KEN GRANT: Morning Corn

Ken discusses bushels of corn, tradewars, and Q2 earnings and more importantly his fears for Q3 guidance.

Morning Corn

July 8, 2018

Woke up one morning, ‘round San Francisco Bay,

She lay beside me, and this was our last day,

No tears were shed, though our hearts would soon be torn,

We just started smiling, laughing, rolling in the morning corn,

Morning corn, morning corn, the blues ain’t gonna getcha, when you’re rolling in the morning corn

-- Corky Seigel

I’m guessing that few of you are familiar with this week’s featured artist (named above), who, along with his former Roosevelt University school chum Jim Schwall, lit the scene on fire a bit 50 years ago, under the eponymous moniker of the Seigel Schwall Blues Band. Give a listen if the spirit moves, and start with our title song, perhaps the band’s best.

Yes, I love “Morning Corn” but the truth is, I love all kinds of corn. Because (you’ve got to admit) corn is pretty cool. No matter what form it may take. And there’s lots. For example, there’s corn on the cob, popcorn, corn flakes, corn dogs, canned corn, creamed corn, corn syrup, corn bread and (of course) Jimmy crack corn, and I don’t care.

Corn is sometimes also called maize, but mostly only by either the indigenous peoples of this continent, or those affiliated with my deadly sports enemies at the University of Michigan*.*

Speaking of indigenous peoples, the European Settlers of the 17th Century first bonded with them guys, over, you guessed it, corn. Corn is also a main food staple -- not only for humans, but also for the domesticated animals we breed to slaughter and convert into other culinary delights. Though highly inefficient, corn can, in addition, also be used as fuel for internal combustion engines.

Plus, to paraphrase Dylan, some of these bootleggers can turn it into pretty good stuff.

Corn, though, is not without its controversies. However, I must take issue with my doppelganger Lewis Black in his assertions that: a) all of the candy corn that exists in the universe was created in 1911; and b) its un-consumed units are collected, washed and resold to the masses each subsequent Halloween. In addition, to the best of my knowledge, and contrary to the inferences embedded in our title song, there’s not much corn to be had in the general region of the San Francisco Bay, and almost certainly not enough to go rolling around in the stuff in the immediate post sunrise hours.

But mostly I feel that this is NoCal’s problem (one of many), and other than that, I wish to convey the happy news that of late, is making a nice comeback.

Yup: Making a Nice Comeback

The accompanying chart indicates a month-long, dizzying collapse from ~$4.20/bushel down to a rather pedestrian $3.60 (its lowest level in > 5 years) as of last week. But the good news is that corn’s now back on the charts with a bullet at $3.71¾. But I don’t want to get to jiggy here. After all, I grew up in the grain pits at the Board of Trade of the City of Chicago.

There, you learn early on that grain speculators will often manipulate prices based upon ultimately inconsequential shifts in Midwestern weather patterns, so maybe some of the recent recovery derives from rather parched conditions in America’s Corn Belt. But I think on the whole I’ll park myself in Missouri (ranked 9th in overall corn production as of 2016) on that one.

Then there’s the whole China thing. But China imports less than $1B/year of corn from the U.S. – the approximate equivalent of the value of finished ceramic figurines we sell over there, and a single digit percentage of overall domestic maize production, so I need some help with the math here as well.

But then again, pretty much all tradeable asset classes have me confused of late. Investors returned from the whole Independence Day in a patriotic mood, and took all our equity indices into positive territory for the week, socializing the first across the board first Mon-Fri gain since mid-June. This move catapulted the Gallant 500 above all of its pertinent Moving Averages, also for the first time in a month, and, in solidarity, the always mystifying VIX plunged to depths not seen in a similar dog’s age.

As suggested last week, one could argue that the official action of the quarter began on Friday, with the release of the June Jobs Report. Here, the numbers came in on the shady side of in-line, with solid job creation and increased Labor Participation causing a modest rise in the base rate.

But as everyone kind of feared, Hourly Earnings growth continues to disappoint, clocking in at a drearily repetitive +0.2%. As such, long sought-after wage inflation and its presumed shot in the arm to consumers continues to be little more than a utopian dream for economists of every stripe.

Perhaps in part for these reasons, financial conditions remain both over easy and sunny side up, with government bonds rallying across the globe last week, and the always-generous Swiss National Bank now willing to charge an annual rate of ~0.15% for the money it borrows. Japan is paying 0.02% for the same accommodations. All of which is consistent with my stated hypothesis that the equity complex wants to rally.

But now I’m not so sure it will. Yes, earnings, set to commence next week, appear to be a poised to tell a happy Q2 story. Consensus estimates are clocking in at >20% profit growth, and high single digit revenue expansion. Q1 will, of course, be a tough act to follow but it’s my belief that if corporate chieftains in aggregate do no better than meet these estimates, no one should be particularly inclined to complain.

And, for what it’s worth, I have a hunch that they will beat them. Consensus estimates, that is.

But, for a variety of reasons, I am beginning to worry about forward guidance. First, I hasten to remind y’all that when the C-Suite crowd guides, it will be guiding for Q3, also known as the Kitchen Sink Quarter, when, according to time-honored tradition, bigwig execs tend to sandbag numbers, so as to make them look all the more fabulous when Q4 comes around. And who can blame them? After all, if you were a bigwig exec, would you rather walk into the Compensation Committee on the upswing, or forced to explain away nefarious gravitational forces plaguing your financial statements?

And in addition to incentives that may drive more modest future estimates, the current situation offers ample fodder for this sort of thing. Of course, we can start with trade wars, now, if the wires can be believed, begun in earnest. It may get worst, and it may hit bottom lines, one can almost hear the tune whistling on the lips of CEOs even now.

Then there’s uncertainty about currency, higher energy costs, questionable credit conditions and the like. I may be wrong here, but I’m just kind of suspecting that the tone at the podiums will shade towards the subdued.

My overriding concern is that there’s just too much uncertainty pervading the ionosphere for confident investment – either implicitly, through the markets, or even directly, through such quaint exercises as research, development and capital expenditure. This, I fear, may tether the markets to their recent narrow ranges. I don’t think there’s much outright crash risk, but I do wonder whether investors have sufficiently digested their Corn Flakes or Wheaties to carry this here market into new frontiers – at least for now.

On the other hand, there are those among us who are convinced that the bull market is over, and while I don’t agree with them per se, I must also concede that they may be right. If so, my fondest advice for you is to wake up early, grab the one you love, and head to the nearest cornfield.

If you don’t know what to do from there, then please accept my apologies for wasting your time.

TIMSHEL

(When i asked Ken Grant, what TIMSHEL stands for, he replied the following;

Timshel is a Hebrew phrase that translates into “Thou Mayest”. It is the only blessing God would bestow upon Cain after he put his mark on him. It is also a key theme of Steinbeck’s “East of Eden”, where it is argued that Timshel is one of the lord’s greatest gifts to mankind, as it gives him free will and the chance to succeed. This is about all that can be hoped for in the markets, and therefore, I believe, a fitting ending salutation for my weekly posting. )

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