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.

Saturday, November 5, 2016

We Have No Angst On Election Eve

Where have you gone, H.L. Mencken?  You are much needed in this year of “Hamilton” ascendant on Broadway, Trump triumphant with your “booboisie” and Clinton winning the hearts of all who have told cops or spouses: “That’s my story and I’m sticking to it.”

Now, hip-hop “music” not being our cup of tea, we confess we have not rushed to see the runaway hit, and thus are at a cultural disadvantage to our more with it peers.  So, we are left to wonder if its creators and players captured the contempt with which Washington’s aide-de-camp so full-throatedly held full-throated democracy.  “Your people, sir — your people is a great beast!”  In other words, Hillary’s basket of deplorables; or Donald’s Mexican Muslims.  We have met the enemy and he is us! Pogo declared from the comic pages of the Sixties.

On second thought, that old scold Jeremiah put it best: “The harvest is past, the summer is ended, and we are not saved!”

But enough of sages profane and sacred.  You, dear reader, come to us, for practical wisdom this weekend before the election.

Those of you anxious about domestic policy under either candidate should not be so – anxious, that is.  With little chance of either party controlling executive and legislative branches, changes to tax policy or healthcare are unlikely.

Far from perfect, Obamacare is here to stay.  Though premium increases have startled and high deductibles mean you’re really only covered if hit by a bus, it has not proven the job destroyer its critics foretold.  Indeed, labor has become scarce enough to force wages to finally respond.

Thus, as far as the home front figures into it, the expansion will continue, only vulnerable, as it always has been, to a Federal Reserve pulling the tightening trigger too soon and too often.  We think it a mistake to raise rates in December, as the Fed has indicated it will do; if it continues to squeeze money supply in 2017, recession will follow no matter who’s in the oval office.  In our forecast for 2016, The Happy Few of 2016, we japed that Donald Trump would win. It remains a jape.

Among the names we cover, we remain buyers of J.C. Penney (JCP), which we believe is taking share in a smaller pie for brick-and-mortar retail chains.  We still like Amazon (AMZN) because, well, it doesn’t sit still and has no significant challenger on-line.

On the avoid side, we still think Whole Foods Market (WFM) won’t command a premium PE again.  There’s just too much competition to expand margins much beyond a regular old grocery store.  Other retail and fashion names we’ve told you to avoid or sell – Michaels Kors (KORS), Under Armour (UA), L Brands (LB) and Macy’s (M) – remain unappealing to us on a long-term outlook.

We still think, as we explicated in “The Happy Few,” that there are few home runs in a market that is fairly to over-valued.

Neither Trump nor Clinton will have the power to affect market valuations either way.  For all Trump’s bluster, a Smoot-Hawley like return to protectionism would likely be allowed by the corporate interests that rule us for better or for worse.  And Clinton’s late-hour critique of the Pacific trade pact is an obvious pose.

Indeed, the real threat to prosperity is something we think both candidates would avoid – another military adventure as misguided as W’s fiasco in Iraq.

Rest assured, gentle reader, something bad is bound to happen, but political fortune or misfortune for those who want to be the big dog won’t matter. 

Thursday, July 21, 2016

These Times

We were recently shocked – shocked! – to discover there are men and women running the world who don’t remember watching the Beatles on the Ed Sullivan Show.  They don’t remember, it turns out, because they weren’t alive. 

As you can imagine, gentle reader, this has discombobulated your correspondent, who has been much bewildered as 2016 charges ahead without him.  Much as Brian Wilson felt 50 years ago, “I guess I just wasn’t made for these times” (Pet Sounds, The Beach Boys, 1966).

We hear you, Brian.  Consider these irruptions on the usually smooth felt of our space-time pool table:

  • Outrageously low interest rates.  The republic has never been held in such high regard by creditors.  The 10-year U.S. Treasury note yields just 1.58%, which is pretty darn low.
  • Stubbornly high U.S. stock prices.  The market capitalization of U.S. equities is 119% of nominal gross domestic product, which is pretty darn rich.
  • Striking correlation of oil prices and stock prices in 2016, which is pretty darn (pun alert) crude.  See the charts below:



Wilshire 5000

Now, these phenomena are not without explanations.  A global savings glut and central bank largesse are keeping interest rates depressed, we are told.  With fixed-income yields so low, investors are forced into equities, boosting stock prices even as corporate earnings decline.  

Brexit proved a brief scare, even though Great Britain is the world’s fifth largest economy, but recent employment and retail sales data have made the case that the U.S. can resist the drag from sclerotic Europe and a slowing China.

All this leads us to believe it could be different this time.  This, we hear you say, is the bell rung at the top, a sign that the final fool has rushed in and all must be spanked vigorously by a market god that cannot be mocked for long.

Nevertheless, as we have sighed before, we can’t call a top, so we can’t let go.  Given the apparent spending propensity of the American consumer and signs in the latest jobs numbers that wages are at last perking up, we still like two disparate retail names – Amazon (AMZN), the online velociraptor, and J.C. Penney (JCP), the undervalued brick and mortar dinosaur.

As a disclaimer, we confess to remaining one bewildered baby boomer.  Just the other day we drove our golf cart to the first tee without loading our clubs.  However, once we retrieved the sticks, we sweetly striped our Titleist, splitting the fairway and convincing us we were infallible -- until we four-putted for double bogey.