Tag Archives: Yields

Teas for Twos

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I dedicate this edition to one George Herman (Babe) Ruth, on this, the 100th (plus two days) anniversary of his sale by the Boston Red Sox to the New York Yankees.  I’m not a huge baseball fan, and, to the extent I follow the sport at all, you can count me among the legion of Yankee detractors. This was always the case, but a decade or so back, when the House of Steinbrenner (amid a financial collapse about which you may have read) extorted about $2 Billion from New York taxpayers (of which I am one) to build that new shopping mall with a grassy diamond in its midst, my disdain hit full flower.

Call it the second great heist in Yankee history.  The first was their 1917 purchase of the Babe’s rights, from Red Sox owner (and New York denizen) Harry Herbert Frazee, for the relatively paltry sum of $100,000 ($2 Million, in round numbers, in today’s dollars).  For Frazee, baseball was something of an avocation; his principal profession was that of Broadway Producer, and he needed the hundred large to finance a then unknown/now classic musical called “No, No, Nanette”.

But again, I’m just not that into baseball.  Is anyone? Really? In fact, what got me on to the whole Bambino thing was my disgust at the Chicago Bulls giving away the sublime Jimmy Butler for little more than a bag of used basketballs.  To add insult to injury, they actually sold their 2nd round pick for $3.8M – about $190K in 1917 dollars – a move which further emphasizes the shocking one-sided nature of the original Yankee scam.  But an additional word about the Babe is perhaps in order. Sports fans, no matter what the sport, never tire of the GOAT (Greatest of All Time) debate, but that there is even a discussion of this with respect to what is anachronistically described as “our national pastime”, is almost beyond silly.  The answer is Ruth, hands down.  He set a passel of records, including for single season home runs, career home runs, career RBIs, slugging percentage, etc., some of which hold to this day.  He led teams to 7 World Series titles (can anyone name anyone else who can make this claim?).  He accomplished all of this in 154 game seasons, in an era long before the leagues started juicing balls and (later) when players started juicing themselves.  He played against superior competition, relative to modern times, as the entire MLB structure featured only a dozen teams, drawn from the country’s best athletes, in an epoch where the competing draw for skilled sportsman to football was in its formative state, and round ball was still being played with peach baskets.

Oh yeah, and he spent the first few years of his major league career as a pitcher, amassing a record that extrapolates to Hall of Fame credentials, winning 94 games, losing 46, with a beyond gaudy Earned Run Average of 2.28.  Had he started his career in the outfield, and conservatively assuming he could’ve “gone yard” 25 times a year, his tater total would be approximately 850, which would have left Barry (Mr. Asterisk) Bonds and, lest fortunately, the fabulous Henry Aaron, in the dust.  Had he remained a pitcher, his win total projects out to over 400; ‘nuff said.

So, 100 years ago, the Babe went on to create some of the most important chapters in the American storybook, and, though it took some time, Harry/Herbie Frazee eventually brought “No, No, Nanette” to a triumphant run on the Broadway stage.  Among its myriad charms, NNN is perhaps best remembered for its feature song: “Tea for Two”, the purloined theme of this column.

But as always, the eternal question abides: why do we care?  Well, as widely discussed in the financial press, it’s been a rough ride for those looking to capture return by owning the U.S. 2 Year Note (the “2s”), as hedged against the same debentures extended out to maturities of a decade.  It was indeed another down week for the 2s/10s crowd, albeit a modest one:

2s/10s: Another 10-Year Low.

Let’s be clear: from a macro perspective, that chart ain’t pretty.  But lo, and without warning, attention has shifted to the even more put upon 2s/30s spread:

2s/30s: Same Deal.                                           

Yield Curve Action Last Week:

Again, all of this begs the question as to why we should care. I mean, OK; so the yield curve is flattening.  Investors are rushing into the powerful arms of our long term debt securities, in part at the expense of those instruments with more fleeting life spans.

I did a turn in Grad School at an institution approximately 3 miles, as the crow flies, southwest of the House That Ruth Built, and one of the things they taught me (at least if I remember correctly) is that the flattening of a yield curve is an indication that a recession may be in the offing.  But that was 35 years ago, and a good deal has changed since then.  Computer programmers no longer are forced to enter code on punch cards and process them through noisy card readers.  Football helmets are no longer made of leather but now built out of materials designed to survive a nuclear explosion, and football has almost certainly replaced baseball as our national pastime. I think there’s something going on out there in the global capital economy which tempts me to unlearn everything those erudite professors at Columbia University attempted to teach me (or, more pertinently, the bare scraps that I managed to retain).

So I’ll go the whole route and offer the opinion that the chances of recession, based upon available information, are, at the moment, de minimus.  Yes, the macro picture is starting to look bleak, as illustrated by the following chart of hard data (Employment, Inflation, Retail Sales, etc.) and soft data (Confidence Measures, Sentiment Indicators):

I’d be remiss if I didn’t also mention the alarming collapse of the Energy Complex, which indeed merits close watching.  But the only noteworthy statistics released last week were some pretty encouraging data on home sales (new and existing).  Corporate profit projections, while slipping a bit, still appear to be shading towards a reaffirmation of the hypothesis that the earnings recession is behind us.

My biggest fears continue to emanate out of Washington.  For now, the Star Chamber Inquisition of the President does not look like it is close to taking down its target.  But these dynamics tend to change by the hour, and meanwhile the Trump policy portfolio, and all that it promises for the investor class, appears, at minimum, to be imperiled.  In addition to this probably messing with the Fed’s flow, one wonders if corporate economic models are, even as I type these words, suffering the indignities of a downward boot.

One way or another, I’m expecting a very quiet week, not in small part because of the holiday that looms shortly after it concludes.  Friday is the last day of what has turned out to be a crazy quarter.  Across the week ahead, it may be worth having a look at Wednesday’s Consumer Confidence Print and Friday morning’s GDP revision, but that’s about the sum total of interesting tidbits scheduled to cross the tape.

I am also more or less anticipating some quarter-end position marking, as all of the necessary ingredients are in place for the time-honored ritual to take place.  Investment pools need the performance.  Volatility is nowhere to be found.  Liquidity should be at a low ebb, so why not buy a little more of what you already own, just in case? A few extra basis points of self-generated love may or may not impact subscription/redemption flows, but that’s hardly the point.  What matters is that traders think it might.  This may not move the markets, but it could provide both some additional fuel for any climb to higher elevations, and supply a much-needed bid if the inexorable forces of gravity set in.

The week that follows should be sloppy, with a holiday interrupted liquidity vortex perhaps threatening to cause gratuitous violence.  The real action, of course, begins on the week of the 9th, and will carry interesting tidings for at least the subsequent few weeks.

So I will remain watchful, and use the extra time to try to get over my disgust at my team’s actions at the recently completed NBA Draft. Maybe Chairman Reinsdorf, channeling Mr. Frazee, needs this dough to finance some spectacular public entertainment. After all, NNN ran for an impressive 321 days, made millions for its sponsors, and of course launched the Yankees to their pre-eminent place in the sports franchise pantheon.  In that case, arguably, everybody won.  Everyone but the Red Sox fans, that is, who endured 8 ½ decades of the Curse of the Bambino.

I do fear the same fate awaits us Bulls supporters.  So, if Mr. Reinsdorf were ever inclined to invite me over for a warm, non-alcoholic beverage, I’m afraid he’ll have to settle for tea for one.

TIMSHEL

Busting Out All Under

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Just as May must follow April in her prime,

June will always find me, counting out time,

They buried Miss July, put her face down in the earth,

She called her baby “August” and died while giving birth

— Dave Rotheray

 

Well, my darlings, it is indeed June, but one hardly sees it busting all over. For one thing, the weather –at least in the Northeast, has pretty much sucked.  This here is shaping up to be a pretty nice weekend, and all I can say is it’s about time.

We just concluded the 6th month’s first full week, and for all of the dramatic promise it portended for those in the investment game, on the whole it was a yawner.

In fact, to date, I’d go so far as to state that from a trading perspective, June, thus far, is indeed busting out all under.

We can take last week’s big events in chronological order, beginning as late as Thursday with the widely anticipated, over-hyped Comey testimony.  With those on both sides of the political spectrum in pitched battle to outflank one another in hysteria, the end result was something of a disappointment.  To paraphrase Forest Gump’s mother, Comey is as Comey does, and Thursday’s turn at the microphone, in front of a group of glowering Senators, served to reinforce the point.  I found all of his responses to be lawyerly and self-serving.  When it suited his defensive interests to describe himself as a weak sister, he freely did so.  When, on the other hand, it behooved him to articulate his heroic support of his country, the government agency he recently ran, and his standing as a patriot, he did just that.

I do think there’s one under-analyzed thread in that whole sequence, deriving from his justification for contemporaneous note-taking as being driven by his agenda to see that a Special Counsel was named – to investigate the purportedly nefarious but as yet undefined Russian interference in the 2016 elections.  I suspect that this was indeed his game all along, and gosh all fishhooks if it didn’t work.  We’ve got us a Special Counsel, one Robert Mueller, former occupant of the seat from which Comey was so rudely dispatched, and longtime bestie of Comey himself (side note; Mueller was named FBI Director on September 4, 2001, so he must’ve had an interesting first few weeks in office).

Given that Comey was unwilling to answer any specific questions about the investigation, I suspect that there’s a long game afoot here, and one that continues to threaten the current administration.  Comey’s job was to get through the ordeal with as little mud splashed upon him as possible, and to punt any substantive queries to the SC. My guess is that this means, though we may not have to endure the redux for several months, that this thing ain’t over.

Investors: be forewarned.

As fates would have it, the Comey testimony came on the same day that the good citizens of the United Kingdom took to the polls, this time to deliver a rather unambiguous one finger salute to recently elected Prime Minister Theresa May.  The Brits stopped short of giving her the gate altogether, but the outcomes are such that she will have to struggle to retain her residence at 10 Downing Street, Westminster, London, SW1.   Perhaps as bad (or worse), the self-imposed ordeal (it was May herself that called for the elections) served to resurrect the political career of Labor Leader Jeremy Corbyn, a chap whose politics are often described as being to the left of Bernie’s, and who was, prior to Thursday, expected to fade into oblivion.  None of this of course, is an encouraging lead-in to the pending Brexit negotiations, which were going to be tricky under any circumstance, and may now devolve into a circus.

Some markets reacted to these tidings.  That the British Pound took an, er, pounding was perhaps to be expected, and, for what it’s worth, I can also see the framework for the rocky EUR ride:

 

Investors also served themselves up a hearty helping of government bonds, with most of the action, somewhat improbably, centered around the oft-beleaguered debentures of Southern Europe:

Spanish Yields:                                                 Italian Yields:                          

If one is looking for root causes here, the glibbest and most accessible justification is that the Continental unrest is likely to keep the ECB Ï printing machine running on all cylinders, and why not? Euro QE is humming along at about Ï90B/month, implying that Team Draghi has printed about $500B in 2017 alone, all directed to the purchase of member nation bonds.  With less transparency on Brexit, is a downshift likely? I think not.

I should also mention that my grain complex had quite a week, with the bulge bracket of Wheat, Corn and Soy Beans all enjoying bids across the cycle.

But as for the equity markets, they seemed to shrug off all external news flow.  In fact, most of Europe, including the U.K. gathered itself admirably by Friday.  Stateside, the SPX dropped 8 skinny handles for the week (> 0.25%), while the Dow actually closed at record highs.

Now, I know a lot has been written about Friday’s big puke of the power part of the U.S. equity lineup, with names such as Apple, Amazon, Alphabet, Microsoft and Facebook (which together, account for nearly half of the 2017 valuation gains in the S&P 500) all dropping 2% or more by the close.  This does indeed bear watching, but here, I can only go with my gut, which tells me that extrapolating out from this action is a dangerous construct.  There’s certainly a meaningful probability that investors view this selloff as a buying opportunity, and, gun to my head, if they don’t adopt this mindset now, they most certainly will at levels not much lower than Friday’s undignified close.

But what strikes me more directly is that there was a significant rebalancing of equity holdings across large capital pools late in the week, that it may not as yet be over, and that there may be more to this than the big whales being tired of making all of that FANG (or, if you will, FAAMG) money and deciding to ease back on that score alone.  I do expect other equities to be in play, and I don’t know how this will evolve, but the individual stock action early next week should be watched with careful eye.

Apart from that, we have a very low-drama FOMC announcement on Wednesday, where another quarter-point raise is a foregone conclusion.  However, by Thursday, we will have reached the midway point of June, and as mentioned in previous installments, I think that pricing action quiets down to almost inaudible levels from then till after the 4th of July holiday.

If I’m right about all of this, then, when all is said and done, June will indeed have spent its short life span busting all under, and then we’ll be on to July/August, during which time the action promises to pick up visibly.  In the meanwhile, perhaps we can take our cues from the song quote purloined above, and spend the last two weeks of the current month counting out the time.

I reckon there are worse fates than this.

TIMSHEL