“Don’t Panic”

— Words Inscribed in Friendly Letters on the Fictional Cover of “Hitchhiker’s Guide to the Galaxy”

“No regrets, Coyote, I’ll just get out up a-ways,

You just picked up a hitcher, prisoner of the white lines on the freeway”

— Joni Mitchell

Nope; Don’t Panic. I’m not. Panicking that is. It was a difficult week, and it didn’t end particularly well for me. As prophesied in these pages, our equity indices did begin the sequence by recapturing some lost ground from the previous 5-day rout, but they couldn’t hold their recaptured ground, and, by Friday’s close, the Gallant 500 had managed to add a microscopic half an index point (1.8 skinny basis points) onto its valuation tally. OK; fair enough, but then, Friday afternoon, I paid a visit to an old comrade of mine – perhaps the best macro trader I ever had the pleasure for whom to serve as risk manager, and he did not share glad tidings. Inflation, though latent, is on the visible horizon, rates must go up, and this will put us into recession. Extrapolating an attendant ~30% hit to earnings, along with an approximate 20% multiple compression, he’s looking at a potential stature slicing of the SPX by nearly 50%. Overall, though, the conversation was pleasant enough, and ended on an encouraging note: the debacle won’t hit right away, and there may be some compelling opportunities in regions such as Europe. Or so he told me.

I managed to gather myself, but it wasn’t long after my equanimity returned when, Friday night, a guy I have known for even longer predicted that Monday – this Monday – will be a Black Monday. He and I endured the 1987 version of this together, pulling our traders out of the quaint but anachronistic 30-Year Bond and S&P 500 pits– so as to avoid incremental gratuitous violence to the under-capitalized floor trading group that we managed at that time. And it worked. The group lived to fight another day, and, somehow, more than three decades later, is still at the game (albeit in modified form).

So I got to thinking: is there a crash on the horizon? Well, I highly doubt it and told both my friends so. But crashes, like volcano eruptions, black holes and other singularities, are part and parcel of life in this here galaxy, so, at least on paper, it pays to be prepared.

And lord knows that if a crash were indeed to transpire, we’d have no shortage of rear-view mirror root causes upon which to cast blame. That great engine of domestic and commercial prosperity – the American Housing Market – is showing multiple signs of being gassed and needing a blow. Economists, though, are at a loss to explain why this is happening. And I am particularly skeptical whenever I read tortured analyses that include both the demand suppressing forces of rising mortgage rates, and a shortage of inventory. Guys. Please. It can’t be both. While economic forecasting may be the most dubious intellectual discipline on the planet, we have it on pretty good evidence that price drops tend to derive from a decrease in demand, an increase in supply, or some combination of the two. My guess is that the Housing Market is probably a bit overvalued (which will happen after an 8-year run), and that the higher mortgage costs are not helping. But I promise you this: if the buyers were there at appropriate prices, sellers would indeed materialize – in force.

But there’s ample reason for concern across the macro galaxy, and they extend beyond the narrow part that our humble homes comprise. The Brits seem really confused on this whole Brexit thing, and if they’re perplexed, where does that put the rest of us? Italy continues its shenanigans, so much so that the demonstrated-to-be-infallible credit analysts at Moody’s Investor Services cut the country’s credit rating to Baa3 – one level above junk. We know, but hardly need to inventory, the problems plaguing the Chinese economy. It’s equity indices, for what it’s worth, are now in the grizzly realms of a > 35% correction. Trade wars rage. The redoubtable Ned Davis’s economic models now indicate a 92.7% probability of a global recession:

But let’s return to the land of Amber Grain Waves, shall we? Well, here, a number of factors do concern me, and one that has drawn the attention of the risk-taking classes is the sustained rise in 3-month LIBOR, now clocking in at levels last seen in 2008:

Sharp-eyed observers will note that the last time this borrowing cost benchmark hit the lofty level of 2.469% was Q4 of 2008, but at that point, it was coming careening down and would soon reach the economic equivalent of 0.000%. It says here that high and rising interest rate glide paths are another matter entirely, and not a particularly pleasant one at that.

But while short-term rates continue their heavenward climb, the long end of the U.S. curve remains fairly stationary, thereby proving my macro mate’s point about cross asset correlations (see Paragraph 1, above).

As a public service, and by way of putting this in perspective, I offer the following visual tidbit that provides at least anecdotal evidence of what happens when free financing disappears, and borrows must pay a cost to fund their dreams and aspirations:

For the uninitiated, the blue line is a mash up of the costs associated with debt-based finance (credit spreads, interest rates, FX impacts), as brought to us by those well-endowed purveyors of truth at Goldman Sachs. The white line is the SPX. Goldman too is predicting a slowdown. Or was that Morgan Stanley?

No, now I remember: it was Jamie Dimon over at JPM. But whether he’s right or wrong, we can be fairly certain that he’s not panicking.

In addition, we do have a bit of a political mess on our hands, with the infantile mud-slinging reaching, nearly every day, a new, improbable high, and an important election now a short two weeks away. Our President is trading zingers with pole dancers, and, while 1,000 people a week are dying of opioid overdoses, the cameras are trained on menacing looking caravans heading northward from Guatemala. Public attention is also transfixed on the murder of a journalist by a country that has used this as a form of governance, like virtually every other nation on earth, since time immemorial. It is the biggest crisis between the U.S. and the House of Saud since the OPEC Oil Embargo, but it I think that like the Las Vegas massacre and so many other tragedies, it will pass into obscurity very quickly. Unless it escalates under the Arch-Duke Franz Ferdinand paradigm, at which point I’ll be forced to reassess its implications.

In the meanwhile, on the other side, the once and likely future Speaker of the House warned of collateral damage to anyone in dissent of the righteous dreams that fit her side gig of being married to a billionaire San Francisco real estate developer. Her party’s most recent standard bearer leaped from grandstand to spotlight with her observation that civility can be contemplated by her minions only after political victory has been secured.

It’s no wonder that everyone in investment land has a case of the willies, but I suggest that a better course is to continue operating like you would if the world weren’t showing signs of madness. We remain at the lower end of the range which I described last week as offering favorable entry points, and I’ve really no choice but to double down on this call. The names I quoted as being “cheap” are still on their heels. None have reported yet, but their earnings announcements are just around the corner. There’s plenty of room for upside in those securities, and if they do rally, then they’ll take a lot of other stocks along with them for the ride. One way or another, earnings growth remains robust, real rates low, and, while the Atlanta Fed’s GDP Now tracker has slipped to a beggarly 3.9% for Q3, that wouldn’t be such a bad print, now, would it? We’ll find out on Friday, when the introductory estimate is actually released.

None of this ensures that we won’t be making new lows over the next little while, and for all I know, my pit manager buddy may be right. Monday may bring Armageddon, but I kind of doubt it. Further, if the market does crash, and this crash is not caused by a military coup led by the XX cabal of Pelosi/Clinton and Warren, then anyone with any cash left should probably load the boat.

One way or another, the volatility spike is likely to continue, and I reckon we’ll have to live with this. Again, I don’t see a breakout from SPX 2750-2900 under any circumstances, but odds on likelihood is that we’ll bounce around between these levels pretty aggressively over the next couple of weeks.

And my best advice, in terms of volatility management, is that contained in the Hitchhiker Book within the Hitchhiker Book: Don’t Panic. Keep doing what you’re doing; cut risk if you must but preserve core investment themes. But in the interest of full disclosure I must inform you that I have never actually read “The Hitchhiker’s Guide to the Galaxy”. I started it a couple of times, but it never took hold. I’m not proud of this, and as long as I’m unburdening myself, I should inform you that the same goes for “Zen and the Art of Motorcycle Maintenance” and (perhaps most shameful of all) Kerouac’s “On The Road”.

I am, however, intimately familiar with Joni Mitchell’s “Coyote”, and can more confidently assert that yes, we’re all hitchers, each of us is a prisoner of the white lines on the freeway. For now, our best moves involve staying within those painted path markers. Those that do are likely to come out of this not much worse off for their troubles.

TIMSHEL

I thank Dave for this week’s elegant and timely thematic nudge. I have known Dave for 50 years, and though we reside on opposite coasts, when we do connect, he can always be counted upon to bring his singular brilliance (induced by a tinge of madness) into our conversations. He doesn’t move around as quickly as he did when he was 12, but his eyes and mind are as sharp as ever.

I hadn’t spoken to Dave in a couple of months, but we managed to catch up mid-week, just when a stock market rout that you may have noticed was setting in. Recently, Dave has transferred some of his formidable analytical skills from Rotisserie League Baseball to the stock market, and, as the subject – inevitably — turned to Google, he mentioned that he thought it was a dreadful name for a search engine. I didn’t immediately catch on – replying with the obvious: that math nerds Serge and Larry selected the name on the basis of its numeric equivalent: 10100: or the number 1 followed by 100 zeros. The idea, of course, being that having gone to the trouble of being the first to have indexed the entire internet, their engine would generate a great deal of content for any given generic search criteria. As further evidence of pointy-headedness in Mountain View, I pointed out that at the time of its IPO the company issued a number of shares that when divided by a million, equaled the 2.718 – a close approximation to the eternal mathematical constant e – the only number in the world that is its own logarithm.

But Dave challenged. First off, he said, they didn’t even spell the term 10100 correctly; it’s actually googol. His main argument, though, was that if you insert a space between the 2“o’s” in the middle of the its name, you arrive at the term “go ogle”: an apt description of how a big portion of the Company’s ubiquitous service is used by the masses. I never thought of this, but had they? Dave is sure they had. Of course, I had to check this out on my own, and I can report back as follows: if you type the words “go ogle” into the google search engine, you come up with zero, goose eggs; for math geeks that’s 0100.

Again, all of this is timely, given the outright rout of the tech sector, which has not spared Team Serge/Larry. So I begin the market commentary portion of this week’s installment by offering my readers a chance to “go ogle” the recent performance of the Mountain View Colossus stock prices action (WARNING: GRAPHIC CONTENT):

Let’s all agree on one thing, shall we? If this truly gruesome plunge in the Company’s price fortunes extends itself, it is a sign that the market as a whole is in a mess of trouble. It’s market cap plunged by >$100B in the stretch of a handful of sessions — before recovering a bit on Friday. At its lows the preceding day, overall valuation had plummeted to a beggarly ~$750B. Pretty much everyone, directly or indirectly, felt the pinch.

So I hold forth that if the attendant head and shoulders configuration reaches the depths of the left shoulder, the market as a whole is indeed in deep sushi.

But that’s just my point: I don’t think that the selloff is sustainable, and in fact am hard pressed to understand why it transpired in the first place. Lord knows there are arguments to be made that: a) the correction was overdue; and b) it stands, perhaps, over an intermediate time horizon, to do a world of good for the health and well-being of the markets in general.

I’ll have more about this further down the page, but first back to Google. It will report earnings on 10/25, at which time it is expected to announce >$27B in Revenues, nearly $9B in profits, at growth rates of 22.7% and 6.5% respectively. 37 out of 42 of the wise sages who officially cover the stock for their brokerages rated it as a BUY — before last week’s puke and the other 5 have it no worse than a HOLD. The consensus one-year target price clocks in at 1384 – a nearly 20% premium over current valuations. For a company ranked Number 4 on a worldwide basis in terms of valuation, that’s not too shabby (did I really just write “not too shabby? Please tell me I didn’t).

But to my way of thinking, the mad love of analysts for Google simply demonstrates always-impeccable sell-side wisdom. No, I mean it this time; seriously. Because it’s time once and for all for us opposable thumb bearing-bipeds to acknowledge that Google is perhaps the most powerful, undivided force in the world; maybe the most awe-inspiring one this side of Genghis Kahn’s Golden Horde. At this point, without Google, our lives as we know it would change dramatically. Consider, if you will, what would happen if The Great Capitol Allocator in the Sky took his enormous eraser out, and disappeared all 100 zeros (not to mention the 10). Traffic lights would immediately stop working. Air Traffic Control Screens would go dark. Our Army, Navy, Marines and even the Coast Guard would be rendered sitting ducks. Hospitals would not have the ability to monitor patient status; your pharmacy could not fill your prescription. The Electric Power Grid would not function. Scientific Research would all but shut down. Much of the world’s most important information would simply disappear. The NFL would probably have to cancel the season, and I personally would be driven to despair by my inability to source old episodes of the Yogi Bear cartoon series (or anything else I might want to stream on a private device).

I’d go so far as to suggest that if we all woke up one morning and every communication device showed nothing but an announcement that Google had taken over completely, that America was now the United States of Google, there’d not be much we could do about it but accept it, carry on and try to smile.

Now calm down; as a trained risk manager, my models say the probability of such an outcome is extremely low, but they also indicate that the Company’s reach and influence can only grow from here. Don’t mistake their silence on blockchain to be a sign of indifference; I suspect they’re working hard on the concept and will eventually own it (perhaps allowing a few No Cal crony enterprises to accompany them on the ride). They are publicly known to be the leaders in Quantum Computing – a concept just on the horizon, not much talked about, but which will inexorably increase the power and speed of computer processing by millions of orders of magnitude. Artificial Intelligence? The Internet of Things? They have gargantuan edges in all of the above. I’m not sure they’ve cornered the future cannabis investment market yet, but I wouldn’t sell them short on that score either.

My point here is that if the pricing action in the markets, as evidenced by names like Google, is really, as has been posited, a sea-change that ushers in an era where the Company’s run is over, that it will start to trade like Johnny John, selling baby powder-like products that are essential but uninspiring, then it probably is time to sell everything in your portfolio and abandon any hope of investment returns anywhere. But the concept of course is ridiculous, and because Google’s run ain’t over, and if so, the name, and the market as a whole, are cheap right here – Friday’s reversal notwithstanding.

So whatever caused the Gallant 500 to rudely and unexpectedly shed nearly 700 basis points – over a rolling 6-day period that began a week ago Thursday and ended (though it could resume) this past Thursday, the normalization of tech leader valuations to public utility levels hypothesis is the ones that ring the hollowest to me. Facebook cannot seem to get through a day without soiling itself, and I’m always skeptical of Netflix, because I think pulling content rabbits out of hats into perpetuity is a tall order. Apple may have overpriced its latest yak devices and could also feel the Chinese tariff pinch. But if we’re talking about Amazon, Microsoft and… …Google, I’m pretty convinced that they have higher elevations to climb ere they are brought down to terra firma. If so, the market as a whole should recover, and quickly.

But what of the other catalysts that across the carnage have been on everyone’s lips? What about, for instance, macro-y stuff? Well, it is indeed worth noting that the start of the above-referenced 6-day puke transpired at a point contemporaneous to an incremental divestiture of our longer-term notes. This took me by surprise, but that will happen from time-to-time. However, I would hasten to point out that the teeth of the horrifying selloff were biting hardest mid-week this week, during a time when our longer dated paper was actually rallying. Meanwhile, the CPI/PPI Reports, contrary to the endless squawking of Chicken Little Inflation hens, came in exactly where they’ve been every month for longer than I remember: 0.1% core, 0.2% overall, 2.7% year-over-year, yada yada yada. In addition, GDP estimates continue to rise with the Atlanta Fed now projecting out a spiffy 4.2% for Q3.

So I really can’t find an economic justification for the big scary correction, and this concerns me. After all, eventually we do, at some point, need to connect the dots between the market and the economy, don’t we? I suspect it was a technically driven culling of the herd (perhaps orchestrated by those evil quant models). And, given that we can expect high-vol conditions to persist, there is every chance that the Chauncey Bear of a selloff could extend itself. But I will stick to my guns here and state my belief that particularly for certain names, and perhaps for the market in general, favorable points entry points are available in abundance. If they continue to go down, my conviction in this regard is likely to increase.

But it’s going to be a rocky ride. While, as indicated above, there’s no reason at the moment to conclude that the recent action is not a healthy correction, it wasn’t and won’t be healthy for everyone in terms of outcomes. Its timing can be viewed as sub-optimal in light of a few unpleasant realities: most of the volatility inducing catalysts (earnings, GDP, etc.) are in front, rather than behind us, and the election psychodrama is likely to increase over the next couple of weeks. Beyond this, I should mention that based upon the numbers I see, 10/10 and 10/11 were the worst P/L sequences (though not, blessedly, to the 100th power) for fund platforms since that VIX debacle in February. 2018 is shaping up to be the worst hedge fund performance year of the decade and there’s only 10 weeks left. Some groups are the walking dead; others are clinging to life. Their continued presence in the markets only adds to the hazard level, and, no matter how sure-footed we are, their death throes present a threat to all of us.

If you’re hanging in there, and, like me, believe that this bad patch will pass sooner rather than later, I’d offer the following advice. There’s no need to try to catch a bottom here. If the market continues to bleed, be patient; buy on the way up. Google’s not going towards 1,400 without providing investors multiple opportunities to jump on board for the ride. If you need to cut risk to preserve capital, as always, I’d also try to protect core themes – even if you must do so at smaller sizes. Shorts are in configuration to be squeezed like grapes and are unlikely to help you if a problematic tape persists. Option hedges are ridiculously expensive at the moment, and never a particularly good bargain even when they’re cheap. But if you wanted to discuss buying those 10% OTM puts, you should’ve called me three weeks ago.

So if you’ve got to cut risk, I say embrace change and sell some longs. After all, to mash up platitudes, nothing lasts forever, and sometimes our main task is to live to fight another day. If you can, channel Google here, which isn’t even Google anymore, but rather is something called Alphabet. The plan for global hegemony presumably marches on. Affiliating with them is no longer a suggestion to “go ogle”, but now evokes images of speculations (“bets”) that outperform Expected Return (“Alpha”). I’ll have to ask Dave if this passes the Dave Test, but one way or another, for now it’s the best I can offer.

TIMSHEL

I truly hope that everyone survived the Kavanaugh confirmation madness. Yes, this is my hope, but not my sense, of our current collective mindset. Because whatever side of the fence one occupies, perhaps we can all agree that the spectacle was not the finest visual that this great nation has ever offered. More has been written about this than the rational brain to absorb, so I promise to go easy here. As I mentioned last week, the uber-political timing of the Ford bombshell was in its own way, sublime. But in the end, it probably sunk the opposition. Bringing charges from >35 years ago, that can neither be proved nor (importantly) disproved, was arguably a bridge too far for the hard pressed populous.

More to the point (or my point, at any rate), the sequence generated an inarguably excessive amount of screen time for BK. Here, I will cop to being pretty skeeved out by his multi-hour star turn, which – let’s face it – generated too much information. I did NOT wish to know that he maintained his virginal status well beyond his reaching the age of majority (whether it’s true or not), nor do I believe I benefitted from his forced, tortured definitions of terms like “Boff” and “Devil’s Triangle”. He had many strong moments, but some of his whimpering and self-pitying attacks will be difficult for any of us to un-see.

And all of this got me to thinking that there’s a reason why Supreme Court Justices generally remain out of the public eye. Admit it: other than perhaps Clarence Thomas (who had his own Star Chamber Inquisition over a generation ago), and the inimitable Ruth Bader Ginsberg, would any of you recognize any current members if you bumped into them on the street? Stephen Breyer? Elena Kagan? Samuel Alito? C’mon!! They keep quiet and stay out of the public eye for the holiest of reasons, so we really don’t know them as human beings.

In addition, though it pains me to state it, very few of them are, or ever have been, particularly easy on the eyes. Consider if you will, William (Cue Ball Comb-over) Rehnquist – a fine jurist but hardly a movie matinee idol. The same can be said of Thurgood Marshall, Warren Berger, Melville Fuller, etc.

I’ve done my due diligence here, and have learned that these protocols of demurral began with one Roger Brooke Taney, who held the “first-among-equals” post from 1836 to 1864. History has not been kind to Jolly Roger, and perhaps rightly so, due ng to his unfortunate role in the Dred-Scott decision which as much as anything placed us firmly on the path to Civil War. But we do owe a debt of gratitude for him for being so homely that nobody ever wanted to look at a Supreme Court Justice for the last 15 decades:

Just pipe those jowls – why they are gruesome enough to make Richard Nixon (not exactly a jowl lightweight) green in his grave with envy.

So whatever else happens now that the Supremes are able to take the field with a full line-up, let’s agree that while we can expect them to do important work and write soaring opinions/dissents, they should, by all that we consider sacred, avoid the cameras at all costs – including or maybe even especially BK.

But now this is over, and we can turn our attention to the vast and vexing problems of how to trade these maddening markets. And make no mistake – this is a BIG issue, as, from my perspective, this rapidly elapsing year has been the most difficult performance interlude in this rapidly elapsing decade.

As predicted in this space for several weeks, the volatility bands across almost all tradeable instruments have widened considerably, and I’ll remain perched on the limb I have placed myself by stating my belief that this will continue. It was, of course, a very difficult week for global equity indices, which, after something of a rousing start, came plunging towards terra firma in rather rude fashion over the last couple of sessions.

Maybe some of this is despair over the undignified doings in Washington, but the handiest catalyst was the alarming selloff in global bonds. The puke in our govies actually continued across the entire sequence, and I will cop to some surprise at the vigor and sustainability of the selloff. While everyone was obsessively focused on the 10-year note and 30-year bond, my own attention was also fixed on the 5- year, which not only breached the unthinkable barrier of 3%, but, at 3.06%, resides at levels last seen 10 years ago — almost to the day when the investment world was just waking up to the horrific short-term problems ensued from the Lehman bankruptcy.

Of course, it’s been quite a while since the Big 3 Central Banks all came out as aggressively hawkish as they have been over the last few weeks, but in the U.S., this is nothing particularly new. The FOMC has already raised overnight rates more than a half-dozen times, and everyone knows they’re not done. Yes, the Fed is rolling down its Balance Sheet, but at a very moderate and civilized rate. Over the course of the somewhat unexpected upward shift in the yield curve over the last rolling month, I count a reduction of holdings on the order of less than 1%. And, for what it’s worth, we’re still above the austerity threshold of $4T. Similar moves in Brussels and Tokyo are, at present mostly rhetoric.

So with respect to the big bond selloff, I’ve been asking myself the following question: why now? And I can’t come up with an answer that satisfies me. And as such, I wonder if it is sustainable. Of course, I can point to any number of glib, rate-rise supporting catalysts, including a strong Jobs Report (particularly Hurricane Charlotte-adjusted), an impossible-to-ignore rise in Crude Oil prices, Amazon’s cheesy, politically motivated minimum wage move, and, of course, the encouraging and somewhat surprising surge in Q3 GDP estimates:

If the Bulldog government economist forecasts from the Atlanta Fed are correct, and Q3 clocks in above 4%, it would be quite a coup. And there are some corroborating data points, perhaps most notably those tied to Jobless Claims, Non-Manufacturing ISM and Factory Orders.

We’ll have more information by next week’s installment, particularly after the BLSt releases September inflation numbers. I don’t think they’ll move the needle much, nor do I believe that a p-less 4% is much of a justification for a bond fire sale .

So I’m not entirely convinced that the bond selloff is sustainable, and on a personal level, I’m sorry to offer this prognostication. As my 59th birthday approaches, I find myself with no debt (not even a mortgage), but with enough money in the bank to wish for yields above the 0.00001% that I am currently amassing in my savings accounts.

But I’m just not sure that rates can hold at this levels, much less climb to thresholds that would represent material comfort to me during my rapidly approaching dotage.

Because while I haven’t written about this in many weeks, I continue to believe that there is a shortage of supply of investible securities on a worldwide basis, and this includes both equity and fixed income instruments. Too much QE cash is still sloshing around, and a lot of it needs to find a home. At current levels, to say nothing of yields much higher, government bonds look like cozy landing spot to me.

The same can be said of equities, perhaps even more so. The world has fewer stocks to own than ever before, and while the available inventory is expensive, it’s likely to remain so, because there’s just not enough supply to feed ravenous investment portfolios. I therefore counsel that at levels much below Friday’s close, or, heck, even at current valuations, favorable and elusive entry points are now available.

Yes, it’s going to remain volatile. Among other matters, for the first time this year, the growing chorus of concern about excessive debt levels are starting to reflect themselves in the credit markets, and this across the lending quality curve:

A passel of this paper is coming due over the next couple of years, and refinancing it is likely to be a sloppy exercise. But hey, why worry about what might happen in a couple of years? What I foresee that is within my field of vision is an extension of the mean reversion cycle that we’ve been enduring over the last rolling quarter and beyond. If I’m right, somewhere in here, there’s a bid for both stocks and bonds.

But that’s my secondary call; mostly I think we’re in for a sustained set of sessions characterized by high vol. There is a truly formidable amount of information on the horizon to assault us, and it is likely to bring a mix of delight and despair. Earnings look remarkably strong, and the macro data appears to be, at minimum, solid. But we do have a critical election on the horizon, and I think that qualitative information may be politically and financially impactful. I won’t inventory all of this, but it’s obvious we need to keep an eye on China and even Iran; pretty much anywhere that political rhetoric might move the polls.

I’m going to close with one last shock-worthy prediction: I have a vague hunch that Mueller (remember him?) might drop some type of interim report over the next few days. In general, I applaud him for his reticence, but if he’s the political animal that I suspect he is, such timing would fit the script perfectly. He wouldn’t need to go beyond innuendo to do a great deal of damage.

So it’s tricky out there and I must urge caution. Of course, I’m here to help, but you won’t find much of me on any media forum. After all, who’s to say that someday they won’t call my name to serve on the big bench? If so, I don’t want to blow my chances through over-exposure. I’m not a virgin, am mostly a teetotaler, and don’t think I resemble either Kavanaugh or Taney. But if I am to urge caution upon my readers, I must lead by example. BK: if you’re out there, I suggest you do the same.

TIMSHEL

“Hark the whimper of a seagull, He weeps because he’s not an ea-gull,

Suppose you were, you silly seagull, could you explain it to your she-gull?”

— Ogden Nash

A lot to cover after a busy week – particularly with a likely-busier week following on its heels. I begin by bidding a bittersweet farewell to Martyn Jerel Buchwald, better known as Marty Balin, founding member of the Jefferson Airplane, who took flight from his mortal coil this past weekend. Marty probably never wanted to be either a seagull or an ea-gull; clearly he preferred to take to the skies in an Airplane. Or a Starship. One way or another, this High Flying Bird took off, and I wonder if looks on me as he flies, so high. But darling look at me, yeah, I’m rooted like a tree, yes I am… …and so are most of y’all.

Separately, and as the years go by, I find myself increasingly marking their passage by my survival of U.N. Week in NYC. I managed to get through another one, but I wish the whole enterprise would just hark off. Strip clubs and illegal parking by night; lecturing about America’s moral failings by day. Can’t they find another spot for this? Say, for instance, the peace/freedom-loving port city of Havana? The Castros, I’m sure, would be only too glad to welcome them with open arms and show them a good time.

But what really caught my eye this week was an editorial in the WSJ describing the downfall of a former high-flying Cornell University scientist somewhat ironically named Brian Wansink (wanna sink?), who was revealed by his colleagues to have blatantly and repeatedly sinned against science. Know that his transgressions, were gall and wormwood to us unfortunate wretches who wallow in data analysis. Specifically, he has shown to have been a serial curve fitter: one who massages data and reruns results until they match up to the point he’s trying to make. More to our purposes here: he is accused of HARKing: an acronym derived from a method known as Hypothesis After Results are Known. For shame, Sink, for shame.

On the other hand, who among us can truly attest to have never curve fitted, never having HARKed? Because all of us statistical seagulls have pined, at one time or another, to be scientific ea-gulls. So part sympathizes with Professor W, and that portion of my psyche might even go so far as to say that not only is an attack on the practice mean and unnecessarily hurtful, it’s positively un-American.

And if you doubt this, I suggest you just take a look around you. If you do, you’ll see HARKing seagulls everywhere you point your peepers. Of course, Exhibit A is Judge Kavanaugh and the spectacle surrounding his prospective elevation to the eagle’s nest of the United States Supreme Court. Whatever one’s predispositions concerning this episode, and however it ultimately plays out, it is beyond dispute that from the outset, his political enemies wanted to crush his ambitions at any cost, and that knowing the desired result, they went on a frantic search for an appropriate hypothesis. At this point, it’s about a flip of the coin as to whether they can pull off the HARK, but one has to give them mad props for a flawless execution of this timeless and time-tested approach to jurisprudence.

I also feel, though with some reluctance, that we should give a HARKing shout-out to everyone’s favorite bong-toting entrepreneur: one Elon Musk. Under full attack from virtually every quarter, he socialized the notion that if investors didn’t like the way he was rolling with Tesla, he might just take his batterypowered ball home and go private. More likely than not, he knew that he couldn’t do so at anything other than a discount, but went ahead and hypothesized that investors were lining up to buy out the public at a premium. In an assist to my thematic struggles, all of this transpired in the seagull/eagull-rich, avian realms of Twitter. But not only didn’t his HARK achieve the desired outcomes, the Feds and the SEC are now coming after him, and, like the HARKs that they are, the stripped him of his chairmanship.

But the whole HARK thing doesn’t end there, not by a long shot. Recent data shows multi-year records in both stock buybacks and insider sales. Now, this, my friends, is indeed the American Way. Use investor capital to buy back shares, as helpfully supplied by the corporate chieftains who are authorizing the purchases. Ladies and gentlemen, this is the HARK as it might’ve been ordained by the Market Gods. Valuations are at or near an all-time record and, having accumulated a galaxy of shares in their company, a CEO might justifiable believe that now is as good a time as any to cull his or her herd of shares. But why risk doing so on a tape suffering gravitational pull? Well, then, why not sell your stock, in contemporaneous time, to your own treasury, at prices you yourself specify? Who is the wiser, who, in fact is harmed? HARK, the herald angels sing.

But most of us are not Cornell researchers, CEOs of publicly traded automotive concerns, or, for that matter, CEOs of any kind. So what are we to make of all this HARKING jazz?

Well, somehow, like those solemn U.N. rituals described above, perhaps the best that can be said about recent market history is that both September and Q3 are over. My anecdotal evidence suggests that few market types will miss them. I know I certainly won’t.

As we enter the home stretch of this extremely quirky year, it strikes me that we do so with market factors in odd configuration. The Gallant 500 enters the proceedings 17 skinny handles below its all-time highs; the NDX charts are in approximately the same relative zenith proximity. Last week was painted in red for both benchmarks, but the action – with beaten down names like NXPI, FB and TWTR subject to incremental pastings — suggested to me that a large number of institutional capital pools were selling down losers so as not to be compelled to list them on their 13Fs and other quarterly position disclosures.

Meanwhile, mid-week and with little fanfare amid the Washingtonian circus, the Fed not only nudged its overnight rates to above 2%, but did so in unapologetic, almost aggressive matter. Longer-term yields, while wavering a titch, remain visibly above the 3% threshold. All of this, albeit in delayed fashion, gave a rational boost to the USD:

I suspect, however, that at least some of this recent USD love/EUR hate is due and owing to economically unfortunate decisions by the Italians to spend tax dollars that they don’t have like Sicilian Sailors, in the process thumbing their collective noses at their paymasters in Brussels and Berlin. Italian stocks and bonds sold off dramatically and in Pavlovian fashion, and I’d share those charts with you if it weren’t for their buzz-killing nature (to say nothing of space constraints).

But in the U.S., all appears to be good in the hood. The VIX has drifted down, seagull-like, to just above 12, and who’s to say it won’t waft benignly lower — into the 10-handle, last breached in the early days of August?

There are, however, some signs that investors are antsy and showing some desperation for respectable yields. And who can blame them? After all, they’ve got to eat too, as do their capital providers.

A somewhat alarming manifestation of this is evident in recent credit spreads, which show pretty unambiguously a net flow of funds out of Investment Grade paper and into the more pulse-quickening but historically capricious embrace of High Yield.

I must state that over my long career (which carbon-dating now traces back to the days of Edward the Confessor), I’ve never seen this sort of thing play out without ending badly, but I’ll stop short of trying to pull a HARK here, because, well, I just don’t have the chops.

The one thing about which I’m most certain is that October should be wild and wooly, with virtually every pertinent, market-impacting factor in play. Perhaps the informed action begins in earnest with Friday’s Jobs Report, but before we even get to this, our senses are likely to be assaulted by breathless revelations about the Kavanaugh Hark, the Rosenstein Roast, or maybe even some news out of the trade wars with Canada and China. Everyone, of course, will be watching for impacts on the Mid-Term polls, and rightfully so, because different electoral outcomes imply widely divergent market paradigms. The pollsters, as we all are aware (and it pains me to write this), have shown themselves to be less than infallible, but given the stakes involved, it’s pretty hard to ignore them in terms of deciding how much risk one wishes to sustain, and how best to distribute it.

I also am compelled to remind my crew that after the Jobs Report, the monthly/quarterly macro data and earnings cycle will accelerate, and that the results may impact the qualitative data flows referenced above, setting up for a potential for some crazy action, just around the bend.

It is thus my further grim but unshakeable duty to remind everyone that given: a) the relative absence of factor volatility over recent weeks; and b) the likelihood that this respite is about to end, the backward looking risk analytics (including those provided by yours truly) are probably underestimating the price dispersion their portfolios are likely to experience over the next 6 weeks. Moreover, this pending action is arriving against the backdrop of what I can only acknowledge to be a difficult performance environment for most funds through the first three quarters, and the associated need for these tables to be turned in the 12 short weeks we have left to HARKy ’18.

And, reverting to our main them, I must inform you that in a simpler, less tear-veiled world, I might be tempted to counsel everyone as follows: if all else fails, just go pull a HARK. But I don’t think this option is open to many. We’re not politicians, we’re not CEOs, we’re not research scientists; we are, for the most part, seagulls. But consider this, even for the eagulls among us, as I have hopefully demonstrated in these pages, the strategy is by no means guaranteed to work.

So, in conclusion, whatever else happens, I’d say the HARK is off.

TIMSHEL

With respect to the all-important matter of selecting this week’s title, I couldn’t decide between the two, and anyway, it really doesn’t matter, because both have a ring of validity to them, right? This left me with no reasonable alternative to including/covering them both.

Let’s begin at the crossroads of the conventional and the obvious; the most prominent Bull in a China Shop is the Leader of the Free World: Good Ole 45 himself. Whatever one thinks about his policies (and other than those on trade and immigration, I endorse them), it’s pretty clear that he cannot, will not adhere to certain protocols of decorum. He says (or tweets) whatever comes to mind, and doesn’t care how much damage is done to the porcelain figurines that are either his direct targets or become collateral damage. He insults people’s appearance, their intelligence, their integrity. If one dares to get in his grill, he will retort in the most petulant of ways, trashing the ratings of news anchors, hurling insults at performances of actors/musicians, and even, when the spirit moves, going toe to toe – in ad homonym fashion – with CEOs of the world’s largest financial institutions.

All of the above has driven everyone – well, most everyone – batty. However, existential threats too many to enumerate notwithstanding, the ship of state lurches forward. Macro statistics are nothing short of gaudy, there’s no inflation on the visible horizon, intrusive and counterproductive regulatory constructs are being either simplified or dismantled outright, and there are even plausible arguments that our enemies around the world are unilaterally on their heels.

Oh yeah, and the stock market continues to careenfrom one record to the next. We are, at least for the moment, in the midst of what can only be described as a Bull Market, and what sits in the midst of our economic angst, and rightfully so? You guessed it: China. So I again submit to the body of deep thinkers that comprise my readership that in addition to our Bull in a China Shop, we also have a China, in fact, the China, in a Bull Shop – our very own U.S. Equity Complex.

If you’re using the fortunes of equity securities as a scorecard, the contrast, at the moment, is striking. At the point of this correspondence, our much-beloved SPX index is up for the year > 9.5%, the NDX over 17%, and the Russell 2000 +11.5%. The Chinese Indices are a different story altogether. As the week ended, they were down nearly 20%, and this after a 3% rally on Friday.

Again, if one uses this math, it would be hard not to conclude that we’re winning this battle of Exports/Imports, but this does not necessarily mean we’re winning the war. Of particular concern is the inconvenient reality that while we live in a land where anybody can attack our leadership (and usually does), China has a stone cold dictator for life calling the shots. Moreover, their organized society has been around about 15 times longer than ours, and has a history of not caring over-much about a lost generation. Or two. There are plausible scenarios in play suggesting that Trump will not survive his current term, and even more so that he’ll be gone by early 2021 at the latest. Who knows? By contrast, however, absent an Act of God or that of the inexorable force of nature, Chairman Xi will still be sitting atop the world’s largest country by population well after Trump and/or his progeny are occupying their time planning and building his Presidential Library – in Mar a Lago, Bedminster or even (my personal choice) Atlantic City.

So I’m still not entirely convinced that when this here trade war is all over, it is our side that will come out on top.

In light of the foregoing, and considering the dearth of data-flows in a month that has been thrice truncated by holidays (Labor Day, Rosh Hashanah and Yom Kippur), I will cop to some surprise as to how much bovine vitality our indices have demonstrated. OK; so the Gallant 500 is only up ~1% and the NDX is actually down, but I have found myself wondering why any buyers are exhibiting mojo. Recall, here, if you will, that September is the worst month of the twelve on the Julian Calendar for stock market performance, and that by a wide margin.

Of equal puzzlement is the contemporaneous selloff in global bonds, not only with U.S. 10-year yields holding fast to 5-year highs, but even the less-price sensitive JGBs trading at yields last witnessed in early 2016:

The Vig Rises in Across the Amber Grain Waves and Under the Rising Sun:

Now, if you talk to the smart fellas and ladies out there, they are bound to tell you that – wait for it – long lamented inflation is finally on the horizon. Well, I’ve been waiting, and I reckon I’ll believe it when I see it. On the other hand, (and nominally supporting this argument), the grains have worked their way off the canvas, albeit modestly, and the publicity shy but nonetheless vital Copper market in reanimating in notable fashion:

Copper No Longer Coming a Cropper:

Like the rest of you, I have heard the rumors that the U.S. mint is planning on reinstating the penny as the main unit of domestic account, but I discount them. Among other matters, while not widely known, since 1982, our pennies have been comprised of 97.5% Zinc and only 2.5% Copper. Maybe they want to give the latter a boost by changing the mix, but I doubt it, as this, while perhaps helping a few metals traders, would probably just add to the deficit. Rather, based upon the most recent Net Speculative Open Interest reports, I suspect what we have here is a modest short squeeze.

And why not? And while we’re at it, why not attribute at least some of the newfound vigor in the equity markets at least in part to something of a short squeeze in those realms?

Because, on the whole, I’m just not buying into the recent strength of the Gallant 500, Captain Naz or Ensign Russell, and must urge caution to those who might otherwise place too much faith in these soldiers of fortune. Among other matters, with pretty much every component of the quaint, almost forgotten FAANG complex currently sucking eggs, what names, under the banner of heaven are likely to catalyze the launching of the next phase of retro rockets in the stock market moon shot? A few months ago, one might’ve nominated Tesla for this role, but, well, we won’t talk about Tesla – recent nominal rebound notwithstanding. Then there’s Tilray, and as for that: hey wait, what were we just talking about?

So what sort of bull do you currently want to ride up further into the valuation heavens? If you know, I’d ask you to share, but I doubt that you will, because, after all, you shouldn’t.

So it falls to my lot to give you a little help here, but I’m not sure how much assistance I can offer, because it should be remembered that I did not volunteer for the job, nor did I earn it through meritorious promotion. The fact is that that the responsibility devolved to me.

And, with respect to the remainder of September, I am at pretty much at wits end in terms of bullprodding ideas. The FOMC meets next week and is almost certain to jack up rates again. At the Presser, it’s an odds-on certainty that Powell will discuss the potentially dilutive impacts of exogenous events like Carolina Charlotte and China (have I mentioned China?).

We could get some end of the quarter tape painting, but then it will be October, and of course, the earnings cycle will be very instructive. Yes, it’s going to be another strong quarter, but the early returns show some arguably worrying signs:

Relax, though, I think the quarter will be fine. On the other hand, publish reports indicate that the windfall of buybacks catalyzed by Tax Repatriation will soon run its course. Moreover, in case you missed it, there is a full on Washingtonian political battle raging — the likes of which we haven’t seen in at least 50, and maybe in 150 years, and which looks like it will get worse before the situation improves. , Our modern day toreadors are certainly fixing to take a crippling bite out of Bull #45: the guy that can’t look in any direction without seeing a red cape, and has shown little if any concern about the delicate tea cups or crystal soup tureens he may demolish in response.

And then of course there’s China itself, which cannot be overly pleased about its positioning in our Bull Shop. I’m not saying they could smash it to bits, but, if pushed too far, if history tells us anything, they could probably do some damage and then patiently wait out the opportunity to pick through the wreckage.

Be forewarned.

TIMSHEL

It was quite a sloppy (Jewish) Holiday shortened week, which nonetheless played out about like I expected it to. It is followed, of course, by what we members of the 12 Tribes consider our Big Enchilada Ritual (Yom Kippur), so I’m anticipating more of the same over the next few days. Last week, the macro data was, on balance, pretty tepid, with CPI, PPI and Retail Sales all coming in as disappointments. However, in spite of this, equities were up a pretty solid ~1%, while global treasuries sold off – to a point where the U.S. 10-year is pounding on the door of 3.0%, and Swiss bonds of the same maturity are poised to breach the unambiguously usurious level of 0.0000%.

As of now, the only major equity markets showing a positive ytd return are those in the U.S. and in (Pearl Harbor perpetrators) Japan.

It is, in short, the kind of environment where one must look for invisible strings, those opaque, counterintuitive interconnectivities that fall under the heading of Chaos Theory, and its corollary: that the flapping of a single butterfly wing in Nebraska can unleash a hurricane in the Sea of Japan. Market participants have for 150 years referred to this dynamic as the Random Walk, where prices move at their own discretion, and those seeking to generate returns must struggle to connect the dots.

Care to take the stroll with me? If so, let’s begin. Speaking of hurricanes, like everyone else, I have been watching in fascinated horror the umpteenth pounding of the Carolina Coast, this time as brought to us by a stubborn mule of Tropical Storm named Florence. It looks pretty nasty down there, and I feel for everyone affected. But I join others in wondering if would be too much to ask of the media to desist the tasteless practice of filming breathless updates from reporters, who, by all accounts, appear at any minute likely to be swept away like the house of the Wicked Witch of the West? Friday night, I was watching one such segment (I won’t reveal which network, other than to disclose that it wasn’t The Weather Channel) where the poor slob at the mike was literally hanging on to a telephone pole at an angle parallel to the ground, and perpendicular to a power pole that looked like it was to be dislodged by the forces of nature at any instant. I feel that all of this unnecessary sensationalism, while undoubtedly boosting ratings, adds nothing to our erudition. Hence the term: Storm Porn.

And speaking of Porn, many of you may have encountered a news item about a rapidly fading (but currently ubiquitous) hero of mine – Paul McCartney, in which he recounted an erotic bonding session with the (even-higher-in-my-esteem) John Lennon, from about 60 years ago. I won’t elaborate, and the sensitive among you can feel free to shove this one into the “too much information” file. But there is a bright side — insofar as the episode enabled favorite newspaper (no joke): The New York Post, to reach new heights with its signal skillset: clever headlines. So we awoke Wednesday morning to an edition featuring a pic of the youthful John and Paul, as accompanied by the following headline: “Beat the Meatles”.

You gotta love the Post, and I’d put this masterpiece right up there with such timeless efforts as 1983’s “Headless Body in Topless Bar” (no explanation needed), and 1996’s “It Works!!” announcing the successful reattachment of a certain body part severed from the person of one John Wayne Bobbit, as the result of a romantic dispute with the estranged wife of his bosom, Lorena.

And, speaking of problems in the realm of “L’Affaires de Coeur” it now appears that the love match between James Dimon and Donald J. Trump has run its course. In response to the former’s spit-balling about his ability to beat the latter in a presidential election, the Leader of the Free World could not resist throwing back some infantile, ornithological shade. I. Wish. He’d. Just. Stop.

And speaking of Jamie, he now remains as the last man standing in a corner office of a Major U.S. Financial Institution in the wake of the 2008 crash, which began in earnest 10 years ago this past Saturday, with the final collapse of Lehman Brothers. There were two, but then Lloyd announced his retirement, so now there’s one. Jamie won’t probably be around for much longer, but he’s still here, and he’s alone. Wonder if he ever misses Sandy, Stan, Dickie Fuld, Ace/Jimmy, John Mack or Angelo?

And speaking of the 2008 crash, while there has been an ocean full of commentary about whether the government’s response was appropriate, I nonetheless feel compelled to weigh in. While we won’t probably know the full effects of the episode for at least another decade, for me, the results to date merit an unambiguous “thumbs up”. Yes, we bailed out the banks and fat cat bankers with taxpayer dollars, and no, none of the thousands that perpetrated what maybe modern history’s most massive financial fraud were ever prosecuted, much less went to prison. But the banking system needed the bailout, and I, for one, was happy to contribute my tax dollars to the cause. Because I am completely convinced that the counterfactual: one that would’ve allowed our then-tottering financial institutions to fail, would’ve had unspeakable consequences. All forms of debt would’ve gone into serial default. Asset prices – including housing – would’ve collapsed to Absolute Zero. Everyone with a mortgage would have lost their home and probably their job. There would’ve been blood in the streets.

And speaking of bailouts, perhaps the most controversial issue being bandied about, 10 years after, is whether or not the Feds were wise in failing to come to the rescue of Lehman. On balance, I think they made the wrong decision here, but I do have some sympathy for those who made this call. Lehman had been given many months to source a capital injection, but didn’t like the prices it was offered, and so, out of greed and hubris, it allowed the window of salvation opportunity to close. In addition, I believe that what really tipped the scales against them was the near-contemporaneous decision to bail out Fannie, Freddie and (the week before the Lehman moment of truth) AIG. The government had NO choice with respect to these institutions – particularly AIG, which had written hundreds of billions of credit insurance to the likes of Goldman, Citi, Credit Suisse and countless others. Had they gone down it would’ve been, like an old boss of mine used to say, “Katie bar the door”. I think virtually every levered institution on the planet would have been transformed into a tumbling domino.

But the depths of AIG’s woes were not widely known untill the need for a bailout became apparent, and the timing was – shall we say – unfortunate for Lehman – which again had so arrogantly squandered its months-long recapitalization window. I think Paulsen and Bernanke felt that they had expended all available political bailout capital, and allowed Lehman to go toes up.

So it goes, and so they moved on. It was then time to inject some adrenaline into the comatose financial system, and hence QE became a permanent part of the financial lexicon. Was it a mistake? I hardly think so. After pumping several trillion dollars of new money into the system, finance companies – at least in this country – got well and started doing business again. Historically low interest rates socialized a recovery in the financial, housing and (eventually) jobs markets. And I ask you this question: if, say, in the spring of 2009: the depths of the crisis, I would have told you that a decade later, the SPX would be a 4-bagger, that housing prices would reach new highs, and that unemployment would achieve record lows – all without a hint even to this day of real inflation (much less hyper-inflation), would you have taken it? I bet you would’ve. Yes, there were other factors that contributed to the astonishing recovery, and yes, somewhere down the road we may end up paying a bigger price for a bank bailout/money printing strategy that I must allow goes against everything I hold as holy with respect to economic theory. Somehow, though, at least thus far, they were right. So I’d like to take this opportunity to salute those crazy kids at the Fed and Treasury for having the courage and political will in terms of monetary policy to try something that shouldn’t have worked but (at least thus far) did work.

And speaking of politically counter-intuitive monetary policy, I think we should pause a moment to salute the kamikaze move last week undertaken by the heretofore entirely anonymous Murat Cetinkaya – Director of the Central Bank of Turkey, who responded to that country’s strongman Recep Erdogan’s diktat not to do so by jacking up overnight rates by 650 basis points — to an eye-popping 24%. I mean, what could possibly go wrong for MCet? But as of the point of this correspondence, I’m happy to report that: a) the move stemmed the freefall of the Turkish Lira, as well as that of b) its benchmark BIST 100 Index (now down only a modest 50% year-to-date); and c) according to published reports, Mr. Cetinkaya is still able to fog a mirror. But my advice to him is to watch his back – particularly given that in addition to his status as supreme leader of the Turkish peoples, Erdogan has, and as evidenced by the attached holy parchment, appointed himself CIO of that country’s Sovereign Wealth Fund:

He may be OK with paying 2%/month vig for short-term borrowings, but I’m not gonna lie: all of the above is making me quite nervous, or my name isn’t Cetinkaya. We’re stuck in a data vortex for the next several weeks, with only the possibility of happy news from Washington, Ottawa or Beijing to catalyze any sort of a rally, and I’m not holding out much hope in any quarter.

So expect a bumpy ride, and whatever else you do, pay attention to the principals of Chaos Theory. Butterflies may at this very moment be causing future tidal waves. A stray bullet can catalyze two world wars. Friendly fire took out Stonewall Jackson, and god knows where we’d be had that not taken place. 500 hanging chads in Dade County, FL turned the 2000 election, and arguably changed the course of history — in dramatic fashion — for the next generation. A microsecond’s worth of a bad data feed can trigger catastrophic quantitative sell programs.

Under the circumstances, who’s to say that a missed beat in a Neil Peart drum solo couldn’t take down the entire continental power grid, or that perturbations in Saturn’s third moon wouldn’t destroy five years of earthly cotton crop?

Not me, because I am prepared to continue my Random Walk through the Theory of Chaos.

And speaking of Chaos Theory, I’d urge caution in its shadow. With all of these strange goings on, it is wise to play the probabilities, but to do so with a realization that what takes place in the tails often determines the outcome. However, one holy blessing remains to us,the one that marks my sign-off each week. Timshel: Hebrew for “thou mayest”, bestows upon all of humanity the opportunity to reach the heavens or to die trying. Thus, in advance of this year’s cycle of repentance, I can only offer you a heartfelt…

TIMSHEL

Remember a few editions ago when I wrote in celebration of the cross-aisle cooperation between Senator Elizabeth Warren and President Donald Trump with respect to the re-engineering of the equity complex? After all, it was only a month ago. However, for those who fail this recall test, the gist of it was as follows. Senator Warren introduced a bill to regulate large corporations in a manner that de-emphasizes profits as a corporate objective, and the President sought to soften the blow by suggesting a reduction in the frequency at which company chieftains would be required to announce the certain-to-be bad news to the investing public.

At the time, I was deeply touched by the prospect of narrowing the gap between two schools of economic thought — so deeply at odds with one another, to such deep annoyance and detriment to the well-being of the masses. However, I feared it was a “one-off”.

So it brings me great pleasure to report upon the happy news that the divide continues to close. As my readers are probably aware, everyone’s favorite Socialist Senior Citizen Senator: Bernie Sanders, took to the airwaves this past week to denounce the evils of what by many accounts is everyone’s favorite publicly traded corporation. In live television interviews, and, of course, on Twitter, Bro Bernie entered into a full-throated denouncement of Amazon, going so far as to include a series of ad-hominem attacks on its fabulously infallible founder: one Jeff Bezos.

In doing so, Sen. Sanders joins a critical chorus led by the President, who for months has been throwing shade at the erstwhile bookseller that would take over the world. Bernie is passionately (if questionably) upset about the unfair treatment of Amazon workers. Trump is presumably most peeved at the temerity of Bezos at having taken ownership/control over the Washington Post. But both agree on one thing: the great unwashed are getting a raw deal with respect to the business arrangement between the Company and the U.S. Postal Service.

I’ve looked into these matters, and objectively as I can determine, this is not an open and shut case against Amazon. Yes, they’re getting a government (and therefore a taxpayer) subsidy, but they are arguably performing services that would be difficult and more expensive for the post office to undertake without them – rain, sleet, snow and gloom of night notwithstanding.

Meanwhile, to their everlasting credit, both Amazon and its shareholders reacted to the rhetorical pummeling with characteristic equanimity:

It’s not as though they didn’t feel the sting a bit, and here, the sentimental can be forgiven if they lament the timing. Sharp-eyed observers will note a slight down-tick in the price at the more immediate, right end portion of the graph. This reversal is all the more unfortunate because on Tuesday, the day after our traditional holiday celebrating the working class, the Company’s valuation joined that of Apple’s as the only business enterprise ever to surpass the lofty and heretofore unimaginable $1T threshold.

But that was then; as of Friday’s close, Amazon’s market capitalization fell to the beggarly-by-comparison level of $952B.

It says here that Amazonians of every stripe should keep that stiff upper lip demeanor at the ready, as I suspect they may face a string of challenges before the inevitable happens, and the Company achieves full global hegemony.

Because, while the following edict did not make the cut on my “10 Commandments of Risk Management”, it probably should have: any enterprise that has found itself in the cross-hairs of both Trump and Bernie has reason to worry.

And if Amazon is staring into the face of a political spit storm, so, too, perhaps, are those other lovable Tech Titans whose stock performance have so deeply enriched us in the post-crash era. Consider, if you will, the recent pricing action of a couple of other tech darlings: Facebook and Twitter, linked not only by the social media stranglehold they collectively command, but also by the fact that each company sent one of their gods down from their heavenly Silicon Valley Olympus, to earthly Washington, where each faced full-on Capitol Hill roasting:

Facebook Defacing:

Twitter De-Tweeting:

Now, this is a Dickensian Tale of Two Stocks if ever there was one. With Zuck presumably hiding under his desk, Sheryl Sandberg taking the Congressional heat this round. In the wake of all that, Facebook managed to breach the lows registered after its historic July tanking of earnings, and is knocking on the door of breaking the bottoms recorded when Zuck had to explain away to hostile legislatures the pimping out of user data to sketchy organizations like Cambridge Analytica. By contrast, the long-besieged Twitter, which had been on an improbable profit upswing of late, managed to give back all and then-some in the wake of Jack Dorsey’s Capitol Hill Star Chamber Inquisition.

Anybody notice a pattern here? Well, for me, what we’re witnessing is the early innings of what I expect to be a slowly unfolding, populist/political undermining of the flower of the American Tech industry. Now, I don’t expect anything overly nasty to transpire in the short term; more likely than not, the garroting of Silicon Valley high-flyers will be a multi-year proposition. Rather, I suspect that the TMT/big dogs of the NDX will more than likely reach new highs – perhaps material ones – before they face the prospect of careening, Icarus-like, to terra firma.

But if the prevailing tone – taking place as it is under a presumably business-friendly political paradigm — is any indication, I shudder to think about what happens when the progressive elements re-assert their mojo and take hold of the control panel. And trust me, they will: if not immediately then eventually.

Of course, one cannot help but admire the way that West Coast Tech monsters – from San Diego to Seattle – have anticipated this, and attempted, and with some success, to brand themselves as torch carriers for the progressive mindset. I believe is that this will work for a while, but not into perpetuity. Eventually, they will be unmasked and vilified as the filthy, profit-seeking capitalists that they are.

And here, perhaps, is the main (if most obvious) point: as Tech goes, so goes the stock market. I don’t have the exact figures handy, but I can assure you that if you review index gains over the last, say, five years, and remove the contribution of Apple, Amazon, Facebook, Microsoft and Google from the equation, you’re looking at a chart that, best case, is flat as a pancake. As such, I don’t think that the unfolding Madam Defarge (villainess of Tale of Two Cities, known most prominently for knitting at the guillotine) dynamic that I fear may be emerging in Tech-land is much cause for celebration.

The shortened week brought a small taste of the look and feel of the new-age vibe that awaits us. Equity indices retreated, but only modestly, and in manner that failed to capture the carnage that lies beneath. I may be connecting dots too far flung to merit they’re linkage, but it is not lost on me that all of the above transpired against the backdrop of a deteriorating geopolitical sneaker fire (Nike?). I won’t waste much space here, but between the editorial stylings of Anonymous, the absolute (if unsuccessful) effort to turn the Kavanaugh hearings into a pig circus, the breathless anticipation of another Bob Woodward political workover, and the unfortunate ramping up of trade skirmishes, it’s hard not to look at the world with a glaze in one’s eyes and a growing pit in one’s stomach.

But of course and as always the news by no means all bad. The Jobs Report pretty much checks every bling box, so much so that slumbering holders of longer-term U.S. debt, and sold down some of their holdings. Factset is projecting another boffo quarter at about ~+20%.

Equities, though, remain a quandary nonetheless (as do Commodities), but my hunch is that the indices will gather themselves a bit over the next few sessions, before breaking everyone’s heart – yet again — later in the month. Moreover, if the months-long pattern holds (Trump offsetting domestic political bludgeons with accretive policy actions), I would expect some happy noise from the front of the trade wars over the next several days. There’d better be, because the long knives are out against the current administration, and the only defensive weapon at their disposal is one that involves playing offense on the economy.

I’m more than willing to do my share, so, as I sign off, know that I’m logging into my Amazon Prime account to purchase a holy document called “The Art of the Deal”, along with “Our Revolution: A Future to Believe In”, written by one Bernie Sanders, and released on November 15, 2016, exactly one week after the author of the former book, against all odds, won the presidential election.

Who knows? Maybe Donnie and Bernie have more common ground than they realize, and if I find anything of this sort, I’ll be sure to pass it along – to them, and, of course, to you.

TIMSHEL

Careful readers will notice that in recent weeks, I’ve made an effort (at any rate) to trim down the digressive introductions that are a signal feature of these weekly missives. Know that I have my reasons for doing so. But sometimes it remains necessary to note certain galactic milestones, which, like the cave dweller etchings of antiquity, mark the ebbs and flows of human existence. Such an event took place on

Friday, and I’d be remiss if I allowed it to pass unremarked. On Friday, August 31st, a sister, weekly publication that we admired a great deal put out its last original content. It would be perhaps a stretch to state that The Village Voice went dark on Friday, because: a) it discontinued its print edition a year ago; and b) a handful of loyal e-journalists remain on the premises to perform the vital task of web-archiving its rich, multi-decade inventory of the written word. I’m really glad they’re taking the trouble to do this, because The Voice, whether you agreed with their viewpoints or not, always had something interesting and topical to convey. But insofar as they will never again provide commentary in contemporaneous time, I suspect that soon, the on-line scanning of back issues will assume the same morbid and depressing vibe as taking a trip to the library and reviewing micro-fiche editions of Look Magazine or The Saturday Evening Post. One is no longer reviewing news, but rather history, and whatever one finds therefore is likely to be lacking in terms of bite and sting.

One last thing about The Voice: anybody who connected with it did so in a very personal way, because that was your only choice. For me, it was about columnists like Hentoff, critics like Christgau, and comic strips like those crudely drawn by Lynda J. Barry. The music section takes me back to a long-lamented era when there were actually viable live music options in Manhattan, when you could see Lou Reed at the Ritz, Patti Smith at CBGBs, or even Sly Stone at the Lone Star. So, like legions of others, when the new issue dropped on Wednesdays, I often immediately turned to the music section, to check out those elegantly cropped lineup listings offered by clubs from the Apollo down to the Knitting Factory.

It was also through the VV that I first learned about a disease menacing the neighborhood called Acquired Immune Deficiency Syndrome, – a malady which woulr hover over the existences of my generation for the next decade and beyond. Nobody could stop talking about AIDS for the rest of the ‘80s, but to have first encountered it through the advanced journalistic efforts of The Voice is something I’ll never forget.

So I hope you’ll forgive me my little opening blues riff, which is also catalyzed by our current positioning on the Julian Calendar. August is over, and its ending always brings me down just a bit. Fittingly this year, it resolves itself into Labor Day weekend, and, as my most loyal droogies know, I hate Labor Day.

To me, Labor Day sucks. Maybe this is due to my having long ago cast my lot with Management, a hardpressed group for whom no one ever thought to set aside a holiday from its toils. Nope, instead they gave us Labor Day, and the attendant honor of paying our staffs for the privilege of NOT contributing to the bottom line. But my beefs with the season extend beyond all that. Though I no longer have school age children, and my grandchildren are too young to have begun their formal education, it always makes me forlorn this time of year to see back-packed little fellers at bus stops, heads down in anticipation of 9 dreary months of toeing the line. Really, though, it’s no better for us adults. July and even more so August typically provide ample pretext to put aside unpleasant but unavoidable tasks, because, hey, it’s summer. The later you get into August, the more you can just tell yourself that no one is working, no one is reachable, so why not boot down a bit?

But then August ends and it’s “go time” again. And this year, not only do most of us have some catching up to do, but will be compelled to operate in this mode at a point concurrent to many unfolding dramas that are likely to command our full attention – perhaps all the way up to the point of the Times Square Ball Drop/horrifying Dick Clark hologram re-emergence, and beyond.

My guess is that pretty much every risk factor is in play as we enter the final trimester of ’18, and I’ll take this opportunity to reiterate my call that volatility should rise across most tradeable instruments before we close the books on XVIII. As I am not shutting down this publication, we should have ample opportunity to comment on the action in contemporaneous time, and we can begin almost immediately, but first I want to get another vexing issue off of my chest.

Specifically, after a reasonably promising start to the year, my observation is that from about June 15th on, hedge funds have struggled mightily in terms of performance. With the market up and most funds positively correlated, the implication is one of alpha give-back. I witness this across a reasonably reliable number of funds that I track, but felt a sense of relief when I found corroboration in the following chart:

Some context is in order here. The graph only references long/short equity funds, but my anecdotal observation is that the pattern traverses all strategy classes. Of course, long/short equity has for years been an unstable region of the investment landscape. Contrary to its longstanding branding, only it erratically and partially generates upcapture, but invariably experiences carnage when its benchmarks selloff. But the underperformance on a tape that has been a one-way ticket upward since the problem started is particularly distressing. The closest historical analogue I can draw is to mid-2014, when the markets threw shade all over the tech sector, while embracing “value” names like Johnny John in a manner that might suggest that baby powder had just been invented.

So I’m guessing that a lot of fund platforms may be soon heading the way of the Village Voice, and my sources tell me that the process is already under way. In the current era, the redemption moment of truth tends to coagulate around mid-quarter (the dreaded 45-day redemption deadline), and if my intelligence is accurate, then a goodly number of equity hedgies received their death sentences around August 15th. Again to the extent that I’m “on-theme” here, it may just be the case that the SPX final push through entrenched resistance to multiple all-time highs can perhaps be attributed in significant part to a short squeeze.

I reckon we’ll find out, but suffice to say that I have viewed the > 90 handles glibly dispatched by the Gallant 500 over the back half of August with something of a jaundiced eye.

Time will tell; it always does. But there are a number of reasons why, as I reminded everyone last week, September is the worst calendar month of the 12 for equity investors. Data flows tend to produce dodgy results: nothing but pre-announcements in equities along with macro data reflecting the often-seasonally slow summer. In election years, and this one in particular, the risk premium tends to climb a wall of worry. Then there’s tax selling, portfolio window dressing and kitchen sink negative earnings warnings.

And this month may be an accurate case and point. I will not address the political risks again this week, because hopefully I made my point in the last installment, but they are palpable. On this holiday weekend, progress on resolving these vexing and untimely trade wars appears to shade negative. Commodities continue to be hard pressed, and if you doubt this, just consider the rather astonishing reality that Sugar is down ~30% this year. Why, particularly on a holiday, it’s positively un-American!

Emerging/impaired markets are a raging dumpster fire, with the Argentine Peso joining the Turkish Lira in a death spiral. In a bold, but hardly major league move, the Italian Government thumbed its rhetorical nose at EU deficit guidelines. Investors, in Pavlovian fashion, sold down their bonds to new yield highs.

Argentine Peso:

Italian 10 Year Yields:

Beyond this, everyone who believes they are in the know is also worried about the yield curve, which has fought mightily against inversion – perhaps aided by the sense that there is now, improbably, insufficient debt issuance from those fly folks at Treasury to satisfy insatiable demand:

So maybe the short end of the curve rallies a bit this month, but that probably won’t last either. The smart money says that the purveyors of Yankee debt are likely to ramp up their issuance in the 4th quarter, and, adding to the pricing pressure will be the odds-on likelihood of at least one more Federal Reserve rate hike before the year bleeds out.

But whatever they do, there’ll still be a Twilight Zone-like shortage of government paper available for consumption by ravenous investors, and, for what it’s worth, there aren’t enough stocks to go around either. As a result, any good news drawing forth from that quarter could socialize a rally to even higher highs. My early hunch is that Q3 earnings will crush expectations, and push against a strong geopolitical (and domestically political) headwind.

So, on the whole, I’m expecting it to be adult swim in the volatility markets, starting Tuesday. On balance this is probably a good thing – particularly for those hedge funds not yet toe-tagged but stuck in the critical care unit and desperately in need of a reversal of fortune if they are to carry forward at all.

That not all will survive is a matter of certainty, but then again, nothing lasts forever. Just ask the publishers, staff and readers of the Village Voice. And my morbid suggestion to those that won’t make it is to try to go out with dignity, perhaps taking a cue from the dearly departed weekly whose demise we lament this weekend. Almost exactly a year ago, their printing presses went silent, but not before rolling out a cover featuring a youthful Bob Dylan, circa January 1965, looking at the camera and offering a full military salute. How cool is that? If (when) I check out, I’d like to do it in similar style.

TIMSHEL

Please take me in earnest about this: I hate writing about politics. Hate it. For one thing, my staff always yells at me when I do, and, being a man of sensitive feelings, their rage cuts me to the quick. Equally important, like those unspeakable points of lower body dorsal human egress, everyone has a political opinion, and, by and large, they all share the same unpleasant characteristics.

But when it’s late summer in an important election year, with earnings in the books along with most macro data, with all playas heading to regions like the Hamptons (or, for stone cold ballers, the Wisconsin Dells), and with mad troubles of various strains a’brewin’ in Washington and other government power centers, do I really have a choice? Didn’t think so.

I ask you to bear with me as I begin with some editorializing. Whatever one thinks about our Commander in Chief (and I am on consistent record in stating that he gives me a headache), one thing is clear: his organization (particularly selected members) has been subject to alarming assaults on their civil rights. Documented evidence confirms that (whatever else occurred), the Trump Campaign was the victim of sabotage by its opponents, working, regrettably, in coordination with members of a sitting government. They were infiltrated without warning. There was deep collaboration between the Democratic Party, the FBI, the CIA and the Justice Department itself. To the extent they found foreign threats, these entities failed to either disclose their concerns or warn the targets – that is, until it suited them to do so.

The process ensued past the election/inauguration, and continued or continues well into the tenure of the present Administration. Some fancy footwork has given us a Special Counsel, who has had free reign to harass and entrap anyone deemed to be useful to his apparent objective: removal of a president by any means necessary. As a result, a couple of shady Administration associates are now convicted felons, and may be ready to say whatever they believe that may reduce their punitive burdens. Trump’s oily lawyer copped a plea, and his reps are now all over the ionosphere seeking money and other forms of assistance to support his efforts to abet the takedown. His drive-by former campaign manager stands convicted of crimes that will certainly send him to prison for the rest of his life. None of the charges that have taken hold of either, er, gentleman has anything to do with the mission of the Special Counsel’s Office when it was originally framed. As I understand the current situation, because Attorney Cohen has implicated the President in the unproven and seldom-prosecuted crime of diverting campaign funds for personal benefit, there’s now a socialized theory going about that casts Trump as an unindicted co-conspirator, evoking cries for his immediate resignation.

OK; fair enough. But I offer the following warning to anybody watching this episode with a measure of glee. You yourself (or someone you admire or support) may someday find that empowered, aggressive political opponents instruct the guys with the hoodies to break into a lawyer’s (or close associate’s) office and home and confiscate everything in sight, with an objective of finding dirt on their target. Perhaps they find something unrelated or more than a decade old. The unfortunate associate may then land himself (or herself) in solitary confinement – a step that former uber-cop/current Trump acolyte Rudy Giuliani only took once during his storied tenure as a prosecutor: in response to Colombo Crime Family Boss Carmine (the Snake) Persico’s offer of $200K to kill him.

But this, my friends, as Rachael Maddow said on election night, is our country now, so I reckon we’ll have to take it as we find it.

By all accounts, the market has ignored these proceedings, as the Gallant 500 fought its way through sustained resistance to set an all-time record close on Friday. Again, fair enough, but I’m going out on a limb to suggest that investors won’t be in a position to ignore political considerations from their valuation calculus for much longer. It strikes me that the sequencing of these cable news-dominating events is entirely political in nature, and if I’m correct on that score, then we can expect an upping of the ante in the weeks after the Labor Day hiatus. I strongly suspect that Mueller will release at least a preliminary report on his quixotic quest to connect the Trump Campaign to Russia by late September/early October. If so, it is certain to be filled with a passel of innuendo – all designed to put his fat thumb on the scales of the mid-term elections for the benefit of the Democrats. To whatever extent he’s successful in doing so, it will likely add to the already-material probability that the Dems recapture the House, and maybe even the Senate.

In terms of investment fortunes, there’s a lot riding on all of the above – even for those that don’t particularly care who pardons the turkey on the Thanksgiving Day White House lawn. Even a slim Democratic House majority (to say nothing of an entirely plausible broad one) would be absolutely impelled to begin impeachment proceedings almost immediately after the 116th Congress is sworn in on January 3rd. As I’ve stated previously, I don’t think the Democratic Leadership is overly warm to this notion. I suspect they’d much rather keep Trump where he is — as an Orwellian/Goldstein-like foe — at whom they can take shots all the way up until 2020. But millions of their constituents (including, notably, most of their big donors) will not allow them to do so. They will demand that the Leadership do everything in its power to place that big orange head, with its one of a kind hairdo, on a silver platter.

Of course, based on what is currently known, they don’t have a prayer of winning an impeachment trial – a nigh-impossible task requiring 2/3rds of the Senate to vote guilty. But I think the process will be an ugly one. I suspect, for instance, that millions of Americans on the other side of the spectrum, who would on the whole prefer to mind their own business, will finally lose their patience. And rightfully so. Elections cannot be justifiably overturned on the basis of 15-year old, tax evasion crimes committed by subordinates, or because a middleman paid off some women to keep quiet about decades-old affairs.

As these matters unfold, the parallels to the Whitewater investigation of 20 years ago come eerily into play. Then, just as now, a dubiously appointed Independent Counsel received a mandate to look under rocks, and (of course) he found some bugs. Folks who probably shouldn’t have gone to jail faced prison terms. Unseemly details about a president’s private life (that had nothing to do with the original investigative mandate) took center stage. The accusing political party hopped on the Impeachment Train and tried to ride it all the way to the Office Removal Depot. Not only did they get thrown off the tracks, but they paid a terrible political price at the next voting cycle. Meanwhile, a wickedly strong equity tape continued unperturbed, and didn’t hit any air pockets until a couple of years after the episode fizzled out.

Sound familiar? Well, yes, but I’m not convinced that we can expect the same happy outcomes here. To be sure, the economy looks strong, and market participants are positively giddy. But this time ‘round, we have no internet revolution to propel us to higher valuations like an angel ascending into the heavens. Trump never had the personal charm of Bubba, and, for that matter, when he did get elected, he received approximately 3 million fewer votes than Bubba’s long-suffering, insufferable wife.

So, particularly if I’m correct about Mueller sticking to the political timetables and attempting to drop his load at a point of maximum damage to the governing majority party, I suspect we’re in for a rocky ride in the markets over the next few weeks. This will be particularly true if the bomb he detonates comes earlier rather than later in September. It bears mention, here, that contrary to popular conception, September, not October, is the historically-worst performing calendar month for equities, and this by a wide margin. The Q3 earnings cycle doesn’t begin till October, so no help can be expected from that quarter. Fed Chair Powell has all but committed himself to a rate hike, to be announced a short week after Yom Kippur.

Meanwhile, not only are investors snapping up equities to beat the band, they are also purchasing longer-term government debt at a frenzied pace. As a result, the U.S. yield curve is now flatter than even Japan’s, and looks ominously like its headed towards full-on inversion:

Who’s to say, before the above-described worst happens, that these happy trends won’t continue? Plus, if the demonstrated (if uneven) political skills of the current Administration come into play, there’s every likelihood that they will pull rabbits out of their own hats. Perhaps trade deals with China and Mexico; maybe a big temporary fiscal stimulus on their part.

I certainly don’t expect them to roll over and get stiffed by hostile actors across the opposition party, the media, and selected members of their own administration.

Thus, once we get through the Labor Day ritual, I am projecting a significant increase in volatility – perhaps in both directions. This will be difficult to play in the markets, in what has already been an extremely frustrating year for professional investors.

I casted about for an answer, any answer, to this dilemma, and, perhaps out of force of habit, my search took me to my home turf of Chicago. This, arguably, is the birthplace of the “borrow your way out of debt” School of Finance, and, as those who are paying attention are aware, they’re up to their old tricks again. Facing $28B of unfunded pension liabilities and an additional $9B of delinquent payables – all against an annual revenue budget of $8.5B, the custodians of the City with the Big Shoulders have all but committed to the biggest debt issuance in the history of municipal finance. Specifically, the Chitown crowd is likely to lay some $10B on the market within the next few weeks, at a projected rate of between 5% and 5.5%. But not to worry, they’ve got a plan: they’re going to invest the proceeds in the market and are certain to get a rate of return of at least 7%. If you doubt they’re ability to do this, just ask them.

By my math, they’ll book a ~1.5% spread here, allowing them to pay both interest and principal down by, say, the year 2050 – all at no incremental cost to taxpayers.

And now, at long last, I’m able to reveal my 45 hedge: invest with the Chicago Pension System. You are guaranteed a rate of 7% under any and all market conditions, and if you’re greedy, you can do like they do in the Windy City and even lever the trade up.

By doing so, you will be immunized against any adverse developments in Washington, Wall Street, and, for that matter, Brussels, Tokyo, Pyongyang, Beijing and even Moscow.

This was a bold move by my Midwestern peeps, and I salute them for it. It took guts and vision – particularly in a year when both the Mayor and the Governor of Illinois must face the voters. However, nothing in this world is either certain or can be taken for granted. So, my backup approach, which I will call the Pritzker plan (in homage to the likely winner of the state’s gubernatorial race), involves being born into one of the richest families in the country, and spend your days dreaming up ways to help the less fortunate – all while keeping your big fat wallet intact and growing.

And this, mis amigos, is about the best I can offer in this quickly elapsing summer of discontent.

TIMSHEL