Tag Archives: Jobs Report

Small Faces

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It’s all too beautiful (the refrain from the band’s most famous song: Itchykoo Park)

There’s a lot to cover here, but we must first dispense with a couple of pieces of business.

In the midst of all of the hubbub around 45’s grandstanding insult of LBJ, y’all might’ve missed a significant milestone that presented itself midweek: The Apple Corporation of Cupertino, CA (or is it Mountain View? I get confused) became the first company every to achieve a market capitalization of $1 Trillion.

And that. Is all. I have to say. About that.

Moving on, I am compelled to address the galactic buzz generated by last week’s note about the Faces. Legions of followers pointed out that the group partially evolved out of an outfit called the Small Faces came first. Some even claimed the Small Faces were the better ensemble. Well, yes, there was a band called the Small Faces that predated the visages presumably of larger size, and yes, a couple of their members were a part of both groups. But any reasonable interpretation of Rock History would suggest that Rod Stewart and Ron Wood’s arrival – fresh from the magnificent and vastly underappreciated Jeff Beck/Truth combo—was the seminal event in the formation of the Faces. And, for the record, while I dig their diminutive predecessors, I’ll stick with my longtime allegiance to the core lineup of the Faces as we knew them.

Finally, and on a related note, I must follow up on last week’s Facebook diatribe. You see, instead of just spitballin’ like I usually do, I checked with a couple of cats that actually follow the stock, and they had some interesting things to convey. It seems that the FB Brain Trust had been warning for the two preceding years of the likelihood of slower user growth – a reporting pattern that ended somewhat abruptly with the Company’s Q1 release in April. Here, in the wake of the whole Cambridge Analytica thing, after Zuck’s Excellent Washingtonian Adventure, they issued their strongest guidance in many quarters. So it came as an enormous shock to the informed that for Q2, they did a 180 on the previous quarter’s 180. In fact, they did a 180+ — demanding that the markets recognize the folly of extrapolating into the future the firm’s extraordinary growth in revenues, sales and user engagement.

Unfortunately, however, this context only adds to the mystery. It would’ve been entirely logical for Team Zuck to take a 2×4 to their valuation back in April; late July, not so much. The most direct inference to draw here is that with respect to a company where > 70% is owned by insiders, where Zuck himself has a majority of the voting rights, the public is informed of its doings on a “need to know” basis. And Zuck doesn’t think we need to know – except what and when he chooses to tell us. A connection of the dots suggests that undisclosed problems continue to lurk beneath a still-shiny surface. And, while we certainly don’t need to know, what lies beneath may be more problematic for the markets in general than is generally assumed. I expect the Menlo Park (or is it Cupertino?) crowd to lay low on all of this, but to me, what happens down the road bears watching and is worrisome, come what may.

However, as the Augustine portion of the Julian Calendar unfolds in earnest, perhaps we can turn our attention to happier tidings. The Gallant 500 recorded its 5th straight week of gains, and is now 113 skinny basis points from its all-time highs. Good Captain Naz recovered his sea legs – albeit modestly, and nasty Viscount VIX retreated back into his shell. He now sports an obsequious 11 handle, and it wouldn’t take too much more complacency and giddiness to push him down to even lower depths.

Because, ladies and gentlemen, much of the news that has hit the tape over the last several sessions can be interpreted constructively. More than 80% of the way through the earnings cycle, reporting companies are exceeding even unambiguously lofty expectations, and projecting out to a plus 24%. Investors are taking notice, and, if that ain’t enough for y’all, feast your eyes on the following two charts:

 

So earnings are strong and investors are reacting favorably. Conversely, and as anticipated in this space, Q3 guidance shades to the negative. 65 intrepid CEOs have shared their associated near-term clairvoyance, and of these 2/3rds are defying both deer and antelope by uttering discouraging words. But hey, it’s early, so let’s not hang our collective heads just yet, OK?

I’d also be remiss if I didn’t share my elation at the positive reversal of fortune in the Grains, particularly Corn, which is showing some A.M. perkiness:

Morning Corn: The Blues Ain’t Gonna Get It

Those sneaky ag traders are attributing some of this to sizzling weather conditions – particularly on The Continent. But I’d be a little careful here. Corn is nothing if not a resilient crop, and if the Good Lord does indeed decide to dial down his heavenly thermostat in realms such as the Grand Republic (France, for the uninitiated), then perhaps it will be yet another sequence of “lookout below”.

But far away from fertile fields from Iowa to Alsace Lorraine, the focus was on very fancy macro events, and the results were, as could have been foretold by the Gods, lacking in clarity.

The Bank of Japan kicked off the festivities early in the week, taking no action and managing to confuse everyone interested in their strategy or associated timelines. Its country’s 10-year rate remains elevated to levels seldom seen outside the Gambino Family’s Jersey City money lending operation, at 0.102% basis points. The Fed did nothing. Finally, the Bank of England maintained its trademark stiff upper lip and raised its overnight rates from 0.5% to 0.75%. This, however, didn’t do much to stem, much less reverse, the gravitational forces currently descending upon the Pound Sterling.

All of this set up for a nominally dramatic July Jobs Report release Friday morning, but this, in retrospect, was something of a non-event. Private Payrolls were a little light at 157K, but the base rate dropped a titch to 3.9%. The much-anticipated Average Hourly Earnings component came in exactly as expected, and precisely in line with the GDP report at 2.7%.

All of the above merits, even by the harshest reasonable assessment, a Gentlemen’s B. But the macro situation is arguably more complicated than meets the eye – mostly due to the ubiquitous but unknowable overhangs of trade wars, and (increasingly as the calendar moves forward) a potential calculus changing election, now a skinny three months away. Of these matters I have little insightful to convey.

By contrast, the related trade action has been worth a gander, as evidenced, first, by a continuing build-up of short interest in U.S. long-term treasury instruments:

Certainly, we’ve seen this movie before. Lots of smart guys and gals have been, for years, anticipating both a rise in longer-term interest rates, and even, for the fully fanciful, a steepening of the yield curve. Maybe someday they’ll be right. Maybe even soon. But the perpetual bid on long-term Treasuries has been perhaps the toughest nut to crack across my market career, which (I remind you) began during the administration of Millard Fillmore. So I reckon we’ll have to see.

On a partially related note, I observe with interest that the self-same smart crowd has thrown in the towel on their long Crude Oil positions.

There are a lot of moving parts here, as Crude Oil is at least theoretically impacted not only by trade wars with the Chinese, but also various cajoling in the Middle East, where a dizzying matrix of production quotas and import/export protocols with utopias like Iran are creating mind-numbing crosswinds. I suspect that in many cases, rather than reversing their investment hypotheses here, crude speculators may be simply capitulating.

It’s all too beautiful, now, isn’t it? But one way or another, it won’t last. The Almighty did not intend us to spend all our days resting our eyes in fields of green, so, perhaps soon, we’ll be forced to bid farewell to Itchykoo Park. The Small Faces had its innings there, as did the (not so small) Faces afterward. Facebook has been the object of our desire for several years, but now we may be forsaking her in favor of our old flame: Apple.

And wouldn’t you know, after Friday’s $1T close, the Cupertino (or is it Menlo Park?) crowd was forced to contend with a shutdown of a major components supplier’s – Taiwan Semi – production plant, so it’s entirely possible that the lofty-but-menacing 13-figure valuation may disappear as early as the Sunday night session.

But here, having violated Paragraph 3’s solemn pledge, I will rest my keyboard, wishing everyone who receives this note a sincere (if redundant) Ooh La La.

TIMSHEL

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

Pearl of the Quarter

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

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

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

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

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

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

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

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

— Donald Fagen/Walter Becker

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

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

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

Voulez, voulez voulez vous?

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

TIMSHEL

Zook Suit

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I’m the hippiest number in town and I’ll tell you why

I’m the snappiest dresser right down to my inch-wide tie

And to get you wise I’ll explain it to you

A few of the things that a FACE is supposed to do

I wear zoot suit jacket with side vents five inches long

I have two-tone brogues yeah you know this is wrong

But the main thing is unless you’re a fool

Ah you know you gotta know, yeah you know, yeah you gotta be cool

So all you tickets I just want you to dig me

With my striped zoot jacket that the sods can plainly see

So the action lies with all of you guys

Is how you look in the other, the other, yeah, the other cat’s eye

— Peter Townsend

Plainly, and as anticipated, there is a great deal going down at the moment, so we might as well start with the most important developments. Topping the list is Zuck’s Capitol Hill testimony, scheduled to take place, not once, but twice, this coming week. On Tuesday, he will sit in front of a committee of the World’s Greatest Deliberative Body, and, given the latter’s historic and never-breached protocols of decorum, I don’t expect much drama. A better show is likely to take place on Wednesday, when he faces the wilder and woolier Lower Chamber. But on the whole I don’t see much intrigue in the pending exchange between our duly elected representatives and the world’s most high-profile Hipster/Nerd. Committee Members will look menacing, issue superficially difficult queries, and appear less than fully satisfied with the responses. And Zuck is sure to stick to the well-scripted, obsequious and cloying replies which, even as I type these words, his legion of overpaid lawyers is preparing on his behalf. I have a hunch that not much more will transpire after that, and that at least for a time, the entire episode will be dispatched to the level of focus now drawn by, say, the Las Vegas shooter investigation.

But all of this begs the most important question: what will he wear? I can’t remember an event with so much sartorial suspense this side of the Academy Awards. Surely he will shed his trademark vaguely blue/grey tee and chinos getup; in all likelihood he will shoehorn his way into a suit. But which suit?

One option will be to bust out his Bar Mitzvah ensemble, images of which I have helpfully sourced through a search from FB Frenemy enterprise Google:

Zuck’s looking pretty sharp here, but I find this choice unlikely for a couple of reasons. For one, he’s probably not going to be able to roll jacketless. Beyond this, it’s entirely possible that either: a) Mrs. Zuck (nee’ Priscilla Chan) has done the wifely thing and thrown these threads out; and/or b) trim as he may remain, he may no longer be able to comfortably wedge himself into this holy, historic outfit.

Thus, in all probability, he will have to bust out some new, or, at minimum, seldom seen, garments. And as someone who wishes him well in his astonishingly successful quest for global hegemony, I humbly suggest that he consider showing up in a wide-lapelled, high waisted Zoot Suit, the uniform of choice for the hep cats of the Roaring ‘20s. As many of my readers are too young to remember much of this high-flying decade, the getup looks something like this:

In addition to I believe setting the proper tone for his grilling, such a choice might help effect greater political balance — away from the measurably left-leaning vibe that Zuck has long exuded. To wit, careful pic observers will note the prominent presence of pinstripes that clearly bring to mind the wardrobe stylings of newly-appointed Director of the National Economic Council: former Cable TV sensation Larry Kudlow.

So formidable and terrifying are the Zuck’s powers of influence (or were, until at least a couple of weeks ago) that should he adopt my advice, he could set off a global fashion sensation. Soon, everyone from Paris Hilton to the Dalai Lama might be compelled to rock the Zoot, and that, at least from my vantage-point, would be pretty cool.

However, as important as this high-drama debate may be, we must move on, leaving the outcomes to Zuck and his tailor. Across our last couple of installments, I made the proclamation that the market’s already expanded volatility bands would further widen, and in a very real sense I was correct. Unfortunately, though, said widening has applied, well, quite narrowly, to the Equity Complex. Not much else is moving at all. The U.S. Treasury Curve does little but flatten, albeit at a glacial pace. In the wake of a somewhat garish late January selloff, The U.S. Dollar Index has wedged itself into a depressing/suppressed 3% band. Similar somnolent patterns have plagued the Energy Markets.

With brouhahas of varying configuration raging everywhere one cares to cast an eye, the question is: why? I met with one of the smartest and most successful macro traders of my wide acquaintance on Friday, and he was ready to pull his hair out at the stasis he observes across the risk factors upon which he is most focused.

And his beefs were not just limited to the price action in underlying instruments; he notes an absolute obliteration of options volatilities in this realm. He asked me what I thought, and I didn’t have a good answer for him. I did, however, agree that given the opacity that plagues the global capital economy and the rapid-fire stream of news bits (many blindingly irrelevant; others not so much), that: a) prices outside of equities should be more migratory; and b) some of these here non-equity options, instead of operating under fire-sale conditions, should actually be being bid up. I told him I’d look into it and revert back to him.

Anybody have any ideas for me? I am desperate to look smart and well-informed to this guy.

Still and all, there are some developments outside of the obsession-inducing world of individual stocks and associated indices that have caught my eye. One was that, with trademark anonymity, the Swiss 10-Year Note managed to slip below the Maginot Line of 0.0%, and now trades, somewhat improbably, at a negative yield:

Thus, a country which produces cheese, chocolate, watches and little else, an economy which is dominated by a deeply impaired, arguably insolvent banking industry, is actually paid by market participants for the privilege of lending to them. And the trend towards easy financing has spread to the neighbors they refused to fight – with or against — in either of last century’s world wars: yields in France, Germany, Italy and even freaking Sweden have declined materially over the last couple of weeks.

But if you’re hunting somewhere outside of equities for volatility, you may want to take a look at the Agricultural Complex, which has anyway shown something of a pulse this year:

As the graph’s caption explains, a good deal of this action is probably catalyzed by the Trump Administration’s well-thought-out, nuanced and impeccably executed trade skirmishes. I am supposed to be something of an expert in these markets, and, to the best I can discern is that the Chinese import a lot of Soy Beans from us, and feed them to their similarly imported Hogs. So the escalating tariff rhetoric is good/bad for Soy Beans/Hogs, as is reflected in the price action. I hope that I’ve made myself clear.

One way or another, the continued war of words on international trade and other pertinent matters is clearly driving investors somewhat batty. I truly wish that this cycle would end, but hold out little hope for this miracle any time in the foreseeable future. After all, it’s not as though we don’t have a great deal of other information to process and seek to monetize. Case and point, just this past Friday, after a somewhat surprisingly tepid March Jobs Report dropped, and just as investors were catching their collective breaths and maybe even trying to look on the bright side, Chair Pow took some questions from a reporter, and his answers offered scant comfort to anyone seeking it in that quarter. Perhaps owing to this end-of-week double whammy, the Atlanta Fed’s GDPNow tracker exhibited some renewed gravitational pull:

On the whole, however, I am inclined to believe that equities will continue to drive the risk pricing train. Last week, they rallied hard early and then sold off even harder, and Q1 earnings have not even begun yet. They start in earnest next week with the banks, which, in eerie consistency with the bizarre paradigms currently vexing us, have all scheduled their releases for Friday the 13th. I will be watching these tidings with a careful eye, and in particular for any hint of what Lloyd, Jamie, James and the rest have to convey about prospects for the rest of the year. The action will be fast and furious from that point onward, and here there is some good news to report. Not only have growth estimates retained a lofty 17% handle, but according to the infallible FactSet, positive pre-announcements have clocked in at a record high:

The chart further shows the skew of these happy tidings towards the recently beleaguered Tech Sector, but I have my doubts about the final outcomes there. Soon after Zuck gasses up his smoke and bids goodbye to Washington, he, Bezos, Serge/Larry and TCook and the others must face their own investors. If I were any of them, I might check in with my CFOs and see if I could possibly defer some revenues and/or accelerate some expenses. Given the horrific P.R. onslaught that has assaulted each of them lately, I think it’s a sound strategy for them to sandbag their numbers. Their stocks will sell off further, to be sure, but they can catch up later, and I just don’t think this is a good time for them to announce earnings moonshots.

One way or another, I expect their guidance to be particularly unpretentious. It’s just hard to imagine someone like Bezos stepping up to the podium and saying something akin to “me and the boys were poolside in Pacific Heights and we’re feeling pretty strongly that we can take our share of the NDX valuations from 50% to 90% this year”.

Guidance beyond San Jose will be especially important – given the looming and growing political risk — about which I have been expounding for the last several weeks. I continue to believe that these matters loom large on the horizon, and our fearless leader does nothing but fan the flames of his potential demise – through his trade tantrums, his attacks on companies like Amazon and – perhaps even worse – his more recent tweeting down of the markets in general. Again, all of the above portends a continued upward trajectory of volatility for the foreseeable future – at least for equities.

As for the other components that comprise the broader market, I reckon we’ll just have to see. My guess is that vol will spill over into the other asset classes; perhaps soon, but one thing is certain: until it does, it won’t.

But all of this is small potatoes. When all said and done, the only thing that truly matters is that you follow my example and make sure at all times that you look fabulous. I expect Zuck to act accordingly, and, my dear readers, you could do worse than bearing this mind yourselves.

TIMSHEL

I’m In

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I know it’s been a long week for everyone, but did you ever stop to consider, in light of the professional path I have chosen, the toll it’s taken on me?

Didn’t think so.

So, with a frazzled hope that you will temper justice with mercy, I need to inform you that I’m in. I actually bought some stock. I have long resisted the temptation to do so, chiefly due to my lack of confidence in my ability to make anything other than a mess of it. In addition, however, please feel free to consider my deference a nod to what I believe to be the preference of the clients who have given me the honor of sharing their proprietary information with me: that I eschew any direct participation in the markets in which they traffic.

Now before you get all in my grill about this breach of long-standing protocol, know that the particulars of this ad-lib are such that I gave my mother-in-law, one Elizabeth J. (Beppie) Oechsle full power of attorney on my account. Those of you who know Beppie may be aware that in addition to dishing up a mean pot roast, she is one of the savviest, and more importantly, most successful, portfolio managers in my wide acquaintance. She’s been trading actively for more than 3 decades, and has never had a down year. In fact, she has the most pristine track record of any I have encountered – setting aside, of course, the golden era of Bernard L. Madoff. Ironically, Bernie was born one month to the day after Beppie, and both will be celebrating their 80th birthdays over the next few weeks, but the similarities end there. Until I begged her to do so, Beppie had never even thought of managing anyone else’s money, so, unless she is somehow in the business of defrauding herself, we can take it as a given that her returns are legit. Let’s just hope her 30+ year hot streak continues.

But more importantly for our purposes, you need to know that this is Beppie’s show. I have no control over this account, and will use neither my experience nor my knowledge of existing market positions and flows to influence her in any way.

On a related note, it may interest you to know why I believe that now is a good time to make my move. By way of context, I had been planning on taking this step for quite some time. But I had been hesitating on pulling the trigger, and was a bit annoyed with myself, because, it seemed that the more I delayed, the higher the prices I’d be forced to pay. But I was planning on taking the plunge nonetheless.

I thought I’d caught a considerable break a week ago Friday, when – horror of horrors – the January Jobs Report showed some signs of life in terms of upward wage pressure, and investors turned tail at the first whiff of this inflationary grapeshot. Then came Monday, and oh what a ride that was. By mid-afternoon, the Gallant 500 had yielded some 140 hard-won index points before regaining some equanimity and closing down a more gentlemanly 113. Still and all, it was the biggest single day point drop in Mr. Spoo’s storied existence. While the key drivers of the plunge remain a mystery – even to Beppie – it was clear that Monday’s panic session set the tone for the rest of the week. Wild rallies and equally unhinged selloffs ensued and lasted throughout the week – all the way through the late Friday upward reversal, which added an impressive 85 handles (~3%) from the mid-afternoon lows – all in the space of a couple of getaway hours.

And that, my friends, is where we left off.

So what gives? Well, first, as has long been apparent, the suppressed volatility that has partially paralyzed (at least below the waist) equities since the 2016 election: a) could not last; and b) was likely when it ended to evince a major Newtonian reaction. Most of the market rabbis with whom I have reasoned this week are relieved that volatility has returned, and here’s hoping that they are correct – albeit in tones more subdued than last week’s. However, I’m not sure. I think there’s a fair chance that within a reasonable time frame, the equity markets simply recover lost ground and find themselves back inside the volatility vortex.

In the meantime, while I didn’t see last week’s train wreck coming, in retrospect, when it did arrive, it came as no surprise. But there were some technical factors that contributed to the mess – most notably the unwind of those beastly, levered short volatility products that never should have been sold to the public in the first place. Here, the head of the dragon was an odd little fellow called the XIV – a ticker that cleverly reverses that of the VIX index that it its mission against which to facilitate speculation. As part of its overly crafty design, the XIV combines a short position in the VIX with a long one in the SPX. Thus, when the volatility powder keg (inevitably) exploded, and XIV sell orders flooded in, the custodians of this instrument were forced, as part of liquidation, to contemporaneously buy the VIX and sell the SPX Index. This was a double whammy to the markets, that quite naturally manifested itself at the worst possible point from an investment perspective. By early evening, XIV lost > 95% of its peak market capitalization (~$6B), and had blown a hole through the equity index and volatility markets deep enough to sink a battleship. And XIV was not alone; there are dozens of these formerly high-flying products –each, best case, now flat-lining in the critical care unit.

Confused yet? You ought to be. But I think the main takeaway is that the heretofore somnolent markets were not prepared for these liquidation flows. While the unwind was taking place, it was all a big ball of confusion, and it looked for a time like all of the big dogs across the forlorn planet were getting out while the getting was good. The levered short vol liquidations, and the attendant confusion, lasted all week, and this, in my humble opinion, deeply exacerbated the carnage.

But matters would’ve been much worse had not the two houses of Congress gotten together in the wee hours of Friday morning to pass a budget resolution. It was nip and tuck there for a while, and it bears mention that an equity tape that by mid-day the following day had yielded an incremental >3% before its aggressive upward reversal, was well-poised to experience the bottom falling out. To those that may argue against this assertion, I ask what Friday’s close might’ve looked like if investors were facing the prospect of heading into the weekend with a full-fledged market meltdown/government shutdown staring them in the face.

But a budget resolution did pass, and, at least for now, the markets have recovered a bit. The Debbie Downers on both sides of the aisle are currently lamenting the all-out spending binge embedded in the bill, projected, as it is, to add hundreds of billions to our burgeoning deficit, and one can hardly blame them. There is already, as mentioned above, enough pressure on government paper to cause anyone paying attention to take notice. And, in the midst of all of these shenanigans, the Treasury held an auction of 10-year notes and 30-year bonds that went about as badly enough to gladden the hearts of the many bond bears of my acquaintance:

I reckon that the main inference we can draw from all of this is that on paper, a perfect storm of upward yield pressure appears to be forming on the horizon. There are as yet unclear but growing signs of inflation everywhere one cares to look. In addition, just as the Treasury is planning to issue paper to beat the band (as it must to fund the ever-widening deficit), its pals at the Fed are raising rates and selling down their balance sheet – to the tune of between $300B and $400B per year. It now resides at a beggarly $4.42T. This trend is expected to continue, as well, perhaps, it should. Us old geezers remember when the Fed holdings barely rose to the dignity of One Trillion, and of course, what comes up must come down:

Fed Balance Sheet: Look Out Below!

There’s also the odd chance that we annoy the Chinese and even the Japanese sufficiently to cause them to sell down the 20% of our debt obligations that they own. And, of course, it is at least theoretically possible that someday – maybe even soon – the ECB and BOJ will discontinue their QE programs, at which point it may well behoove them to start thinking about some balance sheet reduction of their own.

The confluence of these factors means that there should be galaxies of govies available for purchase over the coming months and quarters, and it might be reasonable to assume that this flood of paper will only move at lower prices and higher yields.

So, at magnitudes not witnessed for eons, the probability of a bursting of the bond bubble of thirty years running looks to be rising towards materiality. No doubt that this prospect is part of what’s all of a sudden scaring all those snowflakes out of the equity markets.

So why did I choose this moment to take the plunge? Well, for a number of reasons. As I’ve pounded into these pages for many months, I don’t think there is enough equity supply to meet demand, and I am fairly convinced that the imbalance will continue to grow. In addition, there’s earnings, now, with 2/3rds of the precincts in the books are projecting out at +14%. Sales extrapolate to a handy +8%. Also, guidance is sufficiently optimistic that CEO prognostications, combined with the (widely reported) selloff in equities, have brought forward looking EPS (16.3) down to just about the long-term average (16.0). Visually, the convergence looks like this:

Now, let’s understand that a significant portion of the happy 2018 income sooth-sayings are due and owing to the impact of tax reform. Some in my circle view these kind of adjustments as a form of cheating. Well, maybe so at 2875 on the SPX, but at 2620? Perhaps not so much.

I further believe that the political winds are blowing in such a way as to strongly incentivize a “kitchen sink” policy of economic expansion. Wherever else our honorable legislators disagree, they almost certainly share a dread of returning to their districts this summer with the economy on the down.

Bear in mind, they’ll be asking you for your money – to be invested in the worthy effort to ensure their return to office, and with this return, a continuation of the good works they undertake on our behalf. If the economy turns sour, ALL of them (well, almost all) are vulnerable, and this, among other factors, is the reason why what I truly believe was a budgetary cycle setting up as a nasty game of chicken turned into a combined love fest/spending spree.

But the big question remains: can this here 9-year rally, unquestionably fueled by cheap and sometimes free financing, survive/thrive in a normalized interest rate environment? Loyal readers of this publication are aware that while I believe the answer is yes, I have been much more concerned about the process of rising interest rates than I am about higher interest rates themselves. Pattern recognition suggests that while we probably can survive elevated yields and diminished bond prices, the Fixed Income selloff that is needed could be unpleasant or worse.

I retain this fear, but have forged ahead nonetheless. For what it’s worth, I kind of doubt that the hyper volatility period is over just yet. Investors entered the weekend in an advanced state of confusion, and, while a couple of days off should’ve done a world of good for them, I expect them to enter Monday’s proceedings as befuddled as they were when we left off on Friday.

But the lower the market goes, the more Beppie is ready to step in and do some buying. The SPX closed this week down 2% for the year, and I’m willing to put some money behind the proposition that a level such as this is a constructive one.

But again, it’s not up to me. Beppie is calling the shots, and my final bit of risk management advice is to avoid overtly pushing her buttons. To the outside world, she’s as well-bred and dignified a woman as you’re every likely to meet, but cross her one time and…

…forget it; you don’t want to know.

TIMSHEL