Tag Archives: GDP

Ooh La La

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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

Ah Yes, I Remember It Well

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“We met at nine”, “We met at eight”, “I was on time”, “No, you were late”

“Ah, yes, I remember it well”

“We dined with friends”, “We dined alone”, “A tenor sang”, “A baritone”

“Ah, yes, I remember it well”

“That dazzling April moon”, “There was none that night”

“And the month was June”, “That’s right, that’s right

It warms my heart to know that you remember still the way you do

Ah, yes, I remember it well”

— Alan Jay Lerner/Frederick Loewe

First, I hope that this note has somehow found its way to at least a portion of its intended recipients, because, you see, with little fanfare, an absolute catastrophe befell the internet this last week. Lost in all of the hubbub about the Singapore Summit, IG reports, Big 3 Central Bank Policy Statements and the like, the Federal Communications Commission (FCC) enacted the repeal of the 2015 Net Neutrality Act, an action which had placed federal oversight of the Internet under the jurisdiction of the Telecommunications Act of 1940. Remember the days before the FCC decided to treat the web in a manner engineered to oversee AT&T’s mid-20th Century monopoly on phone service?

Ah yes, I remember it well.

What I remember most is that before net neutrality, the web was a sleepy, dreary place. Scant content was available, and to even access the tool, one needed to attach a landline to a modem, and pray for the appearance of the flashing lightning bolt icon/ accompanying squeal sound as confirmation that a connection had been made. Then one prayed that one’s sister didn’t try to make a call or that some other disruption would take place, forcing one to start the process again.

Can you even imagine a world where the FCC cops weren’t on the job? No Twitter, no Facebook, no $%*#@!! Netflix! Luckily, back in 2014 and before, we still had our washing machine sized radios to listen to FDR’s latest Fireside Chats; otherwise, we wouldn’t have the vaguest idea what was going on in Washington, let alone more remote ports of call.

But now the evil FCC is off the case, allowing (among other things) the providers of bandwidth to charge market prices for the use of their resources. No wonder Bezos, Serge, Larry and Reed Hastings and others of their ilk — champions of the common man one and all — were crying in their soup. After all, the three companies they control (Amazon, Alphabet Google/YouTube and Netflix, respectively) currently account for more than 50% of all bandwidth usage in the world, and desperately need Uncle Sam to ensure that wicked, competitive pricing doesn’t hurt their bottom lines. Each have shareholders to whom they must answer, and since there’s an infinite amount of bandwidth available, why should they let its corporate providers cut in on their margins?

Except there isn’t. An infinite amount of bandwidth available that is. Either in any given location or across the globe. And what is available is being consumed growth rate of >50% a year. The clear answer is technology innovation, by companies like AT&T and Verizon, but it is entirely shocking that these enterprises would be allowed, as they are now, to set spectrum prices on the entities that hoover it up — in accordance with their usage, in order to underwrite capital investment.

However, as suggested in our thematic quote, the month is not April but June, placing me in something of an amorous mood. So it pleased me, speaking of AT&T, that it was allowed to consummate its star-crossed romance with Time Warner, by virtue of a Federal Court rejecting a poorly thought out Justice Department lawsuit seeking to block the marriage. Now Bugs and Ma Bell are one in the eyes of God and Investors. Here’s hoping they are fruitful and make lots of anthropomorphic rabbits, because, during this, its most important season, love is indeed in the air. Twentieth Century Fox now has not one, but two formal suitors (Disney and Comcast) for her hand. And who’s to say that it stops there?

In fact, it doesn’t. Big Don and L’il Kim were able to advance their dalliance, departing last week’s rendezvous with evidence of their intentions to expand their triste. Unfortunately, however, details of their plans to set up housekeeping were not particularly forthcoming. Elsewhere, however, amore, toujours amore, was a more uneven affair. We’re still in a tiff with Canada (though I don’t believe it will last), and the lovers’ quarrel between America and China ratcheted up a bit, with each side extorting the other to the tune of $50B of tariffs – so far. Of course, it will be us Joe Bag of Donuts types that will foot the bill, so this one may get worse before it gets better.

Of these Affairs de Coeur, markets took mixed notice. Commodity markets tumbled, as well they might’ve, with Energy, Metals, Ags and Softs all feeling the gravitational pull, and (more improbably) the USD reached its highest level in nearly a year:

This is a Commodity Index

This is a Dollar Index

Perhaps in a nod to the passion of the season, government borrowing rates dropped across the board (yes, Switzerland is again negative out 10 years), the fact that U.S Fed Chair Pow raised rates and signaled 2 more hikes this year, and that Super Mario announced the ending of euro QE notwithstanding.

But the Equity Complex continues to play hard to get. It was a flat week – at least for the Gallant 500 and his wingman, Major Dow. Captain Naz and Ensign Russell fared better, though, with both indices now resting at all-time highs.

I’d take this opportunity however, to encourage Mr. Spoo to persist in his ardor, based in part on the fact that he has a great deal to offer:

SPX P/E Hovering at 5-Year Averages:

Factset in fact(set) has Q2 earnings clocking in at +19%, and this after a similar performance in Q1.

If they’re right, then it doesn’t look to me like a 16 P/E is an extraordinary amount to pay. Plus, in light of the Judicial Ruling on Time- Warner/AT&T, still-benign financial conditions and a number of other factors, it strikes me that merger mania should persist through the next quarter at least.

However, if these arguments fail to reinforce the intestinal fortitude of my favorite index, I’d hasten to remind it of that ancient truism: faint heart never won fair lady:

In addition, it may bear mention that the VIX breached down into an 11 handle and is close to ytd lows, that the Atlanta Fed’s prediction for Q2 GDP has risen yet again to nearly 5%, and that in addition to the sublime sound of wedding bells in churchyards across this fair land, the second half of June is seasonally known for its trademark tape painting rituals.

So on the whole, I think this here market may indeed be setting itself up for a nice rally.

I wouldn’t anticipate anything particularly dramatic just yet, but the SPX does remain nearly 100 handles below its January highs, and I see no reason why it can’t gather itself to test that threshold, or even breach it, over the coming weeks.

Of course, it would be helpful if we can get that darned internet up and running again, because financial transactors have come to rely upon it (or so I’m told), and buying frenzies fueled by paper orders phoned in and transmitted through pneumatic tubes will be a highly annoying exercise. I will, however, predict that, one way or another, the markets and its participants will survive. And, in closing I hasten to remind my readers that the stock market became a global sensation while operating for more than a century with men in top hats and overcoats conducting business orally, under the shade of a buttonwood tree in Lower Manhattan.

Most of you are too young to have experienced that era, though I was only a young shaver for most of it, I can assure you that it was a magnificent time to be alive.

And yes, I remember it well.

TIMSHEL

Rules 1a and 1b

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He’s a worldwide traveler, he’s not like me or you,

But he comes in mighty regular, for one who’s passing through,

That one came in his work clothes, he’s missed his last bus home,

He’s missed a heluvalotta buses, for a man who wants to roam,

And you’ll never get to Rome, Son, and Son this is Rule 2

— P.D. Heaton

I gotta say, I love Rule 2, so much so that I even included it in my book (remember my first book?). But before we get to it, we must first, as a matter of protocol, pass, wherever it may take us, through the portal of Rule 1. Moreover, while Rule 2 is fixed for all time, Rule 1 has historically been a bit more elusive.

Moreover, recent events point to its partitioning. Hence, I give you Rule 1a: TIMING IS EVERYTHING; and RULE 1b: IT’S ALWAYS IMPORTANT TO KNOW THE SCORE.

In comforting consistency with the age-old platitude, Rules 1a and 1b, are defined by their exceptions, of which this week there were several, of varying form and consequence. Having no better alternative, I have chosen to highlight a few pertinent examples – in chronological order.

Wednesday morning, Northbrook, IL-based Pharma concern AbbVie completed the buyback of its shares – taking the form of a Dutch Tender Auction (a nuanced transaction type that I won’t bother to explain — mostly because I don’t myself understand it). The Company’s intent to do so was known in advance by investors, as was the associated amount ($7.5B). The only unknown was the price it would pay, proclaimed in the pre-open to be $105/share. Later that afternoon, however, Management awarded itself a mulligan, informing the markets that the real price was $103. The pricing action attendant to this regrettable error is as follows:

Let’s all agree that the guys and gals in the AbbVie C Suite have had better weeks.

Further, it would seem that the Company violated Rules 1a and 1b, by failing to know the score, and by mistiming by several hours the announcement of the correction.

I am sure, however, that they have learned their lesson and will, at the point of their next Dutch Tender, reveal the appropriate price at the appropriate time.

Moving on across the week, we turn to the misanthropic Earl Joseph (J.R.) Smith III – Shooting Guard for the Cleveland Cavaliers. Smith and the LeBron-led Cavs entered the 2018 NBA finals as deep dogs to the annoyingly flawless Golden State Warriors as any I can remember. But with a gritty performance in Thursday night’s opener, the team was poised to snatch Game 1, when teammate George Hill stepped to the line for the second of two free throws, which, had it gone in, would’ve given the Cavs a 1-point lead with about 4.5 seconds to go. But Hill clanked it and Smith grabbed the offensive rebound. However, instead of shooting the rock, or passing it to arguably the greatest player in NBA history (sorry MJ) for a buzzer beater, he dribbled out the clock, sending the game into overtime, where the Warriors trounced.

Some debate has ensued as to whether, at the end of regulation, J.R. knew the score, but, indisputably, his timing was off, and now his gaffe passes into history as one of the most bone-headed plays of all time.

All of which brought us to Friday morning and a much-anticipated April Jobs Report. At 7:21 EDT, President Trump issued a casual tweet that he was looking forward to the 8:30 a.m. release. Not knowing for sure what this meant, but being aware of our Chieftain’s tendency towards bravado, a segment of savvy, early rising market participants suspected that the number was going to be a good one, and promptly bought stock futures and sold bonds.

Well, waddya know? The number was indeed strong. Nonfarm Payrolls, the Base Unemployment Rate and even Hourly Earnings were all encouraging. And yes, stocks rallied and bonds sold off. Undoubtedly, here, the Trumpster knew the score, but I’ll go so far as to state my opinion that his tweet timing was indeed off.

The episode set off the usual, wearying cycle of gleeful outrage by the Administration’s enemies, combined with spin control on the part of its friends. But at the end of the day, I ask my readers to keep some perspective here. A review of the SPX and 10-Year Note trading activity during the critical time period between 7:21 and 8:30 does not support overwrought claims of market manipulation:

Nope. Not much happened during the period between when Trump scooped the jobs market, and the actual number became part of the public domain. Still and all, I wish he’d refrain from pulling these types of stunts, because they begin to give me a headache. So I offer the following risk management advice to our Commander in Chief: in those many cases when you know the score, please be careful of your timing. You had all day to brag about the jobs numbers, and a little forbearance (never your strong suit, I know) on your part might save some aggravation or worse.

But now it’s time to move to exceptions to Rule 2. Contrary to our thematic quote, I did, at least rhetorically, manage to make it to Rome last week. For lack of anything else interesting upon which to opine, I actually wrote extensively about pricing problems associated with the government debt issuing forth from that glittering capital. My timing here (it must be allowed) was impeccible, but I will in no way claim to have known the score. It came as a fairly significant surprise to me that the political throw-down in that ancient seat of wisdom would roil the global bond markets, with collateral damage spilling over to other asset classes.

But it did. Roil the bond global markets that is. Yields on the Benchmark BTP Note, having traded all year in about a 20 basis point range around 2.00% careened up to a high of 3.15% before settling on Friday at a still elevated but entirely more civilized 2.67%. The unfailingly neutral Swiss Bond stayed negative. Presumably, in a frenzied flight to, er, quality, market players bid U.S. yields – which recently hit a multi-year high of 3.11%, down to 2.78%.

I do suspect, however, that there were other, slightly technical factors that impacted these tidings. As has been reported multiple times in these pages, net short speculative open interest in 10-year futures has been hitting, and for the most part retaining, record highs in recent weeks:

So, when the big Treasury rally hit us on Tuesday, it had to me the look and feel of a short squeeze. Since Tuesday’s blowout, and in light of Friday’s Jobs Report, the U.S. 10 Year Note has since sold off to a yield of 2.90%.

I suspect that the shorts will have another go at it this month, and that we will not only test 3.00% yet again, but probably break through and hold at these levels.

In addition, after allowing on Wednesday approximately $28B of our paper to expire without repurchase this past week, the Fed Balance Sheet now stands at a paltry $4.3275 Trillion – its lowest level in 4 years. If our Central Bankers have their way, this number will decrease at an accelerating rate over the coming months and quarters.

So, with the big dog domestic buyer in belt-tightening mode, uncertainty about foreign demand among traditional owners of our paper (with whom we may now be commencing a trade war), the logical path of rates probably remains upward. Plus, the economy –even beyond the jobs report – is showing signs of feeling its oats, as evidenced in part by the impeccably accurate Atlanta Fed GDPNow Forecast:

Yes, you read that right. The boys and girls down in Georgia have Q2 GDP clocking in at 4.8%. I personally believe this is something of a pipe dream, but if that’s the number (and we won’t know until late July), then you can be pretty certain that the 10-year note will be throwing off a pretty significant amount of incremental vig.

Again, I think this number will come down considerably before it’s official, but it does seem likely that the bond bears may yet have their day.

But timing will be everything, and here’s hoping that Trump can keep his twitter finger in check. Otherwise, we may just have to move on to Rule 3.

And trust me, brother and sisters, you don’t even want to know what Rule 3 is.

TIMSHEL

Through the Looking GLASS

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Ladies and gentlemen, you have my apology, because somehow I missed it. Maybe it was the Cosby Trial, the NFL Draft, or the weather.

On further reflection, I’d have to say yes, it was the weather.

Given my borderline obsession with celebrating milestones, I am deeply ashamed of myself that I missed a big one: the 20-year anniversary of the functional end of the four segments of the Banking Act of 1933 – sections that are widely referred to as the Glass-Steagall Act. As most are aware, the key provisions of Glass-Steagall forced the legal separation of financial enterprises that accept deposits and issue loans (i.e. Commercial Banks) from those that engage in trickier activities such as stock/bond issuance, proprietary trading and the like (i.e. Investment Banks). The idea was to put a wall of sobriety around those institutions charged with the responsibility of holding customer cash balances and writing mortgages, while allowing the more energetic and creative among the Wall Street crowd to do pretty much anything else that they wished. At the time, it could be argued that this was a wise move – particularly given the widespread failure of nearly every bank this side of the Bailey Building and Loan in the wake of the ’29 Crash and subsequent Great Depression, and the valid concerns that their failures could be traced to their excessive enthusiasm for more speculative activities.

And for 65 years, it was the law of the land. But it was a pain in the caboose for those forced to comply. Investment Banks such as Goldman Sachs and Morgan Stanley suffered the indignities of needing separate subsidiaries just to compete in the frigging swaps markets, and banks had to jump through hoops if they wished to even approach sacred realms where stocks and bonds were issued and traded.

The legislative repeal of Glass-Steagall didn’t transpire until mid-1999 (giving me another year to pay obeisance to the 20th), but Sandy couldn’t wait that long. To wit: Sanford I. Weil, then in the midst of converting the prole-like American Can Corporation into the World’s Biggest Financial Colossus – one that just a decade later required taxpayer support to the tune of nearly $0.5 Trillion – was in a great hurry to add an Investment Bank to his portfolio, and wasn’t inclined to wait for the Wheels of Legislation to turn in his favor. So, in April of 1998, he went ahead and purchased venerable I-Bank Salomon Brothers, and that was it. GSS was dead and everyone went about his or her business. The regulatory wall between Commercial and Investment Banking had been shattered by Sandy’s Golden Hammer, and it was game on – even if it took another year to codify the removal of the restriction into the national legal register.

Of course, Sandy had some help. He was a Friend of Bill (Clinton), and, presumably, as homage to this alliance, he likely gave the guy tasked with executing the nation’s laws an amiable heads-up about his intentions (which I’m sure the latter appreciated). In addition, there was Treasury Secretary Robert Rubin, who, shortly after he greenlighted Sandy’s power move, landed at Citi’s Co-Chairman seat.

But everything ended up for the best, right? At least for most of the subsequent decade, after which, if memory serves, there were a few problems.

And this type of game of “Inside Baseball” is exactly the type of thing that I believe ails us most: a world where different rules apply to entities with different positioning on the Financial Food Chain.

It was ever thus, and perhaps ever it will be. At present, taxpayers support the whims and predispositions of corporate faves such wonder-boy owned electric car manufacturer, a Farming Industry in which the overalls crowd have long ceded ownership to the folks in Brooks Brothers suits, our gargantuan Energy Companies, and yes, our brilliantly run and ethically unimpeachable Banking Sector.

It seems that our system is generous to everyone but consumer/taxpayers, and recent data suggests that, while they shoulder on, they are arguably losing energy. This week brought a first look at Q1 GDP, which brought tidings of marginal weakness, as did the more obtuse Chicago Fed Index of National Activity:

Perhaps owing to these and other little glitches, the U.S 10 Year Note Yield, after having placed a trepid toe into 3% territory the prior week, has backed off to just under 2.96%. Ags were en fuego, and the USD lifted itself off the carpet a titch.

Most of the investor focus, however was on earnings, and here, somehow, my nearly impeccable prognostications failed me. Far from tanking the quarter, The Big Tech Dogs – particularly the two with the biggest targets on their backs (Facebook and Amazon) absolutely blew the roof off the joint. They also declined to heed my suggestion about the possible benefits of issuing muted guidance. Across the Kingdom of the Gallant 500, with more than half of loyal subjects now having dutifully reported, the blended earnings growth is beating even the rosiest of estimates at a somewhat astonishing >23%.

However, for all of that, it was a flat week for the indices, as investors neglected by and large to embrace the enthusiasm issuing forth from Silicon Valley and elsewhere. Maybe they should teleport themselves to the Continent, where (for reasons unknown to this reporter) a post-Lent rally continues unabated:

European Equities: The Destination of Choice This Spring:

But within these here borders, we’ll be through earnings for all intents and purposes, within two weeks. And all we’ve seen for the last month is a narrowing of the SPX channel to a skinny 100 Index Points:

So let’s for the moment dispatch with the notion that the barking volatility dogs have taken over the junkyard, shall we? Once the Retailers report, we’ll have nothing left to anticipate but some always dodgy macro numbers.

We get a taste of this next Friday, when the April Jobs report drops. It might be well to recall that March was something of a dud – so much so that many economists were forced to resort to the shameful ploy of suggesting we focus on the three-month moving average. As of now, this will require adding the fly 313K Feb number to March’s dismal 103K and whatever comes out Friday, and dividing the whole thing by 3 (glad I could help).

By that time, the Fed will have mailed in its latest Policy Statement (i.e. no Presser), and is not expected to have moved. But at the long end of the curve, hope for a price selloff/yield rise springs eternal, with the volume of speculative shorts in U.S. 10-Year Futures currently resting at record levels.

Maybe they’re right this time, but as I’ve written before, the mighty 10-Year Note has been a tough nut to crack. I reckon that some of these days, we will see higher borrowing costs at the long end of the duration spectrum. After all, I’ve lived through cycles when rates were off the charts and there seemed to be nothing under the sun that could move them in a downward direction. I do suspect, however, that for now,influential politicians who must go back to their districts to beg for money this summer would prefer to not have to explain away a sharp rise in interest rates, and you can place me squarely in the camp of those that believe said politicians have an important say in these matters.

But one way or another, what goes ‘round, come ‘round, and to paraphrase Jerry Garcia/Robert Hunter: “If your Glass was full, may it be again”.

Who knows? Someday they may even re-instate Glass Steagall, and if they do, they can perhaps count on the support of Sandy, who in 2012 said this: “What we should probably do is go and split up investment banking from banking, have banks be deposit takers, have banks make commercial loans and real estate loans, have banks do something that’s not going to risk the taxpayer dollars, that’s not too big to fail,” Sounds like he’s now in favor of a reinstated GS, but, having made his money and gotten out of town before the bad hombres arrived, one can hardly blame him. Surely, he maintains substantial holdings in accounts at large financial institutions, and would be justified in wanting to ensure that they are not engaging in monkey business. As for the rest of us, I reckon we’ll have to take pot luck.

TIMSHEL

A Brief Time of History (or: The Theory of Nothing)

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Perhaps for lack of other “forum-suitable” alternatives, I am dedicating this column to recently passed Professor Stephen Hawking. Please understand, it’s not as though I don’t admire Hawking; it’s just that I’m ambivalent. Among his other accomplishments, he was a miracle of modern biology for having lived out 3x lifetimes under the heartbreaking burdens of ALS. He should’ve died at 25 – at least according to his (presumably highly qualified) doctors, but made it to 76. During the 3 penultimate decades of his life, he held the Lucasian Chair of Mathematics at his Alma Mater: Cambridge University, and was only the 15th so-honored academic — dating back to Sir Isaac Newton, for whom the post was created in what I remember to be the somewhat raucous year of 1669. In a stunt you can file under “stranger than fiction”, the University forced him to step down 10 years ago, because he had reached the mandatory retirement age of 65. He carried on though, albeit as a somewhat controversial figure, and to my mind detracted from his legacy in his final years by spewing out a fairly unhinged leftist socioeconomic philosophy. I prefer that practitioners in other fields – from Charlton Heston to Roger Waters to Colin Kap – refrain from laying their righteous cross-discipline political thoughts on the masses. However, on this St. Patrick’s Day weekend, I’m willing to give Ulster Steve a Mulligan. Let’s just agree that in the Brief Time of His History, he had an improbably magnificent run.

To be sure, Professor Hawking had a flair for mathematics, but when all is said and done, Physics was his game. Here, he went both big and small, adding significantly to the world’s understanding of the ordering of the Universe (the behavior of Black Holes, the dynamics of the Big Bang, etc.), but also studying the equally fascinating world of atoms and sub-atomic particles. Alas, he never found his Holy Grail: the above-referenced Theory of Everything, which seeks to reconcile Einstein’s Theory of Relativity with the attendant misbehavior of both sub-atomic particles, and celestial objects travelling at velocities beyond the Speed of Light. The latter set of miscreants operate under a concept called Quantum Mechanics, and, thus far, no matter how much intellectual capital we allocate it, humanity has failed in its quest to harmonize General Relativity and Quantum Theories.

Beyond his heroic endeavors to overcome a disability that proved to be too many for the likes of even Lou Gehrig, he is perhaps best known for dumbing down his work for consumption by the masses, as embodied in his 1988 book “A Brief History of Time”. It was an international sensation, but was ironically panned by some critics for being too pointy-headed, and by others for not being sufficiently so.

I read it many years ago, and enjoyed it. And my main takeaway was the remarkable similarities between the behavior of the Universe as we observe it, and those of every single cell that exists therein. I may have misinterpreted something somewhere (nobody would ever accuse me of being a physicist), but when I completed the reading exercise, I took its main message as being that every cell that exists in the cosmos is its own universe, and that the Universe itself can be thought of as behaving like an individual cell.

To me, a such a sublimely symmetrical concept, if not precisely accurate, ought to be so.

And it got me to thinking (natch) about analogues to the markets. And here I will posit a corollary: the entire global capital market can be viewed from certain perspectives as behaving like a single security, and each such security has strong behavioral similarities to the global capital market itself.

As is the case with Hawking’s “Time” theme, I feel that if this isn’t the so, then it ought to be.

But let’s not dismiss thing out of hand, OK? I believe I’m on to something here. Think, if you will, of the world’s markets as being a single financial instrument. Like many existing securities, it has a lot of moving parts. But then again, so does (or did) General Electric. And so does Berkshire Hathaway. Its Balance Sheet contains an impossibly complex mix of privately held assets, collectively held assets, receivables, payables, commodities, real estate, foreign exchange holdings, embedded derivative structures, and even, perhaps, a smidge of Goodwill. This complexity, however, in no way precludes investors from asking the fundamental question: is the market something that I’d want to own at prevailing price levels, or is it not? Across the span of time and conditions, when they have answered in the affirmative, markets go up, and vice versa.

Similarly, one can view every single instrument as an entire macro economy. Whether it be a stock, bond, commodity, physical asset or unit of account (Foreign Exchange) it bears elements of all human endeavor within it. Just as (according to Chaos Theory) a single butterfly flapping its wings in Brazil can cause a tornado in Texas, so too can a default of a Small Cap widgets manufacture in Singapore cause a collapse of the entire American Cotton market.

Across our quixotic journey through the heavens and inside the mystic universe of particles, Newton’s (old school) Second Law of Thermodynamics, which holds that an object at rest or in motion will remain in said state until it is acted on by a material force, seems, by and large, still good to go. The Law still applies pretty well to Quarks, Higgs Bosons, Black Holes, Super Novas and the like.

In addition, it appears to retain its validity in terms of market pricing behavior.

Over the past couple of installments, I have suggested that as Q1 winds down, not a great deal of price movement would be observed in any asset class. So far so good, but why? Well, if we analogize economic information to the “material force” component of Newton’s 2nd Law, then it may very well be that, as I assumed, the information calendar slowing to a seasonal crawl has frozen the majority of current prices in an “at rest” state. After a little bit of two-way movement early in the week, the Wed-Fri range on the SPX was all of 20 handles. The yield on the U.S. 10-Year note hug snugly within 5 basis points. Ditto in terms of for the FX complex price ranges. On a relative basis, there just wasn’t much going on, and this is reflected in the flat-lining of a whole bunch of price graphs.

Yes, there were a few data nuggets to digest. Industrial Production was a blowout – highest in seven years. But Retail Sales and Housing Starts were absolute duds. Let’s call it even.

Elsewhere, our Washingtonian version of “Being for the Benefit of Mr. Kite” (“full of men and horses, hoops and garters; lastly through a hogshead of real fire”) carried on in full swing, and continues, if not to the delight, then, at least not to disappointment, of observers everywhere. A soon to be eliminated Pennsylvania Congressional District slipped, improbably, into the hands of the Democrats. Tillerson was fired on a tweet; Kudlow brings his pin-striped cable TV personna to the West Wing office most recently held by the less telegenic Gary Cohn. McCabe got his butt canned, ostensibly to deny him his estimated $1.8M pension package. Here’s hoping (and expecting) that some private sector coastal fat cat will scoop him up, stash him into a cushy spot, and make him whole. Meanwhile, the rest of us will continue to suffer through cross-fire emanating from both the Left and the Right.

The trade war of words continues unabated and is likely to further devolve before any subsequent igration towards the Heavens.

Some of the above is sending signals that threaten to disturb our temporary state of blissful economic equilibrium. Q1 GDP estimates have come careening downward in a rather alarming fashion:

I’m not entirely sure that anyone saw this coming. And about the only root cause I can identify is the already unfolding consequences of the tariff policy, along with general uneasiness regarding international relations.

If one wishes to look for signs that any of this matters, one should point one’s attention to Fixed Income markets. But here, as is so often the case with respect to the cosmos in general, one may be left with more questions than answers.

Consider, for instance, that the Treasury’s latest extended frenzy of issuance has simultaneously acted to flatten the yield curve, while causing some immediate mark-to-market losses for patriotic purchasers:

But that’s the type of tape we’re in. Perhaps next week’s FOMC Policy Statement – the first ever to be issued by Chair Pow, might bring some clarity; but more likely not. I just don’t see him doing anything but raising rates by 25 bp, while uttering some ambiguously pleasing and platitudinous words about the upward trajectory of our economic fortunes.

However, as is the case with everything in this here universe, current conditions won’t last forever. Once the calendar turns to April, the magnetic flow of data should be sufficient to cause investor types to rethink their hypotheses, and to effect attendant material price movement.

But for now, very little is discernable to reconcile the General Relativity of the markets with its befuddling tendency to engage in quantum-like calisthenics. If ever this riddle is solved it will, enable us, as Hawking wrote in “Time”, to “know the mind of God”.

By all accounts, though, Hawking was a wandering agnostic, sometimes placing his faith in divine purpose; at other moments rejecting it on conceptual grounds. Maybe, at the time of his demise, he leaned towards the path of righteousness. I mean, after all, he was born on the 300th anniversary of Galileo Galilei’s death, and died on Einstein’s birthday.

The latter calendar date: 3/14, is known among the egg-headed as Pi Day: as it corresponds with the constant that will give the area and circumference of every circle for which a radius can be supplied.

If there’s an over-riding message here, it’s that markets, as the universe itself, travel a circuitous path, and we’d be well-advised to remember this truism in our risk-taking endeavors. This is not a Theory of Everything, but neither is it a Theory of Nothing.

TIMSHEL

AWS (2nd in a Series)

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Remember that AWS throw-down I wrote about last week? I’ll bet y’all thought I’d thoroughly exhausted the topic, and, for what it’s worth, I thought so too.

But we were wrong.

Because just as I was ready to ditch the subject for all time, another form of AWS presented itself, namely Acute Wariness (of) Scaffolds (AWS). You see, I am very wary of scaffolding. Stated plainly, while recognizing the important function that it serves, I don’t like scaffolding: those temporary construction overhangs that perpetually litter the landscape of cities like Manhattan. I remember when I moved back here in the early ‘90, after having resided the preceding decade in my old home turf of Chicago. In the intervening years, I had developed a romanticized vision of the Big Apple of the ‘80s – the one where dangerous looking cats on 125th Street burned fires in garbage cans to keep warm, where the Village still had music clubs and record stores. Where I was young, thought I was cool, and, in any event, felt keenly alive. I wanted it back.

But when I returned, I couldn’t find that New York. I looked everywhere, but to no avail. I knew it was there somewhere, but it wouldn’t come out.

And I blamed the scaffolding. I figured that my New York was hiding behind these flimsy structures. And ever since, I have avoided walking under them – even when it’s raining (OK; maybe not when it’s raining). This personal policy causes me some routine inconvenience, but so be it. I find it’s worth the trouble, because scaffolds bring out my claustrophobia, reduce my field of vision, and generally creep me out. In recent years, these problems have been rendered all the more acute by the emergence of two-sided scaffolds that form little, corridor-like prisons on the streets of Manhattan. One can move forward or backward — but up, down, left and right have been removed from the equation – not only in terms of motion options, but also with respect to sight lines. In general, a two-sided scaffold is like nothing so much as a blind alley. And blind alleys, my loves, are truly terrifying.

I mention all of this because from my vantage point, the market is at present assuming the financial form of a two-sided scaffold. Investors are moving through it, as well the must, but they do so unawares of what is transpiring in any direction where they might point their attention (or their toes). To wit: will interest rates rise up from under their feet and devour them into the earth? Will Vlad or L’il Kim lob one that will crash down upon them from the skies? Will the wall on their left collapse on them in an impeachment/redistributionist/Deep State massacre? And from the right, will the anti-trade/anti-immigration/deficit-hating partition squeeze them to their entrails? For the moment no one can say.

Each of these threats is certainly plausible, but all us poor market wretches can do is attempt to move, with limited vision, in a forward direction, because going backwards is counterproductively unthinkable, and staying put is not an option.

The rhetorical constraints described above certainly appear to be taking their toll. Last week, Equity Indices offered a roller coaster ride that left them, depending upon the benchmark, 2-3% leaner. Best hopes and prognostications notwithstanding, yields at the long end of the Treasury Curve retreated back to levels where they began that crazy month of February, when the Gallant 500 appeared poised to continue its unending stream of all-time highs. Meanwhile, shorter term rates actually rose, placing the Curve, as measured by the 2s/10s spread, at the tightest it’s been since before last decade’s big crash:

Those seeking to understand this graph should draw their exclusive attentions to the blue line, because I have no idea what the “Detrended 10-Yr. Yield” is, and neither, I suspect, does anyone else (including, most likely, the engineers that created this monstrous metric).

But a careful review of these time paths suggests that periods of unambiguous gravitational pull coincide with dilutive conditions in the Equity Complex, and, if one wishes to fully extrapolate, to economic recessions.

I don’t think we’re in danger of the latter menace – at least not yet. On the other hand, it’s hard to review these trajectories against the backdrop of an SPX that is still 550 basis points below its all-time highs and showing scant signs of recapturing its vigor any time soon, without feeling some sense of concern. On the other hand, matters could be worse: at least Mr. Spoo and Captain Naz are in positive territory for ’18, a status that separates him materially from Herr DAX (-7.8%), Sir FTSE (-8.04%), Monsieur CAC (-3.3%) and Nikkei-san (-6.95%). Conversely, if you want to search for happier confines, the Russian Index (Comrade RTS) is up thus far a cheery 9.29%.

Perhaps the oomph evidenced in the last of these derives from Supreme Leader Putin’s proclamation, earlier this week, that he has a bunch of ICBMs – impervious to our defense systems, sitting on launch pads, and poised to begin their short but menacing journey to our shores at the mere word of Vlad the Election Disruptor’s whim.

But hey, who cares about Russia anyway? I mean, it’s not like anybody over here has even thought about them in quite a while. So we’ll leave Vlad – for now – to his own bovine/porcine devices.

Last week, on the land masses west of the Atlantic, there were two fundamental catalysts that upset the digestion of investment types. First came Chair Pow’s introductory address to Congress, during which he confirmed his commitment to balance sheet divestiture, and raised the ugly specter of (count ‘em) 4 Fed rate hikes this year. Now, the Fed Funds rate today currently stands at 1.5%, and is all but certain to climb to 1.75% after the next FOMC meeting – scheduled for a couple of weeks down the road. By my math, 3 subsequent 25 bp rate hikes would place Fed Funds at 2.5% — a figure roughly equal to the 5-year yields at the point that this publication went to press. For those who worry about flat or inverted yield curves, this is a vexing prospect. Presumably, the powers that be (whoever they are) are anticipating that the long end of the curve will rise in sympathy with its shorter life span fellows. But we should bear in mind that lifting longer-term rates has been something of a Sysyphean struggle – particularly in recent times.

In my judgment, something here has to give. And in his inimitable way, the magnificent Jim Grant perfectly illustrated the niggling conundrum of the wandering global interest rate complex, through the presentation of the following chart (it’s the one on the left; I added the one on the right – just for good measure):

 

Thus, the Non-Investment/Grade 4-Year debentures of an Italian Telecommunications Company (which happens to sport the most appealing ticker symbol in Christendom), whose stock can be had for less than a single euro, and which has lost nearly half its value over the last three years, are both more expensive and offer a lower yield than our own T-Bills. For once, I am at a loss for words.

*********

The other high profile buzz-kill event came Thursday, when Trump, to the surprise of everyone (including, apparently, his own staff) announced stiff tariffs on imported metals of various chemical composition – most notably Steel. I really don’t want to waste much space on this, because it’s been widely reported and analyzed, and virtually everyone agrees that it is a numbskull idea. Yes, it was a campaign promise (though not a particularly well-thought out one), and yes, we are often gamed by our global trading partners – particularly in the realm of raw materials. But, to summarize what everybody who’s looked at this already knows: 1) if this is a job protection move, it bears mention that the domestic steel production industry employs at most 200,000 people, while the job rolls for steel consuming companies are on the order of 7 million; 2) our trading partners will retaliate, unnecessarily raising costs across the globe; 3) our own corporations will game the new rules (including raising prices) – to nobody’s advantage but their own; and 4) if this is intended to tweak the Chinese, it should be noted that China accounts for about 2% of our steel imports. It does, however, own about 19% of our Treasury paper, and is almost indisputably the linchpin to any effort we may expend to neutralize L’il Kim. Google the term “leading with your chin” and a picture of Trump at his Tariff Presser pops up as the first 27 search results.

And a nervous capital market simply didn’t need the worry of this – particularly against an economic backdrop strong enough, at least arguably, not to need the, er, boost of a burgeoning global trade war. This past week, Housing, Consumer Sentiment and Manufacturing all clocked in with strong results, and even Q1 GDP Estimates, recently showing signs of taking in water, have perked up a bit:

But I reckon we must render unto Trump that which belongs to Trump, and this includes his inability to resist stirring the pot. Perhaps he will think better about his tariff stunt, and maybe it won’t expand into a huge global economic donnybrook.

And maybe investors will decide it doesn’t matter. But as for me, I will for now revert to my recent hypothesis that we’re in an index pricing paradigm that is constrained by technicals. Consider, again, the following SPX Chart:

Last week’s selloff cast the SPX below the 50-Day Moving Average, and it is now firmly affixed around the 100-Day. The more ominous 200-Day Moving Average looks to be a safe distance away.

But the chart does look a little bit like a 2-sided construction scaffold, now doesn’t it? And that, as indicated above, is a scary place to be.

Over the years, while I have never recaptured that 80’s Billy Idol/Ed Koch/MTV/Bernard King NYC vibe, I do see portions of the City I fell in love with popping out now and then from between the planks and rails of those dreadful scaffolds. Maybe that’s all I’m entitled to, and maybe we’ll have to live for a spell within the flimsy walls of the chart displayed immediately above. If so, while remaining Acutely Wary of Scaffolds (AWS), I shall strive to make the best of it, and my advice to you is that you do the same.

TIMSHEL

The 27 Club

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“Long ago, and oh so far away, I fell in love with you, before the second show”

— from “Superstar” (by Leon Russell and Bonnie Bramlett)

Don’tcha remember you told me you loved me, baby? ‘Course you do. How could you forget?

It was after the first, but before the second, show.

And as for me, your words are burned into my brain. In fact, as I also distinctly recall, you said you’d be coming back this way again, baby.

And you never did.

Well, at least I still have the song, but at this point, the singer could’ve been anybody. Perhaps it was Delores O’Riordan, the fabulous, fetching lead singer of the Cranberries, who left us so tragically and unexpectedly last week.

Or maybe, reaching back further, it was the even more fabulous and (to me) more fetching Janis Joplin. I mean, after all, Friday marked the 75th anniversary of her birth. Yes, on the whole, I think we’ll go with Janis, because, after all, there was only one Janis.

As part of her vast legacy, Janis, along with Brian Jones, Jim Morrison, Jimi Hendrix, Robert Johnson, Amy Winehouse and so many others, is a charter member of the 27 Club – Superstars that shed their mortal coils during their 27th year. On the brighter side of the ledger, we still can hear her voice.

Or maybe it’s just the radio.

In any event, we can also take comfort, this winter weekend, that one of our most stalwart companions managed to escape the fate of the other 27ers listed above. And here, of course, I am referring to our old buddy, Mr. Spoo, who not only survived 27, but in fact breezed through it, unphased, in little more than two weeks. To wit: he blasted for the first time into the XXVII handle on the first trading day of the New Year, and never looked back. Instead, like the precocious elementary school student who finds his grade’s current class load to be somewhat redundant to his erudition, he skipped right into the 28th parallel — without breaking a sweat.

Visually, this sort of thing looks like this:

SPX 27: We hardly knew ye!!!

But Mr. S is not alone in terms of his precocity. Yes, he’s up an impressive 511 basis points in a 2018 that is still in its infancy, but he’s actually trailing his main frenemies General Dow (+547) and Captain Naz (+627) in terms of his scores.

Perhaps all of this is getting a little bit silly. The recently reconstituted propeller heads at General Risk Advisors Jet Propulsion Laboratory (located in the shopping mall next to the train station in Wilton, CT) have calculated that year-to-date, the annualized return for the Gallant 500 exceeds 136%. We tried to do the same calcs for the Dow and the Naz, but the propellers on our hats flew right through the ceiling and are now following the Jetstream over Greenland.

Now, my loves, there are very few specific prognostications that I am willing to make in these troubled times, but one of them is as follows: across the fullness of 2018, the SPX will have difficulty generating a return of 136%, or even 130%. In fact, my own models indicate that it will do well to hit 120%. As such, I am recommending against the purchase of 2018 SPX calls with a strike price above 6,000 (unless, of course, you can buy them at a cheap vol).

And after all, it’s not like there aren’t a few things that could go wrong in the ~11.5 months left to this year. If you’re like me, you awoke this morning to the tragic, unthinkable news that the big D.C. dogs were still unable to come to a budget deal, and that as such, the custodians of that galactic, precision engine known as the United States Federal Government will begin, like Dave did to HAL in the movie “2001: A Space Odyssey”, the solemn process of shutting it down. For most of us, this pantomime has long since passed its “sell-by” date. And yes, for what it’s worth, I do believe that Chuck and Nancy have overplayed their hands (and probably know it) by shoe horning a resolution of this DACA drama into what should be an entirely mechanical proceeding. You can’t really blame them much, though. We do have an important election looming, and, dating back to the Paleoanthropic Era of the Clinton White House/Gingrich Congress, these shutdown affairs have redounded to the political detriment of the Republican Party, and to the benefit of their opposite numbers.

My guess is that we’ll quickly get past this crisis, only to relive it again in a matter of weeks. And even if the debate lingers unresolved, about the only inconvenience this is likely to evoke is a possible delay in the release of economic data – particularly the first look at Q4 GDP, currently scheduled to be announced on Thursday. A postponement of the distribution of this report would be, however, somewhat disappointing, because: a) the models are perking up; and b) the markets should sure use a shot in the arm (couldn’t they?).

But even so, we’ll still have earnings reports upon which to obsess, and, with 10% of the precincts having reported, the numbers are thus far encouraging. True, the banks had to do a one-time set-aside, but virtually everywhere else, the bells be a-poppin’. It starts to get interesting over the next couple of weeks, and, as always, I’d pay as close attention to guidance as I would to profits and sales.

In particular, I’m looking for signs of what I believe to be shaping up as the biggest capex spend since before the crash.

Briefly, elsewhere, there appears to be welcome pressure on government bonds, commodities are showing signs of life, but that poor old dollar appears to lack the ability to source a bid for love or money.

DXY: Whistling Dixie

So maybe it’s our Dead Prez singing that line: “don’tcha remember you told me you loved me baby?”. Well, it says here that somewhere, some way, a bid on the greenback will materialize. And, while we’re on the subject, it is at least theoretically possible that Mr. Spoo will someday find himself “on offer”. At prevailing levels of 2810, this means if it happens soon, he could find himself back in the 27s.

And, in conclusion, if history has taught us anything, the 27 Club is not for the faint of heart, so take care, be forewarned, and, as always…

TIMSHEL

Ice Bowl

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Well, first, of course, I want to wish everyone a Happy New Year. I do hope that 2017 was a good one, and you have my wishes (well, most of you do, anyway) that 2018 will be even better. But first we gotta get through this New Year’s Eve thing, right? And of course I’m spending it like I have every Sunday since time immemorial: sending out this silly note to a readership that has stuck with me through thick and thin (well, most of you anyway).

But (as sung by everyone from Ella Fitzgerald/Louis Jordan to Dinah Shore/Louis Jordan) Oh baby it’s cold outside. And getting colder. My research reveals that multiple parts of the country are already experiencing record low temperatures, and that a rapidly moving, incremental arctic blast that will hit contemporaneous to our seasonal rituals will render the Times Square Ball Drop the coldest one in history. I could go through an inventory of frigid temperatures expected across the fruited plain, but would rather lay the following picture on you of a Niagara Falls that is, for all intents and purposes, frozen:

So I reckon when I finish these infernal emails, I’ll just stay home. And watch me some football.

Touching on football, and with a dollop of irony, today marks the 50th anniversary of 1967 NFL Championship Game, a contest known to gridiron fanatics as the Ice Bowl. The game took place in Lambeau Field, Green Bay WI, with temperatures throughout hovering around negative 20, and wind chills doubling that carnage. In what would prove to be the final gasp of a magnificent dynasty, the Packer’s won: 21-17, on a last second touchdown by Bart Starr, who rolled into the end zone rather serenely after Guard Jerry Kramer managed to push Cowboys Defensive Tackle Jethro Pugh a couple of yards into the end zone.

It is the first football game I ever recall watching – at least with any awareness of the proceedings.

But here we are, 50 years later, freezing our asses off, and the NFL regular season just ending today. The Super Bowl is a month off, and though it will be played in Nordic climes of Minneapolis, participants will experience the relative comfort of practicing their craft in a new-age indoor area, the naming rights of which belong to regional banking behemoth U.S. Bank Corp. While the specific contestants have yet to be identified, we are able to state with certainty that neither the Green Bay Packers nor the Dallas Cowboys will have made the cut.

Yup, a lot has changed these two generations, and, to borrow from the magnificent Lewis Carrol, matters, from a certain perspective, keep getting curiouser and curiouser. No, unlike the lovely Alice, we do not observe our bodies elongating, like a telescope, to the point where our feet are no longer visible, but that don’t mean we aren’t lurching up the curiouser scale.

Case and point (and here I’m looking for a show of hands): who, going into the beginning of the year, had the SPX closing at 2673.61? Now, don’t be shy; faint hart, after all, never won fair lady. Howsabout the U.S. 10-Year at 2.41%? EURUSD at 120.00? The Dollar Index down from 103 and change to 92.30?

OK, here’s an easy one: who had Bitcoin at $12,314.70?

Who, for that matter, had the I-Phone replacement battery discounted to $29 – after the Company got caught red-handed having sabotaged the original power sources on older models? And, for what it’s worth, what did my buddy Joe know about this?

But hey, that’s the kind of year it’s been. The Gallant 500 fell about half-a-league short of everyone’s fondest hopes, but still managed to gin up a >19% gain for the year. Perhaps in a nod to those frozen football warriors of 50 years ago, it was outpaced by the quaint, anachronistic Dow, which not only rose 25%, but did so on Lilliputian volatility of 6.6%, and sub-atomic Downside Deviation of 4.0%. At no point during the year did the Dow, the SPX or the NDX print a single trade at a price below its closing 2016 threshold. Somebody check me here, but I don’t think that has ever happened in modern market history.

As mentioned in previous installments, this type of performance is decidedly not the norm. Most investment pools are fairly content with 10% annual benchmark returns, and expect to accumulate these in a volatility range, both upside and downside, in the mid-teens. So, for our favorite indices, we’ve managed to stroke double the performance bogie on about 1/3rd of the expected volatility. Extraordinary.

So what can we do for an encore?

In reasoning with my learned colleagues, I find that there is a consensus (to which many of said learned colleagues do not adhere) that we ain’t done yet. My thrice-mentioned learned colleagues are more wont to look down their collective noses at various valuation metrics, all of which seem to suggest that: a) a downfall is in the offing; and b) all that remains in doubt is its timing.

Well, on balance, I agree with them. The bible (specifically Proverbs 16:18) instructs us that pride goeth before the fall, and let me ask you: has there ever been a more prideful investment environment than the one we are now experiencing? Well, OK, I’ll spot you the late ‘90s, but that’s exactly my point. By my count, the late ‘90s ran all the way through December 1999, and even then the valuation boilers were running at full throttle. It wasn’t until mid-spring 2000 that they began to overheat and eventually cool considerably.

So yes, the market will need to cool its jets, but if you’re gonna ask me when this cooling takes place, my best answer is not yet. One can view this as a grubby “consensus” opinion, but to my way of thinking, sometimes going with the consensus, and, while doing so, thumbing one’s nose at the “anti-consensus”, is precisely the most anti-consensus step on can take.

However, occasionally, my market sense rises above a simple determination as to which response to fashion-driven stimuli is most particularly suited to my dignity, and when I look at the key drivers, I see an investment environment under which, on balance, it will behoove participants to continue to accumulate assets:

  • They’re just aren’t enough of them out there. Lots of capital pools like their investment inventories, are hard-pressed to trim them, and more likely to add to their rolls at the slightest inducement to do so.
  • The economic recovery, now entering its 10th year, is by most measures either continuing apace or perhaps even accelerating; certainly the latter is true if one views matters on a global basis.
  • The following important inputs do not appear to be fully priced into valuations: o Q4 earnings, which everyone tells me are shaping up to be reaching blowout proportions.
    • Q1 earnings, which will start to reflect the corporate windfalls embedded in the new tax law.
    • The market benefits of the new tax law itself. Analysts estimates appear to be stubbornly unwilling to make the adjustments tied to the new rate, but they’ll have to.
    • Opportunities for a white hot capital markets cycle. Feel free to fry me in hog fat if corporations don’t use the tax windfall to: a) buy back more stock; b) go on an acquisition spree; c) increase dividends; or d) all of the above.
  • The sustained and likely sustaining impact of miniscule interest rates around the globe.

These, my loves, are all formidable tail winds for the markets, and, while something is sure to go wrong eventually, my experience suggests that it does not pay to predict the timing of these negative catalysts, no matter how inexorable they be.

So my word to the wise as we enter 2018 is to beware the compelling lure of the short side, and, for what it’s worth, this applies not only to stocks but also to bonds. We enter the new year with yields on 10-year notes about 1.3 basis points (0.013%) higher than they were precisely 12 months ago, and the same stasis applies to virtually every major bond-issuing jurisdiction on the planet. Meanwhile a titch of gravity has seeped its way into such macro metrics as Consumer Confidence, and our old forgotten friend, the Atlanta Fed’s GDPNow model.

It seems, based upon the foregoing, that it may take some sort of divine intervention to burst the government bond bubble, now entering its 4th decade, and when your investment strategy relies on help from above, it is as sure a sign as any that you’re in trouble.

We can do better, I think, by going with what we know. The 1967 Packers entered the frigid conditions of the Ice Bowl warmed by dwindling embers of a dying dynasty. They made one final push – against a team that would inherit their mantle of hegemony, and came out, improbably, on top. Lombardi soon departed the scene and died a couple of years later. The runs of Starr, Nitschke, Adderley and that great O-Line were at a close. They gathered themselves one last time, on their frozen home field, and completed their date with destiny.

And even then they weren’t quite done. Their 1967 Ice Bowl triumph bought them an invitation to a follow up game, at the time considered little more than an exhibition, against the Oakland Raiders, champions of the emerging but suspiciously regarded American Football League. The game, Super Bowl II, was played exactly 2 weeks later, in the sunny, inviting confines of the Orange Bowl in Miami, FL. Warm and confident, the Packers won that one too, by the comfortable score of 33-14.

There’s something perhaps we can take from this story, as we seek to warm ourselves on this chilly New Year’s Day. For the life of me, I can’t put my finger on it, but I can keep trying, and that, my loves, is sufficient cause for celebration in this veil of tears. So I take my leave for the last time in 2017, wishing you aHappy New Year, and, as always…

TIMSHEL

The Ebert Principle

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For the second consecutive week, I find myself positively impelled to weigh in on a tangential topic that has gone both global and viral. In our previous installment, I attempted, with only partial success, to unpack Gresham’s Law, in the process putting my imprimatur on Goodie’s Law, a construct which no one (as yet) has had the temerity to dispute.

I was hoping to leave it at that, but then, unbeknownst to me, another web-exploding debate emerged, resurrecting a long-established but by-and-large dormant concept called the Ebert Principle. For the uninitiated, the Principle, named after its Discoverer: the late Chicago Sun Times film critic (and possessor of the two of the four most feared thumbs in Hollywood) Roger Ebert, reads as follows:

An anthropomorphic cartoon character suspended in mid-air will remain in said state until being made aware of same. 

Let’s use the obvious example to illustrate. When Wile E. Coyote chases the Roadrunner toward a cliff, and then the latter (with trademark sh*t-eating grin) side-steps the former and allows him to barrel off the precipice, Mr. Coyote does not immediately fall earthbound. Instead, he remains at his peak elevation expressive incredulity affixed on his face, until he looks down. At that point, recognizing the realities of his situation, the inexorable force of gravity over overcomes his state of confusion, and down he goes.

For those among you that remain confused, the following illustration should remove any lingering doubts:

 

I hadn’t thought about this phenomenon in many years, but that respite was about to end abruptly. Just as we were past this Gresham’s Law throw-down; just as we were drying off from Harvey and Irma, the blogosphere exploded on the subject.

So many wise souls opined on this that I can’t catalogue them all, but a small sample of the Ebert Principal response is provided below:

The Mooch issued a formal statement accusing the Roadrunner of cuckolding him, and filed a paternity suit in Federal Court. The Roadrunner’s legal team responded with a motion to dismiss, denying any liaison with Mrs. Mooch, and pointing out that given he and Mrs. M are two different species, the paternity claims were, at best, frivolous. The Judge sided with the Roadrunner in Summary Judgment, and ordered Team Mooch to pay court costs. Team Roadrunner threatened Mooch with a Defamation Suit, but indicated that it would drop the matter if the latter made a formal apology.

Mooch tweeted out a tepid apology, to which The Roadrunner responded in kind: “@Mooch: Beep Beep You”.

Hillary Clinton took general responsibility for the incident, and then proceeded to assign blame to Comey, Sanders, Obama, Putin, Biden, the DNC, the RNC, the Mainstream Media and others.

Former Vice President Albert S. Gore blamed global warming.

LeBron sent out a formal $50M Hang Time Challenge to the Coyote, stating that if victorious, he would donate the proceeds to (Flightless) Bird Lives Matter.

Black Sabbath Bassist Terrence Michael Joseph (Geezer) Butler thought it was all pretty cool, and former British Prime Minister Benjamin Disraeli could not be reached for comment.

Actually, that’s about all the flow generated by the Ebert Principle, but isn’t it enough? Couldn’t I just leave well enough alone? Well, maybe, but it did strike me that I had an obligation to investigate and report upon whether or not there was an investment universe analogue to this construct, and, on first glance, the positive case is fairly compelling. Pretty much every time the market has reached an unsustainably elevated threshold, it did not come careening down until everyone realized that there was nothing but air beneath it. Of course, the most glaring example of this is the ’08 crash. Yes, Casandra Chorus admonished us about a housing bubble and a looming credit crisis. But until borrowers started defaulting in droves and the FDIC began closing banks, nobody was paying much attention to these warnings. Similarly, prior to the bursting of the dot.com bubble, investors were buying up worthless web companies like they were 16th Century Dutch tulips. I could go further back in history, but I think you’ve caught my drift.

But perhaps the more important issue is whether the market has currently run off the cliff, and resides in a Coyote-eqsue state of suspended denial. Again, there is anecdotal evidence supporting this assertion. To wit: equity valuations, by many standard metrics, offer some back up:

 

Then there’s this handy little graph which I unearthed, suggesting that every market, with the ironic exception of Housing, is in bubble configuration:

 

Don’t ask me to explain this psychedelic spaghetti bowl, which I don’t understand at all. Suffice to say that it’s as scary a piece of Microsoft Excel Charting Function handiwork as one would care to see. Further, we can impute that if this guy is on to something, then we’re truly in Coyote Configuration, so whatever else you do, I’d advise you, from a risk management perspective, not to look down.

All of this resides against an economic backdrop that features multiple crosswinds. The macro picture is mixed. On the positive side of the equation, for the first time in history, all 46 countries in what is defined as the developed world are sporting ISM scores above 50. But Retail Sales and Industrial Production came in weak. The former metric does not feature a geographic breakdown, but the latter figure does, and was clearly diluted by all that nasty weather down south. As a result of nature’s wrath, both the NY and Atlanta Fed’s GDP Estimates took a turn for the worse:

 

No doubt here the economy will be issued a Mulligan after the double storm wallop. But we’ll all probably feel the GDP gap nonetheless.

In addition, like it or not, this coming week, we will be forced to endure yet another FOMC meeting, the expectations for which involve the Fed holding rates steady, but announcing some concrete plans for the divestiture of portions of their >$4T Balance Sheet.

I suspect that the dynamics around this may at least partially answer our questions, based upon the following theory that has crystalized for me in recent days: QE has reached a state where it has created a chronic supply/demand imbalance for marketable securities. There simply aren’t enough of them out there to satisfy investor needs, because Central Banks have Hoovered them all up. As long as this persists, then as a matter of pure market technicals, downside volatility – particularly in Stocks and Bonds — has been dramatically suppressed. Perhaps if the Fed really puts some of its inventory on sale, it will break the logjam, but I’m not counting on it – just yet.

So, to answer our key question, I do think we’ve got some of investment version of the Ebert Principle at play here. The Market Coyote is indeed over a cliff, but on the other hand, he shows no signs of looking down. Someday in this fair land he will cast his eyes towards terra firma, and at that point all of us will feel some gravitational pull. I don’t think he’s up nearly as high as he was, say, in late ’07, but neither, for the moment, do his feet appear to be touching any solid surface. Moreover, there’s every chance he’ll climb to more dangerous elevations before the “Aha Moment” reaches his cranium.

On a happier, closing note, while the good folks at the Looney Toons Division of Warner Brothers, producers of The Roadrunner Show (and therefore indirect creators of the Ebert Principle) have only done partial violence to Newton’s Laws of Motion, they have absolutely obliterated core tenets of Biological Science. No matter how far Mr. C. falls, no matter how much it hurts, he gathers himself and begins the struggle anew. For this, he deserves, if not our praise, then at least our sympathy. Moreover, I suspect this is true for us all, so take heart, and, as always…

TIMSHEL

 

Goodie’s Law

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We’ll get to our title subject anon, but first I must weigh in on the frenzied global debate respecting one of its forbears: Gresham’s Law, which as every schoolboy knows, posits that in an environment with which multiple forms of legal tender of varying soundness, the “bad” money eventually push the “good” stuff out of circulation.

Does it apply at present? We may soon find out. On the other hand, we may not.

But first, a little context. The Law was named after Sir Thomas (no relation to John) Gresham, 16th Century British Financier, hired to look after the economic affairs of King Edward VI (the long sought after male heir to Henry VIII, who was crowned at the tender age of 10, but shed this veil of tears at the tenderer age of 15, to be replaced by the indestructible Elizabeth I, who also availed herself of Sir Thomas’s services -up till the point of his death), and founder of the still-extant Royal Exchange.

Notably, Sir Thomas, modest fellow that he was, never took placing his personal imprimatur on his now eponymous law. Nay, the task was deferred for 3 full centuries, and undertaken by a rather anonymous chap, in remembrance of Gresham’s pushback on the debasement of Pound Sterling during Henry VIII’s time. Perhaps Gresham demurred because he knew that the idea did not originate with him; its origins tracing back at least (and somewhat improbably) to 15th Century stargazer Nicholas Copernicus. However, I suspect our forebears were openly availed themselves of this expedient-but-unfortunate habit, dating back to points when they were still living in caves and sporting tails.

But back to Sir Thomas for a minute; in addition to his sobriety, modesty and unmistakable clairvoyance, wherever else we might differ, perhaps we can all agree that in his day, he cut a rather dashing figure.

Sir Thomas w an Unidentified Skull: 

 

Moreover, in my judgment, he was doing the lord’s work in his tireless efforts to ensure a sound currency. And history shows he was successful. But across the ages, it was perhaps inevitable that there would be periods of backsliding. Consider, for instance, the post-WWI replacement of Germany’s Papiermark with the misanthropic Reichsmark – at an introductory rate of 1 PM = 1 Trillion RM. Of course, this was a one-finger salute from the Germans to the French for imposing-impossible-to-meet reparations at the end of the “War to End All Wars”. But as Sir Thomas foretold, the Papiermark soon disappeared from German commerce, and the Reichsmark quickly fell victim to a 21% per day inflation rate.

What followed: the 1929 Market Crash, the Great Depression and WWII, is well-documented.

 

Fast forward to the present day, where, while “bad” money is arguably available in galactic over-abundance, “good” money is an elusive designation. If the current flow in FX land is to be believed, then our own greenback is certainly falling out of favor.

The exchange rate deteriorated all week long, closing at a > 2-year low:

Gresham’s Bad Boy: The USD 

 

And notwithstanding Chairman Draghi’s difficult to assess comments (apparently, he’s prepared to increase or decrease Euro QE, as conditions demand), EURUSD breached 120 for the first time since late 2014. Perhaps our Dead Presidents are seeking to be the bad money beneficiaries of Gresham’s Law. If this is indeed their intent, they’re doing a pretty good job of achieving their objective.

But they have company. This month, the amount of fiat currency printed by Central Banks in 2017 will cross over $2 Trillion, and the total amount created out of thin air since the crash is knocking on the door of $20T. One could argue that for the time being, Gresham’s Law applied in spades, because all of the “good” money appears to have been chased out of the economy over the last few years.

Making a gallant bid for the opposite side of The Law are a number of blockchain/virtual currencies, as led of course by Bitcoin. It was a tough, volatile week for these wannabes, and the trend is likely to continue. Ultimately, as stated previously, I think there’s about as much chance of developed countries ceding any measure of control over their currencies and interest rates to entrepreneurial ventures as there is the U.S. Defense Department sanctioning the development of private sector armies and allowing citizens to choose which military enterprise they wish to defend their rights and property. But in the meantime, the virtual circus rolls along, showing no signs of folding its collective tents. I don’t know whether virtual currencies are bad money or good, but it bears remembering that the more we see of them, the lesser the set of qualities they are likely to possess – at least according to Gresham.

Meanwhile, it was a modestly negative week for equities, a strong one for bonds and a mixed one for commodities. Our justifiable and overwhelming focus has been on the sequence of natural disasters plaguing our southern reaches, and, at the point of this correspondence, the toll, in terms of blood and treasure, cannot even be estimated. Less noticed, as a result, was the détente between Trump and the Dems, who have come together, forsaking those on the opposite side of the aisle, to effect a 3-month extension of the budget – debt ceiling positioning notwithstanding. For the markets, this is probably a good thing. While the rebuild in Texas, Florida and their neighbors will generate some incremental demand, left unfettered, the overall impact of the storms is highly deflationary. As a modest example, consider the current dynamics in Natural Gas. One might assume that the worst flood ever recorded, with its epicenter right smack dab in the geographical core of the energy industry, would take out more supply than demand, and that prices would increase.

One would be wrong on that score:

Natural Gas: Knocking on the Door of Quarterly Lows: 

My friends in the biz tell me that the storm has completely removed significant pools of demand emanating from Mexico, and that demand disruptions from Irma will make matters worse. Overall, one can safely assume that this double wallop from the fist of God will cost at least 1 GDP point to repair, and this is reflected, among other factors, in our favorite GDPNow estimates:

 

So one at any rate can understand the economics of Trump’s deal with his sworn political enemies. Nobody can afford the bite that will be taken out by these storms, and I am therefore OK with this bilaterally cynical deal. But I offer the following but of advice for our Commander in Chief. If you think that you can form new political alliances here, think again. Schumer and Pelosi wish you no more good fortune than Hitler and Stalin did each other when they split Finland between them. If you politically compromise House members of your party, and they lose their majority in the next election, then the first official act of the reinstated Pelosi Congress will be to issue articles of impeachment. As usual, Trump is being too clever by half here, and the act is getting very tiresome.

For what it’s worth, I also remain no less concerned about Korea this stormy weekend than I was last stormy weekend. My belief is that by escalating their nuclear activity amid global demands for reduction, the NK bunch has declared de facto war on the United States and its allies. There is simply no way that the current status quo holds. L’il Kim will continue to build his arsenal until his enemies act to reduce it. This could happen at any time, and we probably won’t hear about it until after the fact. The equity markets don’t care about this, of course, but it explains a good deal about the selloff of the dollar, the rally in bonds and the strength of certain commodities.

So these, mes amis, are my immediate loci of concern: Florida, Texas, Korea and Washington. It is a small list, but in my judgment a content-rich one. There are a few macro data releases next week, but it is an otherwise quiet one in that corner of the universe.

So let’s turn to the corporate side, where everyone will hold their breath till Tuesday, 1 pm Eastern Time, when Tim Cook steps up to the podium for the first time in Apple’s newly opened corporate HQ, to introduce the iPhone 8. It ought to be a mind-blowing affair, but the real drama will unfold over the next few months, as the world evaluates whether or not company can meet expectations.

 

The bar here is high. The A Team are contemporaneously releasing 3 phones. Do they cannibalize each other? Can they overcome widely reported components shortages? Will consumers really pay 1,000 US for the fully loaded 8? Particularly in China: a) which now generates half of all IPhone sale revenues; and b) where suitable substitutes can be purchased for less than 10% of this price?

We won’t know for several weeks, but on Friday I was speaking to my friend Goodie, who unlike me, actually knows something about this subject. We both agreed that this single set of imponderables alone may go a long way towards determining the path of equity valuations in what remains of 2017. If Apple nails it, investors will swoon and perhaps buy everything in sight. If not, the markets may well ignore any technical rationalizations and issue that the cartel of west coast companies bent on taking over the world – the so-called FANGS (and by extension, the overall market) — a much-needed claw trimming.

I will close by designating the importance of the I-Phone 8 to the overall equity market valuations to be Goodie’s Law. It is intended to work in conjunction, rather than supplant, Gresham’s Law. So my risk advice is as follows: if you wish to monitor the potential impact of psychodramas around the world, keep an eye on the USD; if you want to focus on U.S. equities, watch Apple.

If you follow this course, I see no reason why the two edicts cannot achieve harmonious co-existence.

TIMSHEL