Category Archives: Weeklies

The Summer of Love?

Posted on by

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

Posted on by

“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

Posted on by

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

Posted on by

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!!

Posted on by

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

Posted on by

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

Posted on by

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

Posted on by

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

Posted on by

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

Posted on by

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