Tag Archives: VIX

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

Here’s the Story

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I read, with mixed regret and a great deal of interest, that a certain residence: 11222 Dilling Street in Studio City, CA, is up for sale. More pertinently, this 2,500 square foot, 2 bedroom/3 bath dwelling, has been since time immemorial, the home of the Bradys.

My first reaction (a logical one I feel) was to scream “Fake News!” After all, everyone knows that whatever else its appeal (sliding doors, eat in kitchen, etc.), 11222 Dill contains NO bathrooms. I think there was a closet with a mirror and a sink, where those whacky kids used to fight from time to time for sufficient space to brush their unilaterally, impossibly white teeth. But a bathroom? No.

However, I’ve checked and it’s true, Casa Brady is indeed on the market, and for the bargain price of $1.85 mil. And part of me feels that we’re all worse off for the prospective transaction. I developed an early fascination with the Bradys, perhaps in part because the Bunch are my chronological peers. I’m a little younger than Jan; a little older than and Bobby.

So when the series was in Prime Time, I never missed an episode, realizing even at a young age, that it offered a perfect caricature of life in 1970s America at its campiest and blandest. That it did so in contemporaneous time, and without any intended irony, is a marvel for the ages. It ran for about 6 seasons, but was eventually cancelled because the kids got too old. And neither Mike and Bobby’s dubious perms, nor the arrival of the ill-matched, misanthropic Cousin Oliver, could salvage it. But as the saying goes, Old Bradys die hard. A couple of years later, the cast convened through a variety series, which, somehow, and against all odds, managed to outdo even the Brady Bunch in Brady-ness. The same could be said of a spinoff called The Brady Brides, in which newly betrothed Marcia and Jan seek to economize by moving in together with husbands that hated each other. Trust me on this one: hilarity did indeed ensue.

Lingering, still, is the Marcia/Jan debate, and, to me, despite having a soft spot for Jan (easily the most unhinged of the Brady scions), in terms of romantic appeal, it’s no contest. It’s Marcia, Marcia, Marcia. Even with her banged up nose. But I do have one further matter to get off my chest: once, in a fit of sheer boredom, I took a BuzzFeed quiz to determine whether I was more Marcia or Jan, and I came up unambiguously as Jan. I posted the results Facebook.

But as Mick once sang (on a record that was released, as it happens, about the time that the Bradys kids hit their aggregate hormonal peak) “Time waits for no one”. Not even a Brady. Mike and Carol are both dead. Alice is dead, as is Sam the Butcher. Mangy mutt Tiger disappeared with no explanation after Season 1, and, nearly 5 decades later, we can perhaps safely conclude that he too has gathered to the dust of his forebears. Greg rocks a weave/dye job, and croons the borscht belt circuit. Marcia is born again, and no longer speaks to Jan. Peter turns up on the telly here and there. Cindy, I believe, is a radio DJ with pretty solid rock sensibilities. Bobby, improbably, sells decorative concrete on his home turf near Salt Lake City.

So maybe it was indeed time to sacrifice 11222 Dill, but I felt it my responsibility to not allow this milestone to pass unremarked.

So that’s the story. At least that story. But meanwhile, what’s ours?

Well, I’ve nothing to relate that rises to the dignity of the Johnny Bravo episode (or the one where Marcia resorts to cross-dressing, in her hot pursuit of the adorable Davy Jones), but it’s not like we don’t have some ground to cover, so let’s get to it, shall we?

In simpler times (say, suburban L.A. – circa 1972), market participants might’ve casted their collective focus on the many salient data points coming our way,: the acceleration of the earnings calendar, Fed Chair Powell’s testimony on Capitol Hill, and other information flows directly tied to the fortunes of the global capital economy. However, these are anything but simple times, because among other things, our fearless leader accomplished the nigh-impossible, drawing incremental attention to himself – at a point when his face had already become more ubiquitous than that of Orwell’s Big Brother.

More specifically, he’s fighting with everyone, and in doing so, is channeling his inner Jan: always at risk of descending into phantasmagoric delusion (the wig episode, the made up boyfriend, etc.) One time, she even decided, and was accommodated in this wish, to disown the entire Brady crew. And Trump is acting out in similar fashion. He’s brawling, of course, with China, with Europe, and even with Canada for God’s Sake. In his own way (though the superficial narrative runs in the other direction), he’s circling in menacing fashion around Russia. Moreover,, in addition to his longstanding beefs with the FBI, CIA and Justice Department, he’s now picking bones with the supposed-to-be-independent Federal Reserve Bank of the United States.

These are serious matters, but the markets, like the Bradys did to Jan in the aforementioned episode, have chosen to to pretend he’s not there. Thus, just as Jan’s brothers and sisters simply hopped around her when she tried to disrupt a backyard sack race, investors ignored such matters as threats to up the Chinese tariff ante to a cool $500B, and shade throwing at our Central Bank, and went about their business.

They didn’t have much to show for their efforts, but they did manage to gather themselves sufficiently to push the Gallant 500 up about 9 handles for the week (0.27%), and a similar tale can be told about our other favorite indices. Treasuries sold off a bit, pushing yields from ~2.82 to ~2.89, but continue to trade in the narrowest ranges witnessed for more than a decade. The Bloomberg Commodity Index was able to register a pulse, with my victimized grains catching a small bid, but other components – particularly the whole metals complex – continuing their descent into the netherworld. Thus, if nowhere else, we see the trade war risk premium rising in the mundane world of commodities.

Earnings, thus far, have been a mixed bag, with winners such as Bank of America, Morgan Stanley and Microsoft being offset by disappointers including eBay, NetFlix (improbably) and (of course) General Electric. Howver, with 17% of the SPX clocking in, the market is still on pace to reach its socialized target of >20% earnings growth, and if the trend continues, no one should complain.

Casting our eyes towards the VIX, we note benign volatility conditions, but again, that’s not the whole story on vol. As we’ve discussed, the VIX is a rolling measure of at-the-money SPX implied volatility, and it is indeed low by any relative/historical standard. But if one looks out at the tails of the volatility plain – i.e. the realms where investors actually purchase portfolio protection, we see that they are evidencing a willingness to pay up – substantially:

Now, just like the rest of you, having always been a bit leery of the VIX, my inclination is to evaluate an index of skew thereto with a particularly jaundiced eye. But the way this thing is calculated, a value of 100 implies that investors expect a normal distribution of SPX returns, and now we’re at 160 (record levels by a wide margin), which suggests an increase in the options-projected probability of a multi standard deviation crash to statistically meaningful levels.

On the other hand, I mentioned this to a couple of clients and they usefully pointed out to me that all of the implied overpayment for portfolio protection is as strong an indicator that this here bull market has yet to run its course as any we’re likely to find in these troubled times.

I reckon we’ll see. Next week, after all, brings another big series of earnings, including the Googlers and Facebook. Beyond this, on Friday morning, we’ll get our first glimpse at Q2 GDP, and, for what it’s worth, those crazy cats at the Atlanta Fed are up to their old tricks again, turbo-charging their projections back up to a big, fat 4.5%.

Part of me wishes that they’d just make up their minds, but then again, this would be a futile gesture. The Commerce Department will make minds up for them on Friday, and that is the number that will go into the history books.

Until, of course, it is revised. And then revised again. But pretty much everyone who’s cared to look into these matters expects an exceedingly rich quarter, and here it bears remembering, because > 4% prints on GDP don’t last forever.

On the other hand, nothing does. Last forever that is. And if you doubt this, just ask the Bradys. Given that for many of us (myself included of course) they will forever remain the perpetually perky, wellscrubbed teens and pre-teens that they always have been, it must be very upsetting for them to have their childhood home sold right out from underneath their feet. Here’s hoping that the buyer(s) whoever they may be, understand that they are not purchasing a house, but rather, a shrine.

And yes, I’ve considered bidding myself. But it’s a stretch. I can probably scrape together the 1.85 large asking price, but with little margin for error. More importantly, this would leave me with almost no financial resources to undertake certain structural adjustments that I feel are just nigh essential.

I probably don’t need to elaborate here other than to state that, at my advanced age, an upgrade in the plumbing arrangements at 11222 Dilling Street, Studio City, CA is among the most effective risk management actions of which I possibly can conceive.

If I were to take this step, it would be important for me to remind myself that my life in Studio City would not fit into tidy 22 minute segments, resolving themselves in crescendos of happy endings and lessons learnt. This is particularly true 45 years after the demise of the Brady Bunch, and even moreso in today’s markets. It’s tricky out there; not much edge to be found anywhere. Be forewarned.

TIMSHEL

Morning Corn

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Woke up one morning, ‘round San Francisco Bay,

She lay beside me, and this was our last day,

No tears were shed, though our hearts would soon be torn,

We just started smiling, laughing, rolling in the morning corn,

Morning corn, morning corn, the blues ain’t gonna getcha, when you’re rolling in the morning corn

— Corky Seigel

I’m guessing that few of you are familiar with this week’s featured artist (named above), who, along with his former Roosevelt University school chum Jim Schwall, lit the scene on fire a bit 50 years ago, under the eponymous moniker of the Seigel Schwall Blues Band. Give a listen if the spirit moves, and start with our title song, perhaps the band’s best.

Yes, I love “Morning Corn” but the truth is, I love all kinds of corn. Because (you’ve got to admit) corn is pretty cool. No matter what form it may take. And there’s lots. For example, there’s corn on the cob, popcorn, corn flakes, corn dogs, canned corn, creamed corn, corn syrup, corn bread and (of course) Jimmy crack corn, and I don’t care.

Corn is sometimes also called maize, but mostly only by either the indigenous peoples of this continent, or those affiliated with my deadly sports enemies at the University of Michigan.

Speaking of indigenous peoples, the European Settlers of the 17th Century first bonded with them guys, over, you guessed it, corn. Corn is also a main food staple — not only for humans, but also for the domesticated animals we breed to slaughter and convert into other culinary delights. Though highly inefficient, corn can, in addition, also be used as fuel for internal combustion engines.

Plus, to paraphrase Dylan, some of these bootleggers can turn it into pretty good stuff.

Corn, though, is not without its controversies. However, I must take issue with my doppelganger Lewis Black in his assertions that: a) all of the candy corn that exists in the universe was created in 1911; and b) its un-consumed units are collected, washed and resold to the masses each subsequent Halloween. In addition, to the best of my knowledge, and contrary to the inferences embedded in our title song, there’s not much corn to be had in the general region of the San Francisco Bay, and almost certainly not enough to go rolling around in the stuff in the immediate post sunrise hours.

But mostly I feel that this is NoCal’s problem (one of many), and other than that, I wish to convey the happy news that of late, is making a nice comeback.

Yup: Making a Nice Comeback

The accompanying chart indicates a month-long, dizzying collapse from ~$4.20/bushel down to a rather pedestrian $3.60 (its lowest level in > 5 years) as of last week. But the good news is that corn’s now back on the charts with a bullet at $3.71¾. But I don’t want to get to jiggy here. After all, I grew up in the grain pits at the Board of Trade of the City of Chicago.

There, you learn early on that grain speculators will often manipulate prices based upon ultimately inconsequential shifts in Midwestern weather patterns, so maybe some of the recent recovery derives from rather parched conditions in America’s Corn Belt. But I think on the whole I’ll park myself in Missouri (ranked 9th in overall corn production as of 2016) on that one.

Then there’s the whole China thing. But China imports less than $1B/year of corn from the U.S. – the approximate equivalent of the value of finished ceramic figurines we sell over there, and a single digit percentage of overall domestic maize production, so I need some help with the math here as well.

But then again, pretty much all tradeable asset classes have me confused of late. Investors returned from the whole Independence Day in a patriotic mood, and took all our equity indices into positive territory for the week, socializing the first across the board first Mon-Fri gain since mid-June. This move catapulted the Gallant 500 above all of its pertinent Moving Averages, also for the first time in a month, and, in solidarity, the always mystifying VIX plunged to depths not seen in a similar dog’s age.

As suggested last week, one could argue that the official action of the quarter began on Friday, with the release of the June Jobs Report. Here, the numbers came in on the shady side of in-line, with solid job creation and increased Labor Participation causing a modest rise in the base rate.

But as everyone kind of feared, Hourly Earnings growth continues to disappoint, clocking in at a drearily repetitive +0.2%. As such, long sought-after wage inflation and its presumed shot in the arm to consumers continues to be little more than a utopian dream for economists of every stripe.

Perhaps in part for these reasons, financial conditions remain both over easy and sunny side up, with government bonds rallying across the globe last week, and the always-generous Swiss National Bank now willing to charge an annual rate of ~0.15% for the money it borrows. Japan is paying 0.02% for the same accommodations. All of which is consistent with my stated hypothesis that the equity complex wants to rally.

But now I’m not so sure it will. Yes, earnings, set to commence next week, appear to be a poised to tell a happy Q2 story. Consensus estimates are clocking in at >20% profit growth, and high single digit revenue expansion. Q1 will, of course, be a tough act to follow but it’s my belief that if corporate chieftains in aggregate do no better than meet these estimates, no one should be particularly inclined to complain.

And, for what it’s worth, I have a hunch that they will beat them. Consensus estimates, that is.

But, for a variety of reasons, I am beginning to worry about forward guidance. First, I hasten to remind y’all that when the C-Suite crowd guides, it will be guiding for Q3, also known as the Kitchen Sink Quarter, when, according to time-honored tradition, bigwig execs tend to sandbag numbers, so as to make them look all the more fabulous when Q4 comes around. And who can blame them? After all, if you were a bigwig exec, would you rather walk into the Compensation Committee on the upswing, or forced to explain away nefarious gravitational forces plaguing your financial statements?

And in addition to incentives that may drive more modest future estimates, the current situation offers ample fodder for this sort of thing. Of course, we can start with trade wars, now, if the wires can be believed, begun in earnest. It may get worst, and it may hit bottom lines, one can almost hear the tune whistling on the lips of CEOs even now.

Then there’s uncertainty about currency, higher energy costs, questionable credit conditions and the like. I may be wrong here, but I’m just kind of suspecting that the tone at the podiums will shade towards the subdued.

My overriding concern is that there’s just too much uncertainty pervading the ionosphere for confident investment – either implicitly, through the markets, or even directly, through such quaint exercises as research, development and capital expenditure. This, I fear, may tether the markets to their recent narrow ranges. I don’t think there’s much outright crash risk, but I do wonder whether investors have sufficiently digested their Corn Flakes or Wheaties to carry this here market into new frontiers – at least for now.

On the other hand, there are those among us who are convinced that the bull market is over, and while I don’t agree with them per se, I must also concede that they may be right. If so, my fondest advice for you is to wake up early, grab the one you love, and head to the nearest cornfield.

If you don’t know what to do from there, then please accept my apologies for wasting your time.

TIMSHEL

Ah Yes, I Remember It Well

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“We met at nine”, “We met at eight”, “I was on time”, “No, you were late”

“Ah, yes, I remember it well”

“We dined with friends”, “We dined alone”, “A tenor sang”, “A baritone”

“Ah, yes, I remember it well”

“That dazzling April moon”, “There was none that night”

“And the month was June”, “That’s right, that’s right

It warms my heart to know that you remember still the way you do

Ah, yes, I remember it well”

— Alan Jay Lerner/Frederick Loewe

First, I hope that this note has somehow found its way to at least a portion of its intended recipients, because, you see, with little fanfare, an absolute catastrophe befell the internet this last week. Lost in all of the hubbub about the Singapore Summit, IG reports, Big 3 Central Bank Policy Statements and the like, the Federal Communications Commission (FCC) enacted the repeal of the 2015 Net Neutrality Act, an action which had placed federal oversight of the Internet under the jurisdiction of the Telecommunications Act of 1940. Remember the days before the FCC decided to treat the web in a manner engineered to oversee AT&T’s mid-20th Century monopoly on phone service?

Ah yes, I remember it well.

What I remember most is that before net neutrality, the web was a sleepy, dreary place. Scant content was available, and to even access the tool, one needed to attach a landline to a modem, and pray for the appearance of the flashing lightning bolt icon/ accompanying squeal sound as confirmation that a connection had been made. Then one prayed that one’s sister didn’t try to make a call or that some other disruption would take place, forcing one to start the process again.

Can you even imagine a world where the FCC cops weren’t on the job? No Twitter, no Facebook, no $%*#@!! Netflix! Luckily, back in 2014 and before, we still had our washing machine sized radios to listen to FDR’s latest Fireside Chats; otherwise, we wouldn’t have the vaguest idea what was going on in Washington, let alone more remote ports of call.

But now the evil FCC is off the case, allowing (among other things) the providers of bandwidth to charge market prices for the use of their resources. No wonder Bezos, Serge, Larry and Reed Hastings and others of their ilk — champions of the common man one and all — were crying in their soup. After all, the three companies they control (Amazon, Alphabet Google/YouTube and Netflix, respectively) currently account for more than 50% of all bandwidth usage in the world, and desperately need Uncle Sam to ensure that wicked, competitive pricing doesn’t hurt their bottom lines. Each have shareholders to whom they must answer, and since there’s an infinite amount of bandwidth available, why should they let its corporate providers cut in on their margins?

Except there isn’t. An infinite amount of bandwidth available that is. Either in any given location or across the globe. And what is available is being consumed growth rate of >50% a year. The clear answer is technology innovation, by companies like AT&T and Verizon, but it is entirely shocking that these enterprises would be allowed, as they are now, to set spectrum prices on the entities that hoover it up — in accordance with their usage, in order to underwrite capital investment.

However, as suggested in our thematic quote, the month is not April but June, placing me in something of an amorous mood. So it pleased me, speaking of AT&T, that it was allowed to consummate its star-crossed romance with Time Warner, by virtue of a Federal Court rejecting a poorly thought out Justice Department lawsuit seeking to block the marriage. Now Bugs and Ma Bell are one in the eyes of God and Investors. Here’s hoping they are fruitful and make lots of anthropomorphic rabbits, because, during this, its most important season, love is indeed in the air. Twentieth Century Fox now has not one, but two formal suitors (Disney and Comcast) for her hand. And who’s to say that it stops there?

In fact, it doesn’t. Big Don and L’il Kim were able to advance their dalliance, departing last week’s rendezvous with evidence of their intentions to expand their triste. Unfortunately, however, details of their plans to set up housekeeping were not particularly forthcoming. Elsewhere, however, amore, toujours amore, was a more uneven affair. We’re still in a tiff with Canada (though I don’t believe it will last), and the lovers’ quarrel between America and China ratcheted up a bit, with each side extorting the other to the tune of $50B of tariffs – so far. Of course, it will be us Joe Bag of Donuts types that will foot the bill, so this one may get worse before it gets better.

Of these Affairs de Coeur, markets took mixed notice. Commodity markets tumbled, as well they might’ve, with Energy, Metals, Ags and Softs all feeling the gravitational pull, and (more improbably) the USD reached its highest level in nearly a year:

This is a Commodity Index

This is a Dollar Index

Perhaps in a nod to the passion of the season, government borrowing rates dropped across the board (yes, Switzerland is again negative out 10 years), the fact that U.S Fed Chair Pow raised rates and signaled 2 more hikes this year, and that Super Mario announced the ending of euro QE notwithstanding.

But the Equity Complex continues to play hard to get. It was a flat week – at least for the Gallant 500 and his wingman, Major Dow. Captain Naz and Ensign Russell fared better, though, with both indices now resting at all-time highs.

I’d take this opportunity however, to encourage Mr. Spoo to persist in his ardor, based in part on the fact that he has a great deal to offer:

SPX P/E Hovering at 5-Year Averages:

Factset in fact(set) has Q2 earnings clocking in at +19%, and this after a similar performance in Q1.

If they’re right, then it doesn’t look to me like a 16 P/E is an extraordinary amount to pay. Plus, in light of the Judicial Ruling on Time- Warner/AT&T, still-benign financial conditions and a number of other factors, it strikes me that merger mania should persist through the next quarter at least.

However, if these arguments fail to reinforce the intestinal fortitude of my favorite index, I’d hasten to remind it of that ancient truism: faint heart never won fair lady:

In addition, it may bear mention that the VIX breached down into an 11 handle and is close to ytd lows, that the Atlanta Fed’s prediction for Q2 GDP has risen yet again to nearly 5%, and that in addition to the sublime sound of wedding bells in churchyards across this fair land, the second half of June is seasonally known for its trademark tape painting rituals.

So on the whole, I think this here market may indeed be setting itself up for a nice rally.

I wouldn’t anticipate anything particularly dramatic just yet, but the SPX does remain nearly 100 handles below its January highs, and I see no reason why it can’t gather itself to test that threshold, or even breach it, over the coming weeks.

Of course, it would be helpful if we can get that darned internet up and running again, because financial transactors have come to rely upon it (or so I’m told), and buying frenzies fueled by paper orders phoned in and transmitted through pneumatic tubes will be a highly annoying exercise. I will, however, predict that, one way or another, the markets and its participants will survive. And, in closing I hasten to remind my readers that the stock market became a global sensation while operating for more than a century with men in top hats and overcoats conducting business orally, under the shade of a buttonwood tree in Lower Manhattan.

Most of you are too young to have experienced that era, though I was only a young shaver for most of it, I can assure you that it was a magnificent time to be alive.

And yes, I remember it well.

TIMSHEL

Joining the Band

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Join The Band

Hey Lordy… (join the band, be good rascal…)

Hey join the band, be good rascal and join the band

Hey Lordy…

Join the band, be a good rascal and join the band

Oh huh oh ho ho ho

— Little Feat

Don’t you think the moment has come? To join the band, I mean? There are worse ways to spend your time, you know, and when Little Feat’s late and lightly lamented Lowell George asks, I believe we owe it to him to respond favorably – even four decades after the initial request.

So, even at this late date, I am inclined to take up Lowell’s invitation. However, one problem remains: which band should I join? It’s not as though I am flooded with offers; the plain truth is that I have had none. And believe me, this hurts, because these days I can really shred. In fact, I’d go so far as to say that I’d be a major asset to any ensemble fixated on the rolling decade between 1965 and 1974, and, in the right group (i.e. one that: a) narrowed its focus to 1968 through 1972; and b) let me do exactly what I wanted), I could be great.

But at my advanced age, I have learned that delusion is risky and even sometimes fatal, and this forces me to face the possibility that no rock and roll outfit will have me. However, there’s more than one kind of band to join, so I’ve chosen to take a different course, affiliating more assertively with that band of brothers and sisters that form the global financial blogosphere. It’s not as though I haven’t contributed to their catalogue; the consistent production of these weeklies, and subsequent posting to the web is, in itself a testament to my longstanding affiliation with the blog bros. But, my friends, like so many other matters, it comes down to a matter of degree. I’m going to be doing more with them, and whether I become a full-fledged member of the group, or, like Darryl Jones, who has ably managed the base lines for the Rolling Stones for a period longer than founder Bill Wyman but has never achieved full membership, linger as a side man, remains out of my hands.

Please know that I don’t take this step without due consideration. I am solemnly aware that, over the baker’s dozen years that I’ve been pumping out these weeklies, missing nary a one, through sickness and health, triumph and tragedy, that you (the reader) and me (the scribe) have developed a sacred, unshakeable bond. It would nauseate me beyond measure to think that any step I could possibly take would weaken, let alone sever, these ties. Please know that you will continue to receive these missives, under the same timelines, and based upon the identical format – one that as you know, features my often futile efforts to gather what remains of my wandering wits.

That being stated, the chattering voices inside my head have convinced me that a wider audience beckons, and that I must answer the call. So if you observe me blogging, tweeting (under the rather generic handle of @KenGrantGRA) you will have two choices. You can consider this an unacceptable betrayal on my part (I will love you no less if you do), or you can give me a pass.

Oh yeah, there is one other alternative available to you: you can join the band, the @KenGrantGRA Band, accompanying me on my virtual journey through soaring arena anthems, destroyed hotel rooms, mud sharks and other such delights.

There’s room for you (and any friends you might wish to invite) on the @KenGrantGRA Tour Bus, and Cowboy Neil (at the wheel) will pull over and let you off at any point of your own choosing. Do me a favor and think about it, OK?

*******************

Whether you believe me or not, the plain truth is that I hate to write about politics. I find it an unproductive, loser’s game. I tell myself that I have held more or less to the discipline of only doing so through the filter of political impacts on risk conditions. But you’ll have to make your own judgments as to how well I’ve actually adhered to this protocol, and how rigidly I’ll stick to the discipline going forward.

One way or another, I believe that politics hover over current market conditions in a highly menacing fashion, so this week, and perhaps for a spell going forward, I must at least move towards the borderlands of my pledge. By my judgement, Trump had by far his worst political week since he put his hand on that bible, amid so much protest, almost exactly five quarters ago. Let’s dispatch with the easily analyzed events first. Paul Ryan announced he’s stepping down at the end of his term, and, any way you look at it, this is not a positive development for the Administration. I’ve always liked my Janesville boy, and think he was one of the very few competent members of Congress. He did his homework, did his work, and, through a number of hits and misses, actually got things done. And I ask this to anyone in favor of any part of Trump’s legislative agenda: where we’d be now without his steady hand? But he’s riding off, taking the certified Republican House Majority down to a slim 22. Also, and, ominously (at least in a symbolic fashion), his departure means that nearly half (10 out of 21) Congressional Committee Chairs have now stepped down, and, given that it’s only April, that number could rise.

More chilling was the raid on Trump lawyer Michael Cohen’s office and home by those fluffy fellows from the Office of the United States Attorney Southern District of New York. Acting on a referral from Special Counsel Robert Mueller, they forced their way into Attorney Cohen’s private professional and personal lairs, and seized pretty much anything that wasn’t nailed down. Subsequent reports indicate that he’d been under investigation by the Southern District for criminal activity for several months, but the timing and the methods turn my blood to ice. Federal prosecutors have many methods to procure information from investigation targets, most notably their subpoena powers, and raids are the most aggressive of these tools. Typically, this type of thing is only justified when the target is either a flight risk (which Cohen clearly was not), or information suggests he was committing serious crimes on an on-going basis. So I hope for all our sakes, that whatever impelled the G-Men to give Cohen the Manafort Treatment be disclosed in short order. And it better be good.

Because, and I state this more in sorrow than in anger, attorney client privilege is so embedded in basic human rights as to not even require inclusion in the Constitution. It dates back to the Elizabethan Era, and is a core part of British Common law upon which our Constitution is based. We are now headed down a very slippery slope on the treacherous terrain of civil liberties, and however much you may be enraged by Trump, I urge you to bear in mind that someday, you yourself might need a good lawyer, who, if we’re not careful, may have his professional materials seized. At which point they won’t be of any use to you. If this ever happens (and I pray that it doesn’t), it’ll probably be lights out for your case. Of course, this won’t apply to everyone. If you happen to be very rich, powerful and aligned with the appropriate forces, not only will your private realms not be raided, but you will have the prerogative to respond to subpoenas by simply decided what, of the information demanded, you choose to share.

The deal struck between the Southern District and the Special Counsel is such that anything the former uncovers that might be useful to the latter will be referred back to them. And here’s where I can at least plausibly make my case of tying the political to the financial. Anyone who had a shadow of a doubt that Mueller is going for the jugular should disabuse themselves of this fantasy at the earliest convenient opportunity. There’s an end game afoot here, set to play out over the immediate months ahead, and I believe it behooves the risk sensitive to bear this in mind as they seek to navigate through these choppy market waters. Because I don’t think the markets will much like the action, however it turns out.

But equities, notwithstanding these and other worrisome events, gathered themselves in gratifying fashion this past week, with the SPX bouncing jauntily off of its 200-Day Moving Average yet again, and now resting in the friendlier confines of its 50 and 100 day equivalents. One might be tempted to ascribe the bounce to giddiness about earnings, and I’ve seen estimates of growth rise to the dignity of ~20%. But I’d be careful here. A large contingent of big banks reported on Friday (JPM, Citi, Wells, PNC) and despite ALL of them beating both profit and revenue estimates by a comfortable margin, EACH sold off in the wake of their announcements by >2%. This suggests that the bar is very high for a paradigm involving strong earnings being followed by shares being bid up.

Volatility has indeed risen in the equity markets, but perhaps a little perspective here is in order. The combination of renewed price action after the vol paralysis of last year, and a rally that has increased the denominators associated with percentage moves, may be creating the illusion that the Equity Complex is in hyper-volatility mode. However, statistics offer a different story. While February and April brought some truly noteworthy action, across the course of 2018, we’re still only looking at a standard deviation of SPX returns in the mid to high teens, which is about the norm in the modern market era. So the equity market has become more volatile, but not alarmingly so, and while it is likely to continue to rise, in percentage terms, it’s important to remember that we’re pretty much at historical norms. And in terms of options volatility, last week’s selloff in the VIX took this benchmark to under 17.5 – right about its median for the lifetime of this eccentric index.

However, in a continuation of a highly vexing pattern, non-equity asset classes remain stuck in the volatility mud. The following chart, coming to you through the courtesy of those dedicated public servants at Goldman Sachs, Inc., illustrates what it looks like when one asset class awakes from a winters-long hibernation, while others remain in blissful slumber:

I’m not entirely sure what this correlation drop implies, but it doesn’t strike me as the kind of breakdown that the ghost of Tom Petty could reasonably describe as being “alright”.

Meanwhile, as cross-asset class correlations have migrated to decade plus lows, the story is quite different within the equity complex. Here, correlations, have spiked dramatically, again as illustrated by those talented graphic artists in residence at Goldman:

Among other things, one might wish to review other periods when stock correlations took an abrupt leap forward, and the intrepid among you might choose to superimpose equity index graphs on the image. I myself am either to frightened or have too much sensitivity for my readers to connect the dots here.

It may be the case that the jump in stock correlations is more easily explained than the drop in the cross-asset class correlation metric.

To wit: there’s a great deal to worry us in current affairs that has little to do with the relative fortunes of individual companies. For one thing, us Yanks got together with the French and Brits to lob some bombs into Syria this weekend. I don’t know what impact this will have on the markets, and won’t know till at least Sunday night, so I won’t opine upon this development.

More visible is the trade war of words currently under way. No one knows how this will resolve itself, but let’s just agree that it’s a risky proposition. Certainly, the Energy Markets have taken notice, bidding up Brent Crude to a 3-year high, and even the long-suffering, ag-heavy Continuous Commodity index has shown indications of higher pricing:

Strong Trade Winds: Crude And Commodities

Thus, as anticipated, we are in what I believe to be the early innings of a high impact information cycle. My best advice is to temper your investment enthusiasm and add a healthy measure of reactivity. There are opportunities developing, but they will require all of your talents and energies to capture them. You may also wish to place an extra focus on risk management.

So maybe it’s as good a time as any for me to step up my whole blogging game. Lowell George asked for our participation, but he’s been dead for nearly 40 years, and we need to make use of the tools that are at our current disposal. Please, in any event, don’t judge me too harshly for my expanded electronic footprint. And, if the spirit moves you, be a good rascal and join my band.

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

Transanimation

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Welcome to 2018, everyone. I hope you enjoy your extended, but necessarily finite visit. I suggest you take this opportunity to look around and absorb your surroundings. You’re gonna be here – for a while, anyway – so it wouldn’t be the worst idea to spend some time getting a general feel for the place. It may look familiar, but trust me: there are unknown portals, nooks and crannies, mazes that lead to nowhere, and the potential for surprise around every corner. As your self-appointed host, I’d like to be in a position to provide you with a detailed and comprehensive topographical map, but the plain truth is that I’ve just arrived myself, and am myself still surveying the totality of the premises.

I am well-aware that the current physical comfort index leaves something to be desired, what, with record cold descending upon much of the landscape. But this much I can promise you: it won’t last for the duration of your stay. The weather will indeed improve, and though I don’t like to promise, I’m pretty certain that some of you may even get some beach time in before you take your leave.

Your initial impressions may reveal little change — relative to your recently departed realm of 17. And you’d be wise to note not only the similarities, but also their implied continuity. For example, human behavior continues to trend towards the unfettered and unhinged. They’re still yelling at one another in Washington. Back-benching strongmen rants ensue apace. And our overfed, over-indulged psyches continue to run wild. For example, pursuant to today’s theme, I note the ever-expanding tendency for members of our species to redefine themselves to match the troubled inner workings of their brains. Over the last couple of years, the tsunami of focus on gender redefinition has catalyzed such trends as proclamations by certain individuals that, DNA notwithstanding, they have chosen to identify, racially and ethnically, with groups other than those genetically bestowed upon them by their forebears.

OK, where do we go from there? Well, in the fall of 2017, there was an explosion in a concept called Otherkin, under which homo sapiens have determined that in their heart of hearts, they are not homo sapiens at all: rather, they are lions, tigers, bears, and yes, even manatees.

Done and done? Uh, no. On January 1, 2018 – New Year’s Day no less – I uncovered a concept called transability, or, to apply the more generic medical terminology, Biology Identity Integrity Disorder (BIID): a phenomenon involving poor souls who, though being blessed with fully functioning bodies, nonetheless identify as being disabled. They feign paralysis and sit in wheelchairs. As Tommy once said, they “put in their earplugs, put on their eye shades and know where to put the cork”. Presto! They’re blind deaf and dumb. The real legit ballers in this crew actually go so far as to maim, themselves, and I read about one guy who even cut his arm off to prove the point.

So we enter 2018 with only one threshold left to cross: life itself. As such, I’ve created a concept called transanimation, under which certain living individuals identify themselves as dead. Presumably, this paradigm has been in place since time immemorial, but fair warning: don’t try to steal this idea from me because, well, I know where you live.

Thus, from a number of perspectives, 2018 might fairly be viewed as an extension of its predecessor – only more so. And this, at least in part, means that the verifiable realities we confront can simply be re-engineered according to our tastes, moods and predispositions. What, after all, is a cryptocurrency other than an effort by put-upon economic agents to redefine modes of exchange to better suit their agendas? But I have nothing constructive to convey about crypto, so I’ll leave it at that.

However, other, more old-school market mechanisms also reflect the current mindset. Consider, for instance, the Equity Complex, which, both domestically and globally, came barreling out of the gates in gale force fashion, and looking like anything other than a negatively transanimated creature. Perhaps, however, the opposite can be said of the VIX, which rolled over to its lowest close of all time on Wednesday:

VIX: Thinks It’s Alive But is Really Dead:

Yes, the good times keep rolling for options sellers, but like their antecedents, they face at least a nominal risk that what appears to be death is actually hibernation. Perhaps this lasts all winter, but on the other hand, and even so, the VIX Bear could wake up in the spring hungry and angry.

If so, and if history indeed is any guide, it will presumably know exactly where in the investment universe to attack to satisfy its urges.

Copper: Not Coming a Cropper

With all of that equity buying out there to distract our attentions, there wasn’t a great deal of side action with which to concern ourselves. Bonds were pretty flat. The USD remained moribund on the canvas. There was some discernable activity in the Commodity Complex, with even the long shunned grains managing to capture a late week bid.

But the big action was in Metals – particularly Copper – now comfortably trading at > 3-year highs.

And, while we’re on the subject of Commodities, can somebody please explain to me what in heaven’s name is going on in Natural Gas? I mean, please. Just when it looks like the inclement weather would offer some relief to this beleaguered instrument: a) first comes the snow; b) then come the frigid temperatures; and then, in a sign of the times, investors decide to stage a fire sale of their inventories, and short sellers jump on board for the ride.

Time was that Nat Gas was THE market to trade, but this era appears, at least for the present, to have been de-animated.

The Unnatural Behavior of Natural Gas: 

By this past Friday, we got our first glimpse of year-end macro picture. The December Jobs Report came in at solid, but uninspiring levels. Market participants checked the box and then resumed their buying frenzy. Now, presumably, ‘tis the season to turn our collective attentions to earnings, and the default expectation must shade towards the extension of the rolling good times of 2017. The process, in time-honored fashion, unfolds slowly, starting next week, and then accelerates to its crescendo around the end of January. Expectations are about as giddy as this old boy can ever recall them being, in part as evidenced from the following metric:

If I read this chart correctly, then the glide path of earnings estimates (which typically trend downward within a given quarterly cycle) across the quarter appears to be as favorable as they’ve been in about seven years. I’m not sure how much of this is a technical nod to the new tax regime, but it also appears to reflect a pretty encouraging trend line for business activity.

I reckon we’ll find out soon enough.

Four trading days into this annual cycle offer some time to get a feel for this 2018, but only a partial one at best. For what it’s worth, I read over the weekend that: a) the holiday-shortened start outperformed every full week in the fabulous, dearly-departed year of 2017; and that b) every year since 1950 which begins with 5 straight up sessions has ended with positive index returns, with the average gain clocking in at 18.6%.

So, from this perspective, and if one places faith in this sort of pattern recognition, tomorrow is a big day. But, on balance, I wouldn’t take any drastic steps to anticipate what comes next; let’s instead follow my original advice and take a look around a bit. However, if the market forecast calls, as it does, for warm and sunny conditions, you can’t help yourself by putting on your heavy weather gear. There may be an appropriate time to do so, but taking this step prematurely is likely to create only discomfort, aggravation and (worst of all) lost time.

I close by reminding you that in this new era of transanimation, the flows only go one way. Much as they might wish to do so, the dead cannot identify as the quick. And it strikes me that this is true not only in biology, but in finance and investment as well.

So look alive, be forewarned, and, as always…

TIMSHEL

Labor Day’s Love Lost

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 Well, kids, this is it. The Summer of Love +50 is in the books, and here’s hoping you made the most of it. Because, whatever (presumably mixed) blessings it bestowed upon us: a) they are now consigned to the past; and b) our affairs are likely to take on soberer complexion – starting tomorrow. 

Meantime, it’s Labor Day. I truly hope you enjoy it. But I won’t lie: I never liked Labor Day. In fact, in a very real sense, Labor Day sucks. The origins of today’s holiday date back to the late 19th Century, when organized workers became force with which to be reckoned, and took to violence to obtain better terms from their bosses. Bravo to them, I say, for the Industrial Revolution had indeed dealt them a bad hand. Working conditions were abysmal, with unilaterally empowered corporations sending young children into mines for 12 hour shifts. The Labor Movement brought some much needed balance to the equation. But a great deal has changed since that era. Globalization, Automation and (it must be said) widespread, sustained corruption, diluted the leverage of the union paradigm. Members and (more particularly) their reps grew complacent. And they overplayed their hands. And the membership took notice. And they have voted with their feet: 

But of course, there is a portion of the union-verse that is thriving, and that, as is well-known, is the organized segment of working stiffs on public payrolls. Their participation rate, according to the Bureau of Labor Statistics, is more than 5 times that of their private economy counterparts. A strong argument can be made that the only unions with any juice left are consortiums of government employees, who bargain aggressively against other government representatives to determine how deeply they will reach into taxpayers’ pockets. My vague recollections about the Supply/Demand curves I drew in college offer hints of an inefficiency here, and it’s no wonder we are plagued with the troubles we face. 

Thus, whatever it’s noble origins, the organized labor movement is now only in it for themselves, and I have a hard time celebrating the patriotic triumphs of AFL-CIO, the American Federation of Teachers, the NFLPA or the Screen Actors Guild. For these reasons alone, I have always looked at Labor Day with something of a jaundiced eye. But my issues transverse my petty political perspective. Though many years have passed since I was sending my own darlings off to school, a part of me feels sad this time a year, when I drive by bus stops and see the backpacked little fellers with their long faces, trudging off to their essential but decidedly grim organized educational facilities.

And there’s more. Even for us grownups, the end of summer ritual brings about a feeling of both sadness and nausea. I work hard during the summer, as do, presumably, most of you. But as June melts into July, which melts into August, I will admit to allowing my mind to relax a bit. “It’s summer” I tells myself “take it a little bit easy”. 

But that particular crutch expires today, and what lies beyond, on balance, every year but this year in particular, causes my blood pressure to rise. Both Management and Labor will have to resume their toils at full throttle, with outcomes that appear to be decidedly uncertain. 

In a perverse turn of the calendar, the lead up to the holiday I’m abusing offered some insights into the condition of the latter, eponymous class. On Friday of all days, the BLS dropped the August Jobs Report, and presumably y’all know it was a yawner. Private Payrolls came in light. June and July were revised down. Hours worked and hourly earnings barely budged. The base rate actually ticked up a titch. 

But our always-intrepid working stiffs continue to gather themselves on the spending side, more often than not, with funds sourced from origins other than their own personal wealth. According to the latest figures produced by the NY Fed, Consumer Credit hit an all-time high last month: 

That’s a passel of debt to pay back, and it would therefore follow that Management and Labor alike should be highly motivated to knuckle down in the final trimester of ’17. But actually accomplishing anything may be easier said than done. Among other factors, while the rhetoric has cooled a bit in Washington, bond investors are showing increasing concern about the possibility of a government shut down this month, specifically by shedding obligations that will come due over the next few weeks:

In addition, there’s those pesky Northern Koreans, whose leader seems intent on sending what’s left of his long beleaguered country into Kingdom Come. I hesitate to weigh in professionally here, but it does strike me that: a) the presence of deployable ICBMs in the hands of L’il Kim will be deemed immediately unacceptable for the U.S. and its allies; and b) whatever steps are taken to eradicate this threat will be volatility enhancing and valuation dilutive. 

Through it all, though, the Gallant 500, chugs on, half-a-league, half-a-league, half-a-league onward. Factoring in dividend/reinvestment, August marked the 18th month out of the last 19 where the index generated positive returns, and that, my friends, has only has happened one other time in history – in the heady days of ‘95/96: the infancy of the dot.com bubble. In putting up this performance, it stands in firm solidarity with the VIX, which again is bumping down against single digit thresholds: 

VIX Vertigo: 

Kind of strange from my perspective. I would’ve thought that investment pools might be marginal buyers of options going into the long weekend, but apparently they were otherwise occupied. 

In general, I’d say we enter this last, performance-critical third of the year in something of a jump ball configuration. Risky assets appear to be nothing if not fully valued, but are they overvalued? I’m not prepared to state that they are. I will, as has been my habit, offer the following observation though: there’s nothing on the horizon which would particularly incline me to be short any asset class: not stocks, not bonds, not commodities and not credit. 

I’d like to predict that volatility will normalize over the near term, but I’m not even sure on this score. 

So about all I can offer on this sucky Labor Day is an admonishment to remain on your toes. Something’s likely to happen – sooner. Or later. Or never. 

Come what may, I’m girding myself for battle. But all of that starts tomorrow. In the meantime, you must forgive me as I take my leave. The burgers need flipping, and that critical task devolves to me, and as I perform this vital task, I’ll be thinking, more in sorrow than in anger about Mother Jones. 

TIMSHEL 

Viva La VV’s

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Fair warning to those have somehow failed to notice: as the rings embedded in my tree stump increase to uncountable magnitudes (i.e. as I grow older), I find my expository focus increasingly centered on eulogies, elegies and other forms of tribute to the dearly departed.  I don’t think I can stop this trend, because (let’s face it), the passage of time only increases the inventory people and things that went before, while my interest in everything else inexorably wanes.

So I noted with unmixed regret last week’s announcement by owner Peter Barbey (among other things the heir to the North Face/Timberland/Lee Jeans outdoor clothing dynasty) his intention to discontinue the printing and physical distribution of the venerable “Village Voice”.  Oh, the publication will forge on in the crowded and complex ionosphere, competing for what used to be called “mindshare” with a bajillion other on-line periodicals, but soon, those accustomed to the ritual of grabbing a copy of The Voice outside their favorite bodega, will find their routines rudely disappointed, and for all time.

Volumes can and will be written about the periodical: how it was founded in 1955 by Norman Mailer and a couple of his pals out of an apartment located in the neighborhood for which it is named, how it became a portal of passage for writers and artists, ranging from Literary Giants Alan Ginsberg, Ezra Pond, Henry Miller, James Baldwin and E.E. Cummings, to Music Critics Lester Bangs and Nat Hentoff, to cartoonists Jules Feiffer, R. Crumb, Matt Groening and Lynda J. Barry.  How it chronicled the cutting edge sensibilities of the Beat Generation, the Flower Power era, Punk and post-Punk.  And how, above all, and against significant odds, it endured for decades as the bible for local popular culture; its reach, extending well beyond Bleeker Street, well beyond Manhattan, well beyond America’s borders, extending, at least for a time, around the world.

The Voice, of course, has always been free in New York, but I actually used to plunk down the hefty sum of 5 clams to pick up a copy from time to time in Chicago.  It was the late ‘70s, and I was already casting my eyes eastward.  When I finally reached the, er, Promised Land of Gotham, I never missed an edition.  I eagerly checked the live show listings (chock full of formatted ads from venues long shuttered, including the Bottom Line, the Ritz, the Felt Forum, the Lone Star Café and, of course, CBGBs), sneaked a peek at the Personals, and read what articles captured my interest.

It was in the Village Voice, for instance, that I first read of an epidemic of untreatable viruses that were plaguing the neighborhood: a problem that a few months later rose to the dignity of a full blown global crisis: the spread of Acquired Immunodeficiency Syndrome – otherwise known as AIDS.

But in the end, The Voice almost certainly fell victim to the inexorable forces of what transpires at the intersection of cultural change and technological advancement.  The music clubs shut down.  Those looking for hookups found more efficient means of sourcing them.  Its (dubious in my judgment) progressive sensibilities got lost in an interminable stream of such doggerel – made available every microsecond on the web.  In sum, it might be fair to state that The Voice lost its voice, and this is hardly cause for celebration.

I reckon, though, we’ll survive, but I don’t think we’d doing ourselves any harm by taking a moment to mark the changing of the guard downtown.

Anyway, I’ve got a suggestion for moving on from our lamentations, for a new VV has emerged.  SaVVy investors already know this, but for the last couple of years, those looking to trade in the nooks and crannies of what is known as Volatility can avail themselves of something called the VVIX.  It measures the implied volatility embedded in options on the VIX index, which in turn measures the implied volatility priced into options on the S&P 500.

Got that?

Good.  Because unlike the VIX, which aside from the odd palpitation, has been a sleepy ride down a Local (i.e. as opposed to an Express) elevator, the VVIX has been quite lively of late:

 

VIX:                                                                           VVIX:

 

If you’re a bit confused here, I suspect you’ve got company.  But trust me, the VVIX is where the action appears to be.  To wit: while the VIX graph indicates that the implied vol of the SPX is a dreary, high-single/low-double digit affair, the VVIX rises and plunges to levels routinely around (and sometimes above) 100%!

Now, back in the days when Mailer and Co were cranking out The Voice on an inky, noisy, hand-operated printing press (i.e. when I first studied options theory), I was taught that an implied volatility of > 100% is, shall we say, problematic.  It implies that the underlying instrument, with significant one-standard deviation probability, can manifest a price change equal to or greater than its entire value. I can see how this is possible on the upside, but if my increasingly waning arithmetic skills have any juice at all left, this suggests that a single, high probability move will take the underlying instrument (in this case the VIX) into negative territory.

Somebody wake me up if the VIX goes negative, because it suggests that there are investors out there who will pay me for the privilege of holding options, and under the circumstances, I’ll take all I can get.

In fact, such a trade might be about the only low hanging fruit left in the entire global market complex, which continues to show very little sign of reaction to stimulus (positive or negative).  Last week featured some interesting news flow, but many markets barely budged.  The SPX did in fact manage to break a 3-week losing streak, but only to the tune of about 60 bp.  For all of the talk of equity strength, our favorite index has traded inside a 24 handle since just before Memorial Day, and, as I hardly need to tell you, Labor Day is just around the corner! Mathematically, the entire summer season range is under 4%, and at the moment, the SPX is below its midpoint. So perhaps we should be-calm ourselves as to the strength of this market.

Selected other asset classes are showing a little less sloth, perhaps as led by the decline to YTD lows of the US Dollar Index, and the impressive climb of Gold:

 

US $ Index:                                                     Gold:

 

Now, I should inform you that us stone cold ballers think of Gold as a currency, so the yellow rock rally can at least in part be viewed as yet another forearm shiver to our beloved green paper.

The main beneficiary, apart from Gold, of the dollar’s poor performance, was the Euro, which gained over 1% on Friday, most of which it copped in the afternoon, subsequent to the Central Bank speechifying at Jackson Hole.  It does appear to me that as is consistent with the urban myth, FX traders are displaying more sensitivities to global affairs than are stock jockeys.

I think, again, they may be on to something.  While next week, if there’s a God in heaven, should be quiet, we’ll have to burst out, from a standing start, come Labor Day Tuesday.  Perhaps top on the agenda will be untangling a brewing budget crisis, and who among us is brimming with confidence that we can avoid turning this routine exercise into a clown rodeo? Data will start streaming in, and the market action could come from any corner of our awareness, from Washington to Pyongyang, from Corporate C-Suites to the mean streets of Berkley.  We’ll be well-advised to remain on our toes.

I also want to reiterate (in part because I believe I was the first to record this thought) my belief that if investors want anything out of this congressional session, they bloody well better gin off some sort of selloff.  If bad behavior from the White House to Capitol Hill is met with nothing more than a collective market shrug, accompanied by a sustained unwillingness to part with favored holdings, then said bad behavior is rendered politically inconsequential, and will continue.  By contrast, if the market took a dive, I believe you’d see them pols busting their collective humps not only to pass a budget, but also to do something useful on Health Care, Tax Reform and Infrastructure.

I reckon, though, we’ll just have to see how that plays out.  In the meantime, if the spirit moves, I think you should pick up a print copy of the Village Voice – while you still can.  Put it aside for your progeny.  Let them know how we used to do it.  It will do them less damage than obsessing about the latest moves in the VVIX.  And, for those who were wondering, yes you can trade options on this index, raising the likelihood that, ere long, we’ll have the opportunity to turn our attentions to the VVVIX.

Good luck with that one, kids. Because, like James Baldwin, Alan Ginsberg, Norman Mailer, the Bottom Line and (soon) the Venerable Village Voice itself, I hope by then I’ll be out.

TIMSHEL

The Summer of Love?

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

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

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

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

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

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

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

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

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

 

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

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

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

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

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

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

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

 

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

 

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

 

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

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

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

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

TIMSHEL