I don’t know what his story is, so I could be completely wrong here, but Wells Fargo’s Christopher Harvey seems like the kind of guy you’d like to have a beer with.
Again, people who have actually had beers with Chris might disagree and for all I know, he could be completely unapproachable in person, but based purely on his writing style and the CNBC cameos I’ve seen, he seems like a cool cat.
For instance, you might recall that earlier this year, he characterized the Fed as the “POPO” in the course of delivering the following fun play on market acronyms:
And not only that, he actually included a literal footnote in that piece that explained what that term means for anyone who might not have spent any time in the trap:
**For the uninitiated. POPO is a term for police officer (PO) which came from bike mounted police officers. They wore vests with the initials PO, short for Police Officer and usually traveled in twos, hence POPO.
When last I checked in on Chris’s notes (early last month) he was talking about “old grizzled PMs“. Specifically, he said this:
Conversations suggest there’s been some major back and forth between Analysts (generally younger & less seasoned) and PMs (usually older and grizzled). In 2018, seasoned PMs have been worried about a turn in sentiment as the curve flattens and fears of a cyclical peak crescendo. Initially, PMs appeared to be taking a ‘sell the news’ regardless of results and analyst opinions. Now, the analyst story of solid earnings / guidance, improving fundamentals and valuation seems to be gaining traction.
Investors realizing ‘We’re late in the Cycle’ is not Research. A year ago investors were told we’re late in the cycle. Two years ago investors heard the same proclamation as well as three. We think individuals are realizing that’s not research; it’s an observation.
Well, fast forward to Tuesday (so, yesterday) and he’s got something new out called “Here We Go Again”, and it doesn’t disappoint.
As regular readers know, I’m a guy who appreciates creative writing ability and it’s on full display in Chris’s latest, starting with him doing exactly what I would have done with that title, which is answering the question implicitly posed in the first sentence. To wit:
No, not really.
What he means by that is that while recent trade jitters and myriad geopolitical land mines would suggest that we could be headed back to February in terms of volatility and general market angst (i.e., “here we go again”), that’s not likely to be the case. Here’s Chris again:
Looking at the recent trade/tariff headlines, many are reminded of the market swings from earlier this year and are wondering what’s the best tack to take? Is it run for the bunker and grab all the cash & canned goods you can or grit your teeth and ride out the storm because it’s more squall than Cat 5?
The bottom line, according to Harvey (and I wonder if he fully appreciated the extent to which his own last name is a play on the “Cat 5” reference), it is not in fact time to take all of your money out of the bank and barricade yourself in the basement with jugs of drinking water and cans of Beanie-Weenies.
He cites a number of factors for his (relative) optimism, including the fact that the rebalance risk inherent in the inverse and levered VIX products that helped catalyze the February 5 vol. spike is no longer present. This is something that those of you who followed that episode know like the back of your hand (see my classic “wasps in the garage” post), but it’s worth reiterating for the casual observers among you:
A number of overly optimistic or speculative short volatility positions, which helped spike volatility during the Feb ’18 sell-off, have been closed out. This implies volatility markets are healthier and in better balance. The XIV ETN or the VelocityShares Daily Inverse VIX ShortTerm ETN was liquidated in Feb ‘18.
He also cites the FedEx profit beat and then has this to offer on trade:
On trade, we sense a growing investor belief that Trump’s negotiating tactics can range from brinkmanship to BFFs (best friends forever) in mere minutes. Consequently, shooting first and asking question later is no longer the playbook. Trump appears to be a growing pragmatist.
So apparently, Harvey actually sees Trump’s schizophrenic trade stance as a sign of pragmatism.
There’s also this on rates (and I’m not sure I completely agree with his interpretation here, but it’s still worth mentioning):
To successfully capitalize on a more risk averse stance or shift, we feel investors will need to believe that intermediate-term interest rates (10Yr Treasuries) will consolidate (go sideways) or move down over the next 3-6 months. Recent history suggests 10Yr Treasury yields are more likely to rise in the coming months than move sideways to down.
Also included are Harvey’s annotated trade charts which, if you believe there’s elegance in simplicity, are useful:
And finally, from a relative value perspective, he notes the following:
Small Caps seem to be benefiting from their more domestic orientation and could be at risk if tariff fears blow over.
The Machinery group appears to be discounting significant bad news as the stocks are below Nov’17 levels (prior to the Tax bill passing the House vote).
So there’s some (canned) food for thought and generally speaking, Chris thinks investors should “stay the course and ride out the turbulence.”
But as ever, watch out for the “POPO”.