KEN GRANT: Good News Week
Good News Week
August 19, 2018
It's good news week
Lots of blood in Asia now
They’ve massacred the sacred cow
They’ve got a lot to eat
-- Hedgehoppers Anonymous
Brothers and sisters: would it kill us to offer up (as Oddball asked of Moriarty in Kelly’s Heroes) something righteous, something hopeful, instead of all of these negative waves? At any rate we can try. After all, this past week marked the 49th Anniversary of the Woodstock Music and Arts Festival, held on Max Yasgur’s farm, in Bethel, NY. And what an event that was!
So, attempting to pay it forward with a Woodstock Vibe, I offer up my salute to those one-hit Australian wonders: the aptly (for our purposes) named Hedgehoppers Anonymous. I hope you dig.
More importantly, I am happy to report a couple of small steps towards the narrowing of the chasm that separates right from left in this increasingly divided nation; one which if taken to extremes, threatens to destroy what has been one hell of a ride since the Civil War (or WWII at any rate).
First, it would appear that contrary to widely, er, socialized perception, Senator Elizabeth Warren (D-MA) does not wish to destroy capitalism as we find it. In fact, she wants to help, and, seeing as how she’s a Senator and all, she has actually introduced a bill to strengthen its foundation. Specifically, the blood-chillingly named Accountable Capitalism Act would require domestic companies with $1B or more in revenues to apply for a national charter, under which approval (and continued operation) would rest upon their perceived ability to maximize benefits to ALL stakeholders – including (one can assume) employees, regulators, customers, community, creditors, and maybe even competitors (I mean, after all, don’t your competitors have a significant stake in your fortunes?). Presumably, shareholders are not to be excluded from this warm embrace (because don’t shareholders need love like everybody else?), but not under the prevailing terms of monogamy. In fact, if I properly understand the provisions of The Act, being overly attentive to the actual owners of your enterprise can land you in hot water with Sen. Liz: a place where (trust me) you do not want to be. The bill also proscribes that at least 40% of Board Seats of chartered companies must be assigned to employees, and prohibits top executives from selling shares --whether purchased on the open market or acquired as part of a compensation package -- until, well, until forever.
What, in heavens name, could possibly go wrong?
Well, for one thing, investors in enterprises that must, as a price of doing business, de-emphasize shareholder interests might not be willing to pay as much for the privilege of ownership – particularly when one considers that there’s a whole wide world –~~--~~ full of companies that are willing to place their objectives at the highest level of the priority chain. In addition, Corporate Research and Development efforts that might’ve otherwise driven whole new innovation/monetization cycles might not do enough for employees or the community to meet the newly-engineered, federally-mandated underwriting standards. Management teams, confused and disincentivized by the Act, might make suboptimal decisions.
Yup, on the whole, I’m forced to conclude that the passage of The Act would be a market short. Securities of every stripe would probably decline in value, and face a twisted path to valuation recapture. My guess is that there would also be fewer Googles, Ubers, Sovaldis, etc. emerging, because the potential financial returns associated with devoting a life to One Big Idea would have taken a severe downward turn. As such, the pace of development of such life-enhancing tools as those that allow for the immediate access to all information in the world, the booking of a ride that materializes immediately with a few screen clicks, and the creation of bona fide cures for chronic diseases such as Hepatitis C would slow dramatically.
So there’d be a lot of buzz kill for investors. However, before you plunge into a cycle of despondency, please consider my other piece of glad tidings. In a rare show of cross-party back watching, President Donald J. Trump came to Senator Liz’s rescue, by floating the notion of reducing the frequency of earnings reporting from quarterly to semi-annually.
Thus, under the proposed bi-partisan paradigm, while the stocks you own are likely to decline in value, at least you won’t have to hear about it as often.
And one last happy thought before moving on: these initiatives, ladies and gentlemen are the flower of your tax dollars at work.
However, I strongly suspect that the markets wouldn’t cotton to even the Trumpster’s portion of this elegant solution. Being creatures of obsessive habit, I’m guessing that investors would be frustrated if their sequences of noodling over every line item on an income statement, dissecting every word and even the body language of Corporate Chieftains, were to be cut in half. The markets would be rendered riskier; more prone to discrete price jumps in both directions, and as such, less likely to be embraced by institutions and individuals alike.
But in the final bit of positive waves I am able to share on this mid-August day, the markets appear to have ignored both initiatives. All of our indices rallied, and the Gallant 500 now rests a skinny 80 basis points below its January all-time highs (remember those)? That little beyotch of a VIX got beaten back to a 12 handle. And even the perpetually beleaguered Bloomberg Commodity Index was able to register a pulse this past week:
Extrapolating from the market economics playbook, this positive reversal of fortune may have been catalyzed by published reports of progress in trade negotiations with both Mexico and China. But outside of Commodities, nobody seemed to have much noticed these developments either. I feel, however, that if they are signs of legitimate progress, they’re significant indeed. I’ve been in the habit lately of benchmarking geopolitical exposure by asking myself where, in the absence of looming trade wars, the SPX would be trading, and my guess is at least 10% higher.
But I don’t blame the equity crowd for discounting these reports in their valuation calculus. From what I’m told, we’re pretty close on terms with the Mexicans, which would certainly be a step in the right direction. The Chinese, however, are another kettle of fish. I suppose it’s encouraging that our trade reps will soon be sitting down at the table with theirs, but it will probably take more than polite discussions to bridge the gap between the two bull goose economies in the world.
Market participants were, on the other hand, justifiably giddy at the results presented by the late reporting Walmart Corporation. And it was indeed a thing of beauty. Particularly encouraging were the positive trends in both Grocery and On-Line sales: elements of their vast enterprise where the Arkansas Colossus faces direct, arguably dire threats from the Kings of the Columbia Gorge: Amazon.com.
But on the whole, I feel that the next migration in security valuations will be driven by and large by developments in the dodgy world of international trade. As I’ve suggested before, there’s more riding on this than whether Premier Xi buys his Soy Beans from Butler County (IA) or Brasilia. For one thing, I believe that the ebbs and flows of these discussions will impact the outcome of midterms, now a mere 9 ½ weeks away. If we make progress (which can only happen if 45 is able to spin it with trademark bluster), the markets will rally, the economy will surge, and I suspect as a result the President and his minions will experience much better outcomes in November. Conversely, if talks break down (as they well might), it will continue to drive up the risk premium – both in the markets and in the actual economy. Everyone will be nervous/agitated, and I feel that these vibes will manifest in the post midterm electoral map.
Even that wouldn’t be so bad for us market types if the party currently on the outside looking in wasn’t, by all accounts, out for blood. There are a lot of grey areas here, and if the result is some sort of Congressional balance in both chambers, I reckon we’ll survive. However, if the Dems run the table, I fear that they will use their newfound powers in ways that (let’s just say) won’t be overly accretive to the fortunes of wide ranges of risk capital allocators. Imagine, if you will, a market that falls under the iron auspices of Liz’s Accountable Capitalism Act, but without the relief of Don’s reporting cycle relaxation. Great Caesar’s Ghost! I don’t even want to think about it.
Importantly, I don’t believe the markets will wait to know the actual outcomes of our great, bi-annual exercise in democracy to adjust risk appetite and investment configuration. More likely, the rising and falling political fortunes of each side will have a material impact upon valuation trends – as soon as Labor Day if not before.
All of which sets us up for a rather overwrought last trimester of 2018. But hey, let’s not get ahead of ourselves, shall we?
After all, it’s good news week. And, if worse comes to worst with respect to the foregoing, we can perhaps take comfort in the prospect of those world-class market economists: Donald J. Trump and Elizabeth Warren, working together to fix a market structure that has done so little to enrich the lives of so few, for so short a time.