Fear and Loathing in D.C.

April 16, 2018

Only a fully loaded Hunter S. Thompson could write a more outrageous political drama. Beyond the reality of tariffs and trade wars, the bombing of Syria, meetings with North Korea, and multiple Congressional and White House exits last week, there was the ongoing crazy news cycle that has captured too much attention and brain time. It would be great if we could shut off all the drama because it causes ongoing rips in the financial markets, but of course we can’t. And we just never know when one of the rips might be true and create a new direction for a financial asset. For now the uptrends have paused and are either in retreat (like the U.S. dollar and stocks) or trying to find a direction (like long-term bond yields).

Earnings might help give us a direction, but last week’s early numbers out of the big bank stocks did nothing to help set a positive mood. J.P.Morgan, Wells Fargo, Citigroup and PNC reported Friday and all stocks closed 2-5% lower on the day. Expectations were high and while the reported numbers looked good, investors immediately worried about forward trends in net interest margins, loan growth, and investment banking and trading revenues. After the big January increases in 2018 earnings estimates, the bars have been set high. The bulls had better hope that the next wave of earners can jump higher than the banks did last week.

You have to wonder how anything gets done in the White House with this kind of turnover…

Of the 23 officials who took the oath of office on Trump’s first weekday in office, 14 are now gone, the Post’s Philip Bump reported. That’s 61 percent. A quarter of Trump’s core Cabinet members have departed. This week alone, Trump’s homeland security adviser quit, as did the deputy national security adviser for strategy and the National Security Council spokesman. This came with the arrival of Trump’s third national security adviser in 15 months and his second national economic adviser.

(Washington Post)


Hopefully significant turnover in the leadership of the Congressional committees will actually allow them to get something done…

Cowen Washington watcher Chris Krueger notes that nearly half of House GOP committee chairmen—10 of 21—are opting out of running for re-election. “There is no precedence for this. It is hard to numerically underscore how bearish this reality is for the tenuous 23-seat House Republican majority,” he writes in a research note. Even more retirements are possible, given that the deadlines by which candidates must file to run haven’t yet been reached in 19 states, he adds.



And if the incumbents don’t get their messaging right, then they will also be on the way out. Especially if they do not understand their voters…

[Indiana Rep. Todd] Rokita said he is concerned about farmers but supports Trump’s tariffs on steel and aluminum because he thinks they will benefit Indiana’s steel industry.
Purdue University economist Wally Tyner said that doesn’t take into account the state’s automobile and heavy equipment manufacturing sector, which makes up a larger share of the state’s economy and would be hit hard by rising steel and aluminum costs.

“One in four jobs in Indiana is in transportation manufacturing,” said Tyner. “Four of the top ten exporting cities in the country are in Indiana. They would all lose.”
That includes diesel engine maker Cummins, which is headquartered in Columbus, Subaru’s Lafayette plant, which is part of Rokita’s congressional district, and Greensburg’s Honda plant, which is in Messer’s district. Kokomo, which is also in Rokita’s district, makes auto parts and Chryslers. Rolls Royce also has a presence in the state, as does heavy equipment maker Caterpillar.
Then there is Elkhart County, which has long billed itself as the “RV capital of the world.”



Meanwhile, a top investor is radically re-allocating his (political) investments…

Boston hedge fund billionaire Seth Klarman lavished more than $7 million on Republican candidates and political committees during the Obama administration, using his fortune to help underwrite a GOP takeover of the federal government.

But the rise of Donald Trump shocked and dismayed Klarman, as did the timid response from the Republican-controlled House and Senate, which have acquiesced rather than challenge the president’s erratic and divisive ways. So, in an astonishing flip, Klarman, at one point New England’s most generous donor to Republicans, is taking his money elsewhere: He’s heaping cash on Democrats.
He’s given roughly $222,000 since the 2016 election to 78 Democrats running for Congress, according to federal election data from 2017 and a preview of Klarman’s first-quarter donations provided to the Globe by a person familiar with his giving.

“The Republicans in Congress have failed to hold the president accountable and have abandoned their historic beliefs and values,” Klarman said in a prepared statement to the Globe, opening up for the first time about the reasons behind his change in political giving. “For the good of the country, the Democrats must take back one or both houses of Congress.”

(Boston Globe)

Back to the markets, trading volumes have died in the last two weeks…

Are investors happy with their portfolios, uncertain about what to adjust or just frozen like that deer in your headlights?

(Stock Charts)

A great post and chart on previous episodes of high daily volatility but no weekly movement. Doesn’t look too promising for the bulls.

If it seems as though the stock market has been crazy volatile lately without really going anywhere, you’re not imagining things. Over the 2 weeks (i.e., 10 days) through last Friday (4/6), the S&P 500 (SPX) averaged a daily trading range of 2.3%. That’s in the 94th percentile for volatility since the inception of the SPX in 1950. The more remarkable thing, though, is the fact that the total range in the SPX over those 2 weeks is just 4.6%. Since 1950, there have been just 13 other times (or 0.07% of all days) that saw as much daily volatility confined in such a relatively tight 2-week range.

(Dana Lyons)

BofA Merrill Lynch also charts that the ‘Buy the Dip’ trade may be over…

@tracyalloway: Bye bye buy the dip?

Earnings season is very important to the market…

How important are profits? A cool 80 percent of S&P 500 gains have come during earnings seasons since 2013. Over that period, stocks had a perfect streak of rising whenever results were being reported.

That the streak ended in February with the most spectacular equity meltdown since 2011 was a reminder that the foundation isn’t invincible.


Delta Airlines reported their Q1 last week. Maybe a proxy for others: strong top line, but costs were a challenge…

For the three months to end of March, revenue at America’s number two airline by passenger traffic was up 9.5 per cent at $9.97bn, topping expectations for a smaller rise to $9.89bn.

The gains were driven by demand for domestic and transatlantic flights, revenues from which were up 6.9 per cent and 14.7 per cent respectively during the quarter compared to the same period last year.

However operating costs also swelled during the first quarter, rising by over $1bn, or 13 per cent. Over half of this was due to a jump in fuel and labour costs, which rose $374m and $198m during the period, representing year-on-year increases of 25 per cent and 8 per cent.

(Financial Times)

The J.P. Morgan earnings reaction was slightly horrific…

(Stock Charts)

And never a good sign for Financial stock bulls when some big investor is loading up on the Triple Short Financial ETF…


A big earnings calendar for this week…

Meanwhile at the Fed, no one is worried about deflation anymore…


But BofA Merrill Lynch would like to to think more about wage inflation…


As costs rise in the U.S., so does the 2-Yr Yield. Meanwhile the yield curve flattens…


Rising interest rates and a flat yield curve will continue to make investing in real estate more difficult. Prices are already rolling over…

Commercial real estate prices collapsed nearly 40% during the Financial Crisis, according to the Green Street Commercial Property Price Index (CPPI). Then prices more than doubled from the low in May 2009 and peaked in September 2017, when the index was 27% above the crazy peak of the prior bubble.

But since September 2017, the index has dropped 1.7%, including a 1% drop in March from February. It is now down 2.1% from March last year and back where it had been in May 2016.

(Wolf Street)

But lower real estate prices will be good news for renters, especially in NYC…

Here’s some good news for New York City apartment-hunters: Manhattan rents dropped 3.8 percent in March from a year earlier, the most since 2011.

The news is even better for tenants looking in Brooklyn and northwest Queens. Rents dropped 6.3 percent and 6.4 percent respectively, and landlords offered so many move-in incentives that they set records for giveaways, according to reports Thursday by appraiser Miller Samuel Inc. and brokerage Douglas Elliman Real Estate.

“For the renter, it’s a pretty good time to jump in,” said Hal Gavzie, Douglas Elliman’s executive manager of leasing. “For the landlords, it’s a little stressful.”

Property owners across the three boroughs are contending with an avalanche of new apartment supply, giving them no choice but to cut prices. They’re stepping up discounts in the name of attracting renters, who are hunting as much for the best deal as they are for a place to live.



It was a risk-on week with the Nasdaq and Small Caps leading the bounce…


Among sectors, Energy, Biotech and Semis led the bounce…


But even with the move in Energy stocks last week, they continue to significantly lag the move in Crude Oil this year…

(Pension Partners)

Another look at the change in buying pattern of the market…

Throughout the correction, there’s been an overwhelming bias toward opening (or overnight) market strength followed by intraday weakness. Opening action is considered to be more emotionally charged and retail-driven, with intraday moves often providing a truer measure of underlying trend.

(Leuthold Group)

The end of bull markets are tough for long-only investors…

From my experience, the only way to protect capital is to have a lot of cash or significant hedges. Raising 5% cash and trying to hide in the best companies will not keep you from getting your bell rung. There were plenty of great companies 18 years ago that also fell -25%, -50% and even -90% (like Amazon did). Long only portfolio managers would love to buy their favorite stocks at these big discounts but that is difficult to do when your investors are redeeming your Mutual Fund.

What about the prospects of recession? You’ve managed money here entirely within the period of a massive recovery from recession, so you’ve not yet dealt with that.

It’s one of the most important questions. It’s been an incredible historic run [for the market] since the lows of early 2009, especially for tech. I started managing in early 2009, and that was obviously lucky timing! Basically, the fund returned almost 500% since that point. While T. Rowe as a firm had really good performance prior to the long bull market, and at least as good during the long bull market, I think that we will probably do at least as good a job in a tougher market. Because we are really rigorous about what a truly good business is, and rigorous about valuation. I think we have the ability to avoid more of the big losers, while still owning the ones that will be winners. If we’re right about that, buying them when they are down because of recession or a bear market can be a really good opportunity.



If times are to become more difficult for equities, investors are not ready…

(Top Down Charts)

The Leuthold Group studies Trade War winners…

(Leuthold Group)

Is the U.S. Dollar starting to focus more on the big picture?

Another great pen by Eric Peters this weekend…

(Eric Peters/Wknd Notes)

Which rolls right into the top business read of the weekend…

(@greatquarter): NYTimes’ @marywalshnyt on the Oregon’s challenges paying pensions. Dr. Robertson receives pension of $76,111 per month. Pensions are crowding out other spending. Article frames pension challenge as denying school programs to kids.

(New York Times)

Maybe Gold is also focusing on the big picture…

(Humble Student of the Markets)

How many times have I mentioned that if I were in my 20’s, I would run off to Ireland…

Ireland and France are best placed to maintain fast growth after the current euro-area economic upswing runs it course, according to UBS economists.

The researchers looked at the region’s demographics, productivity and investments and came up with a ranking that captures long-term growth prospects for 10 of the region’s larger economies. They assume Europe will have to boost investment to compensate for its shrinking working population.


And then I would find the Irish office for all of these companies and grab a job…


This is a great long read on the history of volatility instruments…

“I don’t know if I’m crazy, or if the rest of the world is crazy,” he says. “But this is the kind of thing our children might look back and say, how did we not see this coming?”
Whether Cole is a modern-day Cassandra or not, it is striking how many of the people who have played a part in the history of volatility defend their role in its evolution while expressing concerns at the next stage. Volatility is now embedded in risk-management models. Trading strategies have been built on volatility targets, Vix futures developed and complex financial instruments created that can fuel the very thing they attempt to harness.

“The more you fiddle around with volatility, the more you disturb it,” Guldimann says. Shah reckons that making volatility a tradeable asset was a valuable development, but says the Vix ETNs are “stupid products” and that he would have preferred XIV “was never born”. Cuban admits some pride but mostly bemusement at the small but pivotal part he played in the saga.

(Financial Times)


Stop. This. New. Trend. Now…

More Americans are stretching to buy homes, the latest sign that rising prices are making home ownership more difficult for a broad swath of potential buyers.
Roughly one in five conventional mortgage loans made this winter went to borrowers spending more than 45% of their monthly incomes on their mortgage payment and other debts, the highest proportion since the housing crisis, according to new data from mortgage-data tracker CoreLogic Inc. That was almost triple the proportion of such loans made in 2016 and the first half of 2017, CoreLogic said.

Economists said rising debt levels are a symptom of a market in which home prices are rising sharply in relation to incomes, driven in part by a historic lack of supply that is forcing prices higher.


Michigan what is up here?

Maps of the Day show the top import good and top export good for each US state in 2016 based on trade data from the Census Bureau. Although only the top import good for each state is displayed above, the large majority of imports (~60%) enter the US economy as intermediate inputs and capital goods (raw materials, parts, machinery, lumber, chemicals, steel, semiconductors, etc.) for US firms, who transform those inputs into final goods using American workers, and might end up leaving the country as a US export. For example, Oregon’s top import is computer and electronic parts and its top export is electronic goods, and it’s the same for New Mexico. Import tariffs and protectionism would make imported inputs more expensive for US producers and manufacturers, and would likely result in a decrease in US exports, which would lead to a reduction in US jobs in export industries. In other words, tariffs would be self-inflicted job and prosperity destruction.


Just Do It…


And you thought that taking a selfie on Facebook was not a big deal…

Sally and Kristen haven’t hung out in forever, so Sally suggests taking a selfie.

After Sally uploads the photo to Facebook, the app suggests she tag Kristen based on its facial-recognition system, which Kristen has given permission to use.

Facebook could collect Sally’s location based on the IP address used to upload the photo, which it could use to suggest local events that might interest her or show her ads targeted at people near a specific place. Its system also analyzes the photo as it does with all images to make sure there’s no inappropriate content.




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