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