Right Place / Wrong Time (POTUS Edition)

Posted on July 15, 2018August 24, 2018 by steve

I been in the right place but it must have been the wrong time

I’d have said the right thing but I must have used the wrong line

I been in the right trip but I must have used the wrong car

My head was in a bad place and I’m wondering what it’s good for

— Dr. John (the Night Tripper)

I reckon I’ll begin by getting a little unfortunate but vital business out of the way. My deepest apologies about the whole Corn thing last week, because it seems that my heartfelt salute to the stalky grain may have done more harm than good:

On the other hand, while I enthusiastically celebrated Corn’s comeback, I never intimated that it would continue. In fact it didn’t. Instead, it reversed itself and managed to record multi-year lows.

And, based upon this train wreck of a chart, I will promise never to write about Corn again. Well, OK; maybe not never. But at least not often.

Let us not forget – the situation, as it currently stands, could be worse. After all, I could’ve also pointed my admiring keyboard at Soy Beans. Or Sugar:

Cain:

Beans:

In fairness, I probably bear some responsibility for the Sugar slaughter as well. After all, last week’s note did include a reference to candy corn, which requires at least a Spoonful of Sugar to make the market go down.

But it’s not just Ags; last week, the whole Commodity Complex acted in consort to put on a flop seldom seen since the likes of of “Springtime for Hitler”. And here, I’m talking Precious Metals, Industrial Metals, Softs; even Energy. In fact, the whole smash. All of which is captured succinctly in the trajectory of the Bloomberg Commodity Index:

Now, presumably, not many people care about the Commodity Complex, because, let’s face it: nobody cares about the Commodity Complex. I mean, it’s not like anybody is impacted by the price of such quaint but uninteresting products as Copper, Natural Gas, Cotton or the like.

There are, presumably, some guys (with bad haircuts) and gals that must concern themselves with these matters, but I suggest that us Sophisticates move on.

So how about we give it up for my man, Dr. John the Night Tripper, born, bred and still pumping his 88 key ax in New Orleans? Our titular theme references his biggest hit, but there’s a lot more to the Night Tripper than one early 70’s FM Radio extravaganza. Meanwhile, I got to thinking about the Good Doctor’s main lyrical hook (a timeless lamentation if ever there was one) with respect to the current geopolitical situation.

More specifically, it occurs to me that we Americans have been plagued by a string of Chief Executives who have undertaken arguably justifiable strategic initiatives (i.e. been in the right place), with supremely sub-optimal timing. I’ll start with Bush 43, who squandered a galaxy of post-9/11 goodwill by turning our military towards the task of removing Saddam Hussein. Yes, Hussain was a bad guy, arguably a bull goose sociopath. But couldn’t we have tried to finish taking out the incrementally odious Bin Laden before committing to a quagmire that: a) cost untold blood and treasure; b) produced dubious strategic gains; and c) still remains somewhat unresolved, some 15 years later?

Treading carefully into more controversial ground, we come to Obama. It is indisputable that, for eons, the U.S. Health Care system has been a hot mess, and yes, he had pledged to reform it. However, whatever side of the Obamacare issue one may reside, it was deeply ill-timed to re-engineer a vital sector’s economics, one representing approximately ~18% of U.S. GDP, at a point when our economy had not formally checked out of the critical care unit. Had he waited a few more quarters, we might’ve all been better off.

All of which brings us to our current situation, unfolding under the steady(?) hands of 45. Yes, the Chinese have been gaming us in trade for many decades. Yes, they steal our intellectual property. And yes, the lovely Canadians, our besties, can probably justifiably be tweaked for their 3x tariffs on our dairy products, while we buy their cheese at no mark up. But, for crying out loud, couldn’t it have waited until after the Mid-terms? History shows that the current rhetorical path is a risky one. Trump may have the perfect strategy, but if his timing is off even by minute orders of magnitude, it could take a big bite out of the economy, and, consequentially, deeply impact the outcomes of the Midterms. I don’t know that this is where we’re headed, but consider, if you will, the obverse. I posit that absent the trade issue, equity indices would’ve ripped through new highs, economic indicators would’ve been much jauntier, and the political calculus (as a result) much more favorable for the fortunes of the investor class. But instead, he bulls on ahead, and creates what I believe to be the biggest risk overhang on what otherwise looks to me like a fundamentally strong environment that is poised to take valuations to higher realms.

Before taking leave of the POTUS component of the Right Place/Wrong Time thing, I must present the exception that proves the rule. If not thrilled about Trump’s Monday meeting with Vlad (the Impaler) Putin, I’m not sure it will do any particular harm. And, if these two statesmen for the ages are to convene, now may be as good a time as any. But Helsinki? Why hold the summit at that remote outpost, which by the way, fell on the Soviet side of the Molotov-Ribbentrop Pact of 1939, under which the entire sovereign nation of Finland, lock stock and barrel – was handed to Stalin? Wrong Place/Right Time. Check.

All of this notwithstanding, the private capital markets are in fairly perky configuration these days. As was the case with my Corn call, I was arguably in Right Place/Wrong Time mode when suggesting caution on equities in last week’s epistle. Instead of wobbling, the Gallant 500 managed to bust through to a 28 handle, while Captain Naz piloted his rocket ship to new all-time highs. Q2 earnings, though with only 5% of the precincts having reported, are coming in within the margin of error relative to lofty expectations. As suspected, forward guidance shades to the cautious, but in mild surprise (at least to me), CEOs don’t seem particularly concerned about tariffs, which thus far has clocked in as the 8th biggest concern among them with respect to their forward-looking prospects.

But we’ve only just begun this here cycle, which picks up a bit next week with the remainder of the Banks and a couple of high fliers like NetFlix and Microsoft taking their turns in the star chamber.

And investors seem to be conditioned at the moment to both receive good news and react favorably to it. I hadn’t expected such equanimity at this point, but then again there’s that whole wisdom of the crowd thing, etc. On the other hand, there may be some turbulence beneath the calm top-waters.

Specifically, while index volatility has dropped mercifully over the last several months, the same cannot perhaps be said about dispersion at the individual security level. Consider, if you will, the following chart:

Apparently, in other words, not everyone is buying into the rosy scenarios. Yet, history shows that the increase in the magnitude of short-sided individual stock positioning is perhaps the most consistently valid reason to own these stocks as any that can be imagined.

The most important objective, of course, is to be in the right place at the right time – one of life’s most difficult challenges. Investors who achieve this make billions, of course, while the rest of us take pot luck.

For politicians, on the other hand, it is nearly impossible, as a simple matter of odds, to avoid finding themselves in Night Tripper configuration, at least some of the time. We’ve already covered our last three Presidents, and, before that there was Bush 41, who probably would’ve been re-elected had he not raised taxes at an inopportune moment. For Carter and Ford, nearly all of their actions were ill-timed, and before that we have Nixon (Watergate), Johnson (Vietnam), and Kennedy (Dallas), which covers the full range of Oval Office occupants across my lifetime.

Except for two. First there was Reagan, who, through either dumb luck or improbable skill, seemed to time everything to perfection. And last, we turn to Bubba, and here I’ll leave his time/place mismatches to your own collective imaginations.

TIMSHEL

The Tip of the Spear

Posted on January 14, 2018August 24, 2018 by steve

Loyal readers of this column are well-aware that its author is obsessively fixated upon anniversaries. We’ve celebrated a goodly number of these over the years, and this river is likely to continue to flow. As ’18 unfolds, we will mark a number of events 50 years in the past, because, well, because 50 years ago it was 1968, and let’s face it, 1968 was a big year.

This week, in slight misdirection, I’d like to begin by drawing reader attention to the 50th anniversary of Johnny Cash’s historic concerts at Folsom Prison: a cozy little enclave for convicted felons located just northeast of Sacramento, CA. In a gesture that I reckon could only be conceived by timeless cultural geniuses, on January 13, 1968, JCash performed two concerts at the notorious facility, and converted the recordings into a magnificent album. It was, to the best of my knowledge, the first time a bona fide superstar performer chose a venue of that kind to practice his craft. It’s important to understand here that while Johnny was a hard livin’ man, he was no jailbird. His history included many arrests, but no extended incarcerations. The record shows that over his decidedly rocky journey through adulthood, he spent, in aggregate, about one week in the stir; none of it in a maximum security state penitentiary. Still and all, one can safely assume that The Man in Black knew his audience that day. And that they knew him.

If you listen to the record (and here, if you wanna go full legit, vinyl is the only way to roll), you can feel the energy popping out of the grooves.

In an elegant little twist, Johnny was made aware that one of the prisoners, the otherwise forgettable Glen Sherley, had written a pretty catchy song called “Greystone Chapel”: an ode to the religious sanctuary situated inside the walls of the jail. Cash heard the tune, rehearsed it, and played it during the show – all as a surprise to its composer.

To my way of thinking, it was a classy gesture. It’s in moments like these, rare though they may be, that the invisible threads across our existence come together to form a magnificent tapestry. But more than this (and forgive the clucky transition here), it might very well have marked the tip of the 1968 spear: the point of the projectile pierces that the intended target, and brings about whatever outcomes the Good Lord intended. As mentioned above, 1968 was an eventful year, as 2018 also shows promise to be. But bear in mind that the show took place in the first half of January: the spot on the calendar where we currently reside. A great deal transpired over the remaining months of 1968, and, when it both mercifully and wistfully melted into 1969, one could not help but note with wonder all that had transpired over the preceding 366 days (’68, was, after all, a Leap Year).

The current news flow features nothing so sublime as the Cash Folsom Prison concerts, but perhaps I’m just searching in the wrong places. Moreover, as this publication exclusively concerns itself with investment matters and nothing else, the time has come to leave JCash to his curtain calls — in front of some of the baddest hombres ever rounded up by law enforcement in the Golden State.

So, then, where might we find the tip of the market spear, these 5 decades hence? Well, as for me, I’m watching the long end of the U.S. Treasury Curve, as I believe that, come what may, it is the behavior of this instrument class that are most likely to pierce the current cross-asset class pricing paradigm.

Nine trading sessions into the new year, we have a very interesting/arguably bizarre, set of market patterns emerging. Equities, as everyone knows, are a one-way ticket to the penthouse, with the first two weeks throwing off seasonal gains not seen over similar intervals for 30 years. We’re up ~4% in this jurisdiction, but the same story can be told pretty much everywhere around the globe. Commodities, too, are ripping, with the GSCI eclipsing its 2015 high and even the disdained and energy deficient Continuous Commodity Index recovering substantially from a horrific December:

GSCI Commodity Index:

Commodity Continuous Index:

All of this Commodity Love, combined with some encouraging early returns on Tax Reform, have, indeed, caused a noticeable lift to U.S 10-Year yields. Indeed, rates for the on-the-run 2-year and 10-year notes have hit gone up in a straight line for several sessions:

Bonds on the Run: U.S. 2-Year and 10-Year Yields:

Now, with equities and commodities capturing a gratifying bid, and bonds selling off pretty broadly, one might expect the USD to be the recipient of some inflows, somewhere. But as I like to write, one wound be wrong on that score:

USDX:

As It happens, the U.S. Dollar Index closed on Friday at its stone cold dead 3-year lows. And one wonders why. Shouldn’t capital be flowing into the Dead Prez – to capitalize on those high-flying equities and to take advantage of the upward trajectory of rates?

I would’ve thought so too, particularly as rates in Europe and Japan are stuck at “play handball against the curb” levels.

I think that the lack of confidence in our unit of account is a tacit message to the custodians of our monetary policy: one of doubt in the latter’s ability to lift the back end of the Treasury Curve. And who can blame them? Their forbears have tried, and failed, to normalize rates for quite a while. Why should they view this here yield bump, or so the thinking goes, as being extendable or even sustainable?

They may have a point or they may not; only time and tide will tell. But I do think that the battle of longer term yields is where the pivotal action will take place in the coming months. Is the deflationary impact of technological innovation, truly, as some would have us believe, an inexorable and overwhelming force? Do the increasing signals of tightness in the Labor Market portend wage inflation, which may be the holy grail of the bond bears? While I don’t have answers to these imponderables, I will opine that if the combination of reduced Global QE, Fed Balance Sheet shrinkage, the inflationary outgrowths of lower taxes and growing profits and revenues don’t cause the long-awaited Pavlovian selloff of long-term government securities, well, then, I don’t know what.

However, if this geriatric bond bubble does finally burst, it should unleash long somnolent concepts, once experienced but long forgotten in this long-term memory impaired era.

This could take a number of forms, including asset allocation away from stocks and into bonds, increased savings rates, the re-emergence of two-way volatility, and (most blessedly) higher borrowing costs catalyzing a capital economy where there are material, identifiable consequences to enhanced risk taking. As such, it would stand in strong contrast to the current, anesthetized paradigm, under which a combination of historically easy finance and a one-way stock market covers for a multitude of sins. On balance, I think we’d all be much better off if those trends petered out.

But I must move towards conclusion on a note of caution. The beginning of the Fed balance sheet un-wind, combined with the surprise Chinese freeze on the purchase of our paper did indeed appear to put some downward pressure on bond prices/upward pressure on yields. But this past Wednesday, our Treasury Department undertook an historically successful 30-year bond auction, in which investors around the globe hoovered up $12B of our paper at astonishing premiums to the already elevated prices they were asking. Our G-Men are expected to accelerate their bond issuance over the next several quarters, and if this most recent experience is any indication, the possibility exists that curve may remain flatter than a pancake for an indeterminate period into the future.

In summary, while there are modest, encouraging signs that we have a spear tip with a point slick enough to pierce one of history’s longest running financial bubbles, the actual proof will be in the piercing, which, by all accounts, has yet to manifest.

On the other hand, JCash didn’t know what he unleashed in Jan of ’68. By early April, King Junior (whose life and deeds we celebrate tomorrow) was murdered. By early June, somebody did RFK in the kitchen of LA’s Ambassador Hotel. There were riots all summer, LBJ (whose words and actions make Donald J. Trump look like a Trappist Monk) decided not to run for re-election. Later that fall, we put Tricky Dick in the White House. As such, it pays, on this crazy planet, to keep your eyes wide open and to pay particular attention to flying projectiles which may, or may not, feature tips that pierce to the core of the object at which we are aiming.

TIMSHEL

Crazy 8s

Posted on December 17, 2017August 24, 2018 by steve

Got me a new phone.

Specifically, an I-Phone 8.

It has a lot of nice features, like stuff to do with the camera. And the apps. And other sh*t as well that they told me about at the store, but I forgot most of it.

I just thought you might like to know. And case you can’t tell by now, I am immensely proud of my new I-Phone.

So much so that I flew Joe Montana in from the West Coast to stand next to me, in a picture of my recently acquired prized possession.

That’s Joe on the right. I, on the other hand, am on the left. Sharp-eyed observers will notice a portable device in my hand.

And you are correct. It is my brand spanking new I-Phone 8. Of which I am immensely proud. I would go so far as to characterize this pixel-captured moment as one of the finest I’ve ever experienced, falling short of divine ecstasy only insofar as it was not captured for posterity on my brand new I-Phone 8.

But if I did that, took the picture on the 8, then, by definition, it would’ve been nigh impossible to include the device in the visual frame, and as such, would’ve rendered Joe’s 3,000-mile journey somewhat quixotic. So I think I made the right decision here. Because (or so it is said) if you’ve got it, you may as well flaunt it, and whoever said this must’ve been referring to the 8.

But in reality, the time had come to make the move. I’d been rocking a 6 for the last couple of years, and, other than the irritations associated with its inability to hold a charge, its faulty speaker, and the various cracks across its façade, I had no particular complaint. It had a good run, but it’s time had come and gone. And, as Apple has discontinued the production of the 6 Series (including the 6-S and 6-Plus) swapping out for the same model wasn’t an option. For any of readers worried on my behalf that I may have moved too precipitously, I present the following photo (take, of course, with my brand new I-Phone 8) as Exhibit A:

Exhibit A: My Wounded Warrior I-Phone 6

Yup, that’s my poor, abused 6. So long, amiga. You won’t be forgotten.

In the modern era, a man’s relationship with his phone is a rather intimate affair, and when he ditches his stalwart but aging electronic companion for the sleek, newer model, there is always some mixed regret. But even here, I didn’t assume what they call in the investment world a “full position”, as doing so would have compelled me to go the whole route and grab myself an X. But what the hell is an X anyway? For Greek Mathematician Pythagoras it is the square root of the length of a non-hypotenuse side of a triangle (as in X2 + Y2=Z2 – aka the Pythagorean Theorem).

Separately It has served for many generations as the default signature of the illiterate.

Beyond this, and in general, it is the vexing, mysterious, eternal variable for which humanity must solve. And at the Verizon Store (and I won’t lie: this was a major driver of my decision), it fits into the following equation:

X = Cost of I-Phone 8 + ~$250 = Cost of I-Phone

8 on the other hand, is easier to understand. It is 2-cubed. It is the answer, in fact the only one that exists in the mathematical universe (using its Cubed Root: 2 as a substitute for that infernal X), to the following equation:

(X*X)*X = (X+X)*X.

It also serves as a cheery homonym for consumed solid sustenance (i.e. “ate”), whereas in homonym-land X can only matches, winsomely, a former love interest.

It’s linkage to Joe should be relatively easy to identify for the intersection of the sports-aware and the mathematically mature. During his glory years with the Niners, Joe wore the number 16, or twice 8. So for those keeping score, in one sense, two of my new devices equals one Joe Montana. Of course, you don’t get the 4 Super Bowl rings or the 7 Pro-Bowl appearances with the 8, but on the other hand, and to the best of my knowledge, you cannot, with your fingertips alone, direct Joe to find you the shortest route to Hackensack, NJ.

*********

At the point of this correspondence, there are 8 full trading sessions left to this year (plus a couple of holiday halves). And what a year it’s been! Financial Assets have been rallying to beat the band, and if you weren’t long (and I wasn’t) well then all I can say is too bad for you (us). Of course, the news isn’t all good (is it ever?). Holders of agricultural commodities, for instance, have experienced the indignity of witnessing a benchmark basket of their inventories breach an all-time low, having shed fully half their value over the last 5 or so years, and enduring a downdraft of more than 5% this month alone – all as captured in the following chart of the Energy-deemphasized Continuous Commodity Index:

Continuous Calamity (er, Commodity) Index

Now, I admit this ain’t so good for some of my “earthier” constituents, but let me ask you: how bad are things if, in a raging bull market, the raw materials that we put into our tummies or wear on our backs are now cheaper than they’ve ever been?

Not so bad, right? And let’s face it: who invests in ags anymore? I mean Soy Beans and Wheat and Cotton are certainly quaint little markets, but us men and women of the world, it is hardly consummate with our grace and dignity to allocate risk to these realms.

Nay, my friends, the locus of action has been in more contemporary markets, such as Crypto. But I don’t really have anything useful to say about Crypto, and am thus compelled to revert to my fallback asset class: Equities. Fortunately, they have not disappointed, and my read on them is as follows.

I consider 2013, call it the last hurrah of US QE, to have been the real outlier year. The Gallant 500 returned ~30% to investors, in the process ginning up a modest volatility of ~10%. As these were the heady days of Zero Interest Rate Policy (ZIRP), I set a risk free rate at zero, and derive a Sharpe Ratio of approximately 3.0. Its 2013 Downside Deviation (defined as the standard deviation of negative observations) clocked in at a logic-defying, 7.31%, which translates into a Sortino Ratio ((Return – Risk Free Rate)/Downside Deviation) of ~4.1. Now, in my experience, any SPX Sharpe above 0.5 is a pretty strong showing, as is a Sortino above, say, 0.7. As such, I was loud at the time in my proclamations that we would never again in our lifetimes (or, remembering my codger-like status, in my lifetime) see such a Joe-to-Dwight Clark sort of performance out of the Index.

But I was wrong. Thus far in 2017, the S&P 500 is on pace to deliver 20.4% returns on a volatility of 6.7%. As we no longer are in ZIRP-land, I subtract 1% risk free rate, and derive a Sharpe of 2.9. But the analysis doesn’t end there; the 2017 SPX Downside Deviation currently resides at a sub-atomic 4.3%, implying a Sortino of 4.5.

Lightening has indeed stuck twice in the same place.

And who’s to say we can’t gather ourselves in the last two weeks and eclipse even the ’13 Sharpe threshold? At the point of this correspondence, Tax Reform appears to be on its way to passage, and whether this helps the capital economy or not (and it should, at least some), recent pricing action suggests that if Trump actually signs a bill, it may be good for a couple of hundred basis points to the upside on the benchmarks. If so, we may well breach into a 3 handle on the Sharpe, yet again.

This past week, we also killed off the cynical government power grab known as Net Neutrality. And Twitter/Facebook absorbed the blow. The tree huggers, when not screaming bloody murder, are weeping crocodile tears on this one. But they are being misled. The big dogs, whatever they state publicly, loved the barriers to entry/innovation and other bennies that devolved to them from deeming the frigging Internet a public utility that needed the same regulatory regime first put in place for telephones in the ‘30s, when AT&T had a monopoly. Expect, now, more capital investment and much better ranges of services and value propositions for consumers. In fact, I challenge any of my prog friends to come back to me within a year with any evidence that the repeal has harmed anyone. To balance matters, I will be glad to identify ways in which the new freedoms have been accretive to consumers.

Finally, and in keeping with the spirit of our weekly theme, I will take the opportunity of devoting the last section to a glimpse into my vision for next year: the 8th of this improbable decade.

I tend to view the early days of any given year as jump ball territory. The solemn, time-honored ritual of tape painting has run its course, , and beyond this, I view each marker year as its own novella, with the story unfolding at its own pace over a period of months. Part of me adheres to this paradigm, but then I remind myself about the glaring supply/demand imbalance which continues to socialize a bid on high quality assets. If you’re looking for more evidence of this, consider the M&A action over the past several weeks. Let’s say you like to Invest in Insurance Companies. Post the merger of CVS and Aetna, there’s one less of them to trade – unless, of course you wanted to own a pant load of drug stores as part of the package. Similarly, those predisposed to speculate on media content will soon no longer have the opportunity to take a piece of 21st Century Fox without also purchasing a healthier dose of Mickey, Donald (Duck not Trump), “Dancing With the Stars” and Monday Night Football.

So I rather think, albeit prematurely, that stocks and bonds will remain in short supply next year, and that their valuation paths will reflect this scarcity. Of course, a lot could go wrong across a 12-month interval which has yet to begin, but all other factors being equal, I don’t believe that high-grade securities “on offer” will remain so, at an point in the sequence, for extended periods of time.

No, this won’t last forever. Nothing ever does. So it may be worth considering getting some while you can, because when it’s over, it will indeed, as Yogi instructs us, be over. Consider, if you will, that the case of the fabulous I-Phone 8. It was released on September 22nd, and managed to remain at the top of the Apple product tree for approximately 6 weeks, whereupon it was displaced (November 3rd) by the X.

Or just ask my friend Joe. After winning 4 Super Bowls with the 49ers, injuries forced him to the sidelines. As fates would have it, he was replaced by a direct descendant of Church of the Latter Day Saints Founder Brigham Young: a chap who never looked back, and won himself 3 more Super Bowls on his own.

And for the record, Joe’s replacement Steve Young’s jersey number was 8.

Crazy, no?

TIMSHEL