The Coteau 4/13

The Coteau

The View from Bannerstone Capital       by Biff Robillard


Hipparchus, Hobby Hobson and Anton Chekov


Spring is sooner recognized by plants than by men. ~Chinese Proverb

The vernal equinox, first described by Hipparchus two thousand years ago, has come and the northern hemisphere increasingly basks again in the warmth of a distant sun. Nature knows. My dog walks in the wee hours are becoming increasingly unruly. Male cardinals in brilliant spring plumage and foraging chickadees are singing away, as geese are again honking in the predawn sky. Two tundra swans recently hurried by on a twilight tailwind. They appeared to be in love. Maple trees are shaking off winter’s torpor as the sweet xylem is secretly rising in their trunks. Howie the Snowplow Man will soon retire his tractor and begin tapping the syrup trees around the neighborhood. I await the first red-winged blackbird of the season, hoarsely defending his kingdom atop a cattail, which will secure the season for good. Seasons change. Spring is delicious.

It is also spring in the U.S. stock market: The venerable Dow Industrial 30 is up over 11 percent year to date. This sounds like summer. Financial pundits fret it is already fall, of course. But storm warnings will always sell news, so discount appropriately but carry an umbrella. It is definitely spring in the Japanese stock market. After peaking at about 40,000 in 1989, the Nikkei Dow fell below 8,000 as recently as 2009. It declined for an entire generation. Do the math: A 32,000-point decline is an 80-percent loss. It took a staggering 20 years. Like the aforementioned xylem rising in a sugar maple, however, the Nikkei Dow has risen over 30 percent in just five months. Yet it is still 50 percent below its value as recently as 2007. A bona fide bull market in Japanese equities may have important implications for global economic trends and, in particular, U.S. interest rates: A rising Nikkei has often coincided with rising U.S. rates.

Some emerging markets are experiencing winter. Brazilians, of course, just experienced an autumnal equinox in their Southern Hemisphere and their stock market has cottoned on to the idea: the BVSP Bovespa is down over 8 percent year to date and has declined 17 percent in the past 52 weeks. Even the Shanghai Index is still down more than 1 percent over the past 52 weeks. Russia’s RTX Index is down over 5 percent this year and has declined almost 15 percent in the past 52 weeks. You get the picture: Developed markets are for the most part up for the year, with Uncle Sam’s equity indexes leading the parade. I like it in front.

It is spring for the U.S. dollar: There is a persistent misperception that the Ben Bernanke Fed has been bad for the greenback. There is just no case for this. If you believe the talking heads, one can just imagine the mythical money presses whirring away night and day in Washington D.C. as wheelbarrows of dollars stream out of the Federal Reserve and are dutifully wheeled down Constitution Avenue, then left on 15th St N.W., behind the White House, and on to the U.S. Treasury. To hear the dollar bears describe it, they fill the same wheelbarrows with Treasury debt and return to the Fed.

But that isn’t really what has happened, of course. Oh, the dollars have moved, albeit as photons. But is it another catastrophic chapter for, gasp, that demon, fiat money? Well, you can look it up: The trade-weighted dollar index is up over 5 percent this year alone. With Helicopter Ben’s 2008 appointment, the dollar declined for two years, until April 2008, but has risen for the last four. The trade-weighted index was between 85 and 90 when he was appointed, and the very same index sits at almost 83 today. This is a dollar catastrophe?  In comparison, the Bush Administration inherited a Dollar Index of about 110 on Inauguration Day 2000. It was never higher for W & Co. On Election Day in 2008 it was under 85, a 22-percent decline over the eight Bush years. That was a dollar bear market. And I never heard anybody even mention it. The dollar looks good for the dollar bulls, bad for the bears.

What about interest rates? Zombies and vampires are all the rage. Thanks to MPR, I recently learned psychologists explain this recurring generational fascination as some sort of projection of subconscious fear of social change (in the 1930s, they represented organized labor). Really? I wasn’t taking notes—I was driving after all—so I really can’t remember exactly, but I was surprised to learn the Living Dead is a heavily researched area of psychology. As in vampires, zombies and other stuff that won’t die but isn’t really alive anymore. I was never so glad to have been a biochem major.

Anyway, the point is the 30-year-old bond bull market is a zombie: It’s dead but it doesn’t seem to know it. How do I know? I don’t. But that’s my guess. Rates across the board are already higher on the year, although one calendar quarter of data are at best tentative evidence; price is always the most important fundamental metric, however. Take symbol ZROZ, the ETF which purportedly tracks a basket of 20-year U.S. Treasury zero coupon bonds. Recall the absence of a coupon (hence “zero coupon”) makes the discount from maturity value the sole source of gain from these securities. This trait makes their market price extremely sensitive to ambient interest rate trends. Zero coupon bonds are invariably the most rate-sensitive instruments for a given maturity. ZROZ has shed 5 percent year to date, and down over 20 percent since its all-time high last July. Currently quoted at 103, a print below 94 is very dangerous for the bond bulls. Zombies can die, but if I can believe the movies, you need a wood chipper. Expect bond bulls to struggle but succumb. See Fig.1.



Figure 1               ZROZ   Bonds Aren’t Leading Equities Higher


Read the following aloud with a courtly, delicate Southern accent:

“I have never found it possible to successfully predict the future course of interest rates. Fortunately, I have not found it necessary to do so.”   –Sir John Templeton

Gold? Run. The long bull market is likely over. The peak will likely be the August/September period in 2011. Want to see a gold bull perspire? Share with them that a recent CNBC poll revealed gold was still far and away the most popular investment category among CNBC viewers. I find this shocking. It wasn’t Everyman’s Fav in 2000 when it was a buy; it was an orphan. Even central banks were sellers. Technology stocks would have been the bell of the ball for CNBC viewers in 2000: Avoid crowds.  The chart tells me to sell both.

Does timing matter? I can’t remember a time when so many investors are concerned with timing the market. My informal analysis of the crowd suggests this is interesting to TV viewers because they want to know when to get out before the inevitable Bad Thing occurs. Is this a hint of some kind? Furthermore, professionals are suddenly looking at 25 percent of the year spent. The underinvested among them have to be concerned about how much game time remains on the clock of 2013. Make no mistake; time plays a big role in behavior. Coach “Hobby” Hobson would agree. He is the late great University of Oregon genius who invented the “shot clock” in basketball. He also managed to win the very first NCAA basketball championship in 1939. As you watch March Madness, recall that the 35-second (24 in the NBA) clock winds down and a team in possession must shoot before zero, of course, or surrender possession. Time drives everything and is eventually the root of almost all that happens on the court.

The shot clock has a short and interesting history, which believe it or not, is utterly germane to our investment endeavors. Without time, a rate of return has no meaning. It turns out that, without a shot clock time in basketball, the game loses meaning. In a game which would change basketball history, the 1950 Minneapolis Lakers (later the L.A. Lakers, of course) lost to the Fort Wayne Pistons in a 19-18 slumberfest. The winner took a whopping 13 shots during the entire game and instead played “keep away” from the titanic George Mikan. Fans rebelled by staying home. Without time acting as a factor in scoring, the National Basketball Association was in trouble.

Danny Biasone, coach of the then Syracuse Nationals (which became the Philadelphia 76ers) persuaded the NBA to use the shot clock in the 1954 season for the first time. Biasone had tried Hobson’s idea in a scrimmage and found it worked: The game’s pace was suddenly improved dramatically as players and teams were forced to shoot by the relentless tyranny of the clock. It also gave Biasone an edge: The Syracuse Nationals won the NBA title in 1954.

Time makes players shoot and time makes professionals buy (and sell) stocks. It may turn out to be the most important factor for the stock market this year. I have missed 10-percent moves in markets while being too defensive (although not this year, thank goodness). It hurts. It then ushers in a torturous state of mind in the absence of returns as the game clock runs down. If this market doesn’t decline soon, the market will force investors in. That will be good for the bulls. If you’re already in, you could be in very good shape.

We finally added Cheniere Energy Inc. (LNG) in the low 20s, now about 28. I waited too long. I dithered away at least five points. I am bullish on the energy revolution unfolding in the U.S. This company will operate the first liquid natural gas shipping port in the country, currently under construction in Louisiana. I recently became aware of a small-cap shipping company, Stealth Gas (who named this one? A fourteen year old boy on a road trip?), symbol GASS. They operate a fleet of liquid natural gas tankers, a pipeline overseas for our exported natural gas. We may accumulate this one.

The European banks have spent the first quarter retreating after a peak in late January. We own three: SocGen, BNP Paribas (both French) and UniCredit, the largest bank in Italy. I love these things. I bought them “wrong” last year in March and we suffered as they declined into May or June. Then they rocked. I regard this consolidation as inevitable. I think they have long and vigorous uptrends for years to come.

We added an interesting spin off, Crimson Wine Group LTD (CWGL). This small-capitalization company was spun out of Leucadia National Corp (LUK), which we think we know a thing or two about. This deserves an explanation. I just read Snowball: Warren Buffet on the Business of Life and it has inspired a rather offbeat hypothesis on Crimson. When Buffet wound up his spectacularly successful investment partnerships in the late 1960s, he went to great lengths to explain why the limited partners should not sell their shares of Berkshire Hathaway, one of many stocks each partnership owned. Rather than liquidate the holdings and return cash (which was a taxable event), Buffett simply distributed the property in-kind to his investors, who could then tailor any sales to their particular circumstances. Each ex-limited partner was now in possession of Berkshire shares.

Buffett, after explaining why investors should not part with their Berkshire shares, then offered to buy any shares from anyone who was selling anyway, despite his recommendation to keep them for themselves. Buffett was an informed buyer. Incredibly, many sold shares to Buffett, who amassed a personal stake in Berkshire of considerable size. The rest is history.

I think Ian Cumming, erstwhile CEO of Leucadia and avowed Friend of Warren, may be up to a similar perfectly honorable strategy to concentrate his own ownership of Crimson. Crimson Wine, a longtime holding of LUK, was oddly excluded from the recent merger of Jeffries and Leucadia. It was the only business that was. The shares were distributed to LUK holders. Investors who have been liquidating these shares in the past weeks have, in my opinion, been selling to Cumming, a very informed buyer. I’m sticking with Ian for now. I don’t know what he is up to, but it is almost sure to be good for Ian.

What are we to make of the Crisis of the Week, the Cyprus Bank Holiday? I confess I was stricken with a familiar sense of dread just a week ago when on Sunday night the Internet was warning of the Cyprus bank deposit confiscation. It was a lightning bolt—out of nowhere. As you doubtless know by now, Cyprus, an EU member and neighbor of badly behaving Greece, is essentially one big bank. What is particularly interesting is that Cyprus is the bank of choice for Russians. Rich Russians, as in rich Russian oligarchs. Why didn’t global markets turn tail on news of an EU sanctioned seizure of property?

Here we turn to Anton Chekov. In Chekov’s short story The Lady and the Dog, personal worlds devolve into unanticipated disarray. The financially successful but personally vacuous (and married) Dimtri Gurov meets a lady with a dog, also-married (but to someone other than Dimtri) Anna Sergeyevna. Both are in the resort town of Yalta (650 miles due north of Cyprus, it turns out). Both are on vacation, but without their spouses. Betrayal ensues, as only a great Russian author can invent. As lives spin apart, Chekov suddenly stops writing and simply ends the story. There is no resolution.  Remarkably, this non-ending is a hallmark of the work. Everything of interest happens before an end, so Anton just skips it. Why bother?

If Cyprus garners a global yawn, as it has so far, perhaps we can take the lesson from Chekov: Everything of interest in the Euro Crisis and the Great Recession has already occurred. We don’t get an end. Waiting around for it might prove expensive in the long run. Like the spring plants of the Chinese proverb, mindless plants can detect spring first. Markets might know something winter-weary human beings do not. Yet.



This publication does not constitute investment advice. The views described may have changed by the time you read this, anyway. Use your head, for crying out loud.

Craig Cox is our editor. Thank you, Craig.

Bannerstone Capital Management, LLC is a registered investment advisor. We are on the web at