Tag Archives: HighYield

The Revenge of Snoopy

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Snoopy he lives in a doghouse outside of town,

And Metropolitan Life took his picture down,

Investors didn’t care – at least for a while,

But now the stock has tanked, you can see Snoopy smile

— with apologies to Rick Derringer and the McCoy’s

As foretold in these pages (and elsewhere), it was indeed a big week for investment data and flows. We’ve a lot of ground to cover, so we might as well get to it.

Let’s start with the big news, which I am perhaps the only prognosticator to identify: Snoopy’s back, and showing his ire. As reported in these pages a full 5 quarters ago, Metropolitan Life Insurance Company of New York (MetLife), made the retrospectively tragic decision to dump its iconic Snoopy logo – in favor of some sort of new age graphic/emoji thing. I warned the world it was a bad idea at the time, and for any doubters, I offer the following illustration, which should tell you all you need to know about this questionable stunt:

Metropolitan Life Insurance Company Logo: Before and After Version:

I mean, c’mon? Do I need to say anymore? Well, maybe I do. In terms of market valuation, the Company fortunes’ while not rising to the dignity of that of, say, Amazon, continued to rise in acceptable fashion:

But then came the Q4 earnings report, and whammo! It was good night nurse. The headline catalysts involved something about them taking a charge due to having under-allocated reserves associated with (among others) annuity obligations. But I have a difficult time understanding how a company, whose main job is to get these metrics right, and who, oh by the way, will be celebrating 150 years of continuous operation at the end of March, could’ve screwed the pooch so thoroughly this past 3 months.

My best guess, as indicated above, is that Snoopy finally decided to make his displeasure known. And felt. After all, he better than anyone, knows the ancient proverb (typically attributable to the sponsors of the French Revolution) that revenge is a dish best served cold. Sleeping on top of his doghouse as he does, Ol’ Snoop has probably felt the bitter, chilly winds of early 2018 as much as anyone, and may have figured that the time had come to make his move.

Moreover, if I’m correct on that score, then Charlie Brown’s BFF must’ve decided to throw some shade on the entire global capital market, which (in case you missed it) suffered its worst week in several years, with our major equity indices dropping, in round numbers, 4%. Most of the carnage, of course, transpired during Friday’s ghastly session, and after a jobs report that not only showed impressive gig creation, but also evidenced, for the first time in several years, some bona fide upward pressure on wages. The confluence of these factors catalyzed another pattern absent from the proceedings in more than a decade: a contemporaneous selloff of both stocks and bonds:

So perhaps investors can be forgiven for being a little bit spooked here – particularly with the infantile behavior of our betters in Washington appearing to be reaching new, heretofore un-breached crescendos. I’ll spare you any (or much) commentary on this memo psychodrama. But let’s just agree for now that the sequence: a) is at best an unhelpful distraction to our return generation efforts; and b) is not likely to have run its course just yet.

Moreover, I do have some concern that with everything else we see transpiring, investors may be ignoring the looming (this coming Thursday) next round of government shut-down pantomime. In fact, I myself am a little bit worried here.

If I read the fallout from last week’s nose to nose budgetary battle, Team Schumer emerged with some egg on its collective faces, and have vowed to stand firmer this time ‘round. I don’t see a framework for the two sides coming together a second time in little more than two weeks. Best case, they may push through another temporary resolution, but this whole thing is getting beyond distressing. Both sides are dug in on this Immigration throw down, and you can be sure that this demagogue dance won’t end this week. Plus, the memo thing has done nothing to lower blood pressures on both sides of the aisles. Finally, if, as is likely, there’s another very short-term extension, all it does is set up for a more serious round of Thunder Dome next month, when our Treasury projects that it will actually run out of money.

In light of the foregoing, it’s perhaps small wonder that, higher interest rates notwithstanding, the USD cannot catch a bid for love nor money, and that even our much-beloved High Yielders are taking in water:

USD Dollar Index and High Yield Bond ETF: America to the World: Don’t Touch our Junk!

But I’m here to tell you that all is not lost. In fact, I rather believe that the big Groundhog Day stock puke is on balance a positive development. If nothing else it shows that such a thing (>2% selloff in the SPX) is, at any rate, possible. Moreover, while all of this hand-wringing was transpiring, the Q4 earnings juggernaut continued apace. There are a lot of ways to illustrate this. For instance, as of now (about half way through the sequence) the SPX is projecting out an impressive >13% year-over-year gain. In addition, and with respect to the critical metric of forward guidance (for Q1 2018 and beyond) we are in the midst of the largest intra-quarter upward revisions to bottoms up earnings in more than 15 years:

So it strikes me as funny, in a perverse, 2018 sense of the term, that those who have been whining about a lack of downside volatility are now complaining when a little bit of it manifests itself. I’d be happy to blame Facebook, Twitter, CNN, MSNBC, CNBC, NBC, CBS and ABC for this inconsistency of logic. In fact, I’d be happy to blame just about anyone other than myself.

We are facing some rocky conditions, though, and if I was going to worry about anything, it’s the afore-mentioned unresolved budget dynamic – transpiring, as it is, against the backdrop of a political dynamic characterized by an anger that is augmented by nothing except perhaps more anger.

For these reasons, next week may continue to be a rocky one, but from where I sit, and though there may be more downside pressure in the coming days, I believe that incremental buyers of stocks at these levels or lower will soon have cause to believe they made a wise choice to dive in at these valuation thresholds.

Yes, Snoopy is still out there and may not be done demonstrating his wrath, but I suspect that even this hot flash will run its course. I believe our favorite beagle will indeed regain his equanimity and, when the weather warms up, will take his place at shortstop, extending his stature as the only competent player on a Peanuts squad that features only 16 opposable thumbs (not one of them belonging to him). If you doubt this, just ask him. But don’t expect an answer, because he probably won’t even speak to you.

Then again, he never does.

TIMSHEL

Bird Watching

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Let’s start with a little ornithology: specifically, the unmitigated pleasure of the Monty Python Dead Parrot Skit. I hope you dig.

Customer: I wish to complain about this parrot what I purchased not half an hour ago from this very boutique. 

Owner: Oh yes, the, uh, the Norwegian Blue…What’s,uh…What’s wrong with it? 

C: I’ll tell you what’s wrong with it, my lad. ‘E’s dead, that’s what’s wrong with it! 

O: No, no, ‘e’s uh,…he’s resting. 

C: Look, matey, I know a dead parrot when I see one, and I’m looking at one right now. 

O: No no he’s not dead, he’s, he’s restin’! Remarkable bird, the Norwegian Blue, idn’it, ay? Beautiful plumage! 

C: The plumage don’t enter into it. It’s stone dead. 

O: Nononono, no, no! ‘E’s resting! 

C: All right then, if he’s restin’, I’ll wake him up! (owner hits the cage) 

O: There, he moved! 

C: No, he didn’t, that was you hitting the cage! 

O: I never!! 

C: Yes, you did! 

O: I never, never did anything… 

O: No, no…..No, ‘e’s stunned! 

C: STUNNED?!? 

O: Yeah! You stunned him, just as he was wakin’ up! Norwegian Blues stun easily, major. 

C: Um…now look…now look, mate, I’ve definitely ‘ad enough of this. That parrot is definitely deceased, and when I purchased it not ‘alf an hour ago, you assured me that its total lack of movement was due to it bein’ tired and shagged out following a prolonged squawk. 

O: Well, he’s…he’s, ah…probably pining for the fjords. 

C: PININ’ for the FJORDS?!?!?!? What kind of talk is that?, look, why did he fall flat on his back the moment I got ‘im home? 

O: The Norwegian Blue prefers keepin’ on it’s back! Remarkable bird, id’nit, squire? Lovely plumage! 

C: Look, I took the liberty of examining that parrot when I got it home, and I discovered the only reason that it had been sitting on its perch in the first place was that it had been NAILED there. 

O: Well, o’course it was nailed there! If I hadn’t nailed that bird down, it would have nuzzled up to those bars, bent ’em apart with its beak, and VOOM! Feeweeweewee! 

C: “VOOM”?!? Mate, this bird wouldn’t “voom” if you put four million volts through it! ‘E’s bleedin’ demised! 

O: No no! ‘E’s pining! 

C: ‘E’s not pinin’! ‘E’s passed on! This parrot is no more! He has ceased to be! ‘E’s expired and gone to meet ‘is maker! ‘E’s a stiff! Bereft of life, ‘e rests in peace! If you hadn’t nailed ‘im to the perch ‘e’d be pushing up the daisies! ‘Is metabolic processes are now ‘istory! ‘E’s off the twig! ‘E’s kicked the bucket, ‘e’s shuffled off ‘is mortal coil, run down the curtain and joined the bleedin’ choir invisibile!!He’s f*ckin’ snuffed it!….. THIS IS AN EX-PARROT!! 

It’s pretty clear, by the end of the sequence, that the parrot is dead, but let me ask a different question: are there any coal miners out there? Don’t be shy; speak up. We need you.

Recently, there’s been a good deal of discussion respecting your industry’s safety practices, and, among other matters, the exchange enabled me to clear up a lifelong misapprehension. Heretofore, the concept the canary in the proverbial coalmine evoked images for your humble correspondent of a songbird trapped in a dark, subterranean workspace, warbling its little beak off with no response other than the echoes of the walls. Now, however, I learn that the canary is placed in the mine for the sole purpose of its demise offering a warning that there may be a tad too much carbon monoxide in the air for the miners to safely operate.

I stand corrected.

So, as a market analogue, the canary in the coal mine actually represents a small bit of damage that may be a harbinger of more dire conditions in the offing. Well, U.S. equity indices suffered their first reversals in two months – to the tune of about 0.2% on the SPX. Think of this as a dead canary, standing in comparison to, say, an all-out crash, which in relative terms, would be akin to the entire crew expiring of carbon monoxide poisoning.

Should we, based upon this dollop of evidence, abandon the premises before we turn tits up ourselves?

For the first time in many weeks, the answer might be yes. It was, after all, a strange week for the besooted wretches who mine the depths of the markets for investment returns. The somewhat nauseating feeling, at least for yours truly, began in the morning hours of Thursday. I had gone to bed whistling my own happy tune, becalmed in the knowledge that the Nikkei 225 (an index in which I have no particular stake) had opened up ~2.0%. But the next morning, before the life-restoring caffeine had even kicked in, I observed the blessed thing actually trading down for the session, and closing in that improbable configuration. Worse, the stalwart NK, still up a hearty 18.66% for the year, yielded an additional unthinkable 80+ basis points on Friday. Visually, the carnage takes the following form:

 

For those who must either turn their eyes away, or cannot un-see what I am displaying, the peak to trough bloodbath rose to the dignity of 2.9% — a downdraft not seen in domestic realms for what is now more than a year.

Here’s hoping that such a catastrophe never hits our shores.

But are we really immune? I mean, after all, the SPX did sell off 5 handles this past week, and if it can do this, why not 10? Or 20? Or 75 (i.e. the rough percentage equivalent, in percentage terms, of the Japan meltdown). It’s not my intention to alarm anyone, but at some point, we’ve got to face our worst fears.

Further, it falls to my grim lot to inform you that last week’s cycle brought other subterranean-songbird-meets-its-maker warnings. We’re now~75% of the way through Q3 earnings, and while the tally comes to a tidy 4.6% gain, according to the good folks at Factset, fully half of the companies that exceeded expectations actually traded down in the wake of this good news, and this by an amount (3.6%) even greater than the give-back associated with disappointers (2.4%).

And it strikes me that contrary to what is indicated in the textbooks you’ve read (or at least the ones I’ve read), earnings do not appear to be driving the valuation train. Instead, in a depressing indication of the state of the times, it seems that the affairs of governments and nations are the key to current pricing dynamics. Residing instead at the top of this daisy chain is U.S. Tax Policy. That fateful Nikkei Thursday also brought the first glimpse of the associated handiwork of the World’s Greatest Deliberative Body. And I ask anyone who found that this distributed wisdom, brang, on balance, additional clarity to the proceedings to contact me immediately. Because I remain more confused than ever. It seems to me that pretty much every phase in the tax code is in play; any and all of them could change, or not, in the final bill. And once these details are settled, the bill itself will either pass, or not. The Republicans may be able to gin up the requisite 50 Senate votes (or not), and if so, VP Pence can bring it home, and we’ll then learn whether the House can resist the temptation to hack it up again, beyond recognition. On the other hand, the issue was in doubt even before the Party’s choice to fill out the remainder of the term of former Alabama Senator Jeff Sessions (now Attorney General) was hit with decades-old allegations of sexual harassment against minors. As such, he may lose, and if my mental calendar is correct, then this Jackson Pollock of a tax bill has a window of about three weeks for passage, lest the seat shifts over to the left side of aisle. Conversely, the above-referenced Judge Moore could still win the election, under which circumstance the thing may have a sell-by date further into the future than is currently assumed.

But I fail to see how or if it either helps or hurts us market miners, and I’d caution against reacting too precipitously on the trajectory the process assumes. Investors do appear to be a bit skittish here, and if recent pricing trends can be extrapolated, they have particular concerns about such “pay for” components as a prosed cap on the deductibility of interest payments at 30% of operating earnings. Contemplating these outcomes, investors took out their wrath on the equity and credit portions of the capital structures of serial borrowers. Ground Zero, as one might expect, is small cap stocks and high yield debt:

High Yield Bond Index:

Russell 2000: 

If one were looking for dead canaries, these markets might be a good place to start. And, if that’s not enough for you, I’d recommend taking a peek at the Saudi Arabian Mao-like Great-Leap-Forward purge (which catapulted Crude Oil prices to 2-year highs), the even more Moa-like Xi Jinping consolidation of Chinese power, and, while we’re at it, the donkeys-run-wild outcomes of last Tuesday’s elections. The Virginia guy seems like a nice enough fellow, but New Jersey went ahead and elected itself a left-leaning Goldman Sachs alum, champing at the bit to raise taxes and light up his buddies. As a result, the Garden State may well achieve his apparent objective of rewinding the clock to those heady days of another ex-Goldmanite: Governor Jon Corzine. Now that the cones are removed from the entrance ramp on the eastbound George Washington Bridge, this is likely to hasten the exodus of the economically sensitive to the money side of the Hudson River.

Any or all of these doings could be the telltale gassed birds that are the object of our agita, but I’d caution against jumping to the conclusion that they are. I mean, after all, as indicated in recent installments, the joyous ritual of year-end tape painting is, by some measure, already upon us. There’s $10 Trillion of government debt trading at negative interest rates, and if you want to lend to the treasury folks in countries such as Spain, Portugal and Italy out two years and (in some cases beyond), you must pay for the privilege of giving them your money. By contrast, here in America, the government treasury curve has re-steepened to bestow upon lenders the types of spreads to which it is our God-given right to extract from the great unwashed masses:

So, like the purveyor of parrot in the timeless Monty Python skit, if we simply employ our gratuitous imaginations, our little melodious Norwegian Blue friend, though it fails to respond to stimulus of any kind, may not be dead, but rather simply shagged out after a prolonged squawk.

Perhaps he’s pining for the fjords at this very moment.

I know I am.

TIMSHEL

 

The Summer of Love?

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This ain’t the Garden of Eden,
There ain’t no angels above
And things ain’t like what they used to be
And this ain’t the summer of love
— Blue Oyster Cult

Following, with some ambivalence, on the worldwide BOC sensation I created a couple of weeks ago, I reach back into to their catalogue, for inspiration in these troubled times. I love the Cult; always have/always will, but with the band blowing up all forms of social media after I wrote about them in late July, I wonder if I should continue to enable this somewhat perverse global obsession.

Alas, though, duty calls, and I must answer. So here, we reference the first song from the band’s last flirtation with greatness: 1976’s “Agents of Fortune”. The record opens with our title track, which deals with the obvious: 1976 wasn’t the Summer of Love. Nine years had passed since the phrase came into being, the tragic end to the poorly conceived and horribly executed Viet Nam War. There were race riots, the murders of MLK/RFK, the violent Democratic National Convention. Nixon was elected and re-elected, and then came Watergate. The clumsy, misanthropic Gerald R. Ford took his place, and (though it was unambiguously the right decision) disgusted everyone by pardoning Tricky Dick. In ’73, OPEC laid down an oil embargo, and the world was introduced, perhaps for the first time ever, to the concept of an Energy Crisis. The economy was in the doldrums, and in general, everyone was in a sour frame of mind. It was indeed a sorry contrast to the fabled, sunny months of 67: the original Summer of Love.

This year, as it happens, marks SOL’s 50th anniversary, bringing forth galaxies of happy reminiscences of an era that began and ended much too quickly. And now, with students beginning their dreary mark back to school and Labor Day fast approaching, we are perhaps in a better position to draw comparisons between the summer season of 50 years ago, and the one rapidly fading before our eyes.
It strikes me that the comparison is more of a mixed bag than one would nominally suppose.

On the one hand, music has taken a dramatic turn for the worse. ’67 brought us the peak of the Beatles, and the emergence of Hendrix, the Dead, the Airplane and Janis. Coltrane died in July, but Miles Davis and Ornette Coleman were in full flower. Even the Bubble Gum stylings of the Monkees, the Strawberry Alarm Clock and Paul Revere were of a higher quality than they had a right to be. The Monterey Pop Festival blew everybody’s mind and set the stage for the epic music jubilees that followed.

Fast forward to the present day. The (admittedly fabulous) Biebs holds two spots in the Billboard Top 10, which also features DJ Khaled, Childish Gambino and Cardi B (Cardi B?). Movies were also better back then, as ’67 produced The Graduate, Cool Hand Luke, In the Heat of the Night, The Dirty Dozen and too many others to name. This year, we are plagued with the 397th releases in the Planet of the Apes, Guardians of the Galaxy and Spiderman series.

TV news featured titan journalists Cronkite, Chancellor, Huntly and Brinkley. Now, were served up (name your poison) Rachael Maddow, Sean Hannity, Mika and Joe.

But there are also similarities. Race relations were at a low ebb, and (improbably) about to get worse. In Washington, a single party held the presidency and both houses of Congress, and managed to pass no bills of import that year. A lewd, blunt President was quickly losing the confidence of the electorate, so much so that a year later he decided not to run for a re-election bid that should’ve been a cake walk. We were immersed in conflicts in remote parts of Asia, and we faced burgeoning nuclear threats and were standing nose to nose in rhetorical conflict with both Russia and China.

And what about the markets? Well, they were ascendant after a rough patch in ’66, which itself had been preceded by an uneven run up that had transpired for across much of the first half of the decade. The economy was growing, and both unemployment and inflation were low:

 

But two trends dominated the American psyche: 1) increasing doubts about the country’s place in the global pecking order, and 2) social issues. With respect to the latter, angry mobs held violent protests in every major city, rudely expressing their, er, displeasure with matters ranging from race relations, police brutality, sexual freedom and wealth/income inequality.

Unrest notwithstanding, U.S. equity indices were pushing to all-time highs, on the heels of a 3 decade upward climb.
Does all of this have a ring of familiarity? I thought it might.

Indeed, I think it might be fair to assert that there more similarities between the Summer of Love and present conditions than meet the superficial eye. Moreover, if history repeats (or, in any event, rhymes), then the next few years are likely to offer a rocky ride.

Meanwhile, it was an interesting week in the markets. U.S. and indeed global indices experienced their worst interval of the year, and, on balance, I believe this was a welcome development. Of course, the headline catalyst was brinksmanship rhetoric issuing forth from two historically infantile national chieftains: L’il Kim and Don John. But the pricing dynamic/trajectory was instructive. It’s difficult to determine which of these players on the world stage outflanked the other in terms of undignified demeanor, but until Wednesday, equity investors, as has been their wont, barely took notice.

Then, on Thursday, the Gallant 500’s Maginot Line of support began to show some cracks. It opened down about 100 bps and closed on its lows – some 50 basis points below this threshold. It was the equity complex’s worst single day showing since the election.

I spent some time trying to discern what had changed between Wednesday and Thursday, and pretty much came up empty. As had been the cycle for days, Trump tweeted and Kimmy-boy blustered. But this time, equity investors blinked. I am not in a position to offer useful insights as to how serious this crisis really is, but I will state one strong opinion in this regard: it is highly irregular for the commander of an army to telegraph to the whole world the precise locus of his intended attack. As such, come what may, it is my belief that, on balance and for the moment, there are probably fewer safer places on the planet than the U.S. Protectorate of Guam.

But as for the markets, it occurred to me after Thursday’s close that the equity complex had reached an inflection point: either this inexorably giddy corner of the investment universe had finally effected a much-needed upward adjustment in the Risk Premium, or investors would view Thursday’s nominal but shocking 1.5% correction as a buying opportunity, and we’d be off to the races again. But Friday’s session brought little in the way of clarity. The SPX actually rallied a titch, while, contemporaneously, the VIX managed to retain the lion’s share of Thursday’s > 40% jump.

 

In addition, the USD remained under pressure, with its weighted index residing at the lowest levels in a year:

 

Rates around the globe were also hard pressed, presumably as the Kim/Trump show causes a global flight to the relative safety of government bonds. And even High Yield investors got in on the risk aversion act, showing some long suppressed and much needed signs of happy feet:

 

Thus, while the market gods were not so forgiving as to provide us with any clear messaging: a) they never do; and b) the preponderance of cross asset class price action suggests that two-way volatility of a more dramatic nature is in the offing. Further to the point, and as widely reiterated across the financial press, the historically worst performing month for equity indices is August, and that the second worst is September.

So I think we may be coming close to a rationalization of the volatility paradigm, and will certainly overshoot the mark if the leader of either the Democratic People’s Republic of Korea or the United States of America finds himself unable to resist using the weaponry dubiously placed at his disposal.

But as to the larger question of whether or not this is the Summer of Love, I can only state my own views, noting that when the season that brought us the phrase took place, I was all of 7 years old. 50 summers have since come and gone, and while I can’t rightly figure out at what age this places me, it’s a fair bet that it puts me pretty far along. I don’t mind stating I feel the years in my bones.

Thus, as always, I yield to the wisdom of BOC. No, this ain’t the Summer of Love, and perhaps it’s just as well that it’s not. After all, with respect to certain historical intervals, no matter how much we enjoyed them, it is wise to “sit so patiently, waiting to find out what price, you have to pay to get out of, going through all these things twice”.

TIMSHEL