Prairie Dogs

Posted on July 9, 2017August 24, 2018 by steve

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 July 2, 2017August 24, 2018 by steve

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 June 25, 2017August 24, 2018 by steve

I dedicate this edition to one George Herman (Babe) Ruth, on this, the 100^th (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 2^nd 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 9^th, 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 June 18, 2017August 24, 2018 by steve

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 June 11, 2017August 24, 2018 by steve

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 6^th 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 4^th of July holiday.

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

I reckon there are worse fates than this.

TIMSHEL

With a Little Help From My Friends

Posted on June 4, 2017August 24, 2018 by steve

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

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

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

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

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

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

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

They are not.

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

Global Dow:

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

More than Dixie Whistling in the Land of Cotton:

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

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

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

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

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

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

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

TIMSHEL

CamelNOT

Posted on May 29, 2017August 24, 2018 by steve

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

TIMSHEL

I Don’t Know Why The Caged Bird Sings

Posted on May 14, 2017August 24, 2018 by steve

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

TIMSHEL

Logos Gone Loco

Posted on May 7, 2017August 24, 2018 by steve

So, what do ya think? Be honest now. Nay, go further if you wish; as Roger De Bris, resplendent in a dainty evening gown, implored Max Bialystock and Leo Bloom, before accepting the directorship of “Springtime for Hitler” in the classic Mel Brooks farce “The Producers”, be brutal.

Of course, I could’ve bypassed these proceedings entirely, but as I see it, if you’re going to have a company, common decency requires that you have a logo, right? Unless, of course, you’re a stone cold baller enterprise like Goldman Sachs or Morgan Stanley (who long ago reached a state of fabulousness that what passed for a logo in those realms is nothing more than the corporate name in block letters), it is simply de riguer. And let’s not kid ourselves here: General Risk Advisors, LLC, whatever its merits and shortcomings may be, cannot be mistaken for either Goldman Sachs or Morgan Stanley.

So we set about the task of creating the visual symbol of our brand, understanding the need to make some sort of graphic statement that extends beyond the protocols established by the aforementioned bulge bracket crowd, but desiring to stop short of the busy bursts of color and shape of, say, the Cadillac logo, which may work fine for them, but which, in the context of our scholarly endeavors, might bring to mind images of a jello fruit salad with too much fruit and not enough jello:

Hopefully, you see my point.

Ultimately the decision devolved to my team, and, having ordered and paid for business cards, it is now inarguably to late to change course. But I do want your opinion(s), that, is, if you care to share them.

I’m not sure what message we’re trying to convey, but the handheld mirror or magnifying glass bursting forward with a pleasing sequence of upwardly sloping graphical bars, crossed by a rising convex arrow intended to reinforce the heavenward climb. can perhaps be tortured into something akin to the following. It’s our desire to hold the glass in front of our clients, with the inexorable result being a surge in their performance. I won’t be held to this implied promise, but hey, stranger things have happened.

Again, it’ll have to do, but if you wish to share any private thoughts, you know where to find me.

One way or another, format changes do not in anyway alter the mission of our weekend musings, which remains our attempt to make sense of current market conditions, with a particular eye towards identifying potential points of hazard and opportunity along the way So we may as well get to it.

As we left off matters last week, and though I was a little coy about conveying these feelings, I rather thought that the equity markets at any rate were poised for a breakout from current entrenched positions. As I’ve repeatedly conveyed in these pages of late, I’m not overly trusting of the markets at present, but have felt that the most unstable characteristic that they’ve shown is the stationary pricing of indices, especially the Gallant 500, which though knocking on the door of another handle, has now gone three full months without a single print that did not begin with the number 23. I know this can’t last, and, if I’m right, then it follows that Mr. Spoo must either climb higher, or retreat to lower elevations.

I’m still betting on the former, and, for the record, the SPX did indeed close at an all-time high on Friday, and came within less than a point of breaching the 24 handle. But its attendant path can hardly be described as a breakout. In fact, it’s gain for last week amounted to about 70 skinny basis points.

I suspect, for a number of reasons, that the 24 wall will come tumbling down as early as tomorrow, and that the 500 could do some open field running from there. Among other matters, the risk premium should by all accounts manifest some deflating, as driven by:
• Presumed favorable outcomes in the French election.
• Some movement on Health Care Reform out of Washington.
• Blithe, encouraging verbiage, and NO action, at this past week’s FOMC confab.
• A lead-filled pencil of an April Jobs Report.
• Purposefully leaked rumors of some sort of Led Zeppelin reunion tour.

OK; feel free to ignore the last of these, but the penultimate bullets should merit attention. The Bureau of Labor Statistics did indeed bring glad tidings on Friday, checking every box, including Non Farm Payrolls, Base Rate, Labor Participation Rate, Average Hourly Earnings, etc.
In addition, it’s hard not to be impressed with the earnings sequence, which now more than 80% complete, projects out to a 13.5% year over year gain. Yes, Mr. Cook is having a difficult time moving those I-Phones, but this disappointment is arguably overwhelmed by the glad tidings from Serge/Larry, Musk, Zuck, and a host of others. And boy oh boy that Bezos! What can one do but marvel at his wizardry?
So we’ve got corroboration that after a rather stormy winter, the private economy may indeed be heating up,, interest rates remain ridiculously low, the non-Fed Central Banks are printing as furiously as ever, and even the World’s Greatest Deliberative Bodies are showing that they are capable of at least a modicum of deliberation. Imagine if they really get their acts together and pass tax reform. Those magnified bars on our logo are likely to jump right off the page at us.

Now, I don’t want anyone to mistake the immediately forgoing comments as some sort of political view, as whether or not the policy path sponsored by the party in power may or may not be a sound one. I’m just referring to the market implications of them getting these things through, which I believe are unambiguously positive.

Again, if the market’s gonna move, as I think it must, I think that it is more likely to rise than fall. And if we needed any additional proof of the traction embedded in our grand domestic economic engines, we may need look no further than to the Atlanta Fed’s GDP Now forecast, which, it must be remembered, was deadly accurate in foretelling weakness in Q1. Well, it’s now Q2, and here’s what the Atlanta boys and girls are seeing:

It’s early days, yes, but the Georgia economists are at 4.2%, and my feeling is that if they’re right, then we could be looking at a 25 or 26 handle on the SPX by sometime this summer. Then, if you dare, consider the additional, bullish prospect of Plant, Page, Jonesy and Bonham the Younger storming these shores like only they can. Under these circumstances (and sorry to do this to you, folks), valuations could truly climb a Stairway to Heaven.

As always though, there are caveats. For one thing, Georgia Governor Nathan Deal may be on the verge of expanding the state’s pilot plan for the legalization of medical marijuana, evoking the possibility that maybe the Atlanta Fedsters did some early celebrating. In addition, there’s a rather worrisome drop in the VIX, which, midweek, unthinkably dropped to single digits, before regaining some equanimity as the cycle ended:

VIX 3 Month Chart:

Finally, I hear an increasing chorus of some of the world’s most savvy investors calling for corrections of up to 40%. Well, maybe, but I reckon they’re gonna have to wait a spell to get paid on that one.

In the meantime, you have my blessing to do some careful shopping here, but as always, the bargain bin is a good place to start. If it doesn’t work out, you are certainly at liberty to follow the time-honored tradition of blaming me. If so, please temper justice with mercy, and save the brutality for your artistic critiques of my new company logo.

TIMSHEL

Success Story

Posted on April 30, 2017August 24, 2018 by steve

“We got the greatest country in the world here. The highest standard of living. The grossest national product.”
— Archie Bunker

For want of superior alternatives, I’m dedicating this edition to Archie Bunker, erstwhile “everyman” hero of the seminal 1970s CBS series “All in the Family”. Many of you may be too young to remember Archie, a hard-working, family loving, WWII vet, spewing out politically incorrect bon mots from his Queens enclave, but much is to be learned from him, that is, if one takes the trouble to pay attention. Improbably (at least to me), I’m now older than he was purported to have been during the run of the series, and, while I always liked him, I believe, with the passage of time, I have come to understand him better. He is a product of his environment and times, working hard, fighting for his country, supporting his family, and, in his off hours, coming home to arguments with his left wing graduate student son-in-law (whom he is supporting) who seeks to tame his ignorance even as he eats his food. He tries is best to cope with the world, rapidly changing before his eyes, but often, it becomes too many for him.

As time goes by, I increasingly know how he feels.

I felt particularly sorry for him when his best buddy, Stretch Cunningham, his doltish, wisecracking comrade on the loading dock, drops dead of a heart attack. Archie is asked by the family to speak at the funeral, and in the process, finds out that, unbeknownst to him and all his peers, Stretch was actually Jewish. This being a problem at the time for a middle aged, working class, high school grad, he struggles to understand, particularly given his fallen buddy’s decidedly Anglican surname. His family offers up the possibility that perhaps he changed his name, but Archie rejects this out of hand, for perhaps the best reason imaginable. If Stretch had indeed changed his name but retained his Jewish identity, one thing was certain:

“There ain’t supposed to be no ham in there”.

Apart from his devotion to his wife, daughter and (eventually) grandson, Archie is above all, a patriot. And, responding to one of his meathead son-in-law’s endless stream of criticism of the country that spawned him, reared him, and provided him all is comforts, he did indeed point out, in a first season episode called “Success Story”, that we have the greatest country in the world, the highest standard of living and “the grossest national product”.

A reading of Friday’s action would seem to corroborate, yet again, Archie’s clairvoyance. Though pointy-headed economists (a tribe to which I belong), for reasons that I have long ago forgotten, decided a couple of decades ago to switch the benchmark metric for nationwide output from Gross National Product to Gross Domestic Product, the introductory first quarter estimates can aptly be described as gross.

The Atlanta Fed’s GDPNow model, often referenced in this space, saw it coming, and, as the hours trickled down to the Friday/8:30 print, private economists started to catch on, with the final consensus coming in at 1.0%. But we missed even this diluted number by a full thirty percent, as, as everyone knows, the actual figure clocked in at 0.7%, annualized: the worst such showing in three years:

The results failed to jolt market participants over-much, and the rationalizations (crazy weather, seasonality, etc.) had been working their way into valuation for weeks. But the consumer spending print of 0.3% (vs. consensus estimate of 0.7%) is somewhat worrying, as is the unmistakable gravitational pull evidenced in the graph supplied immediately above.

Be that as it may, we all knew that the totality of the data coming our way was ambiguous, as evidenced in part by some boffo earnings results released in advance of the Archie Bunker GDP print. Names like Alphabet (OK; Google), Amazon, and sentimental favorite CAT were all astonishingly good. And, while there were some embarrassing misses (Airline Companies, Auto Companies, Starbucks), on balance, with nearly 60% of income precincts reporting, the overall tally is anticipated to come in at a 12 ½ % year-over-year gain – the best showing since the wretched year of 2011.

Moreover, the earnings picture has gained encouraging momentum in recent days:

Perhaps the other most salient dynamic is that Team Trump (never a group to let recent failures and/or humiliations slow them down in their headline grabbing frenzy) released its tax plan last week, a document which fell considerably short, in terms of volume, of the Manhattan telephone book benchmark for quantity of content. In fact, it is precisely one-page long. Scanning its voluminous details, I find it to be a bullish blueprint, and one that investors should embrace. But there’s a lot of caveats here, kids. First, as of right now, there’s no indication that anything of this nature can pass through Congress, and tax reform, an exercise not even attempted in 30 years, is a particularly sticky wicket. It may in fact be even stickier now, especially insofar as the Democrats seem determined to cast not a single vote (other than irrelevant salves to politically threatened seat holders of their own party) in favor of any bill produced by their opposite numbers, and that there is a core group of Republicans who are unlikely to support any tax plan that doesn’t provide offsetting revenues to match any relief provided therein. On offsetting revenues, the, er, tome is silent.

If, however, something of this nature goes through (and it says here that, best case, we’re looking at the end of the ’17 Congressional Calendar or beyond), there will be winners and losers. Perhaps in a dose of poetic justice, the plan calls for the elimination of the deduction of state and local taxes (a dubious and unfair proposition from the get-go) from the Washington-bound levies, thereby forcing us coastal denizens to pay the full freight already imposed upon residents of zero state tax jurisdictions such as Texas and Nevada. In addition, the banks will take a short-term hit – particularly (and you can’t make this stuff up) given the fact that significant portions of the left side of their balance sheets take the form of deferred tax credits, the value of which will be diluted by any reduction in the base rate itself.

I reckon they’ll survive this blow.

And, on the whole, I can’t say there’s an awful lot of which to complain, as the first trimester of ’17 melts into the second. There appears to be earnings momentum, and the dubious consensus may be right this time that: a) Q1 GDP is ripe for an upward revision; and b) the force of this metric may very well gain traction as the year unfolds. In the meantime, mixed macro numbers are likely to keep a lid on domestic rates, and, oh by the way, mid-week, ECB Chair (Super) Mario Draghi took to the podium to announce that he’s in no particular hurry to stop, or even downshift, the Brussels money printing machine.

Perhaps this is why the SPX, though nominally and patriotically selling off on Friday, is 13 puny index points from breaking out of this increasingly tiresome 23 handle, and 10 punier points from all-time highs. It also bears mention that the NASDAQ Composite, with minimal fanfare, crashed through the heretofore un-breached 6,000 threshold, and held this territory even through Friday’s Gross Domestic Product print.

So, on the whole, I am getting a bit more constructive. Next week features a continued onslaught of earnings releases, and, in macro-land, Friday’s potentially important April Jobs number. But this sets up to me as a bad and good news is good news paradigm, with a strong number corroborating happier days, and a weak one likely to be interpreted as being accretive to bonds and catalyzing to constructive fiscal (e.g. tax reform) and monetary policy.

But, global citizens that we are, it bears remembering that the week begins slowly, given Monday’s traditional celebration of International Workers Day. So I’ll conclude by giving a shout out to all of those wielders of shovels and welding equipment. It’s your day, and, as always, you’ve earned it. We don’t pay too much attention here in the States, but what do we know?

And as for Archie, he went from union man to entrepreneur, eventually taking ownership of his favorite local watering hole. Some of his simpatico was perhaps sacrificed in the transition, but at the end of the day, he was indeed a Success Story, and, were he with us today, I doubt he’d be taking May Day off. More likely than not, he’d be pouring drinks and ringing the cash register like always. As Archie knew in his bones, the path to Success, for all of us, makes very little allowance for virtues that run in conflict with diligence and perseverance.

TIMSHEL.