KEN GRANT: Ah Yes, I Remember It Well (June 18)

Ken discusses net-neutrality, the AT&T - Warner merger, and The summit

Ah Yes, I Remember It Well

June 17, 2018

“We met at nine”, “We met at eight”, “I was on time”, “No, you were late”

“Ah, yes, I remember it well”

“We dined with friends”, “We dined alone”, “A tenor sang”, “A baritone”

“Ah, yes, I remember it well”

“That dazzling April moon”, “There was none that night”

“And the month was June”, “That's right, that's right

It warms my heart to know that you remember still the way you do

Ah, yes, I remember it well”

-- Alan Jay Lerner/Frederick Loewe

First, I hope that this note has somehow found its way to at least a portion of its intended recipients, because, you see, with little fanfare, an absolute catastrophe befell the internet this last week. Lost in all of the hubbub about the Singapore Summit, IG reports, Big 3 Central Bank Policy Statements and the like, the Federal Communications Commission (FCC) enacted the repeal of the 2015 Net Neutrality Act, an action which had placed federal oversight of the Internet under the jurisdiction of the Telecommunications Act of 1940. Remember the days before the FCC decided to treat the web in a manner engineered to oversee AT&T’s mid-20th Century monopoly on phone service?

Ah yes, I remember it well.

What I remember most is that before net neutrality, the web was a sleepy, dreary place. Scant content was available, and to even access the tool, one needed to attach a landline to a modem, and pray for the appearance of the flashing lightning bolt icon/ accompanying squeal sound as confirmation that a connection had been made. Then one prayed that one’s sister didn’t try to make a call or that some other disruption would take place, forcing one to start the process again.

Can you even imagine a world where the FCC cops weren’t on the job? No Twitter, no Facebook, no $%*#@!! Netflix! Luckily, back in 2014 and before, we still had our washing machine sized radios to listen to FDR’s latest Fireside Chats; otherwise, we wouldn’t have the vaguest idea what was going on in Washington, let alone more remote ports of call.

But now the evil FCC is off the case, allowing (among other things) the providers of bandwidth to charge market prices for the use of their resources. No wonder Bezos, Serge, Larry and Reed Hastings and others of their ilk -- champions of the common man one and all --- were crying in their soup. After all, the three companies they control (Amazon, Alphabet Google/YouTube and Netflix, respectively) currently account for more than 50% of all bandwidth usage in the world, and desperately need Uncle Sam to ensure that wicked, competitive pricing doesn’t hurt their bottom lines. Each have shareholders to whom they must answer, and since there’s an infinite amount of bandwidth available, why should they let its corporate providers cut in on their margins?

Except there isn’t. An infinite amount of bandwidth available that is. Either in any given location or across the globe. And what is available is being consumed growth rate of >50% a year. The clear answer is technology innovation, by companies like AT&T and Verizon, but it is entirely shocking that these enterprises would be allowed, as they are now, to set spectrum prices on the entities that hoover it up -- in accordance with their usage, in order to underwrite capital investment.

However, as suggested in our thematic quote, the month is not April but June, placing me in something of an amorous mood. So it pleased me, speaking of AT&T, that it was allowed to consummate its star-crossed romance with Time Warner, by virtue of a Federal Court rejecting a poorly thought out Justice Department lawsuit seeking to block the marriage. Now Bugs and Ma Bell are one in the eyes of God and Investors. Here’s hoping they are fruitful and make lots of anthropomorphic rabbits, because, during this, its most important season, love is indeed in the air. Twentieth Century Fox now has not one, but two formal suitors (Disney and Comcast) for her hand. And who’s to say that it stops there?

In fact, it doesn’t. Big Don and L’il Kim were able to advance their dalliance, departing last week’s rendezvous with evidence of their intentions to expand their triste. Unfortunately, however, details of their plans to set up housekeeping were not particularly forthcoming. Elsewhere, however, amore, toujours amore, was a more uneven affair. We’re still in a tiff with Canada (though I don’t believe it will last), and the lovers’ quarrel between America and China ratcheted up a bit, with each side extorting the other to the tune of $50B of tariffs – so far. Of course, it will be us Joe Bag of Donuts types that will foot the bill, so this one may get worse before it gets better.

Of these Affairs de Coeur, markets took mixed notice. Commodity markets tumbled, as well they might’ve, with Energy, Metals, Ags and Softs all feeling the gravitational pull, and (more improbably) the USD reached its highest level in nearly a year:

This is a commodity index

This is a dollar index

Perhaps in a nod to the passion of the season, government borrowing rates dropped across the board (yes, Switzerland is again negative out 10 years), the fact that U.S Fed Chair Pow raised rates and signaled 2 more hikes this year, and that Super Mario announced the ending of € QE notwithstanding.

But the Equity Complex continues to play hard to get. It was a flat week – at least for the Gallant 500 and his wingman, Major Dow. Captain Naz and Ensign Russell fared better, though, with both indices now resting at all-time highs.

I’d take this opportunity however, to encourage Mr. Spoo to persist in his ardor, based in part on the fact that he has a great deal to offer:

SPX P/E Hovering at 5 year averages

Factset in fact(set) has Q2 earnings clocking in at +19%, and this after a similar performance in Q1.

If they’re right, then it doesn’t look to me like a 16 P/E is an extraordinary amount to pay. Plus, in light of the Judicial Ruling on Time-Warner/AT&T, still-benign financial conditions and a number of other factors, it strikes me that merger mania should persist through the next quarter at least.

However, if these arguments fail to reinforce the intestinal fortitude of my favorite index, I’d hasten to remind it of that ancient truism: faint heart never won fair lady:

In addition, it may bear mention that the VIX breached down into an 11 handle and is close to ytd lows, that the Atlanta Fed’s prediction for Q2 GDP has risen yet again to nearly 5%, and that in addition to the sublime sound of wedding bells in churchyards across this fair land, the second half of June is seasonally known for its trademark tape painting rituals.

So on the whole, I think this here market may indeed be setting itself up for a nice rally.

I wouldn’t anticipate anything particularly dramatic just yet, but the SPX does remain nearly 100 handles below its January highs, and I see no reason why it can’t gather itself to test that threshold, or even breach it, over the coming weeks.

Of course, it would be helpful if we can get that darned internet up and running again, because financial transactors have come to rely upon it (or so I’m told), and buying frenzies fueled by paper orders phoned in and transmitted through pneumatic tubes will be a highly annoying exercise. I will, however, predict that, one way or another, the markets and its participants will survive. And, in closing I hasten to remind my readers that the stock market became a global sensation while operating for more than a century with men in top hats and overcoats conducting business orally, under the shade of a buttonwood tree in Lower Manhattan.

Most of you are too young to have experienced that era, though I was only a young shaver for most of it, I can assure you that it was a magnificent time to be alive.

And yes, I remember it well.

TIMSHEL

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