay”. The infantile name-calling and mud-slinging inside the Administration continues unabated, the fact that two new sheriffs (one, improbably, a former client of mine) arrived in town notwithstanding.

North Korea lobbed another one into the Sea of Japan, and China busted out some menacing new bombing devices. Almost nobody noticed. The President is irrelevant issuing orders to the military without providing them the courtesy of notifying them.

Yet our indices continue to climb, and with virtually every tick upward reach heretofore-seldom-or-never-before-breached heights with respect to certain valuation metrics:

 

 

 

But ending (as I always do), where I began, perhaps none of this matters. After all, women like Louise still get by. I can’t help but wonder, though, if the ghost of ‘lectricity still howls in the bones of their faces. This is particularly true for Louise IV, who, if she glows in the dark during an amorous moment, at least can be believed to have come by the practice honestly. Our Lady of the Day married a local bouncer in 2004, and here’s wishing her and her husband Wesley Mullinder all they deserve in this world. If the recent photo of her I managed to unearth offers any indication, she looks content. So perhaps, on balance and unlike 1-3, ‘tis well that she’s not American and that no one has ever written a song for her:

Louise IV: Presumably Holding the Device that Facilitated Her Birth: 

She can also perhaps take comfort in the reality that she blazed a well-travelled trail. Last year, 70,000 new In Vitro brothers and sisters arrived on the scene, in this country alone. But for them and the rest of us, the world spins and revolves, we move our feet – sometimes forward and sometimes backward – and the heavens fail to remark upon the migration. Perhaps this is as it should be; perhaps not.

I reckon, in this world or the next, we’ll find out.

TIMSHEL

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