May 19, 2019
Before y’all get up in my grill about a potential descent into the muck and mire (in this, the age of impeccable decorum), please know that I have no intention of doing so. My days of writing about the pleasures of the flesh ended about a decade ago, perhaps due to my frightening accumulation of trips around the sun. I am now, biologically speaking, what Hamlet wished his mother Gertrude to be: “at (an) age where the heyday in the blood is tame, it’s humble, and waits upon the judgement”.
Instead, our theme derives from a quote from Oscar Levant, who once famously said that he knew Doris Day before she was a virgin. Now, I don’t know much about this Levant person, but according to Wikipedia (that compendium of all human knowledge), he was something of a Renaissance Man, a first rate pianist, composer, and (evidently) a world class wit.
But I do remember Doris Day, who left us after a nearly a century of fluffy, optically prudish elegance this past week. Being a child of the Sixties, I was too young to have carried much of a torch for her. She remains in everyone’s mind’s eye, the lovely, prim, girl next door. Young bloods who doubt this should consider the following: the romantic interest for her most iconic roles was none other than Rock Hudson. Her real life much different; it was wild and wooly, and features many escapades that ran in direct conflict with her public persona. But in respect to the dead, we’ll pass over these without comment.
It was one of those weeks when our idols dropped like flies: Day, Peggy Lipton (the number one object of fantasy for me and any number of my boyhood friends), the architect I.M. Pei, and, for what it’s worth, my daddy. But I’ll spare you any further ruminations on the last of these.
It was also something of a wild and wooly market week, buffeted, as was inevitable, by latest twists and turns in the China saga. I didn’t notice much good news on that front, so, on balance, it’s fair to state that the market held up well against these tidings. I won’t say that we’re virgins again, but the stain of our deflowering is, at this point, barely observable.
Of course, the full tale of our China Syndrome has yet to unfold, but we are perhaps now at a point when we can parameterize various outcomes, and here’s how the fine economists at JP Morgan have handicapped the scenario:
For those among my readership who prefer words to pictures in understanding a story, Team JPM suggests that a bad trade outcome will take the Gallant 500 to depths last observed in the first couple of sessions of 2019, while a favorable result will catapult it to the lofty, never-before breached elevations of 3,200.
On balance, will go out on a limb and agree that it will settle somewhere within these ranges. If I were to quibble at all, I would do so with the implication that any clarity will manifest itself in what remains of the Month of May. Due to the pending holiday weekend, this month has only nine trading days left to it, some of which will be truncated by the Memorial Day getaway ritual.
My best (and of course boldest) guess is that we end the month well below the green arrow tip but significantly above the red one. We may indeed bounce around a bit, but I suspect that the blow-off valuation resolution will not transpire during the date ranges specified in the above-presented graph.
Beyond that, though, and in general, it appears to me that investors are anxious to make a play for those financial instruments that have long been the objects of their collective desires. They may like, Doris Day, again become virgins, but at the point of this correspondence, it looks to me like they have drawn some nectar from the carnal cup, and are thirsting for more.
I offer, as Exhibit A, the market’s response to Thursday’s news that the Trump Administration had placed Chinese component maker Huawei Technologies (and 26 of its global affiliates) on a dreaded blacklist – a step that may preclude it from doing business of any kind with the U.S. or any of its allies. Though long anticipated as possibility, the announcement was, in my judgment very big (and not particularly constructive) news. Huawei is the largest manufacturer of telecommunications equipment in the world.
Its goods traverse the entire supply chain -- for products ranging from smart phones to satellite equipment, etc. If, indeed, they are shut out in significant measure from the global markets, then all of us are likely to feel the bite. And all of this is transpiring: a) in the midst of what appears to be a burgeoning trade war; and b) as the world gears up for the conversion to 5G, and the boondoggle tech spend it portends.
But the markets barely budged. In the United States, equity indices sold off by a titch, but the week ended strongly – particularly in Europe but also across most of Asia-Pacific. The frenzied bid for global bonds continued apace, the USD rallied across the globe, and even my beleaguered Grains began to register something of a pulse.
Contrast this, if you will, to the action in the immediate wake of the last move that 45 made against the Company. On December 6th of last year, Canadian officials, at the request of their U.S. counterparts, arrested Meng Wanzhou, Huawei’s CFO (and, coincidentally, the daughter of its founder) on multiple charges of corporate fraud. To this day, she is awaiting (and fighting) extradition to this country. Astute readers will recall that this move came less than a week after a supposedly productive summit between Trump and Xi, held in conjunction with the G20 meetings in Buenos Aires. You know, the one where the now-imposed tariffs were postponed.
But this earlier event seems to have transpired in our pre-virginal days. At the time of Ms. Meng’s arrest, the SPX had already fallen ~11% from its late September highs, and was less than half way through a rout that took the index down to levels last seen just days before Trump placed his hand on the Bible on the Capitol steps, and Madonna was speaking in Central Park, threatening to blow up the White House.
This time, however, against the backdrop of what I believe to be a more serious step than the staged arrest of a single nepotistic corporate executive, investors reacted with little more than a shrug.
I have pondered as to why this is the case, and the best answer I can offer points again towards the lusty actions of the Fed and other Central Banks. After ignoring/abusing the market for the latter part of 2018, the Fed, ECB, BOJ and PBOC turned their amorous eyes in its direction, and the fluttered investment community reacted with a sigh and a swoon. It remains weak-kneed, and, in my judgment, fully under the spell of these Lothario monetary policy wonks to this day.
Again returning to the JPM graph, I am more inclined to believe that any broom-jumping ceremony between the U.S. and China will launch valuations into the stratosphere, than I am that a full-on desertion will catalyze a rout. One never knows about these things, but until we put on again our Vestal Virginal robes, we must operate with our eyes wide open, while, perhaps, guarding our nether regions with greater care than we have exhibited in recent times.
And I wish there was more at the moment to distract our wandering eyes than the potentially misanthropic courtship between The People’s Republic of China and the United States of America. But there’s not. A few final earnings numbers will trickle in over the next week, but the Q1 chapter is now substantially written. It tells of a mixed bag of more favorable valuations, coupled with some stock suitor wrath at any whiff of disappointment:
After the last earnings love sonnets (or Dear John letters) roll in, we’ll all be off to the Beach. We’ll pick up these threads mid-week next week, when, I suspect, we’ll flutter in, hair askew and skin flushed, to conclude a stormy month on Friday week.
And one final comment before I take my leave. Whatever happens after we get some clarity respecting our intentions with the Chinese, I’d fade the next market move. If we migrate towards the JPM green line, it’s likely time to sell. By contrast, if we swoon towards the red, I will in all probability call for us to gather ourselves and do some shopping. Many times after Rock and Doris had a falling out, she’d pull herself together and head to the mall. We may well wish to consider adopting the same strategy.
But as her signature song foretells, “Que sera sera, whatever will be will be”. My hypothesis is that we are no longer virgins, but we could become so once again. After all, Doris Day pulled off this transformation multiple times. And lived for nearly a century to tell the tale.
So, as a matter of risk management protocols, it is advisable that we prepare ourselves for either contingency.