Random Length Lumber, Random Walks and Other Random Thoughts

Posted on October 15, 2017August 24, 2018 by steve

Sigh. I have written and published more than 600 of these erudite pieces – across a baker’s dozen years – and seldom if ever has the task been more challenging.

And I blame you. For not giving me anything about which to write. Nobody to whom I am particularly attached died this week. I have ZERO interest in this Weinstein thing, and important topics such as the decertification of that swell Iranian nuclear deal that Obama cut, and Trump’s unilateral removal of health insurance premium subsidies, are doing little but causing my eyes to glaze over. The markets don’t care about these things, so why should I?

I therefore thought I’d use our time together this week to take a random walk across some recent random events, which, taken together, perhaps tell us more about our present state than we might otherwise care to know.

This Friday marked the last voyage of sorts of a routine Finnair flight from Copenhagen to Helsinki. The same route remains in place, but under a different numerical scheme. As such, it was the last flight 666 to HEL. And it took place on Friday the 13th. The journey transpired without incident, but I think we all owe a shout out to the brave souls – passengers and crew – who had the intestinal fortitude to take a ride that particular triply jinxed aeronautical bird.

On a more encouraging note, the Nobel Committee awarded the 2017 Prize in Economics to the University of Chicago’s Richard Thaler. Not to blow my own horn (always a difficult task, but now a nigh impossible one), but Dr. Thaler is the 7th, former professor of mine to cop the prize, joining the likes of Merton Miller, George Stigler, Robert Mundell, Gary Becker, Eugene Fama and William Vickrey in this pantheon. Congratulations are due and owing both — to Professor T and to the Nobel folks, who almost (BUT NOT QUITE), have atoned for the mortal sin of having given the award to the odious Paul Krugman in 2008.

Continuing on in Ivory Tower configuration, I read with interest that Hillary Clinton is in discussions with Columbia University regarding a teaching post. I offer my premature “welcome aboard” to Secretary C – with one caveat: I haven’t taught a course in Lion-land for nearly two years. I may do so again in the future, but put it this way – It’s not gonna be because I reached out to them.

This Thursday, we will celebrate(?)the 30th anniversary of the 1987 Crash, and though I can’t say for sure, my sense is that the market has recovered nicely in the intervening three decades. In noting the milestone, this week’s Barron’s got pretty weepy-eyed with nostalgia, going so far as to reprint the late, great Alan Abelson’s “Heard on the Street” column, first published on the weekend after the event. As evidence of how much times have changed, the column features quotes from one John Tudor Jones, my former boss, who (or so the story goes) was correctly positioned going into the drubbing, and who went on to tear a new one into the markets for the next generation and beyond. This all would’ve been a nice touch by Barron’s, had it only gotten Mr. Jones’ first name right.

I finish my random walk with an important financial development, and one that no one, no matter how remote their proximity to the markets, could’ve failed to notice. Here, of course, I refer to the absolute melt-up in the CME’s Random Length Lumber contract:

What gives? My scan of the news flow suggests that the full-on bid is in part catalyzed by some tariff beef with the Canadians, but I have a different theory. The tradeable contract calls for the delivery of 110,000 feet (+ or -) of 2x4s. And, given the news flow as I observe it, one can certainly envision a surge in demand for this commodity, to be inserted into the nether regions of bad actors too numerous to inventory in this publication.

Beyond Lumber, of course, other markets are ascendant as well, most notably those winged butterflies in our equity complex. Another week, another set of records, and all transpiring through the gentlest climb that humankind can experience in a world where (to the best of my knowledge), the acceleration due to gravity remains at a rate of 9.8 meters per second squared. Realized volatility is headed in the opposite direction, and the SPX now features a rolling, annualized standard deviation of returns of approximately 3.5%.

Will anything change this trajectory? With 10 weeks left in this wacky year, I kind of doubt it. The Gallant 500 did manage to breach into a forward-looking 18 handle – for the first time in quite a spell:

But there’s no reason I can identify why we can’t go the whole route and break the dot.com zenith of 24. All we have to do is repeat our playbook from ’99. Anyone for www.mydiscountbroker.com?

There are a few other interesting price developments, including a flattening of the yield curve to levels not witnessed, well (it must be said), not witnessed since the last recession:

So, are we headed toward recession? I don’t see it on the horizon. And I definitely don’t see any rationalization of index volatility, valuations or yield curve characteristics – at least until the calendar turns.

I’m a little more optimistic about a return to the norms for the Lumber markets. After all, even though we could all benefit from the 2×4 treatment, this form of discipline and amusement, like everything else in this godforsaken world, is subject to the laws of diminishing returns.

TIMSHEL

The Ebert Principle

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

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

Louise IV

Posted on July 30, 2017August 24, 2018 by steve

Ain’t it just like the night to play tricks when you’re tryin’ to be so quiet?

We sit here stranded, though we’re all doin’ our best to deny it

And Louise holds a handful of rain, temptin’ you to defy it, Lights flicker from the opposite loft,

In this room the heat pipes just cough

The country music station plays soft But there’s nothing, really nothing to turn off,

Just Louise and her lover so entwined, And these visions of Johanna that conquer my mind

In the empty lot where the ladies play blindman’s bluff with the key chain

And the all-night girls they whisper of escapades out on the “D” train

We can hear the night watchman click his flashlight, Ask himself if it’s him or them that’s insane

Louise, she’s all right, she’s just near, She’s delicate and seems like veneer,

But she just makes it all too concise and too clear, That Johanna’s not here

The ghost of ‘lectricity howls in the bones of her face

Where these visions of Johanna have now taken my place,

— Bob Dylan

They all said ‘Louise was not half bad’,

It was written on the walls & window shades, And how she’d act a little girl

The deceiver, don’t believe her, that’s her trade

Sometimes a bottle of perfume, Flowers, and maybe some lace

Men bought Louise ten cent trinkets, Their intentions were easily traced,

Everybody thought it kind of sad, When they found Louise in her room

They’d all put her down below their kind

Still some cried when she died, that afternoon

— Paul Siebel

For some reason, the “Louise” of the American songbook never seem to get her due. Take, for example, this week’s quotes. Dylan’s Louise plays a decidedly second fiddle to the ethereal Johanna. Call her Louise #1. Siebel’s Louise #2 (made famous by Linda Ronstadt, who sings the sad story of the life and death of a Louise of easy virtue). I assign the moniker of Louise #3 to the character played by Isabel Sanford: Louise Jefferson, who spend about a decade “Movin’ on Up” in the hit ‘70s Comedy “The Jeffersons” She certainly did better than her above-mentioned, epynomous sisters, and always held her own on the show, but the poor woman had to spend the rest of her life having stangers sing her that song, while referring to her, with a distinct lack of dignity, as ”Weezy”.

But lately, I got to thinking about another Louise, one who is not American but rather a Brit, who was once and is no more a worldwide sensation. Here, I refer to the long forgotten Louise Joy Mullinder (nee’ Brown), who came into this world by virtue of its first successful In Vitro fertilization.

For the purposes of this document (and for reasons that should be obvious to my sharp-eyed readers), she will be referred to as Louise IV. She was born in Oldham, U.K. in mid-1978, with the assistance of a doctor/developer of the procedure, who, in 2010, won a Nobel Prize for his efforts.

Nowadays, the practice is common. But at the time, the birth of Louise was a very big deal, reported on a blow by blow basis by every news organization in the world. I will also confess to the following: her arrival kind of freaked me out. I mean, the tens of billions of humanoids that preceded her, dating back, presumably, to the time when our first antecedents slithered out of the primordial ooze, all had in common the fact that they were conceived in an actual human womb. Yes, artificial insemination was a longstanding practice by the time she arrived, but still, prior to her arrival it took sperm meeting egg — inside a uterus, to make a baby. So I wondered about her: would she be like us? And I worried about her: would we treat her differently? And I even prayed for her: would messing with such time tested formulas anger the Almighty, and would he take it out on her?

But none of my concerns ended up amounting to much. Louise was born, taken home by her loving parents, and raised like anybody else. That same day, home country Argentina won the World Cup, and later that week, Bob Crane of Hogan’s Heroes fame was bludgeoned to death in a Scottsdale hotel. Nothing to see here, folks; please resume your normal activities.

I got to thinking about all of this as I pondered the accelerating rate at which longstanding protocols gather to the dust of their forbears, replaced by new, sometimes disturbing paradigms. And my conclusion is as follows: pretty much anything – good or bad– can transpire to upset our equilibria, and the heavens, as well as unaffected mortals, while perhaps marking the changes, will incorporate them mundanely into their affairs.

So…this all kind of reminds me of current market conditions. A great deal of what presumably might pass for important events are taking place at warp speed, but investors are content to serenely go about their business as though this wasn’t the case. Equity markets came out of the gate in strong fashion early in the week, but then lost some of their upward mojo. The SPX actually closed down (~0.2%) for the cycle, proving that such a thing – a down week– is, at any rate, theoretically possible. The VIX broke the into the previously impregnable 8 handle – albeit briefly – on Tuesday. For about 12 hours midweek, and as widely reported by the press, bookseller Jeff Bezos was the world’s richest man (that its, if you ignore a few scammers like Putin), but saw his riches modestly diminished below this breakthrough level after a rather disappointing earnings report issuing forth from his bookstore.

But on the whole, earnings, now half-way through the sequence, are strong — projecting out at about 9% growth. We also bore witness to a cheery Q2 GDP estimate, bringing tidings of 2.6% expansion, and corroborating the glass half full hypotheses that abound among the investment masses.

The news was unilaterally accretive out of the Energy Complex, and rates were for the most part flat. Those that wish to cast their eyes on something more of a horror show, though, need look no further than the USD, which is now trading against the magnificent Euro at a diminished level last seen as 2014 was fading into 2015. Well, here’s to the jaunty Europeans (or at any rate holders of the continental currency) who are making even more of a killing in our shares than us Yankees are – at least if they are buying them with their native units of account.

And it’s not as though the holders of our private debentures, of whatever credit quality, are being left behind either:

Investment Grade: High Yield:

But, as has been the catatonically repetitive theme of these last few installments, it’s plain that for the moment at least, the investor class is unwilling to price the palpable risks that overhang the global capital economy into private security valuations. I can’t think this is an overly promising paradigm with respects to its implications for return prospects on a going forward basis.

Without regurgitating all of the soul-sapping elements of the news flow, it may nonetheless bear mention that Health Care Reform, solemnly promised by the ruling (?) party over the near-decade when it was in the minority, hit a brick wall, and that the coup de grace was executed by a senior senator who rose from his post-operative bed, first to authorize the vote, and then to cast the deciding “nay”. The infantile name-calling and mud-slinging inside the Administration continues unabated, the fact that two new sheriffs (one, improbably, a former client of mine) arrived in town notwithstanding.

North Korea lobbed another one into the Sea of Japan, and China busted out some menacing new bombing devices. Almost nobody noticed. The President is irrelevant issuing orders to the military without providing them the courtesy of notifying them.

Yet our indices continue to climb, and with virtually every tick upward reach heretofore-seldom-or-never-before-breached heights with respect to certain valuation metrics:

But ending (as I always do), where I began, perhaps none of this matters. After all, women like Louise still get by. I can’t help but wonder, though, if the ghost of ‘lectricity still howls in the bones of their faces. This is particularly true for Louise IV, who, if she glows in the dark during an amorous moment, at least can be believed to have come by the practice honestly. Our Lady of the Day married a local bouncer in 2004, and here’s wishing her and her husband Wesley Mullinder all they deserve in this world. If the recent photo of her I managed to unearth offers any indication, she looks content. So perhaps, on balance and unlike 1-3, ‘tis well that she’s not American and that no one has ever written a song for her:

Louise IV: Presumably Holding the Device that Facilitated Her Birth:

She can also perhaps take comfort in the reality that she blazed a well-travelled trail. Last year, 70,000 new In Vitro brothers and sisters arrived on the scene, in this country alone. But for them and the rest of us, the world spins and revolves, we move our feet – sometimes forward and sometimes backward – and the heavens fail to remark upon the migration. Perhaps this is as it should be; perhaps not.

I reckon, in this world or the next, we’ll find out.

TIMSHEL