Waitin' for the Flowers to Pop, the Shoe to Drop and the Meddlin' to Stop

Mid-February finds us enjoying the late innings of another Texas winter. Weather experts have warned that the La Nina pattern that set the stage for last year’s epic drought is still in play, but so far this winter couldn’t be more different from last year’s. That one saw innumerable bitter cold days and nights that overtaxed the power grid, almost no precipitation and a nearly instantaneous transition to an endless succession of brutally hot windy days that went on until September. This year has been more like an endless Spring, with (so far) only two or so nights that dipped below freezing, and above normal rainfall. So much for La Nina, and for expert opinion on big picture issues.

While we wait for the flowers to erupt, we also find ourselves waiting and wondering what will cause the proverbial shoe to drop on this inexorable Market rally. Who knows, considering how long it has been since animal spirits of the Bull variety slipped their leash (a good number of the financial service industry’s recent hires weren’t even in high school when we defined what it meant to “party like it’s 1999”), we could be setting up for a big surprise to the upside. That will happen at some point, but more likely, we will first be treated to another stretch of time where we wish we had raised cash more aggressively in the days leading up to it. I might end up leaving some money on the table, but I am going to assume that Sell in May (at the margins, not completely) and go away will once again be good advice. Indeed, I have already raised my cash holdings by about 5%, to about 11% of investable assets, and expect that to edge upward until we get another episode of fear-based pricing.

So what might precipitate the next fire sale? It is looking less and less likely that it will be last year’s imponderable uncertainty, the European debt crisis. The substance of that crisis, which is really nothing more than entropy having its way with erstwhile principalities that were past their prime generations ago (if they ever had a prime), will be with us for the rest of our days. The ability of the keepers of what passes for news to use it to strike fear into the hearts of investors at the margin has subsided. The bogey-man that was Sovereign Debt default seems to have been neutered. It’s all going to work out, at least for a while, and much more interesting events are taking shape. As I ponder what is likely to rouse the VIX from its slumber, something to do with Israel, Iran and Straits of Hormuz come to mind. (That Madonna fans have implored Mr. Netanyahu to wait until after her concert in Tel Aviv suggests that this might be the worst kept military secret ever.) My sense is that if the Israelis do attack the nuclear facilities, the US Navy will be positioned to foreclose any attempts to disrupt the transit of oil beyond a few “precautionary” days of delay. But to a lot of “investors” at the margin, it will be too scary to sit and wait it out. This, from the vantage point of today, is only the most probable catalyst for a sell-off that we can think of. We can be sure that whoever it is who seems to have the influence to “change the cue cards” that exacerbate investor reactions to ever changing circumstance will come up with something. In the mean time, let’s enjoy the rising tide, try to be a net seller of equities (trimming the “good” positions, pulling the plug on at least a few of the one’s that have disappointed, and having a very high hurdle for any purchases) and wait to see what they come up with.



Speaking of sitting and waiting, I had an interesting encounter last weekend that provided an insight into why the US economy has been recovering at a rate well short of half-step. Anecdotal evidence needs to be handled lightly, but this was the microcosm that goes a long ways in explaining the macrocosm. I ran into a fishing guide I had spent a little time with on the Texas coast last year. When I asked about a plan he had to expand his operation, he said he was doing a few little things, but anything major was going to wait until after November. He went on to say that it wasn’t about him, allowing as how listening to talk radio on the ride up to Austin had gotten under his skin. (I advised him, as I advise anyone so aroused, that the Off button can be your friend.) Rather,it was his clients, which would be a slice of relatively but not supremely well-off households, whose good fortunes are more likely than not derived from some involvement with an energy play such as Eagle Ford. It instantly dawned on me that there must be at least a million, probably several million, decision makers out there who are similarly on hold. From tiny operators like this guy up to the private equity titans plotting their next moves, the heightened uncertainty brought about by an unabashedly intrusive State is causing the producers of goods & services to sit on their hands and wait. Even the rent-seekers who have enjoyed this Administration’s fondness for crony capitalism must be hedging their bets at least a little. I can’t help but wonder if herein lies the basis for the next time the Bull goes large. Perhaps an unleashing of a whole lot of pent up hopes, dreams and expansion plans (not to mention in-sourcing of at least some manufacturing back from venues that turned out to be not as low cost as they had seemed) could trigger an economic boom that gets money flowing back into equities in a way that reminds us that debauch that ended over twelve years ago.

It is quite possible, in my opinion, that that November outcome that so many are waiting on has just been sealed. I am referring to the HHS mandate with respect to insurance of contraception, etc. that has lit up the opinion pages of late. The Administration’s decision to proceed with this mandate is either something too politically shrewd for me (or anyone) to grasp, or the dumbest move in history. They seem to have thought they could make it about contraception, a subject on which reasonable people, including faithful Catholics, can disagree on. It’s not. All they had to do is listen to the bishops. It is about freedom of conscience, something sacred not just to Catholics but to all persons of good will. Does the term “endowed by their Creator with certain inalienable rights” ring a bell? By framing it this way, the bishops have instantly drawn in allies from leaders of other faiths and from persons of no religious faith whatsoever. And they didn’t just come up with this stance when the mandate hit the wire. Well over a year ago, the USCCB (Conference of Catholic Bishops) formed an ad hoc Committee on Religious Liberty, comprised of ten bishops and a wide array of consultants, attorneys and lobbyists.

It matters that these men were formed, spiritually and philosophically, under the papacy of a man who knew totalitarianism, at its onset, in full bloom and in its dotage, first hand. The bishops consider this mandate to be an unprecedented attack on freedoms that were enshrined in our Constitution. There will be no backing down. It will remain a hot topic, begging the question of what else is in that abomination that calls itself the Patient Protection and Affordable Care Act is waiting to pop out and remind us why our Founding Fathers devised the checks and balances that power mad Nanny Staters wish would go away. A lot can happen in the 260+ days and nights between now and November 6, but this issue has more than enough moral weight and emotional fire to tip the balance decisively in the favor of a prospective leadership that would promise to not be so damn menacing towards people who just want to get on with their hopes and dreams. Perhaps the Markets is discerning a glimmer of this possibility.