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DAILY DIARY

Doug Kass

Calling It a Day

  • I'm finishing out very slightly net short.

I am calling it a day.

I end the day very slightly net short (under 5%).

Thanks for providing me with such a terrific platform in my Diary, and I hope I provided value added input to all of you.

Enjoy your weekend.

And God bless Uncle Vinnie.

Position: None

Life Insurer Shorts Back to Best Ideas List

  • Again, that's MetLife at $53.05 and Lincoln at $52.75.

I am putting my Lincoln National (LNC) and MetLife (MET) shorts on my Best Ideas list (again).

Position: Short LNC and MET

Reshorted the Life Insurers

  • MetLife at $53.05 and Lincoln at $52.75.

I have reshorted MetLife (MET) at $53.05 and Lincoln National (LNC) at $52.75.

Position: Short MET and LNC

Added to Berkshire Short

  • First time this year.

I have not added to my small short in Berkshire Hathaway (BRK.B) all year.

I have just added to my Berkshire short at $122.45, however, for reasons that I have previously mentioned.

Position: Short BRK.B

Reshort the Life Insurers?

  • It could be next week's business.

I am eying a return to my life insurance shorts, MetLife (MET) and Lincoln National (LNC).

But it could be next week's business.

Position: None

Biotech Weakness Continues (Part Deux)

  • IBB is down nearly 5% in two days. 

The iShares Nasdaq Biotechnology ETF (IBB) is down another 2% today after yesterday's near-3% fall.

Position: None

Recommended Reading

  • Run, don't walk, to read Travis Hoium's '1 Auto Company Tesla Motors Should Be Afraid Of' on The Motley Fool.

Travis Hoium's "1 Auto Company Tesla Motors Should Be Afraid Of" is a must-read over on The Motley Fool.

Position: Short TSLA

My Short Book

  • It includes Starbucks, Green Mountain, Tesla, Berkshire Hathaway, and Nasdaq and Russell ETFs.

In terms of individual stocks, I remain short Starbucks (SBUX), Green Mountain Coffee Roasters (GMCR), Tesla (TSLA) and Berkshire Hathaway (BRK.B).

As far as index ETFs go, I remain short PowerShares QQQ (QQQ) and iShares Russell 2000 (IWM) -- I am also short the Russell 2000 via my long position in Direxion Daily Small Cap Bear 3X Shares (TZA) common.

Position: Long TZA; short SBUX, GMCR, TSLA, BRK.B, QQQ and IWM

Cashin's Comments

  • Here are his musings at midday.

Midday musings from Sir Arthur Cashin:

Early guess was that the payrolls were a bit of a goldilocks number.  Then came concern that the three bears might come home early.  In this morning's Comments, I wrote of last night's hard reversal into the close by biotech and healthcare stocks.  They look wounded today.  Ukraine should only be a factor if rumors or troop movements pop up.

Run rate at 12:30 projects to an NYSE final of 720/800 million shares.

Have a great weekend!

Position: None

Staying in Neutral

  • No more trading for me today.

As mentioned earlier, I moved to market-netural on the whoosh lower this morning.

I will spend this weekend cogitating over the markets and writing up a perspective of how things are so differenet today from the generational bottom in March 2009.

No more trading for me today.

Position: None

Reallocation Under Way?

  • Rumor has it.

High above the Alps, my gnome is hearing that there is a large reallocation (from a big pension plan) out of equities and into fixed income after a recovery of a previous funding gap.

As I have written, I do not expect a reallocation into stocks whe bond prices fall but rather a reallocation of cash back into fixed income.

Position: Long TBT

Boockvar Reviews the Week

  • Here is his summary.

Below is The Lindsey Group's Peter Boockvar summarizing the important macroeconomic events of the week:

Positives

1)Payroll gain of 175k was better than feared, 162k of which came from the private sector. The 3 month winter average of 129k compares with 230k in the same months last winter pointing to hopes of a rebound in coming months. While the U3 rate rose to 6.7% from 6.6% because of a modest gain in the household survey and bigger increase in the labor force, the all in U6 fell to 12.6% from 12.7%, the lowest since November '08. Workers also collect more in wages than expected as average hourly earnings rise .4% m/o/m and 2.2% y/o/y. The BLS said 601k workers had a job but were not at work due to weather, the 2nd most going back 10 years.

2)Initial Jobless Claims fell to 323k from 349k last week, below the estimate of 336k and it brings the 4 week average to 337k from 339k, about in line with the one year average of 340k.

3)The February ISM manufacturing index was 53.2, almost 1 pt above the estimate of 52.3 and up from 51.3 in January but is still below the 56+ figures we saw from August thru December last year. The ISM said this, "As in January, several comments from the panel mention adverse weather conditions as a factor impacting their businesses in February. Other comments reflect optimism in terms of demand and growth in the near term."

4)Personal Income in January rose .3% m/o/m, a touch better than expectations of up .2%. Spending was up by .4%, well above the estimate of up .1% but only because December was revised down to a gain of .1% vs the initial read of up .4%. The spending gain was mostly on utilities and ACA premiums. The savings rate was unchanged at 4.3%, matching the lowest since March.

5)A 6 bps downtick in the average 30 yr mortgage rate to 4.47% drove a 9.4% increase in purchase applications off the lowest level since 1995 last week. Refi applications were up by 9.6% but after falling 11.4% last week.

6)The BoE and ECB leave rates unchanged mostly as expected. I say mostly because some hoped for more from the ECB but with a slowly improving economy and legislative and regulatory constraints, there is not much left for them to do. The euro is at a 2 ½ year high vs the US$ in response.

7)The euro zone PMI services index was revised up to 52.6 from the initial print of 51.7. It's up from 51.6 in January and at the highest level since June '11 with Italy's PMI in particular jumping back above 50 to 52.9, the best since March '11. UK services PMI was little changed at 58.2, a touch above the estimate of 58.

8)Retail sales in January for the EU region in January rose 1.6% m/o/m, twice expectations and Q4 GDP was up by .3% q/o/q, in line but the 3rd quarter in a row of growth, albeit modest.

9)Due in part to some short term jobs programs, France reported a 41k drop in the number of unemployed for Q4, well more than expectations of a drop of 10k and the prior quarter was revised to a drop of 16k vs the initial figure of a rise of 31k.

10)German IP gains .8% m/o/m in January, in line but off a higher than expected base in December.

11)China allows the first publicly traded corporate bond to default as Chaori Solar is not bailed out and missed its interest payment. Creditors of highly indebted companies are now on notice but China realizes that socializing risk is unhealthy and hopefully a more efficient allocation of capital will follow.

12)Hong Kong and India saw a slight gain m/o/m in their HSBC PMI manufacturing indices. China sees gains in services.

Negatives

1)Notwithstanding the broad consensus, especially within the Fed, that there is no inflation, the CRB index as of this writing is up almost 2% on the week, 10% year to date and 5% y/o/y. Combine this with the persistent 2%+ y/o/y gains in services inflation within CPI due to near 3% rent gains and the higher than expected wage data in payrolls and it results in the 5 yr breakeven inflation rate rising 5 bps today, the biggest one day gain since November to above 2%, the highest since May. If this trend continues, the Fed won't be behind just one curve even with their methodical taper.

2)Vehicle sales in February total 15.27mm SAAR, below the estimate of 15.4mm and little changed with the 15.3mm seen in February 2013.

3)The ISM services index in February was softer than expected falling to 51.6 from 54 and compares with the estimate of 53.5. It's the weakest since February 2010 and the ISM said this, "The majority of respondents' comments indicate a slowing in the rate of growth m/o/m of business activity. Some of the respondents attribute this to weather conditions. Overall respondents' comments reflect cautiousness regarding business conditions and the economy."

4)Productivity for Q4 was revised to a gain of 1.8% from the initial figure of 3.2% and that was less than the estimate of 2.2%. This brings unit labor costs lower by .1% vs down 1.6% initially and vs the estimate of down .5%. Productivity over the past 4 years has averaged just 1.35%, well below the 20 year average of 2.1%.

5)Nerves calm a bit in Crimea but upcoming referendum clouds outlook along with the now permanently stained reputation of Putin. Micex index closes week down 7% and most major European stocks markets all close lower on the week, particularly Germany which is also being hurt by the rise in the euro.

6)A few days after seeing a 1.4% y/o/y increase in inflation for January, Japanese cash labor earnings fell .2% y/o/y in January. The one bright spot though within the figure was regular pay rose .1% y/o/y, the 1st increase since March '12 as a 15% drop in bonus money was the main factor in the headline number.

7)China, Taiwan, Indonesia and South Korea all see modest m/o/m declines in their manufacturing PMI's.

Position: None

Tesla Big in Europe?

  • Er, maybe not.

Tesla (TSLA) has lowered the Model S price in Germany by 7,000 euros and also throughout Europe.

Here is the advertisement.

Demand must be strong!

Position: Short TSLA

Adding to Apple Long

  • At $527.60.

I am adding further to my Apple (AAPL) long at $527.60.

Position: Long AAPL

Shifted Back to Neutral

  • Covered SPY short.

I have covered my SPDR S&P 500 ETF (SPY) short, and I have moved back to market-neutral now.

Position: None

Read as Much as Possible

  • That is why I publish the commentary of Peter Boockvar and Mark Grant.

Many have commented in the comments section that they find the perma-bear rants from Peter Boockvar and Mark Grant as unnecessary and/or repetitive.

To all who have commented, I take my cue from Warren Buffett whose No. 1 recommendation to every investor is to read as much as possible. (He repeated this at last year's annual meeting in response to an investor's question in Omaha.)

That is why I publish their commentary.

I also publish it because Wall Street research strategists are nearly always bullish and nearly everyone has access to their commentary. They deliver bullish forecasts on a silver platter. Everyone sees it.

You don't necessarily see the bearish commentary from the likes of Peter and Mark.

I hope this explains my mission in publishing their commentary.

Position: None

Biotech Weakness Continues

  • Is it a broader warning for the Nasdaq?
Position: Short QQQ

Adding to SPY Short

  • At $188.45.

I am adding back to my shorts now, shorting SPDR S&P 500 ETF (SPY) at $188.45.

Position: Short SPY

Inflation Tremors

Rising inflation and slowing real growth are value-destructive factors to the U.S. stock market.

The inflation voices are rumbling.

The five-year breakeven today has jumped above 2% for the first time since May.

This will serve to slow domestic economic growth in the months ahead.

Rising inflation and slowing real growth are value-destructive factors to the U.S. stock market.

Below is a chart from Deutsche Bank that shows that when wages begin to move higher, inflation takes hold.

Position: None

Repeating for Emphasis

  • Here's the closed-end muni fund game plan.

As I mentioned yesterday, traders of closed-end municipal bond funds (a recent Kass Katch and successful asset class year-to-date), should consider paring back.

As an investor, I am holding on to my core position.

Position: Long BTT, BKN, ETX, VCV, VPV, VGM, NAD, NMA, NMO, NRK, NPI, NPM, NQU and NQS.

The Plan

  • I plan to reshort any bounce.
Position: None

How Short?

  • I moved to 10% net short on the whoosh lower.
Position: None

Something Fishy in Tesla's Warranty Reserves

  • False accounting or mistaken accounting? Either way, it's bad accounting.

Yesterday's "How I Shorted Tesla and Survived" described my short selling journey in Tesla (TSLA).

This morning I wanted to do a deeper dive on some recent SEC filings at Tesla -- namely the Nov. 8, 2013 Form 10-Q (quarterly report) and the Feb. 26, 2014 Form 10-K (annual report).

Tesla's accounting has long been controversial.

In a prior post, I characterized Tesla's reported profits as EBBS (earnings before B.S.).

What got my attention this time at Tesla was the release of warranty reserves that provided a nonoperating, one-time $10.2 million boost to Tesla's most recent quarterly earnings.

For all of 2013 Tesla reduced it's warranty reserve nearly $2.1 million, a sharp reversal from the nearly $8.1 millionincrease through the first three quarters of the year. In other words, in the fourth quarter alone, Tesla reduced its warranty reserve by a hefty $10.2 million, a gain that flowed directly into its income statement and boosted reported margins from 23.5% to 25% (exactly what Tesla had guided to) and earnings by an extra $0.07-$0.08 a share.

Given the early state of Tesla's automobile production cycle, it is highly unconventional and unclear to me why the company went from $8 million under accrual for prior year warranties for the nine-month period and then in the next quarter decide that it has actually over-accrued for the year by $2 million, serving to unwind the reserves (and then some, $2 million) from the first three quarters of the year.

In essence the question comes down to whether Tesla's warranty reserve release was used as a cookie jar to boost profits in the latest quarter, or did the company simply miscalculate its warranty calculations?

Tesla might make the case that its current warranty experience is coming in better than it previously expected (relative to its reserving), so it made this adjustment in the latest quarter. To this observer, however, considering how early it is in Tesla's production cycle, Tesla's warranty reserve release was aggressive accounting.

Another argument that I have heard (when I approached some knowledgeable friends on this subject) was that the reserve release occurred because the pricing of Tesla's used cars is higher than most had expected, but this shouldn't impact warranty reserves as a warranty is a guarantee that a company will replace or fix a defective item it sells to a customer. This doesn't have, as I understand, anything to do with the value of the car. (Note: You can calculate a warranty reserve liability and record it in your accounting records to reflect the amount you expect to pay for warranties in the future. You must record a warranty expense in the accounting period during which you sold the items and create a liability for the same amount. You can reduce or draw down your warranty liability account in the future when you perform warranty service.)

Regardless of the interpretation of the warranty reversal, Tesla got a consequential and one-time boost from an accounting change. Without this change, Tesla would have missed consensus earnings forecasts right before a $2 billion capital raise was deployed.

This morning's critical view of Tesla's quality of earnings doesn't change the broader debate on Tesla as an investment, but Tesla's nosebleed valuation and share price have such a high P/E multiplier attached that these should not be impervious or not influenced by the aforementioned accounting hieroglyphics.

I remain short Tesla.

Position: Short TSLA

Jobs, Jobs, Jobs!

  • Parsing the jobs report.

Payrolls rose by 175,000 in February, 25,000 more than expected, while the private sector added 162,000, 17,000 above the estimate. The net revisions to the two prior months were up by a total of 25,000. The household survey measured an increase of just 42,000, but due to a 264,000-person increase in the size of the labor force, the unemployment rate ticked up to 6.7% from 6.6%. The labor force increase over the past two months is 787,000 with some noise related to the end of extended unemployment benefits. The all-in U6 rate, though, did drop to 12.6% from 12.7%. The participation rate held steady at 63%. A 0.4% month-over-month increase in average hourly earnings was a definite positive within the number for workers, twice expectations and brings the year-over-year gain to 2.2%. With a 6% year-over-year increase in commodity prices and 3% gains in rents, an increase in wages is what consumers could use, but of course that creates issues for the Fed.

Notwithstanding weather, construction jobs rose by 15,000, and manufacturing was up by 6,000. The BLS said 601,000 had a job but was not at work due to weather, thesecond-highest going back 10 years, which was likely the reason for weekly hours worked falling to 34.2 from 34.3, the lowest since January 2011.

Bottom line: The winter months of December through February averaged 129,000 jobs compared with 230,000 in the same months last winter, thus pointing to the weather impact, but there are no more excuses going forward, and hopefully we'll get a snapback. That said, the inflation component of higher wages, combined with higher commodity prices is something that bonds should start paying attention to, and the 10-year yield at 2.80% is the highest since mid-January.

I had previously made the case that I would rather be short bonds than long stocks.

In support of that view and in response to the jobs report, this morning the ProShares UltraShort 20+ Year Treasury (TBT) is up 2% and the S&P futures are up only 0.5%

Today's report is quite supportive of my short bond position.

From my perch, bond yields are now in a multiyear uptrend.

As to the U.S. stock market, today's better than expected jobs number might have been materially discounted.

Stay tuned.

Position: Long TBT; short SPY

Post-Jobs Strategy

  • Short bonds.

One must be short bonds after today's jobs report.

Not so sure about stocks, though.

Position: Long TBT; short SPY

Sell the News?

  • This is clearly an outlier view.

The strong consensus is that the better labor report will buoy stocks.

After the magnitude of the rise in the S&P 500, I would not be surprised if there is a sell on the news.

This is clearly an outlier view, however.

Position: None

The Gospel According to Peter Boockvar

  • Here are his morning musings.

The gospel according to Peter Boockvar:

As impressive the week has been so far for the US stock market is as unimpressive it's been for the major European market of Germany. Whether it's concerns with their natural gas supply from Russia or the 2 ½ year high in the euro vs the US$ that will hurt German exporters, the DAX is on the cusp of closing at a 4 week low on a Friday closing basis and is just 1% off the Monday low close. The S&P 500 has rallied on payroll day for the last 10 months so maybe part of this week's US strength was gaming ahead of 8:30. The broad market consensus for today is that a below consensus number will be given a weather hall pass and stocks will rally with anything better than expected. Either way, today will be the last of the very important, market moving data that will be tainted by a weather influence, therefore no more economic excuses going forward and the Fed will be cutting another $10.b from their asset purchase program in a few weeks anyway.

Data wise in Europe, the only thing of note was an in line .8% gain m/o/m in German IP for January but comes after a .7 of a pt upward revision to December. In Asia, Shanghai Chaori Solar Energy Science & Technology was not bailed out, couldn't sell assets fast enough and therefore was not able to make its scheduled interest payment today. It is the very first default of a bond that publicly traded on their debt market. While all other highly indebted and challenged Chinese companies and its creditors should be now put on notice, letting failure occur will only strengthen their capital markets as it would improve the scrutiny and differentiation of credits and improve the allocation of capital. The Shanghai and Hang Seng indices were down only modestly.

Position: None

Late Start

  • One of those mornings.

It's a late start for me for me this morning.

In case you missed it: After the market close Altisource Residential (RESI) announced a $0.40 cash dividned, up from $0.25 a share in the prior quarter.

Position: None
Doug Kass - Watchlist (Longs)
ContributorSymbolInitial DateReturn
Doug KassVKTX4/2/24-31.13%
Doug KassOXY12/6/23-14.95%
Doug KassCVX12/6/23+12.40%
Doug KassXOM12/6/23+14.91%
Doug KassMSOS11/1/23-22.06%
Doug KassJOE9/19/23-14.08%
Doug KassOXY9/19/23-26.33%
Doug KassELAN3/22/23+28.94%
Doug KassVTV10/20/20+66.05%
Doug KassVBR10/20/20+77.71%