What Took Three May Now Only Take Two

Those of us that care to remember any of the warning signs prior to the Great Financial Crisis where terms morphed from being the “greatest thing e-va!” into the greatest thing ever reaching critical-mass, triggering a near extinction level event for finance and markets, remember a term vividly.

That term was known as “Credit Default Swaps” or “CDS” for short. And it proved to be the financial alchemic mixture of hubris and greed that brought the entire financial system to its knees.

I just want to call your attention to this both to jog-the-memory as they say, while also brining front-of-mind what may end up being its equivalent.

Although many believe that CDS’ are a thing of the past, which would be a grave mistake because, they’re baaack! There has been another form of mental “insurance” construct playing out, which has the potential to bring anyone who ever thought “these things are safe” to their financial knees should things , once again, go awry.

But this time it’s only two words, but the possible contagion effects both for the market, as well as investors psyche, should not be discounted.

That term is: “Covenant-Lite” or “Cov-lite” for short.

Many have taken to these things as if there’s some implied “insurance” component as they think of when thinking about normal bond issuance. Nothing could be further from the truth. And for many realizing this truth, too late, could have serious truth bearing consequences.

Here’s a bit from Investopedia™ on what they are and how they work. I would suggest to you, very strongly, to familiarize yourself with not only what these are, but also, who has been loading up on them, as well as issuing them.

The possible insight could be well worth the effort both from a competitive advantage standpoint, as well as general market insight and more. To wit:

What is a Covenant-Lite Loan?: Covenant-lite loans are a type of financing that is issued with fewer restrictions on the borrower and fewer protections for the lender. By contrast, traditional loans generally have protective covenants built into the contract for the safety of the lender, including financial maintenance tests that measure the debt-servicecapabilities of the borrower. Covenant-lite loans, on the other hand, are more flexible with regard to the borrower’s collateral, level of income and the loan’s payment terms.

How a Covenant-Lite Loan Works: Covenant-lite loans provide borrowers with a higher level of financing than they would likely be able to access through a traditional loan, while also offering more borrower-friendly terms. Covenant-lite loans also carry more risk to the lender than traditional loans and allow individuals and corporations to engage in activities that would be difficult or impossible under a traditional loan agreement, such as paying out dividends to investors while deferring scheduled loan payments. Covenant-lite loans are generally granted only to investment firms, corporations and high-net-worth individuals.

Covenant-Lite Loan Explanation via Investopedia .com

It is in my humble opinion that it is here many “investors,” as well as the entirety of the so-called “smart crowd,” will trample over their own mothers to get to the nearest microphone, camera or keyboard to say how shocked, shocked! they are to find how much trouble these things are causing should something go awry. Just like they all did during the CDS revelations throughout the financial crisis.

Or, quite the opposite happens, where suddenly you may need to send out the bloodhounds to find them, because finding these once “genius'” of the mainstream/financial media to talk about them was suddenly like trying to find Waldo. It’s comical to think about it today, but back then, it was a completely disgusting.

Going back to the days of yore (i.e., during the meltdown of 2008) that one three word descriptor (e.g., CDS) came up over, and over, and over again as the reason for much of the crisis.

OK, there were more as in MBS’, CDO’s and others. But the above really took the cake during this period, from my purview. But not too worry, we may only be down to one term and two words, so that’s improvement, right? Right? But I digress.

That once “no brainer” insurance policy (CDS) that appeared as “good as gold” went from rock solid status to then morph before everyones eyes not just into some form of fools-gold or tungsten plated equivalent. But rather, became so viscus, so gooey, so toxic, so acidic to the underpinnings of balance sheets everywhere, that the only equivalent description would be something along the lines of what we see in all the Alien movies. i.e., it burned through layer, after layer, after layer of ledger balances with no apparent way on how or if it could be contained.

The difference this time is that these “Cov-lite” loans have been bought and sold like they’re the most stable, trusting and safe way for companies to finance themselves, as well as “investors” to load up on as way to “extract yield” in a near yield-less world.

It all appears genius – till it bears its idiotic fruit.

© 2019 Mark St.Cyr

From ‘Seismic’ to Systemic Catastrophes

Do robots dream? That’s one of those questions that begets a different answer every time. Here’s something we do know: when they are awake in the “markets” they control it. Humans are the ones that can go back to dreaming as if their trading matters. Why?

Because they don’t. Or said differently: It’s their world now – you just happen to live in it.

The rise of algorithmic bots in the market was suppose to ensure greater efficient markets with tighter spreads for buying or trading stocks. And for a while it did just that.

But today what was once seen as “efficient” seems to have morphed into something more along the lines of parasitic. And that’s just the start of it.

Another side of this new phenom is this: Yes – they can buy, sell, hold or sit out. But (and it’s a very big but) can they truly interpret? i.e., can they really tell when a false positive or negative is truly false or positive?

This is where things begin to get tricky. And it is here that the “market” seems poised to find out – whether it wants to, or not.

Currently the bots or quants (i.e., systematic strategy allocations) are dominating the “market” buying anything with a ticker symbol backed via a buyback schedule. All while the humans (i.e., discretionary investors) have been cutting back.

What’s at issue here is whether or not this lines up with any skillful interpretation of true “market” front-running vs real future economic insight. Or is it purely: if A = B then C?

You can count me in on the latter.

What’s quite ironic about the above is it’s also “code” for one of the most telling signs that should signal danger to those knowing how to interpret. i.e., It’s called: herding. And it now seems the bots are taking on their own persona of “Electric Market Cowboys.”

Does this pose a systemic issue? It could, and here’s why…

As I insinuated in the title we are already experiencing seismic like ripples throughout the global “markets.” If this appears to be news to you, don’t be surprised, because the only thing that’s made “news” over the last few weeks is the verbal contortions of logic being spewed to explain why record setting market highs signal the need for rate cuts. But here’s the stuff that really matters…

China’s economy is not just showing signs of stress, but rather, it too is showing systemic concerns. Banks are beginning to fail, yes fail. China’s Baoshang Bank fell at the end of May, but the shock waves are still reverberating throughout its funding channels.

Speaking of “banks,” have you heard the tremors rippling across the ocean from one of Germany’s biggest, also known as Deutsche Bank™? If not, let’s see if I can sum it up…

So far this month they let go about one fifth (18,000) of their work force; their stock seems to be nosediving ever further and faster towards “rescue” territory; Oh yeah – and they have $49 Trillion worth of derivative exposure (aka “risk”) that most of our own “too big to fail” banks are exposed to in one form or another. Not to mention 401K’s, pension funds, etc., etc., etc. But I digress.

Again, that’s $49,000,000,000,000.00 give or take a few billions, I would imagine. Because with numbers like that, billions are just chump change, right?

I say that because when you see (or don’t see) the amount of press such a situation is getting, one has to be thinking “What, me worry?”

For those who work better with visuals. Here’s a “picture” that says far more than words can summarize. To wit:

(Chart Source)

Then we have what can only be described as “getting in to the meat of things” such as: earnings.

Since I brought up “meat” it’s probably a bit nerve rattling that we have more of those “FANG” stocks coming out this week. For if Netflix™ is any guide – someone better ready the Novocain® dispensers. Or better yet, maybe the gas will be more appropriate.

Again, speaking of “laughing gas.” Did you hear the one about how maybe Netflix might need to add commercials to become profitable? You know, just like the industry it decimated with its more “superior” model. I mean, who needs anesthesia when you have “insight” like that, right? And we all thought the dentist/stock broker jokes were all but dead. Who knew! What’s next, commercials on Spotify™? Wait…

Then there’s the IPO darlings that either can’t stop falling or can’t stay above their IPO price. i.e., Slack™, Uber™. All I’ll say to them is this: Don’t feel bad – at least you’re not WeWork™. Or what is it now, something like “The We Company” or something like that?

Before it IPO’s the Co-Founder is reported to have already cashed out for, wait for it… $700 Million. And no, that’s not a typo. But hey, that’s what being a Silicon Valley disrupter is all about, right? Get yours – get out. Who cares about ethics, optics, or anyone else. “Cha- ching!!”

Remember: for every cash-burning “wonderling” that IPO’s – more often than not – that great “exposure to growth” stock suggsted and supplied via some broker is probably in someones mature 401K retirement plan or pension fund. Think about it. You know, to make sure they were covered for any “inflation expectations.”

And never forget: when it comes between you eating dog food in retirement and a fund managers stock bonus today? Be thankful you bought an electric one when times were good, just sayin’.

Last, but surely not least, during all this we get ready for what could portend to be “plate shifts” that make the San Andreas fault look down right miniscule. Or would a mechanical bull in a china shoppe be more fitting? Hmmm…

Then, of course, you have the Fed. decision coming forth a week from Wednesday, where three things take place also.

First: It (the Fed announcement) falls directly on the month end. If you like “market” shenanigans? Month-end is where the “pros” play, and for real. A disappointment or, buy the rumor – sell the news event, in conjunction will make things interesting, to say the least.

Second: More earnings like Apple™ the day before the Fed. decision. Did I just feel a tremor? Probably nothing, right? Right?

Third: Another jobs report the following Friday. Wait, what was that…?

“So what’s the kicker here?” you may be asking. Good question, and it is this:

Throughout the entirety of next week, with everything going on. How are the machines going to interpret what to do next? Because when it comes to the “markets,” remember what I said earlier: It’s their world now, we just live in it.

What if they decide the best strategy, as described in the movie “WarGames” (1983/United Artists™) is: “Not to play?”

Tremors can go from seismic waves, straight to systemic contagion all in the blink of an L.E.D.

© 2019 Mark St.Cyr

Maybe A ‘Step” Too Far

Anyone that was old enough to remember where they were when we set foot on the moon (I am one) are probably aware, as well as watched, the show “Happy Days.”

This latter event gave us another of those enduring moments in our pantheon of memes that has lasted almost as long as Apollo’s. i.e., we went from landing men on the moon where “One small step…” has been applied to countless memes – to a television actor “Jumping the shark,” which has taken on its own status for implying that almost assuredly – it’s over.

To add to this, let me quote another that’s been used to describe many a situation from a revered band of that same era known as the Grateful Dead: “What a long, strange trip it’s been.”

Today we have an entire segment of people claiming we never really went to the moon, and another still believing it was really Fonzie jumping, as opposed to a stunt double. After all, it was the Fonz!.

The only thing that’s remained consistent since, in my view, is the Dead’s now proven astute observation then and continuing now. For “strange” doesn’t seem to capture the entirety of it all.

So here we are celebrating the 50 year anniversary of that monumental achievement – and the biggest thing dominating the mainstream news (NYT™ is just one of many) is either how going to the moon was some form of intentional male privileged or race based endeavor that needs to be shunned.

All I have to say is this: Did the entire “triggered” movement just “jump the shark” or “the moon” with this one?

If it did? Then at least, maybe, there’s one good aspect to this entire nonsensical brouhaha…

A safe landing back to sanity. (Cue the Dead’s “Truckin” song here)

© 2019 Mark St.Cyr

For Those Wondering What I’m Currently Watching

Below is a chart of the S&P 500™ just after the open at about 10am ET. It is represented via 15 minute candles/bars.

Remember: If someone tells you they “know” what happens next – don’t just walk, but run – and fast! So with that said…

What has caught my eye is there is what is described in technical analysis lingo as an “ending diagonal.” The reason why these types of patterns catch the eye as they say is because they usually have more “predictive power” for lack of a better term after what are also known as “extreme moves.”

And to say the recent run up to new never before seen highs in the history of mankind, as most of the same companies making up said market are making either lower lows never mind new highs isn’t “extreme” enough to warrant at the least an eye brow rise? I don’t know what will.

And yes, that’s not a misstatement. Or said differently, welcome to your central bank fueled fantasy of “market” logic.

So with that said here’s the aforementioned chart. To wit:

(Chart Source)

Another way to describe what these types of indicators suggest in image form show what one could consider as “A strong conviction to buy – loosely held.”

As always, we shall see.

© 2019 Mark St.Cyr

And Then Godot Arrived

The tragicomedy play “Waiting For Godot” by Samuel Beckett of the 1950’s cemented into the collective consciousness (what we may now refer to as “meme”) that moment where one waits for something or someone to arrive, that was assured with certainty, for whatever the reasoning – yet never does. Hence creating the enduring, applicable “Waiting for Godot” (WFG) moniker.

On an aside: my favorite adaptation of this same theme is “Waiting For Guffman” by Christopher Guest and Eugene Levy of “Spinal Tap” fame, “Best In Show” and others.

The reason why this moniker fits so many situations is because we as humans will give every reason known to man (and then some) as to why we should wait, rather than act. Why?

Because it’s easier to believe in the stories we’ll tell ourselves that facilitate more waiting than doing. It’s procrastination’s dark side. i.e., Where the “proactive” part of doing something – is to do nothing but to sit, wait and hope. Remember that thing about “hope” not being a strategy?

Now to be clear, there are times where one needs to “wait and see” as that other timeless adage reminds us.

But the application of WFG in dealing with things is far more prevalent and applied far too many times in different aspects of both life and business.

Usually it ends in much the same manner: either in disappointment, or worse – disaster.

When looking at the current state of “the markets” many are, once again, applying the WFG strategy rather, than a wait and see type.

The issue here is that “Godot” has made an appearance nearly every-time the so-called “smart crowd” predicted the opposite. Let me illustrate just a few:

Remember in days of yore, you know, circa 2017 when then Chair of the Fed, Ms. Yellen gave us the most detailed assumptions that not only would reducing the balance sheet be like “watching paint dry” and other insights such as, expecting there wouldn’t be no new financial crisis in “our lifetimes?”

A funny thing happened In January of 2018 as the now Chair, Mr. Powell stepped to the platform to receive the hand-off of the bag baton from Ms. Yellen. With an almost immediacy as Mr. Powell implemented her “watching paint dry” schedule for normalization someone named “Godot” made an appearance also.

It’s been one financial (e.g., “market”) crisis after another ever since.

All through 2018 it appeared that “Godot” would make an appearance every-time this same so-called “smart crowd” would profess he was no longer even on the “invite list.”

But “Godot” has proved he has his own set of criteria for appearances. “Hoping” he’ll not show seems to have just the same effect as “hoping” he will.

Again, remember that whole “hope” thing and strategy?

Now there are a lot, and I do mean just that, a lot of people looking at the current state of the “market” with its now “never before seen in human history” highs as some form of nullification that those which either have been predicting, or at the least, contemplating the rationale for an imminent market sell-off in extreme measures are the ones still waiting.

To that I say: Au contraire mon ami. Au contraire…

For those with a memory on par with that of a goldfish i.e., the mainstream business/financial media et al. May I remind you that it was only six and a half months ago that everyone, including the entirety of the so-called “smart crowd” which were absolutely shocked (shocked!) to see how such a seemingly innocuous term as “autopilot” could turn their “market” ride into near immediate “crash alert” status.

Maybe someone should’ve checked the passenger manifest for anyone named “Godot.” But that’s just me.

Only after the Fed immediately and vociferously announced that they would not only “pause” everything with near immediacy. But, they would reverse all prior stances – halt the normalization process almost in its tracks (e.g. September) and would signal not just one, but multiple rate cuts for the remaining year and into 2020 did the “markets” reverse.

And it was only June!

So now to stave-off any further surprise appearances of Mr. Godot, the Fed has not only signaled at its June meeting a July rate cut, but just to make the case crystal clear, Mr. Powell at his Humphrey/Hawkins appearances before congress delivered text and speech in no uncertain terms (terms that the “market” keys off of that is) that’ll be the case.

The resulting “market” action proved this point for those that still question it. And for those that may: Here’s said proof in “picture” form as they say in The Valley. To wit:

(Chart Source)

So now here we are with U.S. “markets” at extreme heights, an employment report that surprised in much the same manner to the upside – and the Fed is going to embark on what?

Can you say: all credibility lost?

Hint, you don’t have to say it. Just look at the above “picture” again. It says the equivalent of the all words in a library, never mind some thousand.

Will “Godot” make another appearance? No one knows for sure, but the odds are clearly in that favor. After-all, what has been solved when it comes to tariffs, trade, ___________(fill in the blank)?

The only thing, so far, that is a known known is that the world is going to get one extremely “dovish” central banker to replace another. e.g. Christine Lagarde to replace Mario Draghi at the ECB. So a return to the “printing presses for all” seems now to be all but secured with the now Fed pivot and more.

All I can say to that is remember “Godot.” For it seems he has a way of showing up just when everyone least expects him. Or said differently: remember 2018 for possible clues.

Then again, he does seem to not want to visit one aspect of these markets known as cryptos. Just ask any recent HODL (hold on for dear life) club member. Because isn’t 10K a lot lower than 14K? But then again…

Hope springs eternal, right? I mean, all I keep hearing is “winter’s over.”

I wonder how “Godot” views it?

© 2019 Mark St.Cyr

A Prediction Concerning Mr. Powell’s Future At The Fed.

Predicting anything is usually the first step to proving said prediction will not come to fruition. So with that said, here are my thoughts:

I was watching Mr. Powell’s opening remarks in regards to his appearance before the House Financial Services Committee this morning. Once again the political aspect in regards to the Fed and its Chair was put on full display.

Regardless of what side of the political aisle or viewpoint one holds. The Fed is suppose to be an Apolitical type institution. However, when it comes to recent events, it appears it is anything but the further time marches on.

I found it amusing that some of the very first questions or statements to Mr. Powell from members of the Democratic side of the aisle were about whether or not Mr. Powell would resign if the President asked.

His answer, once again, was just a wee-bit too-cute-by-half in both his delivery and his demeanor from my observation. But there was one that really caught my attention.

About 30 minutes into the proceedings one of the members, once again, emphatically asked if Mr. Powell would resign if asked. It was more of a rhetorical type of question, because what followed was more or less a clarifying statement of some insinuating guarantee that they (Democrat members) would “Have his back” should the circumstances warrant.

His (Mr. Powell’s) response was what caught my eye.

On camera he is seen in what appears to be both smiling and affirming to someone on his right (I’ll guess a staffer) the same type of impression that Sally Fields once gave when receiving an award. i.e., (paraphrasing) “They like me, they truly like me!”

Yes, this is an over the top reference. But the reason why I believe it fits is because bankers, especially people in the position of Mr. Powell, are supposed to appear, at all times, stoic in appearance. i.e., neither happy, sad or amused. Just dead pan. (think Greenspan who was the epitome of such.) Anything other and its far too notable, hence why I use the reference.

Regardless of how one feels about the current president or others of any administration, what I’m pointing out is that maybe Mr. Powell would be better served by reviewing a few of the older recordings of one of his predecessors (e.g., Mr. Bernanke) and see just how much said party will embrace Mr. Powell should he not tow their “advisement” for Fed policy should they desire to give it.

My prediction is this: Should the Fed disappoint the “market” in any way, shape, manner or form that causes a sudden reversal of fortunes? In other words: major unrelenting sell off?

It won’t be the President calling for Mr. Powell’s resignation – it will be Mr. Powell begging for it, or offering it himself. Why?

Because the President already has the “blame game” in his pocket. It’s been signed, sealed and delivered via the Fed and its own actions and words of the last two years. He can (and will) beat that drum into the elections every-time there is any wavering in the “markets.” He can just sit back and point a finger.

But then that would leave the other side to do, what? Here’s a possible hint of what may come should the severity of any fall become chaotic.

The now assumed BFF of the other side of the aisle will be the first to take all that “got your back” type praise – and use it for their own bulls-eye of where to put the forthcoming knives. Because in an election year, when it comes to the economy, one thing’s for certain:

No politician is going to allow any blame of a faltering “market” or economy to reside at their polling doorstep. Any politician, regardless of affiliation. Period.

Mr. Powell will be faced with both sides of the aisle pointing fingers – and the populace calling for heads to roll: Any!

And if you think there isn’t any past examples for what I’m saying (as in how politicians view how the Fed should be run and by whom.) I would remind both Mr. Powell and anyone else to not forget this exchange between then Chair Mr. Bernanke and Sen. Schumer. aka “Get To Work” Mr. Chairman” moment, 7 years ago this month.

As always, we shall see.

© 2019 Mark St.Cyr

A Thought About Ross Perot

Today it’s hard to talk about business without someone interjecting how a business should be doing this political thing, or that political thing.

Usually this comes from someone new (i.e., last decade) out of the so-called “business schools,” where such recent graduates don’t understand what they’re really advocating is more along the lines of how “businesses” need to parade as businesses, and be more political in this current central banker enabled farce. Or said differently: business, customers, net profits, etc., etc. don’t matter. It’s all about their “share value.” But I digress.

Ross Perot was that individual for me, that made me interested in the goings-on when it came to business and politics. Sure, during my time there was Reagan who represented a complete sea-change in regards to the economy and other things political. But Perot was an entirely different matter.

I was 21 when Reagan took office, I was 30 when Perot was beginning to be a political force to be reckoned with. Both time periods were extraordinary.

If you were a kid of the 70’s like myself (and there were a lot of us) the future didn’t look all that promising. Then came that time period now known as the “Reagan Revolution” was truly amazing.

Computers were just bursting onto the scene and more. Regardless of what side of the political aisle one stands, whether you want to give credit or not (that’s your prerogative) – the time period and change was breathtaking when looked back upon in retrospect.

That is not open for interpretation – that is pure fact. The change was extremely dramatic in so many ways.

However, with that said, it wasn’t until the emergence of Mr. Perot did I become more, let’s say, politically curious, as well as being just as curious in regards to business leadership. And here’s why…

As I stated I was 21 when Reagan became president. That means I was old enough to vividly remember the entirety of sentiment, news and more as the Iranian Hostage standoff unfolded day, after day, after day totaling 444 (e.g., 1 year, 2 months, 2 weeks and 2 days) until it finally ended with the swearing in of Reagan.

There have been books written (conspiracy theories mostly) how there was a secret deal with Reagan and more, blah, blah, blah. However, there was another book written in 1983 (which I read when it came out) called “On The Wings of Eagles” Ken Follett (Harper Collins™)

This was basically the tale of how Mr. Perot and others, using his own personal and company resources, refused to allow the proposition that two of his employees would remain in some Iranian jail and devised a plan, then personally traveled to Iran with his team – and got them out.

This was all at great risk to both Mr. Perot, his son which was with the team, and everyone else involved. And nobody ever knew. (i.e., it wasn’t some front page story type deal)

Mr. Perot didn’t brag, didn’t show-boat, didn’t really do anything more except for when ask replied in his characteristic Texan snappiness with something akin to “And what would you expect me to do for my people?” And the thing was: you knew he truly meant it.

If you’ve never read the book, you really should, especially in this day and age where we have corporate C-Suites falling over themselves and their marketing departments to shout just how far of a “virtue signalling” they can do over their peers.

If it means trashing the flag, the country, a politician, founding fathers, Constitution _____________(fill in the blank) so be it. After all, it’s just business, right?

Actually, in my book, it’s not – it’s utterly disgusting. But again, I digress.

Regardless of where one wants to put their political questioning of Mr. Perot, there is one thing that is above reproach: Mr. Perot, the businessman, as well as American, is one of the all time forces of business that acted and presented himself the way we should want any American business person to emulate.

Mr. Perot had a tenacity for competitiveness that was second to none; a firm believer and defender in the American experiment; and a true businessman where his employees were just as important to him as his family, and would go to the same lengths to help them where possible. Even if it might be at his own peril. And proved it.

No “sneakers” required.

Godspeed, Mr. Perot.

© 2019 Mark St.Cyr

Addendum To: More Evidence Why Social Media’s Value-Prop Is Overvalued

Here’s another addition to my ruminations from Sunday’s article with a story being reported this morning (Monday) via The Telegraph™ in the U.K. To wit:

“Britons abandon Facebook as usage plummets by more than a third”

The amount Brits are using Facebook has plunged by more than a third over the past 12 months, new research indicates, in sharp contrast to the company’s official statistics.

The number of online interactions made on Facebook’s mobile app in the UK plummeted by 38pc between June 2018 and June 2019, according to the analytics firm Mixpanel.

Interactions, which occur when users click on a web link or advert inside the Facebook app, declined in seven of the last 12 months, with an average monthly fall of 2.6pc. That paints a very different picture from Facebook’s own numbers, which report a slow but steady rise in monthly active users across Europe.

User numbers have traditionally been considered…

“Exclusive: Britons abandon Facebook as usage plummets by more than a third”

Again, just to reiterate, the above story just came out this morning, which is a day after my article. I point this out only so I can’t be accused of front-running it.

Also, please be aware that the rest of the story is “exclusive” meaning it resides behind a subscriber only wall. (Remember my thoughts about a growing “subscriber access only” prevalence in the future, also?)

However, I think the headline alone says all one needs to know.

© 2019 Mark St.Cyr