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After the SEC asked a New York judge last week for a court order to compel Jay-Z to testify in an investigation into Iconix Brands, a New York City-based company that purchased the rapper’s Rocawear clothing label back in 2007, Jay-Z’s legal team has fired back with a 15-page memo blasting the SEC’s request as “unreasonable” and pointing out that the rapper has already offered one day of testimony.

Lawyers for Jay-Z also raised concerns about the direction of the investigation, saying a probe into Iconix, which has financial ties to Jay-Z, could morph into a “celebrity hunt” (like they did to Martha Stewart), according to USA Today.

Arguing that the rapper, whose birth name is Shawn Carter, has little information about the direction of the investigation, attorney Alex Spiro said asking Jay-Z to testify for an unlimited period of time would impose too much of a burden on the rapper and his crew, who are preparing for a 45-date world tour in support of his album 4:44.

“The SEC continues to insist on meeting Mr. Carter in person for an unlimited period of time,” Spiro wrote in a 15-page legal memorandum. “The upshot imposes unreasonable burdens on Mr. Carter and raises serious questions about whether this exercise has transcended any investigative purpose and crossed over into a celebrity hunt.”

In a separate declaration, Jay-Z stated that providing the asked-for testimony at the SEC’s Washington headquarters on May 11 would “impair the work of many individuals and entities who are preparing for the tour and will hinder my own work in preparation for the tour.”

As far as we know, the investigation centers on potential securities law violations by Iconix, which paid Jay-Z more than $200 million to acquire “intangible assets” associated with Rocawear. The company has since written down most of the value of those assets, announcing a $169 million writedown in March 2016, and a further $34 million writedown in March of this year.

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Authored by Lance Roberts via RealInvestmentAdvice.com,

If you repeat a myth often enough, it will eventually be believed to be the truth.

“Stop worrying about the market and just buy and hold stocks.”

Think about this for a moment. If it were true, then:

• Why do major Wall Street firms have proprietary trading desks? (They aren’t buying and holding.)

• Why are there professional hedge fund managers? (They aren’t buying and holding either)

• Why is there volatility in the market? (If everyone just bought and held, prices would be stable.)

• Why does Warren Buffett say “buy fear and sell greed?” (And why is he holding $115 billion in cash?)

• Why are there financial channels like CNBC? (If everyone bought and held, there would be no viewers.)

• Most importantly, why isn’t everyone wealthy from investing?

Because “buying and holding” stocks is a “myth.”

Wall Street is a business. A very big business which generates huge profits by creating products and selling it to their consumers – you. Just how big? Here are the sales and net income for some of the largest purveyors of investment products:

• Goldman Sachs – Sales: $45 Billion / Income: $8.66 Billion

• JP Morgan – Sales: $67 Billion / Income: $26.73 Billion

• Bank Of America/Merrill Lynch – Sales: $59.47 Billion / Income: $20.71 Billion 

• Schwab – Sales: $9.38 Billion / Income: $2.45 Billion

• Blackrock – Sales: $13.25 Billion / Income: $4.02 Billion

There is nothing wrong with this, of course. It is simply “the business.”

It is just important to understand exactly which side of the transaction everyone is on. When you sell your home, there is you, the buyer and Realtor. It is clearly understood that when the transaction is completed the Realtor is going to be paid a commission for their services.

In the financial world the relationship isn’t quite as clear. Wall Street needs its customers to “sell” product to, which makes it less profitable to tell “you” to “sell” when they need you to “buy the shares they are selling for the institutional clients.”

Don’t believe me?  Here is a survey that was conducted on Wall Street firms previously.

“You” ranked “dead last” in importance.

Most importantly, as discussed previously, the math of “buy and hold” won’t get you to your financial goals either. (Yes, you will make money given a long enough time horizon, but you won’t reach your inflation-adjusted retirement goals.)

“But Lance, the market has historically returned 10% annually. Right?”

Correct. But again, it’s the math which is the problem.

1. Historically, going back to 1900, using Robert Shiller’s historical data, the market has averaged, more or less, 10% annually on a total return basis. Of that 10%, roughly 6% came from capital appreciation and 4% from dividends.

2. Average and Annual or two very different things. Investors may have AVERAGE 10% annually over the last 118 years, but there were many periods of low and negative returns along the way. 

3. You won’t live 118 years unless you are a vampire.

The Entire Premise Is Flawed

If you really want to save and invest for retirement you need to understand how markets really work.

Markets are highly volatile over the long-term investment period. During any time horizon the biggest detractors from the achievement of financial goals come from five factors:

• Lack of capital to invest.

• Psychological and behavioral factors. (i.e. buy high/sell low)

• Variable rates of return.

• Time horizons, and;

• Beginning valuation levels 

I have addressed the first two at length in “Dalbar 2017 Investors Suck At Investing” but the important points are these:

Despite your best intentions to “buy and hold” over the long-term, the reality is that you will unlikely achieve those promised returns.

While the inability to participate in the financial markets is certainly a major issue, the biggest reason for underperformance by investors who do participate in the financial markets over time is psychology.

Behavioral biases that lead to poor investment decision-making is the single largest contributor to underperformance over time. Dalbar defined nine of the irrational investment behavior biases specifically:

• Loss Aversion – The fear of loss leads to a withdrawal of capital at the worst possible time.  Also known as “panic selling.”

• Narrow Framing – Making decisions about on part of the portfolio without considering the effects on the total.

• Anchoring – The process of remaining focused on what happened previously and not adapting to a changing market.

• Mental Accounting – Separating performance of investments mentally to justify success and failure.

• Lack of Diversification – Believing a portfolio is diversified when in fact it is a highly correlated pool of assets.

• Herding– Following what everyone else is doing. Leads to “buy high/sell low.”

• Regret – Not performing a necessary action due to the regret of a previous failure.

• Media Response – The media has a bias to optimism to sell products from advertisers and attract view/readership.

• Optimism – Overly optimistic assumptions tend to lead to rather dramatic reversions when met with reality.

The biggest of these problems for individuals is the “herding effect” and “loss aversion.”

These two behaviors tend to function together compounding the issues of investor mistakes over time. As markets are rising, individuals are lead to believe that the current price trend will continue to last for an indefinite period. The longer the rising trend last, the more ingrained the belief becomes until the last of “holdouts” finally “buys in” as the financial markets evolve into a “euphoric state.”

As the markets decline, there is a slow realization that “this decline” is something more than a “buy the dip” opportunity. As losses mount, anxiety increases until individuals seek to “avert further loss” by selling.

This is the basis of the “Buy High / Sell Low” syndrome that plagues investors over the long-term.

However, without understanding what drives market returns over the long term, you can’t understand the impact the market has on psychology and investor behavior.

Over any 30-year period the beginning valuation levels, the price you pay for your investments has a spectacular impact on future returns. I have highlighted return levels at 7-12x earnings and 18-22x earnings. We will use the average of 10x and 20x earnings for our savings analysis.

As you will notice, 30-year forward returns are significantly higher on average when investing at 10x earnings as opposed to 20x earnings or where we are currently near 25x.

For the purpose of this exercise, I went back through history and pulled the 4-periods where valuations were either above 20x earnings or below 10x earnings. I then ran a $1000 investment going forward for 30-years on a total-return, inflation-adjusted, basis.

At 10x earnings, the worst performing period started in 1918 and only saw $1000 grow to a bit more than $6000. The best performing period was not the screaming bull market that started in 1980 because the last 10-years of that particular cycle caught the “dot.com” crash. It was the post-WWII bull market than ran from 1942 through 1972 that was the winner. Of course, the crash of 1974, just two years later, extracted a good bit of those returns.

Conversely, at 20x earnings, the best performing period started in 1900 which caught the rise of the market to its peak in 1929. Unfortunately, the next 4-years wiped out roughly 85% of those gains. However, outside of that one period, all of the other periods fared worse than investing at lower valuations. (Note: 1993 is still currently running as its 30-year period will end in 2023.)

The point to be made here is simple and was precisely summed up by Warren Buffett:

“Price is what you pay. Value is what you get.” 

This is shown in the chart below. I have averaged each of the 4-periods above into a single total return, inflation-adjusted, index, Clearly, investing at 10x earnings yields substantially better results.

So, with this understanding let me return once again to those that continue to insist the “buy and hold” is the only way to invest. The chart below shows $3000 invested annually into the S&P 500 inflation-adjusted, total return index at 10% compounded annually and both 10x and 20x valuation starting levels. I have also shown $3000 saved annually in a mattress.

The red line is 10% compounded annually. You won’t get that, but it is there so you can compare it to the real returns received over the 30-year investment horizon starting at 10x and 20x valuation levels. The shortfall between the promised 10% annual rates of return and actual returns are shown in the two shaded areas. In other words, if you are banking on some advisors promise of 10% annual returns for retirement, you aren’t going to make it.

I want you to take note of the following.

When investing your money at valuations above 20x earnings, it takes 22-years before it has grown more than money stuffed in a mattress. 

Why 22 years? 

Take a look at the chart below.

Historically, it has taken roughly 22-years to resolve a period of over-valuation. Given the last major over-valuation period started in 1999, history suggests another major market downturn will mean revert valuations by 2021.

The point here is obvious, but difficult to grasp from a mainstream media that is continually enticing young Millennial investors to mistakenly invest their savings into an overvalued market. Saving your money, and waiting for a valuation based opportunity to invest those savings in the market, is the best, safest way, to invest for your financial future. 

Of course, Wall Street won’t like this much because they can’t charge you a fee if you are sitting on a mountain of cash awaiting the opportunity to “buy” their next misfortune.

But isn’t that what Baron Rothschild meant when quipped:

“The time to buy is when there’s blood in the streets.”

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With Trump’s long anticipated announcement on the fate of the Joint Comprehensive Plan of Action, i.e., the Iran Nuclear Deal, now set at 2pm on Tuesday, the world is scrambling to handicap the odds that Trump actually lets this one live.

However, barring some last minute miracle, if the late afternoon conjecture by the NYT is any indication, and following news over the weekend that Obama’s Secretary of State had secretly been engaging in shadow diplomacy to preserve the JCPOA, in less than 24 hours the US will no longer be a signator to the Iran deal, just as Trump had promised during his presidential campaign.

According to NYT sources, “diplomats who were familiar with the negotiations said Mr. Trump appeared inclined to scrap the deal and reimpose sanctions on Iran that were suspended in an accord reached in Vienna in July 2015.”

And yet, following a full-court press by European heads of state, most notably Macron and Merkel, both of whom have been purchasing Iranian crude at below-market prices for the past 3 years and are eager to continue the Iran real, it is distinctly possible that in announcing the scrapping of the deal, Trump will provide for some continuity for the rest of the world so that i) Iran is not blacklisted by SWIFT again and ii) Iran oil exports can continue, to wit:

it is unclear whether he would moderate that move, perhaps by allowing the European nations to move ahead with their economic relations with Tehran without being penalized by the United States.

Mr. Trump issued two tweets about the coming decision. The first berated John Kerry, the former secretary of state, for his “possibly illegal Shadow Diplomacy on the very badly negotiated Iran deal.” It was an apparent reference to Mr. Kerry’s calls to leaders around the world looking for ways to save an accord that he dedicated much of his term during the Obama administration to negotiating.

Withdrawing the US from the deal will open the way for Tehran to resume making nuclear fuel: as a reminder, Iran’s agreement with world powers required the country to ship about 97 percent of its nuclear fuel out of the country, and to halt production of new fuel for 15 years.

This newfound liberty for Iran will also mean that the odds of a war with Israel soar, as Netanyahu will do everything in his power to prevent Tehran from developing nuclear weapons, as was the case in the several years before Obama sanctioned Iran in March 2012 with an executive order.

But the key question that has yet to be answered is whether Trump has been notified that the surging oil – and thus gasoline – price as the world “prices in” the elimination of up to 1 million barrels in Iranian oil, will offset any benefits to the middle class from Trump’s tax cuts as we explained last month in “Rising Gas Prices Threaten To Wipe Out Trump’s Tax Cut Benefits.” And, related to that, since there is nothing Americans hate more than high oil prices, how long until Democrats latch on to the issue of declining Iranian oil supply as the key driver of the highest gas prices in 4 years as a key political talking point for the upcoming midterm elections.

Since it is unlikely that Trump is willing to risk a political revulsion to a commodity inflation tide just to teach Iran a lesson, especially one that may lead to his impeachment, it is more likely than not that for all the bluster, Trump will offer some quasi-compromise that keeps Iranian oil exports in play, and may explain why oil has continued to sell off on the news…

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Elon Musk’s feud with Tesla shorts is not business, it’s just personal.

After lashing out at some vast, anti-Tesla conspiracy (technically, he has a point, Tesla is the most shorted US stock for good reason) in the aftermath of  last week’s earnings bizarre conference debacle Musk first warned shorts that “oh and uh short burn of the century comin soon. Flamethrowers should arrive just in time“, then followed it up just hours later with another taunt on the coming short squeeze which “Looks like sooner than expected. The sheer magnitude of short carnage will be unreal. If you’re short, I suggest tiptoeing quietly to the exit”…

Looks like sooner than expected. The sheer magnitude of short carnage will be unreal. If you’re short, I suggest tiptoeing quietly to the exit … https://t.co/A0Q90pSLKA

— Elon Musk (@elonmusk) May 5, 2018

… on Monday afternoon, Musk decided to triple down, and has putting money where his trash-talking mouth is, revealing that on Monday he bought about $9.85 million worth of Tesla shares on Monday…

… his biggest purchase since March 2017.

Musk’s aggressive purchases which were surely leaked by the buying desk probably explains the wide intraday divergence between Tesla’s equity and its bonds: because while Musk was buying TSLA stock, he forgot to “dip his toe” in the company’s increasingly more distressed bonds.

For Musk, who is already Tesla’s largest shareholder with a stake approaching 20%, the Monday purchase was merely theatrical, and meant to strike fear among the shorts.  The only question is whether it was funded with yet more margin loans from Morgan Stanley, as some humorously asked.

The long anticipated $tsla squeeze was Musk buying his own stock with margin loan? Almighty then.

— George Choumarov (@gchoumarov) May 7, 2018

Incidentally, this is not a joke: Elon Musk has personally borrowed $624 million in loans from various investment banks – first mostly Goldman, then mostly Morgan Stanley – as of a year ago to buy Tesla stock. And as we calculated last week, if one factors in his Boring investment as well as various other “sundry expenses”, the next public disclosure will likely have Musk at around $800MM in personal borrowings from banks…

… which as discussed last week, when applying to new collateral requirements instituted by Tesla’s Board, would require some $3.2B worth of stock. And with 13.775M Tesla shares pledged…

… that implies that at a share price below $232.30 (assuming a current balance of $800 million), Musk would face either a margin call or the need to post additional shares as collateral. (For context, in April, the stock dipped as low as the $244s). For more details please read “Will Elon Musk Be the Next CEO to Face A Margin Call Death-Spiral?”

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Authored by Nick Schmitz via Verdad Capital

In ancient Rome, a clerical class known as the haruspices trained in the inspection of the entrails of sacrificed animals for omens of the future. Today’s market commentators have replaced bird intestines with an equally fervent passion for equally unreliable forms of long-term divination. 

“Bad Omen for Markets from First Signs of Yield Curve Inversion,” a recent Bloomberg report trumpeted. Two thousand years on, the vultures of clickbait clarion calls appear eager to forget that auguries are for the birds.

We would like to take a break from our usual analysis of investing through statistics, theory, and philosophy to look at the world of investing from a new perspective—cultural critique.

We have a rich academic tradition to frame our critique. Anthropology is the study of the societies and cultures of the only species known to believe that anthropology just might work. But unlike the questionably legendary and legendarily questionable anthropologists of yesteryear, we will not be studying cannibalism or mating rituals, but rather the practices and rituals of the Tribes of Wall Street through the lens of the late great Sigmund Freud.

While much of Freud’s early work on psychoanalysis and sociology has been debunked (sorry, mom), his work is still highly influential in the Ivory Tower. As structure for our analysis, we borrow the title of chapter three of his 1913 book Totem and Taboo: Resemblances Between the Mental Lives of Savages and Neurotics – Animism, Magic and the Omnipotence of Thought.

Animism

Animism is the religious belief that objects, places and creatures all possess a distinct spiritual essence, not to be confused with the Internet of Things. According to Sir Edward Taylor in his 1871 work Primitive Culture, Animism is “one of anthropology’s earliest concepts, if not the first.” It is thus only fitting that it has since taken on a life of its own: while uncommon today in western civilization outside of baseball dugouts, groundhog sightings, and a few environmentalist scions of San Francisco, we find this belief system to be strikingly prevalent among our community of investors. Investors often assign a spiritual essence to the market itself.

Turn on any Bloomberg news update, read a Reuters market summary, or listen to an expert commentator invited to explain daily movements in markets, and a neutral linguistic anthropologist would find a heavy dose of this phenomenon used to explain market mysteries. The following Bloomberg headline may have been plagiarized from the Book of Genesis or Jonah: “The world’s biggest bond market has managed to gulp down a swelling deluge of issuance in recent months.” Somewhere an A.I. bot must be laughing: those chyrons hawking causal explanations don’t write themselves.

Magic

According to anthropology professor Pamela Moro (Ph.D. from Berkeley and author of Magic, Witchcraft, and Religion: an Anthropological Study of the Supernatural) “Magic” involves beliefs and behaviors in which the relationship between an act and its effect is not empirically or scientifically verified but, from a Western perspective, rests on analogy or a mystical connection.

We have written extensively on numerous instances of beliefs and behaviors on Wall Street with no empirical or scientific backing that fit this operational definition. Applications of the Capital Asset Pricing Model through discounted cash flow analysis are but one example of a ritualistic practice employed by the Tribe of Wall Street that “is not empirically or scientifically verified.” Worse than magic, these rituals have often been empirically invalidated, and most dangerous of all, the conjurers have cast aside their telltale top hats and capes (in favor of $2,295 Loro Piana zip-ups).

Indeed, there is evidence they may be no better than actual magicians. A recent investigative report on the use of psychics to forecast market movements found they may have done about as well as these more traditional, ritualistic models used within the Tribe of Wall Street:  “On the whole, market forecasts from astrological and psychic sources don’t appear to have fared any better than those from more traditional methods of number-crunching and dart-throwing.”

Omnipotence of Thought 

Freud’s “Omnipotence of Thought” phrase was inspired by a patient he dubbed the “Rat Man,” whom he diagnosed with Obsessional Neurosis on account of his fixation on unrealistic fears, fantasies and theories involving rats. The Rat Man believed his thoughts were so powerful that they could both change and provide insight into the future.

We find a good deal of this among the ritualistic obsessions of the Wall Street tribe members as they run amok in a rat race that never ends. There we find obsession with the power of ideas surrounding GDP growth, TAM (Total Addressable Market), Moats and Market Share, and Income Statement forecasts that have about as much empirical validity when forecasting price returns as rats have when guessing the going rate for cheese.

Indeed, the general belief in the power of the individual mind to foresee the ebbs and flow of time has given rise to a priest class since time immemorial, and the Tribe of Wall Street has employed many in its priesthood. While the Ancient Greeks consulted the Delphic Oracle when considering major political actions like the declaration of war, millions of Americans turn to the seers of Wall Street when making important financial decisions. Casual analyses are now revered like mystics’ mantras—an irony we can safely assume the Oracle of Omaha saw coming.

Yet some Americans, like Jack Bogle, are skeptical of the divination power of Wall Street’s prophets of profit.  The renowned anthropologist E. E. Evans-Prichard famously rebutted such criticisms, arguing that outsiders rarely understand the societies they study.  Non-believers like Bogle, he noted, are quicker to explain religion as an illusion while believers understand that mystical beliefs are an important “method of conceptualizing and relating to reality.” If an Excel model and a 100-slide PowerPoint presentation helps you conceptualize and relate to reality, Evans-Prichard might have argued, then go for it!

Evans-Pritchard noted that although many of the Azande people he studied decried individual witch doctors as cheats and liars, he never met a single tribesman who did not believe in witchcraft. If a particular diviner was proven wrong, it was because he did not practice his art well: the failure of the individual practitioner does not undermine or disprove the system as a whole.

Hocus Focus

And so we come full circle on our cursory tour of the anthropological disposition of many among the Tribe of Wall Street. After 10,000 years of Homo sapiens repeatedly displaying such predilections toward Animism, Magic and the Omnipotence of Thought, is it so unimaginable that the modern investment profession’s short 100-year history might reveal similar cultural affinities among the much younger Homo investicus? In an age when commentators can still make a living pulling the same old rabbits out of the same old hats, we should take care to ask how they got there in the first place, when half-truths breed faster than hares.

But why are such traditions so prevalent? In his 1972 book, Violence and the Sacred, the renowned French anthropologist René Girard argued that oftentimes these practices become “unformulated dogma to be accepted on pure faith,” because “whatever makes other things clear does not need, apparently, to be made clear itself.”

Perhaps more relevant to Wall Street, the anthropologist Bronislaw Malinowski noted a curious phenomenon in his 1948 study of the societies of the Trobriand Islands, Magic, Science and Religion. He found that “in the Lagoon fishing, where man can rely completely upon his knowledge and skill, magic does not exist, while in the open-sea fishing, full of danger and uncertainty, there is extensive magical ritual to secure safety and good results.”

If the investment profession is characterized by its need to cope with uncertainty, then it appears that Wall Street may be precisely the sort of culture where we would expect to find reliance on such unfounded beliefs.

This means that vigilance has never been more vital: as financial instruments grow more complex, and market movements remain just as inscrutable, it hardly takes a master magician to make your money disappear.

But for the skeptical investor, where there lurks superstition, there will always lurk opportunity. These misplaced myths inevitably lead to market mispricings, and we believe that understanding the Tribe of Wall Street’s conceptual weaknesses is the first step to exploiting the value of its wares.

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Everything was calmly elevating just how the central banks want it… and then Iran headlines hit… “Don’t Panic”…

 

Stocks soared overnight and extended gains through the open with Small Caps (strong dollar) and Nasdaq (tech short squeeze) outperforming. Then when Trump headlines hit about tomorrow’s Iran decision, the S&P and Dow dumped to unchanged…the bounced…

Futures show the overnight hump and then buying panic at the open…

VIX closed with a 14 handle once again…

 

And Stocks caught down to bonds disdain for the morning exuberance…

 

Notably, the S&P 500 tagged below its 200DMA on Friday’s open and bounced and today it tagged above its 50DMA and rolled over…

 

All thanks to the biggest short-squeeze since Brexit…

 

The yield curve flattened once again today to a new low post-crisis…

And while stocks rallied, yields did not sell-off…and when stocks tumbled, bonds did not move…

 

Perhaps because every trader who can fog a mirror is now short bonds…

 

Although interestingly as the Fed balance sheet has accelerated lower (red line below inverted) so Bond yields and Bond vol has decoupled…

 

Emerging Market Debt continued to slide to fresh six-month lows, and judging by the dollar index trend and the liquidity stress’ lagged effect, there is a lot more to come…

 

The Dollar Index ended the day higher amid some swings (EUR weakness after a disappointing Sentix confidence print)… BBDXY crossed green for 2018 briefly before closing below the unchanged for the year level…

 

And as the US Dollar gains, so the Hong Kong version drops back to its lower peg band limit…

 

And the Mexican Peso is plunging…

 

And the Turkish Lira dropped for the 6th day in a row…

 

Oil prices were pushing notably higher – WTI above $70 – ignoring the dollar gains until news that Trump would make Iran decision tomorrow and everyone decided that was time to “sell the news”…

The rest of the commodity space leaked lower on the day…

 

Finally, we note that with the S&P 500 managing to barely scratch its head above water year-to-date, the picture remains ever-hopeful for 2018 EPS…

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