This Week’s Column Brought to You by the Letter V

December 30, 2018


Sharp-eyed readers will note that for my last piece of this wretched year, I have borrowed liberally from the good folks on Sesame Street. I hereby apologize for any unseemly liberties that I have taken in this respect, because, let’s face it, everyone loves Sesame Street: a bona fide American Institution now in its 50th year of continuous production. Far be it from me to exploit its good name and good works.


As is the case with many transcending forms of children’s entertainment, what SS perhaps does best is to address its audience without talking down to them. Most every adult who has not yet reached 60 years of age has passed through its portal, and, for our current breed of adorable little shavers, the show, by all accounts, continues to inform and delight. It targets, of course, preschoolers, but there are also little bitties in there for their guardians – ones that extend beyond the divine blessings of distracting the young ones so that mommy, daddy, auntie or grannie can grab themselves a few minute’s rest.


It occurs to me, though, that in light of the many infantile doings that have abounded this rapidly expiring year, many of us past the age of majority could stand to benefit from a Sesame Street content refresher course. Hardcore fans are aware that most episodes are based upon alphanumeric themes, and I did think long and hard about starting at the beginning, with “A”. However, upon further consideration, I felt that such a return to the rudiments of would be overly insulting to my constituents.


So, as indicated by our title, I have chosen a single letter: “V” for this week’s sponsorship, and if you hang with me, you’ll soon know the reason why.


First and foremost, my selection is a tribute to the near-miraculous V-bottom registered by the indices in the three-day sprint that took us from Boxing Day to the point of this correspondence. For the non- chartists among us, and focusing on the S&P 500, it looked something like this:

OK; so as V’s go, this is hardly the most elegant representation of the 22nd member of the King’s 26- letter arsenal. Moreover, Linguistic purists, noting the double dip, might even justifiably call it a W, and could also further quibble with the modest descent socialized in Friday’s session.

But for me (and, I suspect, other market-obsessed participants) this is unambiguously a V as I’d ever hope to see. And boy was it ever timely in its arrival. As everyone knows, after an abbreviated, horrific Christmas Eve session, the SPX was experiencing its worst December in about 70 years, capping off the worst quarter of the worst year in a decade.


So the ~7% rally from the pre-Saint Nicholas ride lows, hard won as it was, evoked an enormous sigh of relief for most every professional investor and associated paymaster in my wide acquaintance. Unless Monday’s New Year’s Eve session generates a never-even-contemplated single day rally, it won’t save December. Or the 4th Quarter. Or the entire year of 2018. But it may have breathed renewed life into any number of presumed-to-be-toe-tagged portfolios, so I reckon we’ll take it nonetheless.

And now for the bad news. Particularly insofar as it applies to their abilities to generate sustained rallies, I’m not much of a believer in V-bottoms. They tend to work over shorter periods of time, but in my varied experience, they peter out rather quickly. Sustained recoveries, as I have long lectured, do not often materialize until the wide price dispersion has dissipated, large capital pools are able to examine at the carnage, come to the conclusion that price levels are compelling, and start shopping in earnest.


And this particular V-bottom strikes me as being especially transient. Regarding the regathering of buying forces towards the end of last week, I believe we should take note of a number of technical tail winds that indisputably aided our cause, but which will probably run their course rather quickly. First, it generally agreed that Monday’s half-day puke took equities into deeply oversold territory, which, from a forward-looking perspective is always a good thing. Next, as had been widely reported (including in this space), the ~20% correction in the equity complex forced pension funds with fixed allocation targets (e.g. 60% stocks/40% bonds) to purchase tens of billions of dollars of stocks before year end. Further, I’ve no doubt that there were any number of short sellers out there who got their nuts squeezed and had to cover when the buying began to materialize on Wednesday. Finally, and as always, we can (as a matter of convenience if nothing else) be pretty well-assured that buy signals of the algos, long in hibernation, arose from their slumbers to lend their always helpful assistance to the cause.


Well, if the markets were oversold on the morning of 12/26, they are less so now. I’m not sure whether or not the pension fund rebalance is yet complete, but you can bet your boots it will be over by Monday’s close, because that’s the deadline. If you’re long, short squeezes provide the dual benefit of positive returns accompanied by a measure sangfroid, but once the covering is over, there is, by definition, no more squeezing to be done. Finally, what algos giveth, algos, of course, can taketh away.


So I think whatever happens Monday, we will usher in the new year with the slate will be, so to speak, wiped clean. Which brings us to our next V in this -themed note. Volatility has been ascendant for several months, and it says here that Volatility will continue to make its formidable presence felt once the calendar turns. In fact, as we enter 2019, about the only thing which I can predict with any confidence is that sustained Volatility will prevail. I can’t remember the last time that I felt we were entering a new year with as much opacity as that which confronts us as 2018 winds down, and I’m not gonna lie: it’s not exactly giving me a warm, fuzzy feeling at the moment.


We’ve covered the problems confronting the global capital economy in the coming months, so I won’t tax your patience with a reiterated, detailed inventory of same. But some contextualization is necessary. The odds-on likelihood is that the world will experience an economic slowdown. Most jurisdictions are feeling the bite, and important ones such as Germany are already in recession. Whatever is or is not happening in Japan, it bears mention that 10-year JGBs actually went negative on Friday, and that our friends in Switzerland now want ~25 basis points for the privilege of using our money for a decade:

Now, with the Land of the Rising Son’s rate rising ambitions yet again failing, when the Swiss extort investors into paying them for stashing cash in Zurich, it hardly portends glad tidings for the global economy. But that’s not all. Draghi is on the hook with his pledge to turn off his money-printing machines – at a time when all member nations are feeling the pinch, and while the U.K. dithers about how – or if – to turn in its membership card. Meanwhile, in this here monetary jurisdiction, the psychodrama catalyzed by a skinny little 25 bp Fed Funds hike has generated more Central Bank agita than any time perhaps since Andy Jackson shuttered an earlier version of the outfit back in eighteen hundred and thirty- three (ah yes, I remember it well). As mentioned over the last couple of editions, I think the Fed made a mistake with its latest stunt, but it wasn’t, and shouldn’t have been that big a deal. The real damage was done in my view by virtue of the President attacking an institution which of course is political, but must avoid publicized political battles if it is to do its job competently.

Oh yeah, and there’s a government shutdown unfolding at the moment. And the point of dispute is so infantile that even newly-minted Sesame Street watchers might turn away in disgust. While it shouldn’t affect most of my readers overmuch, its optics of it are unilaterally bad. I don’t expect it to be resolved in the foreseeable future. And the 116th Congress will be sworn in early Thursday afternoon. And they will be out for blood. And they are likely to draw some.

On the other hand… …by all accounts, the U.S. economy does not appear to be evidencing any signs of rolling over. News reports over the last week have brought forward a gusher of glad tidings respecting holiday sales. Earnings will almost certainly fail to match ’18 out-performance, but I suspect when Q4 numbers start dropping, they’ll shade positive relative to expectations, perhaps significantly so. And, for what it’s worth, absent some unforeseen catastrophe in the economy, while one can claim that our final V-word: Valuations, are rich, they are much less so than they were a few weeks ago. There’s also happy talk about settling matters with China, which I would discount excepting the significant reality that the incentives are high for both parties to fix this thing. Gun to my head, I think they will, and it will help.

So maybe we can skate through what is bound to be an emotionally overwrought January, and get back to normal. I think a good deal of this turns on how hard Mueller and Congress hit Trump in the new year. I’m highly convinced that he will be compelled to absorb a body blow the likes of which he has yet to experience, and it is far from a sure thing that he can withstand it. At this point, few would much lament his absence, if the script holds, if he does go down, he won’t go alone. If so, it could be look out below.

But on balance, I think I’ll hold to my faith in private enterprise to prevail. Yes, the V-bottom may be winding down, while Volatility is likely to sustain itself for at least a few more weeks. But Valuations are now within reasonable ranges, and know this, my children: there’s hope in that.


And so ends our Sesame Street lecture, brought to you by the Letter V. And I’ll leave you with this. After nearly five decades of being owned and operated by Public Broadcasting, in 2016, the rights to the show were acquired by HBO, which itself is a subsidiary of AT&T’s Warner Media. In a more perfect world, its corporate ownership would be that of Verizon or Viacom, thus completing the symmetry of my analysis.


Unfortunately, boys and girls, the realms we occupy are seldom as tidy as we wish, and yet we carry on. My kids of course watched Sesame Street, as do, now, my grandsons. There’s some comfort in this (among other things, HBO/AT&T/Warner do not appear to have bitched up the show). So, if you’ve nothing else to do, and if the meaning of my rantings has escaped you, it may behoove you to download the episode dedicated to the Letter V. I suspect it’ll do you no harm. In the meantime, Happy New Year and, as always…




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