Ooh La La

Posted on July 29, 2018August 24, 2018 by steve

Poor young grandson, there’s nothing I can say,

You’ll have to learn just like me, and that’s the hardest way,

Ooh La La…

The Faces

Full disclosure: I’ve written about Ooh La La before. It was back in the days of “The Left Tail Report” – a publication I put out every quarter, the content of which was so “out there that”, by comparison, my current weekly musings look more like the Editor’s Note in Readers Digest.

Anyone out there remember “The Left Tail Report”?

For those that do, I freely acknowledge that I once dedicated an entire installment to O-L-L. The song – title track from the Faces last album –is an interchange between a grandfather and grandson about the mysterious ways of women. It was written and sung by Ronnie (Woody) Wood, and I think he did a fine job. By the time of its release, his bandmate Rod the Mod was flaking off to a solo career, whence we began to bear witness to his steady, horrifying, 45-year decline into a caricature of what he once was. From a commercial perspective, the Faces couldn’t survive his departure. Woody soon bailed, of course, to the Stones, and even here I was disappointed. I think they could’ve done better. When Mick Taylor split suddenly, I took great interest in his replacement, hoping for someone like Jeff Beck or even Mick Ronson. But they hired Keith-clone Woody, and I knew then and there they were going to settle into a comfortable middle age. And history proved me right; post Woody’s arrival, they seldom, if ever, challenged themselves musically. For the most part, they have simply mailed it in, writing boring songs, basking in their monumental, unshakeable legacy, and, of course, banking scads of cash along the way.

So Woody’s mid-70’s move arguably ruined two great bands. And it is the demise of the Faces that I particularly lament. So spontaneous, so delightfully under-rehearsed. For years, I’ve offered the following warning to my clients: the only development that could impel a hiatus from my professional toils would be a reunion of the Faces, because I’d have no choice other than to accompany the band on the road. This warning, for the record, still applies.

So it is with all of this in mind that I address the unavoidable the astonishing facial that those modern-day Faces: social media behemoth Facebook, delivered to their investors. Admittedly, nobody can shut up about this, but there’s something strange going on here, and duty calls me to weigh in. Let’s just say that the episode was so catastrophic that it’s causing me to rethink my general approach to financial advisory. Loyal readers will recall that earlier this year, and in advance of Zuck’s much-anticipated testimony on Capitol Hill, I advised him to eschew his trademark tee in favor of his Bar Mitzvah suit. I think he tried to comply, but presumably finding it a poor fit, he at least rocked a reasonable facsimile thereof. And he managed to endure the episode without emerging much worse for the wear. I further predicted that the markets would soon forget the incident, and I was proved right on that score – at least insofar as FB not only recovered, from a valuation perspective, everything it had lost from the grilling, but added another >20% to its historical highs – all within what amounted to about three months. I don’t know if the Zuck Suit did all of the heavy lifting in this respect; let’s just agree it didn’t hurt.

But perhaps thus feeling himself able to fully accept my counsel, he might’ve taken too literally my sentiments that the Q2 earnings cycle was logically setting up for downward guidance. Because boy did he guide down. And he had help. In fact, the earnings call evolved in such a way as hasn’t been seen in these realms, well, in forever. It all began innocently enough. Zuck took to the podium with chipper demeanor. It was a good quarter, he said. Just a tad light on revenues, but gosh almighty aren’t people loving Insty and Snapchat? He then turned the mic over to the redoubtable Sheryl, who put a damper on the festivities by fretting about such matters as currency impacts and ad revenues.

Here, the stock started to waver, but still, we were not in red flag configuration. That is, until 5:20 PM – EDT, when Sheryl punted to CFO Dave (Dr. Doom) Wehner, who not only punctured the sagging balloon, but burned down the all of the party favors, the house and the entire block. He didn’t simply guide down for Q3, or even just for the back half of 2018. He suggested that growth rates would be on a downward trajectory for years. We all know what happened after that.

FB shares plummeted to generate the biggest one day/single stock valuation destruction in market history. Again, a great deal has been written about this, but for our purposes, a number of factors merit our further attention. First, I don’t ever recall a company in such fine shape overall guiding down anywhere near that far into the future. Second, while I am not as laser-focused on earnings as some of my readers, it is my experience that when a CEO brings bad news to the podium, he or she usually drops it in the first five minutes of a call. But the Faces waited nearly an hour and a half before cluing in the investment community their fears that their fabulous innings in the sun are winding down.

I’m puzzled, here, about a number of things. Most of all, there’s no reason on this earth that a company generating > $10B annually in free cash flow, which has 2.5 Billion users (competing, at these levels, with Air and Water as the most ubiquitous product on the planet), and which clearly has resources and reach to continue to achieve astonishing consumer technology breakthroughs, should be talking about topping out on its growth. And for me, there is only one possible explanation: management tanked the stock, wanted it to go down. And hard. The obvious question follows: why?

But whatever the true explanation, I feel it behooves me to now be much more careful in offering my counsel about such matters as earnings guidance, because, if my sentiments are over-interpreted, the consequences can apparently be dire.

There were other hits (Googlers, Amazonians) and misses (beyond FB: Twitterers and Netflixers) across the rest of the week’s earnings extravaganza, but on the whole, we’re still looking at a >20% quarter. We’re now past half-time in this here contest, and I think we can safely assume that the last three months will be shown to have been kind to the bottom lines of public companies. Investors appear, on balance, to be mildly impressed, but pockets of doubt clearly remain, and maybe rightfully so.

The week’s other quarterly tidings feature our first glimpse at Q2 GDP, which clocked in at a robust 4.1%. The media-politic stuck to the script, with the current holders of power not slow to grab all of the credit, while their detractors groped about to tell the other side of the story. By any standard, 4.1 is a pretty solid number, but now, less than 48 hours after its revelation, it already feels like old news. In addition, after months of trade war brinksmanship, there appears to be some sort of détente in place between America and Europe, and this, my loves, if authentic, is unilaterally good news. Among other matters, it caused Commodities to move modestly off the schneid:

Commodities Off the Schneid

But the news isn’t all rosy. Virtually every metric associated with the domestic housing market is on it (the Schneid, that is). And the timing for its underperformance is arguably less than ideal. Bear in mind that ALL macro statistics are backward looking, but Housing particularly so. Right now, we’re getting our first insight into May numbers – a point in the calendar that represents the peak of the selling season. Not much buying (and hence selling) activity is in evidence.

One can identify numerous causes here. Mortgage rates are higher; inventory is low. Some areas in this country are just plain unaffordable.

However, in perhaps the unkindest cut of all, the ubiquitous website www.mansionglobal.com reports that the purchase of American terra firma by non-Americans has suffered a 20% drop. Leading the way are the two biggest sources of historic demand: the Chinese and the Canadians. At the risk of stating the obvious, it’s just possible that their feelings are hurt.

So I’d check any instincts I might otherwise have to ascend to giddiness about the GDP report. Among other matters, as we remain in a turbo-charged information release cycle, it might behoove the rational to be a bit reactive here. Next week brings a number of noteworthy earnings reports. First, of course, there’s Apple, and if that’s not 2018 enough for you, Tesla reports, in characteristic fashion, after the bell on Friday. Also, while admittedly a stretch for some of you, I personally have my eyes on the Pride of Peoria, IL: the Caterpillar Corporation. CAT’s been guiding up but getting no love for their troubles. If the numbers are bad/or and they guide down for the future, it’ll be look out below. I also think their briefing will be greatly informative for such topics as the strength of the overall economy and the potential impacts of trade wars.

Lest we forget, there’s plenty of data love for left out non-equity types as well. Tuesday/Wednesday is the next FOMC meeting, where no action is expected, but for which the accompanying policy statement will be parsed down to the letter. Also meeting – under high-drama conditions – are the Banks of England and Japan, respectively. There’s a good deal riding on these transoceanic monetary policy statement exercises – particularly in Japan, which is showing signs of getting tired of issuing debt at 0% interest rates:

And once we’re through all of that, we can point our peepers to the July Jobs Report, scheduled for release at its regular time next Friday. Everyone expects the number to be a pretty strong one: ~200K in new gigs; maybe a drop in the base rate and a rise in the Labor Force Participation level.

However, in familiar refrain, it is likely that all eyes will be trained towards the Average Hourly Earnings print; perhaps (but not likely) to solve the vexing mystery of why an economy humping along as ours is, that is known to have a labor shortage, cannot seem to gin up the wage inflation that would bring tears of joy across the great wide way.

I’ll be watching closely all week – unless, of course, the Faces reunite and decide to go on tour, at which point matters will be out of my hands. I’m not expecting this, so I wouldn’t worry overmuch on that score. In fact, it may never happen. Rod is working the Casino circuit, no doubt enjoying the swoons of females from ages 8 to 80. I’ll give him a pass on that one. Woody is scheduled to play to crowds in excess of > 100,000 across the globe for the next several months, so he’s presumably unavailable. Ronnie Laine and Ian McLagan have shed their mortal coils, leaving only drummer Kenney Jones to carry on. If so, then the Faces become the Face, and I’m less interested.

The band, no doubt, passes into finite history, but a few of us fans remember, and will try to pay it forward. I did manage to make my son and his friends hip to the Faces, and perhaps one or two of them are carrying on.

Now’s not the right time, but when it comes, I’ll share these gifts with my grandsons. But I won’t overdo this. I’ll play the records, tell the story and leave it at that. From there, we know what to expect: they’ll have to learn just like me, and that’s the hardest way. And now we can conclude this week’s business, as there’s only one more thing to say, and I hope you’ll say (or sing it) with me:

Ooh La La…

TIMSHEL

Pearl of the Quarter

Posted on July 1, 2018August 24, 2018 by steve

On the water down in New Orleans, my baby is the pearl of the quarter,

She’s a charmer like you never seen, singing voulez voulez voulez vous,

Where the sailor spends his hard-earned pay, red beans and rice for a quarter,

You can see her almost any day, singing voulez voulez voulez vous,

I walked alone down the Miracle Mile, I met my baby by the Shrine of the Martyr,

She stole my heart with her Cajun smile, singing voulez voulez voulez vous,

She loved the million dollar words I say, she loved the candy and the flowers that I bought her

She said she loved me and was on her way, singing voulez voulez voulez vous

— Donald Fagen/Walter Becker

A little Steely Dan on this hot, pre-holiday weekend? How ‘bout it kids? Well, anyway, it’s my call, and I say yes.

“Pearl of the Quarter” is merely one of the gem’s on the Dan boys’ 1973 “Countdown to Ecstasy” LP, the second in a string of remarkable albums, recorded over a 5-year period in the early ‘70s. The sequence begins with “Can’t Buy a Thrill”, continues on to “Ecstasy”, then soars through “Pretzel Logic”, “Katy Lied” and “The Royal Scam”. My own view is that the quality of the songwriting dropped from that point on. However, many disagree, feeling that the group’s subsequent release: “Aja”, was their finest work. But you can take that record, along with your Big Black Cow and Crimson Tide, and get out of here. There are a few sublime moments on “Aja’s” follow up: “Gaucho” (1980), but that’s about it. They didn’t hit the studio for the next 20 years, and the produced two forgettable albums around the turn of the century. Then, as I believe was a wise move on their part, they cashed in by touring for about a decade and a half (the only way even the Stones or McCartney make money these days). And now Walter Becker is dead. So it goes.

But oh those first five albums! We could’ve chosen to honor SD by featuring virtually any track contained therein. “Pearl” however, is among my faves, telling the age-old story of a loney guy falling head over ears for a Cajun prostitute in the French Quarter of the Crescent City. Her allure is irresistible, and yes, she loves him (or at least tells him so). But in her inscrutable way, she knows she must spread her love around. He knows it too.

Voulez, voulez voulez vous?

But of course, we have other reasons to home in on “POTC”. Friday, after all, marked the end of an interesting, but on the whole, frustrating, second quarter of 2018.

Across the three-month cycle, there weren’t many pearls about which to report, at least from an investment perspective. And I certainly have a personal beef with its swansong, which made hash out of a prediction of mine that the equity markets were poised for a rally.

But rally they did not. Yeah, after a horrific start, they threw me a small bone as the week wound down, picking up a skinny half a percent in the last two sessions. But their hearts weren’t in it. Friday morning, and on the back of a slight ratcheting down of the China thing, they gathered themselves for an energetic climb, but, as I suspected at the time, they lost their vitality in the afternoon. The Gallant 500 did manage to gin up a 0.3% gain for the April-June interval, and at least this is better than Q1, which socialized a loss of slightly smaller magnitude. Thus, despite an historic tax cut, an earnings cycle that has shattered records, and various other hope-inspiring catalysts, Mr. Spoo now tips the scales at +1.67%.

Of course, it could’ve been worse, and, in fact is — across most of the planet. To wit, of the ~20 indices tracked on Bloomberg’s ubiquitous World Equity Index (WEI) page, the SPX is the only one that has earned the right to paint its performance in green:

Sure, we could turn our attentions to happier environs, including those haunted by the indomitable Captain Naz (+8.79%) or Ensign Russell (+7.00% but falling fast). And certainly the news has, on balance, been positive for the holders of 10-year notes (and, lately) the USD, but I’m gonna go the whole route here and suggest to the Market Gods that, with half of the year now in the books, I’m just a tad bit disappointed.

But the Market Gods most certainly operate in mysterious ways, and who are us mere mortals to question these?

We’re entering what is likely to be a sloppy week, and I think I can speak for the market-obsessed masses when I suggest that Wednesday is the least productive day to celebrate American Independence. Most of us would prefer to either get it over with earlier, or postpone it to the end of the week so we can chop some wood before giving our shout-outs to the Stars and Stripes.

But the Julian Calendar was established well before most of you were even twinkles in the collective eyes of your forebears, so I reckon we’ll just have to live with that. Those of us who plan to return to our posts after the last Roman Candle has burned out will no doubt turn collective attention to next Friday’s Jobs Report, where the base rate is expected to hold steady at 3.8% and195K new private gigs are anticipated. The real action, though, is likely to revolve around Average Hourly Earnings, and the testing of the hypothesis of whether or not wage gain acceleration is, or ever can be, part of the picture.

This may be even more important than usual, because, as has been the case so often in recent years (and proven wrong each time), a big concern for us pointy-headed types is whether the indefatigable American Consumer might, at long last, be running out of steam. About the only interesting macro number that dropped last week was a surprising downward shift in Personal Consumption Expenditures, expected to clock in at +3.7%, but only managing to reach a tepid +2.7%. So alarming (to some at any rate) was this miss that it caused the recently high flying GDPNow Index to undertake an unsettling nosedive:

But what the Atlanta Fed taketh away, the Atlanta Fed can surely giveth back. And one thing that would almost surely invigorate both our domestic shoppers and give a boost to the broader measures of economic performance would be some evidence that pay raises, long promised, are actually manifesting.

There are indications, however, that the market doesn’t believe this to be the case – none more visible than the continued rally in global bonds, which also went against my recent call, and which now have tethered 10 year yields to a rather pedestrian 2.86%.

For those tracking such matters, yes, Generalissimo Francisco Franco is still dead, and 10 Year Swiss Notes are still offered at negative yields.

Once we get through the holiday and the Jobs Report, we can, the following week, turn our attention to highly anticipated Q2 earnings. The early returns have been good, but of course investors have not been overly impressed; otherwise the indices would have done what I ordered and rallied.

But c’mon, people.! Estimates for the quarter are the 2nd best (i.e. after Q1) since the crash, and have actually, been rising across the last three months. This, as indicated in the following chart, is something of an anomaly:

Current P/E’s, at 16.1, are below the 5-year average but above the 10-year mean. But please; the latter takes us back to the period covering the crash and the recovery, and are hardly reflective of what might be expected across today’s strong economic environment, with very favorable financing conditions, and an awful lot of companies putting up astonishing – and still expanding – bottom line performance.

So, though chastened by my misdeeds over the last couple of weeks, I continue to project the near-term balance of the risks in the equity markets to be shaded to the upside.

And, in closing, here’s hoping that Q3 generates more pearls than what was served up to us in Q2. However, this is most certainly out of our hands. After all, sometimes you walk alone down that Miracle Mile; sometimes you do so in the most pleasant of company. And sometimes the pearls we find are artifacts of God’s perfection, while other times they are Cajun women of easy virtue, singing “voulez voulez voulez vous”.

Either way, we take what we can get, because there’s really nothing else for us to do. So we carry our lovingly purchased flowers and candy, and utter our million dollar words, often to no avail. But we return, each day, to the Shrine of the Martyr, hoping for the best.

I reckon I’ll see you there, next week. In the meantime, I bid you a happy holiday, and, as always, a heartfelt…

TIMSHEL