Thursday, June 14, 2018

Is Your Daddy Rich and Your Momma Good Lookin'?

This article first appeared on (
Sometimes, gentle reader, we think things will be all right, especially when summer rolls in and fish are jumpin’ and the cotton is high.  Why, just the other day we were tooling down the highway in our 18-year-old Saturn station wagon (she and her V-6 can now vote.  Hurray!) and, miracle of miracles, our i-phone music library played beautifully through the cassette deck thingamajig from what had once been a problematic stereo.
Not so fast, you say; OK, we hear you.  Yes, the “check engine” light was still on. But we had Petula Clark telling us that she knew a place where we could go where the lights are low, and Peter and Gordon were assuring us that nobody they knew loved us more than her.  All with no bass rattle!  What’s more, the potholes we had dodged for several months had been filled by conscientious government pothole fillers. As we always say when each day confounds us with good luck: so we’ve got that going for us.
Which means that one of our pillars for equity underperformance – a trade war (see – has been masterfully parried by that stable genius Donald Trump.  He may not know the American lyrics to “God Save the Queen,” or that red coats, not Canadians, who served under that anthem burned the White House down in 1814, but he’s a shameless son of a gun and Wall Street doesn’t care as long as profits keep growing. Yes, the cotton is high indeed.
What we hadn’t counted on was the co-dependency of the United States of America and the People’s Republic of China.  For all the blustering about trade deficits, the USA loves buying cheap Chinese stuff at Wal-Mart so that Beijing gets the dough to buy USA bonds. Duh!
The S&P 500 is up 3.62% this year and up 13.83% year over year.  We find it interesting, though, that the consumer staples sector -- the manufacturers and distributors of Eggo waffles, Marlboros, diet Coke and the like -- is down 12.5% year over year, while information technology is up 28% year over year.  This tells us that investors believe that we wage slaves will never dig ourselves out, while Facebook, etc., will soldier on and raise rents wherever they invade.
The bull in the China shop is the Federal Open Market Committee. Once it starts choking credit as prices rise (try booking a flight from Dixie to NYC this summer!), the proverbial punch bowl will be snatched away before working stiffs like you and us get a raise.
We love the late sunshine; our tan is progressing nicely.  But in two weeks the star that nourishes us will begin its lazy slide into the horizon and so will stock prices, in our view.  The United States 10-year note is at 2.93%, close enough to our buy target of 3%.  Sell stocks, buy bonds.
Forgive us, dear reader, but we must resort to the New Testament for our outlook:
“No trial has come to you but what is human.  God is faithful and will not let you be tried beyond your strength; but with the trial he will also provide a way out, so that you may be able to bear it.” (1 Corinthians, 10:13).
We can bear it if you can, gentle reader.  We’re pouring another diet Coke, opening another pack of Marlboros and plan on toasting an Eggo waffle in the morning.

Monday, March 26, 2018

What Rough Beast?

This article first appeared on Talk (&uid=28607)

One of the more athletic of the school’s security guards bounded into the cafeteria one January day, yelling “pow, pow,” hands holding a phantom firearm.  The remedial class of reluctant readers we were overseeing as a substitute teacher scrambled back to our room as instructed by our principal, himself an overseer of the active shooter drill.
We trailed, necktie flapping, Weejuns slipping on the polished linoleum, claudication stabbing us in the lower left leg.  We made it limping through the door, mercifully held open by our charges, literate in empathy if not the printed word.  Maybe they couldn’t, and didn’t want to, read, but the high school sophomores and juniors were nice enough guys and gals not to lock the door until their not so beloved Mr. Chips scooted inside.
Our faux escape accomplished, we returned to the lost cause of cultivating a taste for odes evoking beauty and truth versus Instagram and wondered “what rough beast, its hour come at last,” had been born among us.
Indulgent readers will forgive us for mixing our Keats and Yeats, but we wonder if they’ll forgive lawmakers who refuse to take the common-sense measure of outlawing firearms that discharge a whole lot of bullets real fast (buy Dick’s Sporting Goods). It was done once from 1994-2004 and the Republic survived.  This is so truly a no-brainer that it strains one’s sufferance of the gun-centric crowd that worries its “rahts” (as non-Southerners mock our accent) will be compromised.
Enough preaching.  In the meantime, the “four ‘easter” battering the Eastern Seaboard this spring is an apt metaphor for the four things that spell doom for equity investors in 2018.
  • Withdrawal of monetary stimulus.  This is the biggest.  The Federal Open Market Committee, under the new regime of Fed Chairman Jerome Powell, hiked, as expected, the Fed Funds rate 25 basis points at its meeting yesterday.  If inflation is the result of too much money chasing too few goods, the bull market has been fueled by too much money chasing too few assets.  It’s ending.
  • Overvaluation.  The market is priced at 143% of gross domestic product.  Experience says returns will be subpar until this ratio reverts to the mean.
  • Trade wars.  President Donald Trump appears bound and determined to impose tariffs in an effort to erase the U.S. trade deficit.  As a wiser head than us (wish we could recall who it was) has said something to the effect: A trade deficit is not a bad thing or a good thing, it’s just a thing.
  • Trump himself.  Whether it’s Mueller or Stormy who rocks his world, unpretty things await.  In a way, though, Republicans might be glad to be rid of him and work with reliable conservative VP Pence, we think.
In any event, gentle reader, we think equities are dead money or worse for a while.  The likeliest bull market to come, despite Fed tightening, is bonds, we believe.  We know that some heavy-hitting interest rate gurus believe bond prices are headed downward.  But we think an inverted yield curve looms as the Fed squeezes and investors flee to safer assets.  If the 10-year note yield hits 3% (it’s currently about 2.85%), it’s a screaming buy, we think.

Monday, February 5, 2018

The Truth About Time

If timing is everything, how come it ain’t in ye olde financial markets, as a myriad of experts will tell you? 

Here’s what they really mean: Of course timing is everything, even in investment decisions, but we don’t want to be wrong, so we advise not timing the market even as we tell you to buy or sell.  Even more infuriating is the fellow who’ll tell you he was right but his timing was off!

Well, gentle reader, we’re that second fellow.  Please click on TalkMarkets for more)

Thursday, January 25, 2018

A Stable Genius Guide to 2018

The hour is getting late, as Bob Dylan told us while businessmen drank his wine and plowmen dug his earth, but never too late, dear reader, for our annual outlook all along the watchtower.

Our back-of-the envelope estimate for real fourth-quarter gross domestic product growth is an annual rate of 3.3%, higher than the consensus of 3.0%.  The Atlanta Fed’s GDP Now calculation pegs growth at 3.4%, citing better-than-expected December retail sales.  In any event, it’s safe to say growth was between 3-4%, sustaining the 3%-plus rates of the second and third quarters.  The rest of the world is doing well, too.  But just as the U.S. was the engine that pulled the global economy into expansion, it’ll be the millstone that drags it down, too, we think.

We must, however, note first of all that, being stable geniuses, we reserve the right to alternative facts, should we prove wrong.

  • Trumpism will fade like an old man sitting on a sofa contemplating raking the leaves; it’s simply too much to ask and still think about stuff like porn star hookups and infrastructure.

  • Recession will loom as the yield curve flattens and inverts.  The Fed will tighten too much and investors will flee to T-notes as scary stuff happens

  • What scary stuff?  We’re geniuses, not soothsayers, but the potential list includes North Korea, terrorism, Donald Trump off the rails and the New England Patriots supplying their own refs for the Super Bow.

  • With U.S. stock market capitalization already at 150% of GDP, a sell-off is inevitable after the Fed puts the screws to the economy and, well, screws it up.  Wait for the crash, then buy Amazon.

  • We famously predicted a Trump victory (see here), and now we predict Democrats will retake control of one of the houses of Congress, insuring and even less perfect union and all the blessings of deadlock.

  • Tiger Woods will play creditably in his comeback but fail to win a single tournament.  The field is too good.  Sell Nike (and Under Armour; Jordan Spieth won’t win either).

  • Despite Oklahoma’s freshman sensation Trae Young, Kansas will win yet another conference title and make it to a final four that includes Duke, Villanova and a commuter school whose players are inspiring inner-city stories that Jim Nance will pretend to care about.

  • The new Yankee manager Aaron Boone will start a trend by going to his mighty bullpen by the third inning.  Since more pitchers will be needed on rosters, this will spark a desperate search for pitcher/hitters like the Japanese fellow the Angels hired.  This will expand the definition of “Ruthian.”

  • The Eastern Seaboard will gain population at the expense of catastrophe prone California, driving already steep housing costs beyond the means of all indigenous tribes of teachers, firemen and police.  Shithole countries will be designated to provide replacements.  Indeed, lawyers specializing in procuring shithole status for immigrants will flood late night TV abroad.

  • Despite signs of the Apocalypse everywhere, Jesus may not return.  We won’t be disappointed, though.  Our preference, as it is every new Anno Domini, is for many more circuits around His creation before He calls in His note.  Happiest and healthiest of new years to all!

Tuesday, November 7, 2017

Summer Reading: Unvisited Tombs and Trouble

Our tan is hard won, but we know it will soon fade as the days grow shorter and the words of that curmudgeonly scold Jeremiah pierce us once again: “The harvest is past, the summer is ended, and we are not saved.”
Yet college football returns and the metrosexual in us wonders if pleated khakis are making a comeback, given the overpaid coaches we see spouting jeremiads of their own about “execution”  and “we need to make adjustments” to attractive lady reporters on the sidelines at halftime.  Perhaps all is not lost. It is little things that keep us looking forward to the autumn sunshine and 20-foot putts drained.
But we have been touched by our summer reading beyond the Holy Bible, so we’ve got that going for us (see “Caddyshack”).  George Eliot’s “Middlemarch” is one of those books we should have read many years ago, but we just found her this year, and have trembled.  Gotta tell you, dear reader, we love this gal.  OK, we’re a sensitive guy. The heroine dreams of accomplishing great things, but a lot of other things happen on the way; yet she remains authentic through a misguided marriage, widowhood and eventual union with the man she loves and who loves her.  Eliot says this about her:
“…for the growing good of the world is partly dependent on unhistoric acts; and that things are not so ill with you and me as they might have been is half owing to the number who lived faithfully a hidden life, and rest in unvisited tombs.”
We expect our tomb, and probably yours, gentle reader, will remain unvisited as well.
The plot of “Daniel Deronda,” another Eliot masterpiece, is flawed by unlikely coincidences, but the portrait of the heroine Gwendolen is so affecting that it reminded us of our struggle to be “good” when our first instinct is to think of our superior selves:
Those who have been indulged by fortune and have always thought of calamity as what happens to others, feel a blinding credulous rage at the reversal of their lot and half believe that their wild cries will alter the course of the storm.”  If only Donald Trump could learn to read.
We have long been a Civil War buff, having visited battlegrounds from Pea Ridge in the west to Gettysburg in the east, so we were inspired by the events in Charlottesville and Confederate monument brouhaha to take a stab at Jefferson Davis’ ‘Rise and Fall of the Confederate Government.”  We recommend it for those interested in arcane legal arguments over the legitimacy of secession, but a page turner it is not.  We all know how it ends.
Far more illuminating is James M. McPherson’s “Embattled Rebel,” a surprisingly sympathetic view of Davis from this generation’s foremost Civil War historian.  Not really germane to the subject itself, it struck us that the lost art of letter-writing, yea, even writing in thoughtful complete sentences, is probably forever lost in the age of instant telecommunication. Sad, as a Trump tweet might conclude.
We performed our annual re-reading of “Hamlet,” and discovered that we are more like the gas bag Polonius than we would like to admit.  We are very good at tut-tutting.  We have an opinion on everything and are convinced we are wise, despite our track record.

Our favorite read was a collection of Scott Fitzgerald stories that somehow have remained buried, “I’d Die for You and Other Lost Stories.”  Some are weak, but the tales of love won and lost have a special attraction for us.  Our favorite was “Trouble,” the nickname of a heroine who reminded us of an old girlfriend.  Which was nice.

Thursday, January 26, 2017

Saving Par Will Take Some Doing in the Age of Trump

In defiance of the will of the people, our slogan for the year just begun must be “Make Kev (the middle part of him, anyway) Small Again.” We’re not talking the fakery of cosmetic makeovers or the desperation of fad diets, gentle reader. The mirror may show a man of a certain age, but the inner man says 25, so we pause to drop and give you 50.
WHOA!  Give us a moment. Catching our breath. There, we’ve managed to light a Marlboro. “Curse Sir Walter Raleigh, he was such a stupid get!”  (Thanks, John Lennon).  Much better. The heart rate is steady enough to type again, and the fine Virginia tobacco curling in our lungs is allowing us to think great thoughts and deliver them, as Athena sprang from the brow of Zeus, fully formed to a waiting world.
We have to begin with Time’s Person of the Year. Like any blowhard or child, Donald Trump won’t sense a bit of irony when he rails against the Federal Reserve for raising rates in the coming months. We can only imagine the new president dueling with Janet Yellen and brethren via Twitter. It’ll probably go something like this:
Mr. Trump: “She kept ’em low for Hillary & now disses the people.  Big Mistake #FEDUP”
Ms. Yellen: “Data tell different story. Drink up. Punch bowl coming away #PARTYPOOPER”
Mr. Trump: “Waterford? Nice.  It’ll make a beautiful chandelier in White House visitors’ men’s room, and Fed’s gonna pay for it!”
Ms. Yellen: “The reverse repo is in the mail!”
Mr. Trump, the Wharton School graduate, will declare victory, knowing nobody on his side knows the Fed is draining reserves. Working men and women everywhere will hail the chief’s latest triumph over the elites.
Trumpians will hardly be able to catch their breath, though, before the repeal of Obamacare restores the delivery of healthcare to its former glory before the socialists ruined things. The irony (there’s that word again) is that, despite all the fulmination against the Affordable Care Act, the tacit acknowledgement in its replacement is that the “market” was a failure. It’s our opinion that whatever replacement is fashioned will be just another step toward an eventual single-payer system. Again, no one will notice.
As for investing in the stock market – we’re reluctant.  It’s too expensive at 127% of gross domestic product.  It seems to us, the growing share of corporate profits at the expense of wages in the national income and profit accounts has been a significant factor in the stock market’s higher valuation. According to the St. Louis Fed, profits were 5.8% of GDP in 1990, compared with 9.3% in 2015, while wages and salaries slipped from 46.6% to 43% in the same periods.
Ironically, though, the election of Mr. Trump (and the strong showing by Bernie Sanders in the Democratic Party tussle for that matter) was in large part driven by a sense that the billionaire real estate developer could reverse that trend. If he delivers, and the scale starts to tip toward labor, it seems fair to conclude that market participants would consider current valuations too high.
All that is rather long-term, though. In the shorter run, the biggest risk to equities is likely to be the unforeseen shock. Of course, that fatuous observation is always a shadow on the investment horizon, but we think the probability is greater in the age of Trump. There is something strange about a man (or the speechwriter channeling him) who sees “American carnage” when he looks out his window or believes Hillary Clinton’s 2.9 million popular vote advantage was the result of fraudulently cast ballots.
We are no head shrinker, but we’re willing to bet Republican mainstreamers are grasping at whatever psychological strategies available to keep the president on the rails. They may well succeed, but a geopolitical or domestic political crisis is probably a greater risk than usual.
We also think the market is just beginning to consider the fallout from protectionism and the risk of diminished global trade implicit in Mr. Trump’s walls and border tax threats.
Still, all could go well. The path in 2017 could very well resemble the magical golf hole we traversed recently. We approached the narrow, 175-yard par three lined on both sides with towering old pines. Our first shot was well-struck, but alas, it hooked square into the trunk of one of them, the ball landing in the short fairway. We then smacked a wedge into a pine on the right side, the ball caroming further back on the fairway. Chagrined but unbowed, we wielded the wedge once more.  A delicious collision of blade, ball and turf sent a shiver of pleasure through our athletic pose. The dimpled sphere bounced once on the green. Then, just as we feared it would bounce off, it miraculously hit the stick and dropped into the hole. The greatest par save of our career – successful but a harrowing ride.  Investing in 2017 could be something like that.

Saturday, December 10, 2016

Post-Election Humility and a Vulnerable Market

We ask you, gentle reader, after indulging in some well-earned schadenfreude, to print this epistle, burn it and let its incense waft heavenward to be inhaled by St. Thomas More, the patron saint of politicians, who, among other achievements, was beheaded for dismaying Henry VIII.  We should be so lucky.

This sacrificial rite is called for, we believe, after our premise on election eve was neatly defenestrated by the stunning victory of Donald Trump and the upending of our expectation that divided government would persist in these United States.

The upshot in financial markets has been a rout in debt on expectations of a Trumpian agenda that includes more spending on infrastructure and defense, meaning more bond supply; fewer workers via mass deportations, meaning wage inflation; and, perhaps more importantly, the expectation of significant tax cuts for corporations and the one-percenters.  Stocks, meanwhile, have climbed ever higher, anticipating brisker economic growth on the back of the aforementioned government outlays, tax cuts and business-friendly government.

The irony in all this, of course, is that the hot-under-the-blue collar class (no snarky ripostes, please; we’re a working man ourselves) is likely to cede even more slices of the pie to capital.  If you’re a lefty, you should be happy; after all, to paraphrase Lenin, “It has to get worse before it gets better.”  How much worse (or better, if you’re so inclined)?  As the network correspondents say, only time will tell, but Trump’s recent selections for the Labor and Environmental Protection portfolios suggest coddling for capital and nose-thumbing for workers.

We all live in the meantime, though, and we are reminded of a line from our favorite Christmas movie, It’s a Wonderful Life.  When Clarence the angel remarks no money is needed in heaven, George replies, “Comes in pretty handy down here, bub.”

With the warning that the cake that Trump bakes will be heavily salted with surprise, we attempt to reconfigure our outlook.

  • Obamacare is dead! Long live Obamacare!  Republicans will not return healthcare for the poor back to the emergency room.  Neither will they get rid of the pre-existing condition guarantee or parental coverage for young adults.  They’ll just call it something else.
  • With Trumpian inflation on the way and the U.S. economy at full employment, the market expects the Federal Reserve to ratchet up the Fed Funds rate another quarter to one-half percentage point at the Open Market Committee’s meeting in five days. Indeed, futures contracts assign a 97% probability of a rate hike.  But don’t expect another unless the Fed wants to pop the equity bubble.
  • And a prodigious bubble we think it is. The ratio of stock market capitalization to gross domestic product is over 125%, significant overvaluation by historical standards.
  • Which means we believe that it’s wise to focus on individual trees, not the forest.  We pick two consumer retail names at opposite ends of the income target spectrum.  We still like J.C. Penney (JCP), despite its recent rapid run-up, believing it undervalued at a price-to-sales ratio of 0.25 compared with 0.50 for flailing Macy’s (M).  And more disposable income for the wealthy should favor luxury names.  We recommend Coach (COH), the handbag, shoes and fashion house. Superior operating margins and a safe dividend that yields 3.49% justify its trailing 12 months’ price-to-earnings ratio of 22, in our view.
Meanwhile, gentle reader, we pause in this season of light to count our manifold blessings and, at the risk of squandering our remaining brain capital, cogitate in peace about the year ahead.  We called the election of Trump last year (albeit as a jape), so we’re confident of your attention to our 2017 predictions.  Coming soon.