Tag Archives: VIX

The Efficient Cowbell Hypothesis

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Let’s get back to the music, shall we? After all, it’s been several weeks, and I don’t know about you, but as for myself, I’m Ready 2 Rock. Today’s subject (though perhaps not its direct object) is Blue Oyster Cult: in my judgment one of the finest and most overlooked bands in rock’s pantheon. They are comprised of a bunch of erudite New Yorkers, most of whom attended fancy private colleges in the region. They burst onto the scene in the early ‘70s, when rock most needed the boost, and released 4 killer albums (self-titled debut, Secret Treaties, Tyranny and Mutation and Agents of Fortune), featuring wicked riffs, cerebral lyrics and tasty hooks, at a time when our heroes were fading into mediocrity, and it was becoming increasingly clear that the next generation didn’t have the goods to do the job.

Like many such outfits, they captured a following, rode a modest crest of fame, lost their composition touch and have been mailing it in, under various lineups, for most of the past four decades. However, for better or worse, the apex of their awareness in the public eye came in the form of an SNL skit called “More Cowbell”. In it, a fictional lineup of cast members takes to the studio and do a fantastic job of replicating the band’s sound with respect to their biggest hit: the accessible but on balance forgettable Don’t Fear the Reaper. The punchline derives from the perfect casting of Will Ferrell as the band’s cowbell artiste, and Christopher (Bruce Dickenson, aka The Bruce Dickenson) Walken as the record’s producer. Walken is so enchanted by Ferrell’s cowbell work that he forces it into an overwhelming domination of the arrangement (“I really want you to explore the space of the studio” Walken declares to Ferrell). Ferrell is magnificent as the clueless percussionist, and Walken is at his sleazy best in his role as the grease ball, know-it-all producer. The band at first is skeptical that the cowbell should take the lead, and the affable, sheepish Ferrell offers to stand down, but in the end everyone agrees that Will should take center stage, and, as the scene fades to black, he’s blissfully banging away (maybe still is to this day).

As a result, the term “More Cowbell” has entered, perhaps for all time, the cultural lexicon of this great nation. As a public service to my uninitiated readers, I offer a link to the full sketch, below (courtesy of the National Broadcasting Company; all rights reserved, natch):

http://www.nbc.com/saturday-night-live/video/more-cowbell-with-will-ferrell-on-snl-video-saturday-night-live-nbc/3506001?snl=1

The whole thing is beyond silly, and (though the band gracefully and even enthusiastically embraced its incremental 5 minutes of SNL fame) doesn’t give a great ensemble its props, but I believe it captures the American ethos about as well as anything that comes to mind on this warm, mid-summer weekend.

But perhaps more importantly for our purposes, it begs the following question: does any corner of the investment universe need more cowbell? 

Now, here, in trademark mashup fashion, I must loop in my University of Chicago roots. It is there that I learned (from Nobel Laureate Eugene Fama, no less) of the Efficient Markets Hypothesis, which avers that markets, and, by extension, all economic factors, are oriented to point-in-time perfection, based upon available information and sentiment. From this perspective, one can argue that markets must be “cowbell efficient” as well, featuring precisely the amount of cowbell that conditions demand, and that any incremental additions or dilution of current cowbell quantities would only serve to diminish the mix.

Well, maybe, but even Fama himself has admitted that markets are not at all points perfectly efficient, so perhaps we’ve got some wiggle-room, cowbell-wise. If so, we can probably first turn our vision to the equity markets, which few would argue at the moment are cowbell-deficient in any sense of the term. The SHAZAM effect referenced in the preceding edition was in full force in the early part of last week, catapulting markets yet again to new record highs (both here and across the globe) before ending the cycle in flat-line mode. The main driver here once again appears to be Q2 earnings, which are now nearly 1/5th in the books. On balance, they’re strong, but while there are a number of Netflixian-like triumphs to celebrate, there were also some General Electrician disappointments.

Perhaps more pertinently for our purposes, it is clear that the expectations bar has risen. As reported across the wires, “beats” are being welcomed this quarter, but perhaps with slightly less valuation enthusiasm than in past cycles, “meets” are facing disdain, and misses, as always, are suffering merciless punishment. Indices continue to rise to the heavens, but the breadth is putrid. Moreover, in messaging that would be more difficult to miss than Ferrell’s percussive whacks, equity investors continue to shrug off darkening macro and political clouds. As a case and point, ask yourself whether, in the middle of a brutally serious investigation of potential criminal activity at the top, with members of his administration facing one subpoena after another, a President insults the Attorney General and practically begs him to resign, would you want to load up on stocks or lighten the cargo?

Investors have responded with a resounding “Buy ‘Em”! Ergo, we can conclude, at minimum that no additional cowbell is required in equity-land.

But how about other asset classes? Well, it appears that Mr. Ferrell might very well consider pointing his solitary drumstick at the U.S. yield curve, which, due to a fairly dramatic end of week selloff of 3 Month T-Bills, actually inverted at the short-term end:

There was a good deal written about this over the past few days, and the stock explanation is concern about a Washington throw-down over the debt ceiling – due to expire on 10/1. If you own October T-Bills and Uncle Sam defaults, you may be left holding the bag, or so the argument goes. But as for me, I think we’ve got more important concerns to vex us.

If any feature component of the global risk factor combo could use some bell, it may be the USD, which took a pretty significant beat-down over the latter part of the week, and is now, on a weighted basis, sitting on >2.5 year lows:

 

US Dollar Index: 

It is said in financial circles that while sunblind equity investors remain unconcerned about Investigations, Legislative agenda breakdowns and the like, these matters do tend to get under the skin of those who bang around in the Fixed Income/FX complex, and who knows? They may have a point.

My most abiding belief at present is that while smarter guys and gals than me may justifiably debate the appropriateness of current asset values, I will stand by the following precept: whatever their other merits may be, said valuations fail to fully reflect the risks embedded in both the political and capital economy. I don’t in my travels run across too many souls who are unmindful of the hazards looming on our collective horizons, but in terms of voting with their trading accounts, they have for the most part chosen to ignore the warning signs. Evidence of this ostrich dip abounds everywhere the eye meets, including the collapse of short interest mentioned in last week’s installment, and the widely discussed weakness in risk measures such as the VIX, now hovering at fractions of basis-points above all-time lows:

As such, and channeling my inner Bruce Dickenson, if I was to add more cowbell, I would apply it perhaps exclusively to measures of the risk premium, including the above-displayed VIX, realized index volatility, and other, similar dynamics.

Unfortunately, however, there’s only one Bruce Dickenson, The Bruce Dickenson, and he alone carries the vibe to take us to the Promised Land. But Good Sir: Oh Keeper of the Controls, Oh Captain of the Cowbell, please consider its wider application, Pete Seeger-like, to ring out danger, to ring out a warning to all our brothers and sisters, all over this land. For, from my vantage-point, the Efficient Cowbell Hypothesis is sorely in need of the type of recalibration that you and you alone can provide.

TIMSHEL

CamelNOT

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 OK, a quick word about Greg: a man for his time and place. Loved the music, the persistence, the reinvention. And I forgive you for the folly: for letting your road manager take the fall for your cocaine bust, for that nonsense with Cher, for firing Dickie. You proved, as much as anyone this side of Dylan, that the road does indeed go on forever…. 

I dedicate this Memorial Day edition to John Fitzgerald Kennedy, the 35th President of the United States, on this, the 100th Anniversary of his birth. 

His record on this earth (well, what is publicly known at any rate), is beyond the stuff of legend. It is so indelibly burned into the brain of Americans as to almost transcend its own historical context, which, significant as it was, should’ve been bloody good been enough. To recap briefly, 35 was the scion of a powerful family whose wealth may have derived from dubious, ill-gotten sources. He matriculated (where else?) at Harvard, joined the Navy during WWII, got his PT boat rammed by the Japs, and organized a 3-mile swim to relative safety, dragging an injured crewman that entire distance with his ‘effin teeth! He then entered politics, copping a Congressional Seat, knocking the entrenched Henry Cabot Lodge out of the Senate, blowing by Johnson and Stevenson in the 1960 Democratic Primary, and then winning a (perhaps Daley enabled) squeaker over Richie (aka #37) Nixon in the General. Like Nixon (who established detente with the Soviets and the Chinese, and instituted Wage and Price Controls), his (albeit brief) stay in the White House was marked by astonishing divergences from his party’s play book. He cut taxes, and presided over an economy that was growing at 5% with 1% inflation and did not engage in deficit spending. He took on the Red Scare on two separate occasions in 1962 – first an unsuccessful invasion of Cuba’s Bay of Pigs and then a triumphant showdown with Khrushchev, the end of which featured the dismantling of Soviet missiles on Castro’s turf. 

He sowed the seeds for the Vietnam War (which didn’t turn out so good), but also established the Peace Corps and the American Space Program. Finally, though he didn’t live to see it, he was the visionary behind the Civil Rights Act of 1964, a milestone that your humble correspondent believes may have been the last useful piece of legislation ever enacted by the World’s Greatest Deliberative Body. 

Of course, just as he was cranking up his re-election campaign machine, someone (and, being a grassy knoll kind of guy, I’m not convinced we know the full story) blew his head off. Like Jim Morrison, John Lennon, Roberto Clemente, Abe Lincoln and so many others, his untimely demise only added to his status at as an historical icon. 

His is, and will presumably remain, among the most recognizable visages in history. But what strikes me most about him is this: he was a man. A real man. Of course, part of this is is his well-documented status as a world-class horn-dog, whose bedroom exploits might give contemporaneous superstar Wilt Chamberlain a run for his money. But there was more than that to consider, more, even than his military record, more than his political record, more than his movie star demeanor and epic life story. If you get a minute, listen to some of his speeches: his acceptance speech at the 1960 Convention, his Inaugural Address, his remarks in Berlin (and for the truly obsessed) his Commencement Speech to the (presumably hated) Yale University Graduating Class of 1962 (The Peace Speech). There and elsewhere, his stood tall, articulated clearly and spoke (for the most part) what was on his mind. 

Shortly after his death, his fetching, accomplished widow, Jacqueline Bouvier Kennedy Onassis, described his fleeting time in the White House with a single, sublime term: Camelot. 

I got to thinking about this, on 35’s 100th B’Day, from the perspective of the stark contrast to the current paradigms in Washington. Yes, my friends, Camelot appears, for the time being, to be transformed into CamelNOT. 

Here, I write not to disparage the current administration, many of whose efforts I applaud, and for whose success I am ardently rooting. No, my friends, the problem goes deeper than that, and it says here that the situation from this perspective would be no less dismal had the outcome of the 2016 gone the other way. If you doubt this, give a listen to Hillary’s recent commencement address at, her alma mater, Wellesley College, in which, conveniently and characteristically forgetting her lifetime of serial dissembling, chose to lecture the graduates about the importance of truth telling. 

But one way or another, for the time being, our biggest challenges continue to emanate (or so it would seem) from Washington. Last week’s pre-holiday action featured the nebulous content of the Fed Minutes, the release of a Presidential Budget Plan that seemed to please no one and anger many, the micro-analysis of Our Leader’s first overseas capitol hop, and of course, the drip-drip-drip of leakage about collusion with the Russians. 

But for now, choosing not to obsess over these matters, the markets instead ignored them entirely. Domestic Equity Indices rallied, unimpeded, to new all-time highs. Rates, both domestically and globally, drifted downward. The VIX, after showing signs of life last week, actually managed to submerge, yet again, to all-time lows of 9.81: 

(By the way, while I LOVE the WSJ, I ask them PLEASE to stop writing about how robots are going to displace all humans in the investment profession. Guys: you’re really starting to depress me).

 Meanwhile, economic and financial statistics have been, of late, encouraging – at least on balance. Friday’s poorly attended trading session featured a modest upward revision to the heretofore dismal Q1 GDP Report. True, we only came up to a dismal 1.2%, but that’s a clear sight better than the original print of 0.7%. Durable Goods and New Home Sales came in on the light side, but PMI and Weekly Jobless Claims told a happier story. 

Perhaps most encouraging of all is the final (or near-final) tally on Q1 earnings, which evidenced a 14% rise. Arguably as important is the firming/convergence of top-down and bottom up estimates for Q2: 

It occurs to me, on the whole, that we’re at something of an inflection point here. The markets, as I suggested a couple of weeks ago, and then (so it must be admitted), I retracted last week, are showing signs of wanting to break out. The technical are strong and a flight to the upside is certainly possible. My best guess is that the main gravitational pull derives from the high-probability series of new tape bombs emanating out of the White House, a dwelling that at present is clearly occupied by persons other than Arthur, Lancelot, Galahad and Guinevere, or for that matter, John, Jacqueline, Lyndon, Lady Bird or Everett (McKinley Dirksen, that is). 

In any event, I don’t think that valuations stay where they are, come what may. The SPX breaking through 2,400 was impressive, but current levels strike me as being nothing more than a weigh station between more heavenly elevations or a reversion to that wearisome 23-land. It’s of course a holiday shortened week, and June, other than a few important tidbits like next Friday’s Jobs Report and Chair Yell’s Flag Day (6/14) turn at the FOMC podium, will be relatively bereft of pertinent information flow. 

The tape, in short, will be tricky, even if everyone in Washington behaves themselves. We’ve been here before, my loves, but that may be of little comfort. We are all of and in our times, and clearly, there’s no Knights of the Round Table, nor even inspiring figures like JFK to shore up our fortitude. 

So, let’s take a moment today to celebrate 35, whose final resting place is on the sacred burial grounds of Arlington National Cemetery, which was once the estate of last week’s anti-protagonist, R.E. Lee. After that, it’s back to the grind, and, CamelNOT or not, we have no choice but to strive to prevail. 

TIMSHEL