February 16, 2020 -Weekly comment

Disruptors.  In the cutting edge investment world, it’s not a pejorative word.  Disruptors are the creative destruction agents that tear down the old ways of business and force greater efficiencies and benefits.

My brother and I went to the Chicago Auto Show on Saturday morning.  First we had breakfast at Lou Mitchell’s, a Chicago institution on Jackson Blvd, near the starting point of Route 66.  This place was founded in 1923.  It’s not a disruptor.  The last ‘disruption’ was in 1958:

The fun part of Lou Mitchell’s magic formula was added one day in 1958 when the restaurant began offering breakfast diners donut holes. A tradition was set in place and since that day, millions of donut holes and boxes of milk duds have been given out to our fabulous customers.

So we walked in and got a donut hole, and fluffy eggs.  At the old Parthenon restaurant, a few blocks to the west, they used to give shots of ouzo to patrons walking in and standing in line. Young and old.  But that’s no longer there. That’s when the city used to work WITH local business, (for a little something on the side).

After breakfast we took an Uber to McCormick Place.  Uber, one of the great disruptors.  The bill was $15.44.  Of course I tipped in cash.  Here’s the breakdown:

Fare                                                                                       $7.36
Chicago Special Venue Surcharge                             $5.00
Chicago Ground Transport Surcharge                      $1.13
Chicago Accessibility Surcharge                                  $0.10
Tolls, Surcharges and fees                                            $1.85

On the way back there was a taxi stand, so we just took one.  $11.50 before tip.  Same distance.

Where’s the disruption?  It’s the government of the City of Chicago, County of Cook. Oh, it’s creative alright. “Ground transport surcharge?”  Maybe the cab didn’t have to add the $5.00 “special venue” charge.  So the fare would have been about the same.  The point is, the government has a way of smothering business.  Even big tech.  In this day of historic low unemployment, in part due to the gig economy, the disruptors can no longer be counted on as disinflationary forces.  Maybe the particular state of my residence, where there doesn’t seem to be any governmental unit that can run a balanced budget or come anywhere close to fully funding pension obligations, clouds my objectivity.  Oh, by the way, I had driven downtown and parked in a public lot near Lou Mitchell’s. $10.00.  The Chicago tax on public parking lots is 20% on weekdays, but there’s a break on the weekend, just 18%.

The US national election is this November.  A choice between tax-and-spend or tax-cut-and-spend.  Mayor Bloomberg is reportedly considering asking Hillary to be his running mate.  Way to tie a quarantined-cruise-ship anchor to your leg Mike.  Either way, the gov’t is coming for wealth creators.

Obviously the election can be a disruptor. Like COVAD-19, locust swarms, and an escalation in Turkey/Syria hostilities that draw in US and Russia. 

On a more mundane level look at the downgrade of Kraft Heinz to junk on Friday (by Fitch and S&P)..  Almost Daily Grants had a great quote from Christian Hoffmann, portfolio manager at Thornburg: “Kraft is to investment grade as Velveeta is to cheese.”  Grant’s noted that KHC’s sales in the fourth quarter fell 5.2% from a year ago.  You know what happens when sales start to decline?  Can’t pay the interest on massive debts.  There’s a lot of Velveeta in the IG world.  Or maybe it’s Cheese Whiz.  “Now, he discovered, not only was cheese no longer prominently listed as an ingredient, it wasn’t listed at all.  Not surprisingly, Kraft kept this change to itself.” (from 2013).  ADG notes that just over 50% of Investment Grade bonds are BBB, the last notch above junk.  Another article from 2019 said that 58% of IG was BBB rated.  In any case, the BBB spread to treasuries is incredulously near its absolute low at around 125 bps (recent low in Feb 2018 was 116 bps; recent high at end of 2018 was 210 bps).  Many have warned about the “triple-B cliff”, including Gundlach.  Or maybe it all just oozes down like melting Velveeta.  But when Powell says the Fed will aggressively use QE in a downturn as he did last week, it’s hard to stop dancing.

Another rather interesting article I read noted the circular support of stocks, bonds and USD.  “Even though risk is bid, bonds actually go up in price because they have to price the second derivative, strengthening USD and the negative effect that has on growth, [particularly in EM].


Let me just circle back to the auto show for a minute.  There are a LOT of $55 to $75k aspirational pick-ups and SUVs on the floor.  The State of Illinois collects a 7.25% sales tax on the purchase of all vehicles.  “There is also between 0.25% and 0.75% when it comes to county tax. In addition…the City of Chicago has a 1.25% sales tax.”  https://www.salestaxhandbook.com/illinois/sales-tax-vehicles

Let me add another change made with the turn of the decade.  In Illinois, before 2020, when one traded in a used vehicle to buy new, the buyer only paid tax on the difference in value.  So, trade in the old SUV for $20k, buy new for $55k, and pay tax on $35k.  The new law doesn’t give a tax break on the trade-in.  Tax is on the full $55k.  So that’s an extra $1450 (at minimum) in tax.  How does that filter into inflation and growth data?  I don’t know. The only way to keep those plates spinning is with low, low financing and lease rates.

An interesting NY Fed Liberty Economics publication last week notes that among auto purchasers:   

Borrowers with credit scores less than 620 saw their transitions into delinquency exceed 8 percent in the fourth quarter (annualized as a moving sum), a development that is surprising during a strong economy and labor market. Meanwhile, the delinquency transitions among those with the highest credit scores have remained stable and very low. In aggregate, the increasing share of prime loans has partially offset the deteriorating performance of the subprime sector.

The note concludes:

Although rising overall delinquency rates remain below 2010 peak levels, there were over 7 million Americans with auto loans that were 90 or more days delinquent at the end of 2018. That is more than a million more troubled borrowers than there had been at the end of 2010 when the overall delinquency rates were at their worst since auto loans are now more prevalent. The substantial and growing number of distressed borrowers suggests that not all Americans have benefitted from the strong labor market and warrants continued monitoring and analysis of this sector. 

The Fed’s Consumer Credit release cites only $1.19 trillion of auto loans.  Not really enough to wring one’s hands over.  But in the UBER, Lyft and WeWork gig economy where treasury and corporate borrowing rates are already near record lows, there doesn’t seem to be much wiggle room.

Lest one think it’s all dour, on Saturday afternoon I met a few friends at Sketchbook, a relatively new brewpub in Evanston that was full at 4:30 pm.  No tvs.  Few cell phones out. Just good beer in a great setting…almost like an old public house gathering spot.  YZ unveiled one of his business plans that I am not currently authorized to share, and I think I never laughed as hard at the conversation in general. 


Week over week changes weren’t particularly large.  SPX was up, VIX was down to 13.68, DXY at 99.16 closed at the high for 2020, and near last year’s 2 ½ year high just over 99.50.  I don’t think COVAD-19 is being properly priced, but markets are convinced the Fed has our backs.  In euro$’s, EDU0 settled 9854.0 or 1.46% and EDZ0 settled 9858.0 or 1.42%.  Both contracts have about 1.26 million in open interest.  Both have developed large long call open interest.  In EDU0 there are 1 million combined open 9875 and 9887 calls.  In EDZ0 there are 432k open in the 9900 call strike.  If the Fed changes from “the economy is in a good place” narrative to “we might have to ease” then positioning in strong hands will be a more important factor than fundamentals in driving price.

Bank stocks don’t seem to be too enthusiastic about the prospect of ever lower rates and a flat curve.  Charlie Bilello on twitter put out the following interesting chart.  Banks are relatively underperforming to the point of the lows in 2009.

The CPI inflation data was released last week, +2.5% yoy.  Several Fed officials have noted that low readings in the beginning of last year will begin to fall out of the yoy calculations, bringing the level up.  I’m not sure the market will respond to higher inflation data, but it’s also worth noting that 20-year bonds will start being auctioned in May.  June treasury options expire May 22.  At these low vol levels, it might be worth owning some put spreads in TYM or USM. 

2/7/2020 2/14/2020 chg
UST 2Y 140.1 142.2 2.1
UST 5Y 140.3 141.1 0.8
UST 10Y 157.7 158.7 1.0
UST 30Y 204.7 204.3 -0.4
GERM 2Y -64.3 -65.5 -1.2
GERM 10Y -38.6 -40.1 -1.5
JPN 30Y 39.1 38.7 -0.4
EURO$ H0/H1 -34.0 -33.0 1.0
EURO$ H1/H2 -2.5 -3.0 -0.5
EUR 109.46 108.31 -1.15
CRUDE (1st cont) 50.32 52.05 1.73
SPX 3327.71 3380.16 52.45
VIX 15.47 13.68 -1.79






Posted on February 16, 2020 at 10:27 am by alexmanzara · Permalink
In: Eurodollar Options

Leave a Reply