It May Take a Village (but the Village Lacks a Voice)
September 3, 2018
Careful readers will notice that in recent weeks, I’ve made an effort (at any rate) to trim down the digressive introductions that are a signal feature of these weekly missives. Know that I have my reasons for doing so. But sometimes it remains necessary to note certain galactic milestones, which, like the cave dweller etchings of antiquity, mark the ebbs and flows of human existence. Such an event took place on Friday, and I’d be remiss if I allowed it to pass unremarked.
On Friday, August 31st, a sister, weekly publication that we admired a great deal put out its last original content. It would be perhaps a stretch to state that The Village Voice went dark on Friday, because: a) it discontinued its print edition a year ago; and b) a handful of loyal e-journalists remain on the premises to perform the vital task of web-archiving its rich, multi-decade inventory of the written word. I’m really glad they’re taking the trouble to do this, because The Voice, whether you agreed with their viewpoints or not, always had something interesting and topical to convey. But insofar as they will never again provide commentary in contemporaneous time, I suspect that soon, the on-line scanning of back issues will assume the same morbid and depressing vibe as taking a trip to the library and reviewing micro-fiche editions of Look Magazine or The Saturday Evening Post. One is no longer reviewing news, but rather history, and whatever one finds therefore is likely to be lacking in terms of bite and sting.
One last thing about The Voice: anybody who connected with it did so in a very personal way, because that was your only choice. For me, it was about columnists like Hentoff, critics like Christgau, and comic strips like those crudely drawn by Lynda J. Barry. The music section takes me back to a long-lamented era when there were actually viable live music options in Manhattan, when you could see Lou Reed at the Ritz, Patti Smith at CBGBs, or even Sly Stone at the Lone Star. So, like legions of others, when the new issue dropped on Wednesdays, I often immediately turned to the music section, to check out those elegantly cropped lineup listings offered by clubs from the Apollo down to the Knitting Factory.
It was also through the VV that I first learned about a disease menacing the neighborhood called Acquired Immune Deficiency Syndrome, – a malady which would hover over the existences of my generation for the next decade and beyond. Nobody could stop talking about AIDS for the rest of the ‘80s, but to have first encountered it through the advanced journalistic efforts of The Voice is something I’ll never forget.
So I hope you’ll forgive me my little opening blues riff, which is also catalyzed by our current positioning on the Julian Calendar. August is over, and its ending always brings me down just a bit. Fittingly this year, it resolves itself into Labor Day weekend, and, as my most loyal droogies know, I hate Labor Day. To me, Labor Day sucks. Maybe this is due to my having long ago cast my lot with Management, a hard-pressed group for whom no one ever thought to set aside a holiday from its toils. Nope, instead they gave us Labor Day, and the attendant honor of paying our staffs for the privilege of NOT contributing to the bottom line. But my beefs with the season extend beyond all that. Though I no longer have school age children, and my grandchildren are too young to have begun their formal education, it always makes me forlorn this time of year to see back-packed little fellers at bus stops, heads down in anticipation of 9 dreary months of toeing the line. Really, though, it’s no better for us adults. July and even more so August typically provide ample pretext to put aside unpleasant but unavoidable tasks, because, hey, it’s summer. The later you get into August, the more you can just tell yourself that no one is working, no one is reachable, so why not boot down a bit?
But then August ends and it’s “go time” again. And this year, not only do most of us have some catching up to do, but will be compelled to operate in this mode at a point concurrent to many unfolding dramas that are likely to command our full attention – perhaps all the way up to the point of the Times Square Ball Drop/horrifying Dick Clark hologram re-emergence, and beyond.
My guess is that pretty much every risk factor is in play as we enter the final trimester of ’18, and I’ll take this opportunity to reiterate my call that volatility should rise across most tradeable instruments before we close the books on XVIII. As I am not shutting down this publication, we should have ample opportunity to comment on the action in contemporaneous time, and we can begin almost immediately, but first I want to get another vexing issue off of my chest.
Specifically, after a reasonably promising start to the year, my observation is that from about June 15th on, hedge funds have struggled mightily in terms of performance. With the market up and most funds positively correlated, the implication is one of alpha give-back. I witness this across a reasonably reliable number of funds that I track, but felt a sense of relief when I found corroboration in the following chart:
Some context is in order here. The graph only references long/short equity funds, but my anecdotal observation is that the pattern traverses all strategy classes. Of course, long/short equity has for years been an unstable region of the investment landscape. Contrary to its longstanding branding, only it erratically and partially generates up-capture, but invariably experiences carnage when its benchmarks selloff. But the underperformance on a tape that has been a one-way ticket upward since the problem started is particularly distressing. The closest historical analogue I can draw is to mid-2014, when the markets threw shade all over the tech sector, while embracing “value” names like Johnny John in a manner that might suggest that baby powder had just been invented.
So I’m guessing that a lot of fund platforms may be soon heading the way of the Village Voice, and my sources tell me that the process is already under way. In the current era, the redemption moment of truth tends to coagulate around mid-quarter (the dreaded 45-day redemption deadline), and if my intelligence is accurate, then a goodly number of equity hedgies received their death sentences around August 15th. Again to the extent that I’m “on-theme” here, it may just be the case that the SPX final push through entrenched resistance to multiple all-time highs can perhaps be attributed in significant part to a short squeeze.
I reckon we’ll find out, but suffice to say that I have viewed the > 90 handles glibly dispatched by the Gallant 500 over the back half of August with something of a jaundiced eye.
Time will tell; it always does. But there are a number of reasons why, as I reminded everyone last week, September is the worst calendar month of the 12 for equity investors. Data flows tend to produce dodgy results: nothing but pre-announcements in equities along with macro data reflecting the often-seasonally slow summer. In election years, and this one in particular, the risk premium tends to climb a wall of worry. Then there’s tax selling, portfolio window dressing and kitchen sink negative earnings warnings.
And this month may be an accurate case and point. I will not address the political risks again this week, because hopefully I made my point in the last installment, but they are palpable. On this holiday weekend, progress on resolving these vexing and untimely trade wars appears to shade negative. Commodities continue to be hard pressed, and if you doubt this, just consider the rather astonishing reality that Sugar is down ~30% this year. Why, particularly on a holiday, it’s positively un-American!
Emerging/impaired markets are a raging dumpster fire, with the Argentine Peso joining the Turkish Lira in a death spiral. In a bold, but hardly major league move, the Italian Government thumbed its rhetorical nose at EU deficit guidelines. Investors, in Pavlovian fashion, sold down their bonds to new yield highs.
Italian 10y bond yields:
Beyond this, everyone who believes they are in the know is also worried about the yield curve, which has fought mightily against inversion – perhaps aided by the sense that there is now, improbably, insufficient debt issuance from those fly folks at Treasury to satisfy insatiable demand:
So maybe the short end of the curve rallies a bit this month, but that probably won’t last either. The smart money says that the purveyors of Yankee debt are likely to ramp up their issuance in the 4th quarter, and, adding to the pricing pressure will be the odds-on likelihood of at least one more Federal Reserve rate hike before the year bleeds out.
But whatever they do, there’ll still be a Twilight Zone-like shortage of government paper available for consumption by ravenous investors, and, for what it’s worth, there aren’t enough stocks to go around either. As a result, any good news drawing forth from that quarter could socialize a rally to even higher highs. My early hunch is that Q3 earnings will crush expectations, and push against a strong geopolitical (and domestically political) headwind.
So, on the whole, I’m expecting it to be adult swim in the volatility markets, starting Tuesday. On balance this is probably a good thing – particularly for those hedge funds not yet toe-tagged but stuck in the critical care unit and desperately in need of a reversal of fortune if they are to carry forward at all.
That not all will survive is a matter of certainty, but then again, nothing lasts forever. Just ask the publishers, staff and readers of the Village Voice. And my morbid suggestion to those that won’t make it is to try to go out with dignity, perhaps taking a cue from the dearly departed weekly whose demise we lament this weekend. Almost exactly a year ago, their printing presses went silent, but not before rolling out a cover featuring a youthful Bob Dylan, circa January 1965, looking at the camera and offering a full military salute. How cool is that? If (when) I check out, I’d like to do it in similar style.