Tag Archives: SPX 500

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

Alpha-Beta City

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Yes, Alpha-Beta City; not Alphabet City, but perhaps we’ll begin with a word about the latter. For the under-initiated, it is a term generally associated with an area on the Lower East Side (bounded on the North by 14th Street and on the South by Houston) of Manhattan, where the Avenues are bestowed alpha, as opposed to (as is the case with most of the rest of the borough) numeric, monikers. The marvelous conveyance of Google Maps offers the following illustration:

Sorry; Couldn’t Resist Throwing in The Satellite Image Next to the Regular Map:

For eons, the neighborhood has had the rep of being one of NYC’s grittiest (and thus the hippest), and knowledge of the area (to say nothing of actual residency) has always been a goal to which locals seeking Street Cred have aspired.

It is comprised of 4 (more or less) North/South thoroughfares, named in ascending order – from West to East — as Avenues A through D. I was discussing this hood with a very close friend (with whom I was having lunch at a quaint restaurant in the anti-Street Cred locus of Fairfield County, CT), and he informed (or perhaps reminded) me that, back in the douce, hipsters hung the pseudonyms Aware, Beware, Caution and Death on these roads.

Perhaps those handles remain in place to the present day. I don’t know, because, on the Street Cred scale, I cannot at present rate myself anything higher than a Gentlemen’s 5.

As I never lived in Alphabet City, I might not even place myself at that lofty threshold if it were not that for a few months in 82/83, I dated a girl: Laura, who was actually a resident. She was a cute, lively little thing, and one of the main points of mutual attraction was the fact that we shared identical dates of birth (11/04/59). She also graduated from the University of Wisconsin at the same time I did, but I didn’t know her there. We were introduced by mutual post-graduation eastbound Badger acquaintances. At the time, she was pursuing a dream of being a punk photo journalist, and her career had progressed to the state that she worked the counter at Grand Central Camera – adjacent to the eponymous train station. I, of course, was cooling my heels Uptown, and slogging forlornly through the first semester of the Graduate School of Economics at Columbia University.

Still and all, there was something about her. She never came to me, but a couple of times a week, I’d take the Lexington Avenue Line down to St. Marks, and trudge up the six flights of stairs to the cold water, two-bedroom flat that she happily shared with about a half a dozen strangers who had become her roommates.

The entire setting was not, shall we say, conducive to the bloom of romance, and I’m not gonna lie: the street in front of her building was an open shooting gallery that frightened the living daylights out of me. But there she was, all 95 pounds of her, entering and exiting at a whim all hours of the day and night.

In the end, if memory serves, she dumped me. And who could blame her? What was a could, a big, goofy L7 grad student offer to a hip downtown chick such as herself?

But I didn’t come here to write about Alphabet City. I’m much more interested in the topic of Alpha-Beta City, that psychic purgatory where most of my clients spend nearly all of their waking moments.

As this remarkable January comes to a close, I hear a crescendoing chorus of self-flagulation from a number of investment quarters that, year-to-date, their portfolios are generating negative Alpha. Again for the under-initiated, this refers to a condition when performance falls short of the returns of the market, as adjusted by the net Beta configuration of a basket of securities. To further illustrate, with the SPX having thus far generating a gain of ~7.5%, a portfolio with a Beta of, say, 50% would’ve had to have produced year-to-date performance of >3.75% to be on the sunny side of the Alpha Street (not, for what it’s worth, located in Alphabet City). If your year-to-date gains only rise to the dignity of, say, 3.0%, it implies a cumulative 2018 Alpha of – 0.75%.

Kind of a kick in the head, no?

I’d like to take this opportunity to implore those in this position to temper their self imposed-negative judgment with the higher quality of mercy. Because, you see, this is NOT an Alpha-generating tape. By my reasoning, it would have taken a combination of nearly unachievable clairvoyance and imprudent position concentration to have gotten north of the Alpha Mendoza Line thus far in 2018. I have a few clients who have reached this Nirvana, but even they are skeptical as to how it happened. To the rest I say, cheer up. By way of perspective, you might’ve traded at a -50% Beta this month and produced a loss of 2.0%, and, under the perverse protocols that govern Alpha-Beta City, you’d have generated a positive Alpha of -1.75%.

Would you have been happier under these circumstances?

My point here is that when the broader market is turbo-charged to the upside, it’s wise to dial down your Alpha expectations; capturing a meaningful portion of the Beta ride should be sufficient for your purposes. As mentioned last week, with the Gallant 500 annualizing thus far in ’18 at well over 100%, one needs to make some allowances, as further described below.

First, let’s all agree, once again, that Mr. Spoo is highly unlikely to do a double or better this year, and if we’re correct on that score, then we’re in for, best case, some leveling of valuations in the coming months. The good news here is that while a flatter or (heaven help us) more two-way tape will likely to be dilutive to benchmark returns, all other factors being equal, it should give some lift to that infernal Alpha metric. So cheer up.

Perhaps more importantly, and as has been the case for quite some time now, the extraordinary upside skew of the markets carries the unfortunate but undeniable consequence of causing nearly all standard risk models to to understate forward looking investment loss ranges. As a long-tenured risk manager, allow me to be the first to state that our (on balance) poorly calibrated exposure estimates are littered with extrapolations that the near future will resemble the immediate/recent past. We apologize for this, but for now, I fear, it’s the best we can do. As a case and point, somehow, some way, the year-to-date Downside Deviation of the S&P 500 has managed to undercut last year’s microscopic thresholds, and now clocks in at a barely pulse-registering ~4.0%. This lack of negative price action works its way into our analytics in both direct and stealth fashion. And as long as this suppression continues, well, again, your Vols, Implied Vols, VaRs, Betas, Gammas, Deltas and such, are all distorted to the downside.

On the other hand, and as I’ve conveyed to many of you personally, I don’t necessarily see any signs on the imminent horizon of risk normalization. True, some of the macro numbers (GDP, New Home Sales) are coming in a little squishy, but earnings have been nothing short of a blowout. With 24% of SPX Companies reporting Factset is showing record Upside Revenue surprises:

Earnings are on a similar trajectory. A quarter of the way in, we’re looking at +12%. All 11 Industry Sectors are participating, and even those few laggards that are missing estiments are showing on average no worse than flat prices over the next couple of trading sessions.

This is not a tape, lofty valuations notwithstanding, that I’d wish to be short.

Yes, there’s other weird doings about which to concern ourselves, none perhaps so perplexing as the apparent gravitational pull of the earth on the USD. We all bore witness to our Treasury Secretary’s perhaps ill-advised (though unambiguously misinterpreted) comments about the relationship between FX levels and trade, and let’s just agree they weren’t helpful. But I don’t worry too much on that score. Nobody wins if the dollar collapses, and my guess is that it not only stabilizes, but perhaps regains some of its vigor in the coming months.

The big action this coming week will divide itself between earnings and a good deal of information to process in domestic Fixed Income markets. With respect to the latter, there’s the odd chance that bonds may move on whatever the Trumpster has to say at his (prematurely vilified) State of the Union Address. The following morning, our Treasury will announce its near-term funding plans, with the expectation of plans to dump an unusually large supply of new paper on the markets. That afternoon’s (Wednesday’s) FOMC meeting does not portend (at least according to the consensus) another rate hike, but it will mark the passing of the gavel from Chair Yell to Chair Pow, and will bear watching on that score alone. By Friday morning (Groundhog Day) we’ll not only learn how much winter we have left, but will also get our first look at the January Jobs picture.

That’s an awful lot of bond news to digest in a single week.

And on the whole, there’s no denying that here in Alpha-Beta City, strange days have found us. My best advice is to filter out the noise, make your trades based on your best, if necessarily fallible, judgment, and let the Alpha chips fall where they may. I would perhaps size things a little bit smaller – if nothing else as a nod to the above-mentioned current tendency of risk models to understate potential loss. But please don’t try to predict a turn (I promise you that you have no edge there), and while we’re at it, it would also be wise to dampen expectations with respect to the efficacy of hedges.

I mean, from what I understand at any rate, even Alphabet City has fallen victim to inexorable gentrification. The shooting galleries are gone. Entrepreneurs have renovated the walk ups (and jacked up the rents), and on the whole, the neighborhood now looks indistinguishable from virtually every other posh and largely unaffordable section of Manhattan.

And as for Laura, I never caught up with her again. About a year after the above-mentioned dumpage, I do recall walking in to Grand Central Camera and asking for her. She was nowhere to be found. Perhaps she realized her dreams, and I certainly hope she did), but probably not.

Maybe, on November 4, 2019, we’ll rendezvous one last time to celebrate our 60th.

After all, stranger things – inside and outside of Alpha-Beta City — have happened.

TIMSHEL

The 27 Club

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

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

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

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

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

And you never did.

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

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

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

Or maybe it’s just the radio.

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

Visually, this sort of thing looks like this:

SPX 27: We hardly knew ye!!!

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

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

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

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

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

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

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

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

DXY: Whistling Dixie

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

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

TIMSHEL

Ice Bowl

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

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

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

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

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

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

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

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

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

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

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

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

So what can we do for an encore?

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

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

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

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

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

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

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

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

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

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

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

TIMSHEL