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DAILY DIARY

Doug Kass

Market on Close Imbalances

  • How much to sell?

"One last thing."

-- Lt. Columbo

My mavens on the floor of the exchange see $1.1 billion to sell on the market close.

Sectors to sell include health care, financials, energy and consumer staples -- all with about $170 million to sell.

UnitedHealth (UNH), Coach (COH) and Vornado (VNO) are to buy (under $20 million each), while ExxonMobil (XOM) has $53 million to sell, Pfizer (PFE) has $40 million to sell and General Electric (GE) has $35 million to sell.

Position: None

Glibness Is on Display

  • This is a tell -- and not a positive one.

Along with higher stock prices, self-confident bullishness permeates the business media now.

Indeed (while fully recognizing and admitting that I have been terribly wrong-footed), some of the most glib and confident talking heads who are consistently wrong-sided are among the most confident.

Is a wonderful sales and profits future their reason for optimism? Is it cheap valuations?

No, it's that there is no alternative.

I have, over many cycles, heard this mantra before, and it always ends badly.

To me, this is a tell -- and not a positive one.

I am back on a conference call shortly with a management I may be investing in, so if I don't return by the close, enjoy your evening and thanks for reading.

Position: None

Pressed QQQ Short

  • At $75.66.

I just pressed my PowerShares QQQ (QQQ) short at $75.66.

Position: Short QQQ

Jerk Alert!

  • Suggestions welcome.

A reminder: Jerk award suggestions would be appreciated later this week!

Position: None

On Chimera

  • Again, I am out of the name.

I have gotten a lot of emails regarding Chimera (CIM).

As I recently posted, I am no longer long the name.

Position: None

Bidding for More Northwest Bancshares

  • My price is $13.80.

Bidding $13.80 for more Northwest Bancshares (NWBI).

Position: Long NWBI

Barclays Updates Second-Quarter Data

  • Earnings growth in second quarter 2013 (excluding financials) rose by only 1%.

The good folks at Barclays have updated the second-quarter reporting period.

As I have suggested, earnings growth in second quarter 2013 (excluding financials) rose by only 1%.

Revenue growth has been +1.4% (excluding financials), and margins have risen by 33 basis points (though five out of 10 sectors are experiencing margin contraction).

Fifty-three percent of the reporting companies have exceeded consensus sales estimates, with total sales up marginally against projections (+0.4%), and 72% of the reporting companies have exceeded consensus earnings estimates (on average by 3.5%). 

The ratio of negative-to-positive guidance is 3.4x, slightly lower than last quarter... The forward quarter earnings estimate (2Q13) has been marked down by ~120bp; the average markdown during reporting season was ~4% over the last six quarters.... EPS misses are underperforming by an average of 170bp (80bp for sales misses) while beats are outperforming by 80bp on average (100bp for sales beats).

Position: None

Dog Day

  • Milo puts the day into perspective.

A range-bound and boring day thus far.

My small-cap analyst Milo puts the day into perspective.

Position: None

Market Weight

  • Mr. Market continues to feel heavy

Like Joanne Rosenberg, who sat on me in fourth grade at my elementary school playground.

She almost killed me.

Position: None

The President's Speech

  • Haves and Have Nots.

High above the Alps, my Gnome is hearing that the president's speech this afternoon will contain a lot of rhetoric about the "haves" vs. the "have nots."

The "Screwflation of the Middle Class" remains one of my themes as to the failure of trickle-down economics and why we have a structural issue with the domestic economy.

I don't expect this to impact the market.

Position: None

Shorting Stocks

  • For what it is worth, I added to nearly every individual equity short (not ETFs) I have today.
Position: None

Weighing My Options on Berkshire Short

  • It's starting to look like a better rental.

My concerns regarding the trajectory of the housing recovery, an extended (and overbought) financial sector, my expectations for slowing domestic economic growth and Travelers' (TRV) decision to cut auto insurance rates all suggest to me that Berkshire Hathaway (BRK.B) is a better rental short now.

I am trying to short some in-the-money calls and buy some out-of-the-money puts.

Position: Short BRK.B

Cashin's Comments

  • Here are his thoughts at midday.

Midday musings from Sir Arthur Cashin:

Market sleepwalks as it awaits FOMC statement at 2:00 Wednesday.

Volume in first hour more active than yesterday (Europe?).  Standard late morning swoon showed up a bit late.  No single theme but commodities showing damage.

Run rate slowed after Europe closed.  Projects to an NYSE final of 620/700 million.

Position: None

Hanson on Housing

  • The real estate maven's take on Case-Shiller.

Real estate maven Mark Hanson looks at today's housing report:

1) Today's "May" Case Shiller is the "three month" average of the movement in "median" prices of "closed" escrows...e.g., "closed" transactions from March, April and May.

But "prices" aren't set at closing, thus the "May" Case Shiller reflects purchase and pricing decisions (Pending Sales metrics) from Jan, Feb, March and April.

Bottom Line:Today's Case Shiller is SEVEN MONTHS OLD at the tail. And based on more contemporary price surveys (including NAR's) we know median prices increased as recently as June. So, expect the CS to continue to rise for a few more months at least.  Note, the most real-time gauge of pricing power and buyer "affordability" is within the monthly New Home Sales report, as the metrics are surveyed at the "pending" stage.  And last week it was reported that builder prices were down 12% over 2 months, which is the fastest and sharpest drop since the great crash. The CS will get interesting when the "Surge" gets priced into the market -- August "closings" onward reported by NAR beginning in September -- but that won't be fully reflected in the survey until Sept/Oct results are reported in Dec/Jan.

2) Weighing heavily on prices going forward -- in addition to the 15%+ 'overnight loss' of affordability due to the "Surge" -- is the loss of the "distressed" segment and investor flipsContrary to popular understanding, the "distressed" trade has caused a huge boost in "prices paid". That's because when an "investor" buys a Junker for $125k, puts in $25k to rehab, and resells it for $175k most price surveys pick this up as $50k -- or 40% -- "appreciation". Or, in other words the price surveys count $25k in labor and materials as "appreciation".

Bottom Line:  The unintended consequences of the outright outlawing of Foreclosures and fairly sudden loss of the "distressed trade" is an invisible weight on housing that will blindside pretty much everybody.  There is a 20%+ air pocket under median prices that will appear this year as a result of the sudden change in "composition" of sales back towards individuals.

As I said over the past several months, I have rarely been more bearish housing and related sectors.  Not so much on an absolute basis...yet (housing will grind worse month after month as the lagging data catch up and the "triple-dip" in volume and prices is a story for early next year). Rather, relative to out-of-control, nose-bleed, nirvana-state housing market sentiment, expectations, and sector equities the reality of the post-"surge", post-"distressed trade" market has rarely been further apart.   At least in 2006/07 I had a decent amount of company wearing bear suits. And in late 2009 into 2010 -- when consensus believed that the positive housing market activity couldn't possibly be due to the Homebuyer Tax Credit and was organic  -- expectations and sentiment got fairly bubbly but nothing like we have seen over the past year.  I suppose that the greatest housing market stimulus of all time for such a long time -- the Fed spending $45 billion a month to buy rates down in order to turbo charge "affordability" the exact same way WaMu and Countywide used exotic loans to make houses "cheaper" from 2003 to 2007 -- can go a long way in fooling "most of the people" most of the time.

Position: None

Divergences Emerging

  • Is a diveregence developing that could potentially lead to lower share prices?

A question to our technically inclined contributors: Today the Russell 2000 and S&P 500 indices are flat with the Nasdaq flying.

Is this a potential diveregence developing that could lead to lower share prices?

Position: Short IWM, SPY and QQQ

Whither Bears?

  • If all you did was watch CNBC, you'd think they were extinct.

Nary a bear on CNBC this week.

Despite the commentators' euphoria, Mr. Market is going nowhere.

Position: None

Facebook and Apple

  • They are 'going Tesla.'

The shares of Facebook (FB) and Apple (AAPL) are "going Tesla (TSLA)."

Position: None

N's Over S's

  • Dramatically.

The Nasdaq is dramatically outperforming the S&P 500 today.

Position: Short QQQ and SPY

Life Insurers Are Down

  • I pressed my shorts in the sector this morning.

Looks like the first day down in a while for the life insurers today.

I pressed small during the morning on my shorts.

Position: Short LNC, PRU and MET

Short Book

  • Here it is.

I am very light on the long side now.

Here is my current short book (individual equities only): Berkshire Hathaway (BRK.B), McDonald's (MCD), Schwab (SCHW), Morgan Stanley (MS), Yahoo! (YHOO), Home Depot (HD), Lowe's (LOW), Grand Canyon Education (LOPE), Danaher (DHR), Prudential (PRU), MetLife (MET) and Lincoln National (LNC).

Position: Short BRK.B, MCD, SCHW, MS, YHOO, HD, LOW, LOPE, DHR, PRU, MET and LNC

More From Grant on Munis

  • Here is his latest on the municipal bond market's issues.

Coming up with CNBC's Rick Santelli is Mark J. Grant shortly.

Below is his latest on the municipal bond market's issues.

"Ability is of little account without opportunity."

-- Napoleon

The bond markets are in an odd place. The sell-off has been dramatic as the Fed contemplates tapering off from its purchases. There is quite a bit of negativity in the mind set of fixed income investors while the stock market has shown little effect from the rise in interest rates. It is only in housing that the markets have focused upon the effect of rising yields and the increased cost of borrowing or issuing new debt has been mostly ignored.

Now the real number, including rolls-offs and coupon interest, has the Fed buying debt at around $100 billion a month and not the $85 billion that is generally touted in the press. Do not discount the differential here because it is significant. Just announced were the new LTM borrowing needs of the Treasury for the 4th quarter which forecasts a decline of 31% from last year's levels. The numbers were $1,134 billion last year falling to $782 billion this year. Then if the Fed does not taper it would monetize 69% of all new issuance and probably over 100% of issuance with any significant duration. 

The knee jerk reaction to tapering has been a massive sell-off but I expect that to turn as people realize that even with some sort of tapering that the Fed is still going to absorb a massive amount of the government's debt. Then if there is no tapering private investors will literally be forced to push up prices and lower yields to purchase what is mandated under various programs. I think that the sell-off has run its course for the moment.

Then while I have been warning about the travails of the Municipal market and the additional credit analysis that should be done we have witnessed an even greater sell-off in this market than other segments of the capital markets. First it was Detroit and the new set of assumptions that must be considered; subjects that I spoke about in the past several commentaries, and then it was the SEC charge of fraudulent financials directed at Miami. No warm fuzzies in either situation.

While no one was looking though the yields on many good Municipal credits have risen and risen to the point that some are once again yielding more, on an absolute basis, than correspondingly rated corporates or mortgage-backed securities. Each time this has happened it has presented an opportunity as the markets square themselves away and return to the basic considerations.

In my mind we are at a point where, utilizing some stealth so other people do not know what you are doing, I would do the credit homework and begin to buy the decent Municipal credits as value is readily apparent in this sector once again if you just take the time to look. The probable subordination of General Obligation bonds to pension obligations has severely impacted the prices of these bonds and raised yields but it has also created a second little noticed opportunity. These are the basic services revenues bonds such as water and sewer bonds which have been hit with a massive amount of selling as well though they should rebound significantly as people begin to realize that they are not in the same position as the G.O. bonds.

There are good opportunities in the revenue bond segment of Municipals and I would take a serious look now at this area before everyone else catches on and the dislocation evaporates.

"In the middle of difficulty lies opportunity."

-- Albert Einstein

Position: None

On the Long Side

  • I'm buying more Northwest Bancshares and raising my bid for more Altisource Residential. 

I just paid $13.92 for more Northwest Bancshares (NWBI), and i am raising my Altisource Residential (RESI) bid to $19.

Position: Long NWBI and RESI

Reshorted Schwab

  • At $22.23.

As I observed yesterday, the bank stocks look like they are laboring.

This could cap market upside for now.

I just reshorted Schwab (SCHW) at $22.23.

Position: Short SCHW

Why the Strength

  • It could be due to a WSJ column on corporate tax reform.

I suspect the early market strength could be attributed to this article in The Wall Street Journal on corporate tax reform.

Position: None

Doing Less

  • That's how I cope.

I am feeling as worthless (investment-wise) as Showtime's "Ray Donovan's" brother Brendan "Bunchy" Donovan these days.

When I have this ailment, I do less.

Stated simply.

Position: None

A Pause in Housing Is Imminent

  • The current pace of higher prices is not sustainable.

The May Case-Shiller Housing Index rose by +1.05% (compared to expectations of +1.4% and +1.73% in April).

The year-over-year change of +12.2% is the best in over seven years, and May represented the twelfth consecutive monthly increase. All 20 cities (on a year-over-year basis) showed price increases, and 18 of 20 cities exhibited an increaese month over month.

While home prices advanced strongly, the month-over-month index change in May was the slowest since January 2013. As mortgage rates have climbed dramatically since May, home prices will moderate further.

Most importantly, the rate of home price appreciation (+12%) is significant when measured against personal incomes (+2%) -- ergo, affordability has been reduced, and the current pace of higher prices is not sustainable.

The combination of modest real income growth, higher home prices and mortgage rates when coupled with a cessation of new-age buying of homes (by insitutional investors, hedge funds and private equity) will pressure housing demand over the balance of the year as the organic and first-time buyers are being priced out of the markets.

If I am accurate in a housing stall, second-half domestic economic growth expectations are too optimistic, and the U.S. stock market's advance will be challenged.

I would avoid all housing stocks, and I have added to my Lowe's (LOW) and Home Depot (HD) shorts on this morning's strength.

Position: Short LOW and HD

Short Action

  • I am back short Yahoo! and added to Danaher.

I have reshorted Yahoo! (YHOO) and have added to Danaher (DHR) short.

Position: Short YHOO and DHR

Herbalife Short Squeeze

  • Shares are no longer available to borrow.

As most can plainly see, there is a major short squeeze developing in Herbalife (HLF) now.

The shares of Herbalife are no longer available to borrow.

This is why one of my basic tenets in short selling is to avoid high short interest stocks (whether measured by short interest divided by average daily trading volume or by float).

Position: None

More Activist Pressure

  • Again, don't follow activists blindly.

Another activist-led situation, Health Management Associates (HMA), is under pressure.

And another lesson learned.

Don't follow activists blindly.

Position: None

Added to Shorts

  • They include Lowe's, Home Depot, Danaher and RTH.

I have added to the following shorts this morning: Lowe's (LOW), Home Depot (HD), Danaher (DHR) and Market Vectors Retail ETF (RTH).

Position: Short LOW, HD, DHR and RTH

Exercise Caution When Following Activists' Trades

  • Let the dust clear first.

A painful lesson was learned today in the fertilizer stocks after Third Point's announcement that it had acquired a position in CF Industries (CF).

There has been a lot of money been made after activists have filed in certain companies, but there is an ever-present danger in following activist investors.

Today is an example.

I would not catch today's falling knife, as I don't view these as opportunistic trades ... yet.

Rather I view them as gambles, with a 50/50 chance of working out in today's session.

Let the dust clear first.

Position: None

Recommended Reading

  • Run, don't walk, to read Jim Cramer's latest column.

Run, don't walk, to read Jim "El Capitan" Cramer's latest post, "Three Specs Powered by Lust."

In this column, Professor Jim explains perfectly the tug of war between his pragmatic (and time-tested) way of investing weighed against the lure and lust of Netflix (NFLX), Amazon (AMZN) and Tesla (TSLA) shares. (Note: These are three out of my "Five Horsemen of the Nasdaq.")

It is a very worthwhile read this morning.

Position: None

Earnings Roundup

  • Here is a summary of today's earnings beats and misses. 

There were seven beats, 10 misses and 10 in line. I remain unimpressed with the profit reporting period that has been characterized, ex-financials, by relatively weak top and bottom line growth relative to expectations.

Below is a summary (by sector) of today's earnings beats and misses:

  • Consumer -- BYD (in line), COH (misses), HLF (beats), MDC (in line), TXRH (misses).
  • Financials --  AGNC (beats), ARE (in line), GGP (beats), HIG (misses), WDR (misses), XL (misses).
  • Health care -- PFE (in line),  MRK (in line), AET (beats),  VRTX (beats).
  • Industrials -- CRK (misses), GNRC (beats), MTW (in line), PES (in line), SPN (misses).
  • Information technology --  CVLT (beat), DISCA (misses), FIS (in line), NSLN (in line), PBI (in line), S (misses), PMCS (misses). 
Position: None

Investments vs. Rentals

  • My investments are based on fundamental analysis, and my rentals are typically based on a market view or individual company catalysts.

I break my trades into investments and rentals.

My investments are based on fundamental analysis. Each investment has different catalysts and time frames. Unlike chart gazing (which shows you where stocks have been not where stocks are going), investments require a good deal of fundamental work. This is time-consumptive and requires patience of action (and patience from you the subscriber). This is particularly true in the search for investment home runs.

At the current time, as illustrated by yesterday's "Levels" post, few investments meet my criteria to purchase.

My trading rentals are typically based on either a market view or on individual company catalysts (e.g. in the most generic case an expectation of better or worse earnings, quality of profit issues, industry releases, etc.) They produce, when done effectively, a cash-register effect of adding on to our core investment returns. The rentals occur with relative frequency (particularly compared to investments), and at times, this strategy is almost frenetic.

Currently, I have a number of trading rental ideas. You will see more and more in the very near term as the market (from my perch) grows increasingly overvalued.

I continue to believe that trading rentals will dominate my portfolio in the months ahead in an uncertain, unpredictable and, at times, volatile setting that requires an opportunistic strategy.

Position: None

Early-Morning Market Look

  • Let's take a peek at overnight and early price action in some of the more important asset classes.

The rundown:

  • S&P futures up 4;
  • Nikkei up 1.5% -- despite the rally, what is being asked is whether Abenomics is already failing (Japan is the hedge fund industry's favorite trade);
  • China Shanghai up 0.50% (China injects liquidity, but...Is their economic recovery faltering?)
  • European markets up -- BP weak after disappointing report, and bank stocks soft with Barclays raising capital and Deutsche Bank missing EPS;
  • euro up;
  • crude down $0.50;
  • gold down 5; and
  • the 10-year U.S. note yields 2.60% (close to the "line in the sand").

Worth mentioning:

  • While the bears won the day on Monday, the carnage in the Asian stock markets failed to really pressure the U.S. stock market. (Perhaps stocks are being buoyed by month-end marks.)
  • Given the absence of follow-through selling this  morning, I wouldn't be surprised if Mr. Market (i.e., the S&P 500) has a date with 1700 sometime early this week.
  • I remain net short -- and miserable!
  • Speaking of Asia, Japan issued two more ugly economic reports on Tuesday -- 1. June household spending unexpectedly dropped -2% month over month and -0.4% year over year (+0.7% month-over-month and +1.4% year-over-year gains were expected); 2. June industrial production declined -3.3% month over month (-1.5% decline was consensus).
  • Is Abenomics working? (See this chart of the Nikkei.)
  • According to The Wall Street Journal, corporate profits are losing steam, but corporations are hoarding cash while the middle class continues to get screwed.
  • Bernanke skips Jackson Hole, but Yellen doesn't.

In the press:

Here are some economic and earnings catalysts that could impact trading today:

  • India/RBI rate decision
  • SNB releases Q2 earnings/currency holdings
  • Eurozone confidence readings for July (5:00 a.m. EDT)
  • US Case-Shiller for May (9:00 a.m. EDT)
  • US consumer confidence (10:00a.m. EDT)
  • Berlusconi tax fraud hearing due July 30
  • WSH analyst meeting
  • Earnings before the open -- AET, ACI, ADS, Barclays, CMI, COH, CVLT, DDD, Deutsche Bank, DISCA, Fiat, FIS, GT, GLW, Infineon, JBLU, MDC, MRK, MSO, MWV, NLSN, NOV, NYX, ODP, OSK, OXY, PBI, PFE, S, Santander, Softbank, TRW, UBS, VSH, WDR, WLK, WM, WU, X.
  • Earnings after the close -- ACAS, AJG, AMGN, BXP, CARB, CENX, CLD, CVG, FISV, FTNT, GNW, GDOT, ISIL, JIVE, KIM, NCR, RVBD, SNCR, SYMC, ULTI, VRSK, XXIA.
Position: None
Doug Kass - Watchlist (Longs)
ContributorSymbolInitial DateReturn
Doug KassVKTX4/2/24-31.72%
Doug KassOXY12/6/23-14.53%
Doug KassCVX12/6/23+10.81%
Doug KassXOM12/6/23+13.02%
Doug KassMSOS11/1/23-22.80%
Doug KassJOE9/19/23-14.64%
Doug KassOXY9/19/23-25.97%
Doug KassELAN3/22/23+37.02%
Doug KassVTV10/20/20+64.63%
Doug KassVBR10/20/20+77.10%