I got a call last evening from Mickey the Guillemot, a retired old bond dog in New York.
He asked me, as do countless other people who seem to believe that I have some special insight into the minds of mindless buyers of the markets, whether this might not be the time to start strapping on some out-of-the-money puts on stocks. I suppose I can understand his thinking with the Nasdaq having made yet another high in Tuesday’s trading.
It was not in fact until Tuesday of last week that the Nasdaq first ventured above 6,000 points and within five days, on Monday, it had ventured above 6,100 for the first time in its history, albeit only by a whisker. Although it opened above 6,100.000 yesterday, it dropped back sharply and never seriously threatened that record level again although, when it closed at 6,095.366, it gave us another closing high. The Dow and the S&P had up-days too, the latter closing at 2,391.17, its second highest ever close and within five points of the all-time high close of March 1.
So what could I say to Mickey the G, other than repeat the old John Maynard Keynes chestnut that markets can remain irrational for longer than you can remain solvent. It came back to the three core tenets: Firstly, with cash paying nothing and bonds not much more, equities are the only game in town. Secondly, nobody has ever been fired for being long. Thirdly, with computers programmed to buy anything that drops out of its algorithmically defined trading pattern, the downside seems systemically limited.
BEAR FACTS
They say the time to sell is when bears get bullish. If that were true, especially given my long-established reputation for being the sceptic-in-chief, one would have missed the last 20% of stock performance for I decided to be positive on stocks, irrespective, when it became obvious that the central banks had dug themselves a hole out of which they might not re-emerge during our working life-times. The FOMC is meeting today where nothing is slated to happen in policy terms and thus it will not be until May 24 when the minutes of today’s coffee morning are released that things might become interesting.
Projecting three weeks forward, I’d expect a reiteration that the economy is doing just fine – steady as she goes – and that the committee will be monitoring developments with a view to the next increase in Fed Funds. I’d also expect, and this is key, a lowering of the tone with respect to balance sheet contraction. Janet Yellen and her merry men are doing all they can to verbally gear down risks although the constellation of markets does not, at this time, appear to be either particularly impressed or scared by the smoke signals rising from 20th and Constitution.
Investors learnt from the costs of getting caught in the vacuum of the taper tantrum not to fall victim a second time by being panicked by and into a potential balance sheet reduction ruction. My opposite number at Mint Partners and fellow teenage scribbler Bill Blain nailed it yesterday in his own missive when he wrote:
“Modern Financial Market Theory is exceptionally complex and often counterintuitive, but it would seem the algorithms underlying post 2016 markets all seem to function the same way: however bad it sounds, it’s not! Whatever was said or whatever happened, it’s likely to be good, so “Buy!”
Ultimately, one suspects there might just be a spanner somewhere in the works.. Markets’ current rosy read on absolutely everything - no matter how lunatic - might just prove to be “over-optimistic”. But for the moment, let’s go for it:
· No matter the economy looks tired - buy stocks.
· No matter interest rates are rising and the Fed (and others) is going to “rationalise” the balance sheet - buy bonds.
· No matter how uncertain politics are, relax it will be fine..
· No matter the US Navy is about to execute Operation Neanderthal on the top half of Korea - its “Risk On!” in spades.”
It is said that if you look around the table and you can’t see the fool, then you’re the fool. For the while it would seem that the guy who’s trying to get rich by shorting the market is the fool. By this time next week he might not be the fool but as things are at the moment, chances are that he will. Don’t ask why, just buy, hold and pray.
CORE EARNINGS
Meanwhile, overnight, we’ve had the quarterlies from Apple. And what a fruit salad they turned out to be. Earnings were up, beating market expectations, at US$2.10 per diluted share versus forecasts of US$2.02 although there was disappointment on the sales front where “only” 50.8m new iPhones were sold as opposed to the estimate of 51.4m. The company’s cash pile now exceeds a quarter of a trillion dollars at US$256.8bn.
CEO Tim Cook, wandering up and down a stage dressed in black just like you know who, excused the sales miss by pointing to leaks of the new 10th anniversary model which is due out in autumn and which he believes punters are now waiting for. Apple products, and especially the phones, have a life cycle of their own and this does not follow the reporting calendar. What really needs to be studied is not sales quarter-on-quarter but sales 30 days from launch, 90 days from launch, 180 days from lunch and then adjusted, when necessary, by the announcement of the date of the next generation release. Only by comparing the “life cycle” of each generation of iPhone will one really be able to assess the comparative success or failure of the product.
The iPhone 7, much questioned on its release for the lack of a headphone jack, seems to have worked. I know that because when one walks down the street nowadays it’s no longer people with wires hanging out of their ears but guys and gals in smart clothing sporting a massive set of brightly coloured wireless cans.
Apple will be planning to make a splash when the new iPhone hits the shops so the next quarter might not be too exciting either, but two quarters down the road there might be fireworks again. Look at price developments in both stock and bonds and make your own judgement. Note also the reported increase in dividends.
LE GRAND DÉBAT
Tonight brings a full two-and-a-half hour TV debate between Emmanuel Macron and Marine Le Pen. Le Pen might be busily disassociating herself from her party and rapidly and quite visibly shuffling towards the middle ground where she would like to, by Sunday, turn the second round of the French elections into a classic centre left/centre right punch-up with her taking a goodly chunk of the Fillon vote.
View from the sidelines: Too little, too late and not overly credible. All Macron needs to do is to show up and not make a complete fool of himself. Le Pen will endeavour to unmask her opponent as nothing more than another Enarc and another fully paid-up member of the disdained establishment; she will be right but in the end it’s the devil you know over the devil you don’t know.
Macron will win and then face the self same challenges that have frustrated a generation of his predecessors. He will do well to find a good translation of the late Harold Macmillan’s legendary response to a journalist’s question as to what might blow the government’s policies off course. He simply answered “Events, my dear boy, events”.
MESSY DIVORCE
The British press is still working its way through the very public verbal punch-up between Theresa May and the muppet-in-chief, Jean-Claude Juncker, which has now been followed by the estimated Brexit cost to the UK of around €60bn being increased to anything between €100bn and €165bn, depending who one listens to. This so reminds me of my own divorce. My bacon was saved by a very level-headed solicitor, the phone number of whom I’d be happy to pass on the Downing Street if they think she might be able to knock a few heads together.
The problem is that I only had to settle with one wife who asked for the moon and the stars while May is facing divorce from 27 of them, each with a different idea of what they want in alimony. Not only that but 48% of her family seem to be siding with the future ex.
Oh, and Hillary Clinton was on the tapes blaming her loss on Russian hackers in the pay of Vlad “put me in” Putin and FBI chief Jim Comey. Sorry Hills, you lost the election because you simply weren’t good enough to beat the man who you should have done.
And finally, my sincere thanks to my friend Raja Visweswaran who caused great hilarity yesterday by posting on Facebook:
“”Alitalia starts bankruptcy”, reads the Bloomberg headline … and that old credit cynic in me pops up with “Surely, that should read “All-Italia” …?”