KEN GRANT: Small Faces

Ken discusses Itchycoo Park, Facebook, Earnings, last weeks' Central Banks, NF Payrolls, Spec position, and ... Corn

Small Faces

August 5, 2018

It’s all too beautiful (Small Faces - Itchycoo Park)

There’s a lot to cover here, but we must first dispense with a couple of pieces of business.

In the midst of all of the hubbub around 45’s grandstanding insult of LBJ, y’all might’ve missed a significant milestone that presented itself midweek: The Apple Corporation of Cupertino, CA (or is it Mountain View? I get confused) became the first company every to achieve a market capitalization of $1 Trillion.

And that. Is all. I have to say. About that.

Moving on, I am compelled to address the galactic buzz generated by last week’s note about the Faces. Legions of followers pointed out that the group partially evolved out of an outfit called the Small Faces came first. Some even claimed the Small Faces were the better ensemble. Well, yes, there was a band called the Small Faces that predated the visages presumably of larger size, and yes, a couple of their members were a part of both groups. But any reasonable interpretation of Rock History would suggest that Rod Stewart and Ron Wood’s arrival – fresh from the magnificent and vastly underappreciated Jeff Beck/Truth combo—was the seminal event in the formation of the Faces. And, for the record, while I dig their diminutive predecessors, I’ll stick with my longtime allegiance to the core lineup of the Faces as we knew them.

Finally, and on a related note, I must follow up on last week’s Facebook diatribe. You see, instead of just spitballin’ like I usually do, I checked with a couple of cats that actually follow the stock, and they had some interesting things to convey. It seems that the FB Brain Trust had been warning for the two preceding years of the likelihood of slower user growth – a reporting pattern that ended somewhat abruptly with the Company’s Q1 release in April. Here, in the wake of the whole Cambridge Analytica thing, after Zuck’s Excellent Washingtonian Adventure, they issued their strongest guidance in many quarters. So it came as an enormous shock to the informed that for Q2, they did a 180 on the previous quarter’s 180. In fact, they did a 180+ -- demanding that the markets recognize the folly of extrapolating into the future the firm’s extraordinary growth in revenues, sales and user engagement.

Unfortunately, however, this context only adds to the mystery. It would’ve been entirely logical for Team Zuck to take a 2x4 to their valuation back in April; late July, not so much. The most direct inference to draw here is that with respect to a company where > 70% is owned by insiders, where Zuck himself has a majority of the voting rights, the public is informed of its doings on a “need to know” basis. And Zuck doesn’t think we need to know – except what and when he chooses to tell us. A connection of the dots suggests that undisclosed problems continue to lurk beneath a still-shiny surface. And, while we certainly don’t need to know, what lies beneath may be more problematic for the markets in general than is generally assumed. I expect the Menlo Park (or is it Cupertino?) crowd to lay low on all of this, but to me, what happens down the road bears watching and is worrisome, come what may.

However, as the Augustine portion of the Julian Calendar unfolds in earnest, perhaps we can turn our attention to happier tidings. The Gallant 500 recorded its 5th straight week of gains, and is now 113 skinny basis points from its all-time highs. Good Captain Naz recovered his sea legs – albeit modestly, and nasty Viscount VIX retreated back into his shell. He now sports an obsequious 11 handle, and it wouldn’t take too much more complacency and giddiness to push him down to even lower depths.

Because, ladies and gentlemen, much of the news that has hit the tape over the last several sessions can be interpreted constructively. More than 80% of the way through the earnings cycle, reporting companies are exceeding even unambiguously lofty expectations, and projecting out to a plus 24%. Investors are taking notice, and, if that ain’t enough for y’all, feast your eyes on the following two charts:

So earnings are strong and investors are reacting favorably. Conversely, and as anticipated in this space, Q3 guidance shades to the negative. 65 intrepid CEOs have shared their associated near-term clairvoyance, and of these 2/3rds are defying both deer and antelope by uttering discouraging words. But hey, it’s early, so let’s not hang our collective heads just yet, OK?

I’d also be remiss if I didn’t share my elation at the positive reversal of fortune in the Grains, particularly Corn, which is showing some A.M. perkiness:

Those sneaky ag traders are attributing some of this to sizzling weather conditions – particularly on The Continent. But I’d be a little careful here. Corn is nothing if not a resilient crop, and if the Good Lord does indeed decide to dial down his heavenly thermostat in realms such as the Grand Republic (France, for the uninitiated), then perhaps it will be yet another sequence of “lookout below”.

But far away from fertile fields from Iowa to Alsace Lorraine, the focus was on very fancy macro events, and the results were, as could have been foretold by the Gods, lacking in clarity.

The Bank of Japan kicked off the festivities early in the week, taking no action and managing to confuse everyone interested in their strategy or associated timelines. Its country’s 10-year rate remains elevated to levels seldom seen outside the Gambino Family’s Jersey City money lending operation, at 0.102% basis points. The Fed did nothing. Finally, the Bank of England maintained its trademark stiff upper lip and raised its overnight rates from 0.5% to 0.75%. This, however, didn’t do much to stem, much less reverse, the gravitational forces currently descending upon the Pound Sterling.

All of this set up for a nominally dramatic July Jobs Report release Friday morning, but this, in retrospect, was something of a non-event. Private Payrolls were a little light at 157K, but the base rate dropped a titch to 3.9%. The much-anticipated Average Hourly Earnings component came in exactly as expected, and precisely in line with the GDP report at 2.7%.

All of the above merits, even by the harshest reasonable assessment, a Gentlemen’s B. But the macro situation is arguably more complicated than meets the eye – mostly due to the ubiquitous but unknowable overhangs of trade wars, and (increasingly as the calendar moves forward) a potential calculus changing election, now a skinny three months away. Of these matters I have little insightful to convey.

By contrast, the related trade action has been worth a gander, as evidenced, first, by a continuing build-up of short interest in U.S. long-term treasury instruments:

Certainly, we’ve seen this movie before. Lots of smart guys and gals have been, for years, anticipating both a rise in longer-term interest rates, and even, for the fully fanciful, a steepening of the yield curve. Maybe someday they’ll be right. Maybe even soon. But the perpetual bid on long-term Treasuries has been perhaps the toughest nut to crack across my market career, which (I remind you) began during the administration of Millard Fillmore. So I reckon we’ll have to see.

On a partially related note, I observe with interest that the self-same smart crowd has thrown in the towel on their long Crude Oil positions.

There are a lot of moving parts here, as Crude Oil is at least theoretically impacted not only by trade wars with the Chinese, but also various cajoling in the Middle East, where a dizzying matrix of production quotas and import/export protocols with utopias like Iran are creating mind-numbing crosswinds. I suspect that in many cases, rather than reversing their investment hypotheses here, crude speculators may be simply capitulating.

It’s all too beautiful, now, isn’t it? But one way or another, it won’t last. The Almighty did not intend us to spend all our days resting our eyes in fields of green, so, perhaps soon, we’ll be forced to bid farewell to Itchykoo Park. The Small Faces had its innings there, as did the (not so small) Faces afterward. Facebook has been the object of our desire for several years, but now we may be forsaking her in favor of our old flame: Apple.

And wouldn’t you know, after Friday’s $1T close, the Cupertino (or is it Menlo Park?) crowd was forced to contend with a shutdown of a major components supplier’s – Taiwan Semi – production plant, so it’s entirely possible that the lofty-but-menacing 13-figure valuation may disappear as early as the Sunday night session.

But here, having violated Paragraph 3’s solemn pledge, I will rest my keyboard, wishing everyone who receives this note a sincere (if redundant) Ooh La La.

TIMSHEL

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