August 11, 2019
“To get back to the warning that I’ve received, you might take it with however many grains of salt you wish, that the brown acid that is circulating around us is not specifically too good. It's suggested that you do stay away from that. Of course it’s your own trip, so be my guest. But be advised that there is a warning on that, okay?”
-- Chip Monck – August 16, 1969, Yasgur’s Farm, Bethel, NY
My adamant risk management advice to everyone is to listen to Monck. The brown acid? Stay away from it. After all, Chip was the Master of Ceremonies of the Event, right? And as such, he ought to have known.
This has to rank among the most magnificent Public Service Announcements of all time.
Of course, my reference derives from the Woodstock Music and Arts Festival, which kicked off 50 years ago this coming Thursday. A few weeks ago, I warned my readers that I would draw heavily from references to the Golden Anniversary of that crazy, unfathomable, in-some-ways-horrible-but-on-balance- magnificent, summer of ’69. And the truth is that I haven’t done much to follow through on this admonition, because, well, there’s been a great deal deriving from the realms of current affairs to distract me from this intent.
But Woodstock is different. Ah yes, I remember it well. And I wasn’t even there. I was only nine years old at the time, and I couldn’t cop a ride from my mom (to be fair: she was a Bobbie-soxer) who didn’t even own a car at the time). I’d like to think that I would’ve otherwise gone. However, I have seen the full length feature film a number of times, and I reckon that this counts me as an expert of sorts.
It all began as the dream of a Trustafarian Miami Head Shop owner, who wanted to recreate the magic of 1967’s Monterrey Pop Festival, this time on the East Coast. The lineup, of course, was unrivaled, bookended by the fabulous, (at the time) toothless Richie Havens (who had to be pushed onto the stage and ended with his African robes drenched in sweat), and Jimi Hendrix’s iconic set, climaxing with his one and only version of The Star Spangled Banner (which almost no one heard because by then everyone was frantic to get out of there). Less than a year later, he was dead.
If the event took place in today’s era, the whole country would be patting itself on the back for the reality that the proceedings were opened and closed by African Americans. But that is now; back then it was all about the music, as well it should have been.
In between Havens and Hendrix, the half million in attendance were treated to the likes of the Airplane, the Dead, the Who, Janis, Canned Heat, Country Joe, Santana (who arguably stole the show) and countless other acts from the Golden Age of Rock and Roll. A pregnant Joan Baez, husband in jail, performed a haunting acapella version of “Swing Low Sweet Chariot” as only she could pull off.
Artistically, and culturally, it was a one-of-a-kind success. But as later revealed, the event was pure chaos, beginning to end. They had to close the New York State Thruway due to traffic. Militant Reactionary New York Governor Nelson Rockefeller called in the National Guard, only to think better of it at the 11th hour. I won’t name names here, but one of my former closest business associates, the long- time General Counsel from one of the world’s most successful hedge funds (till he retired), attended at age 16 with his 14-year-old brother. They got separated, and my friend went home. Alone. I never asked him, but presumably, his brother also emerged from the episode unscathed.
And then there was the whole brown acid thing. I’m not sure how accurate Monck’s warnings were, or what effect they had, but that is beside the point, don’t you think?
Because, fast forwarding the calendar five decades, it’s pretty clear that: a) the brown acid is still floating around; and b) a significant portion of our numbers are dosing on it and feeling it’s questionable events.
Market activity offers a stark case and point. The week began with an upping of the ante on the preceding psychodrama of U.S/Sino trade negotiations deterioration drama. Monday was the worst performance day of the year for the Gallant 500 and its fellows, and mid-day Tuesday, after the Chinese started goosed the yuan downward towards 7.0, 45 took the rather aggressive step of formally labelling our frenemies from Asia currency manipulators. Contemporaneously (though less remarked than what was merited), global bonds, already at impossibly stratospheric levels, catapulted into the ionosphere. Our 10-year note yield plunged an almost unprecedented 20 bp by mid-week, to a miniscule 1.63%, and the rest of the world’s paper followed suit.
My read of the situation was and remains that with bond bids at these magnitudes, any equity selloff would be transient, and, if anything, a buying opportunity. And midweek, equities began showing some renewed vigor, mostly as a reaction to any tweet/snippet associated with the trade negotiations.
That brown acid can really do a number on you.
The week ended on a modest down note, but by all appearance, the bid remains there, ready to pounce, like an iguana picking flies of a wildebeest (I saw a National Geographic special on this on Monday night) or lion. And I am sticking with my call that you folks ought to remain long at this point, or, at minimum, avoid positioning yourself in short configuration. I figure that even if the September 1 tariffs do go into effect, our 10-year is likely to trade through 1%, and if this socializes an all-out trade war, we’re probably heading to a Woodstockian cycle of Peace, Love, Music -- and Negative Rates.
And then let me ask you: under that scenario, whatchoo gonna wanna own? Yes, stocks are expensive by historical standards, but let’s take the example of Proctor and Gamble, that iconic maker of disposable diapers, laundry soap, feminine hygiene products and so many other of life’s essentials:
Now, given that it may be the most boring, least Woodstockian company in the galaxy, that it is currently trading at 27x forward earnings, and that it’s stock has been on what passes at its Cincinnati HQ as a major tear, the obvious question is why own it, much less buy it here?
Well, if I’m right about interest rates, some answers do indeed emerge.
Using the inverse P/E methodology, one is purchasing nearly 4% of earning per year.
And these earnings themselves are projected to grow at >3% over the next couple of years. It pays an annual dividend of 2%, and does so with the regularity that babies and women use some of its signature profits.
It also is one of only a handful of companies that sport an Aa rating by Moody’s Investor Services. So investors in P&G, buying in – even at 116 and change 00 can own ~4% earnings and a 2% dividend from a company that – let’s face it folks – isn’t going anywhere. Heck, even Woodstock produced a couple of babies, and I bet someone had some Pampers handy for the happy mother.
Now, under normal financial conditions, this might be one of the least appealing trades of which my brain could conceive. However, in the brown acid world of near-zero interest rates, it all kind of looks like a beautiful psychedelic image dancing in front of our eyes, now doesn’t it?
Again, again, again, investible securities are disappearing in front of our eyes like the come-down from our brown dose. Just a couple of days ago, telecom giant Broadcom announced the acquisition of technology security titan Symantec, for a cool $10B. We can thus strike another name off of the list of interesting companies investors can own in a differentiated fashion. In the future, anyone looking to capture upside in the cyber security game will either have to look elsewhere, or take on a gnarly conflagration of Broadcom cable assets for the privilege of doing so.
And as long as the brown acid peak hallucination period of impossibly low interest rates remains upon us, this sort of thing will continue.
But now we are entering the last legs of the summer. Earnings are pretty much in the bag, and they came in at -0.7% on a year-over-year basis, which was better than the highest expectations, but still places the market in a position where, for the first time in three years, Corporate America has generated back-to- back quarters of negative earnings growth. I reckon we can withstand the blow.
And there’s really not much left on the calendar between now and Labor Day upon which to focus -- other than whether Trump and Xi are embracing or issuing menacing glares at one another. All of this could move the markets, but I encourage everyone to avoid paying too much close attention to these shenanigans.
Because I’m going to ignore them, keep the faith, and, of course, focus on Woodstock, which, at the end of the day, was a capitalistic initiative. The one and only Wavy Gravy even encouraged those “who aren’t too creeped out by the whole capitalism thing” to patronize a hamburger stand that some enterprising hipster had established on the premises. The rich kids whose parents financed the event took a bath at first (in part by letting everyone in free by Day 2), but eventually turned a profit. And the cash keeps rolling in. Especially this year: it’s Golden Anniversary.
I say “right on, brothers”. Because from my vantage-point, they earned every penny.
Yes, Woodstock abides, but so too does the brown acid. My advice remains to steer clear of it, because the rumor around us is that it’s not specifically too good. But like Monck said, it’s your own trip, so be my guest.
And this, my wonderful fellow Woodstockians, is what makes the world go ‘round.