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DAILY DIARY

Doug Kass

Signing Off

  • What's coming up.

Tomorrow I will be writing about my expanding short bond position and why I favor General Motors (GM) at current prices.

Thanks for reading my Diary today. Enjoy your evening.

Position: Long GM TBT

Market on Close

  • No market on close orders to speak of today.
Position: None

Opportunity to Short Bonds

  • Today's break in yields opens the door.

I am viewing the break in yields today as an exceptional opportunity to short the U.S. bond market.

This is an investment, not a trade. If you go back to my Value Investing Congress presentation and my Northwestern University Kellogg School lecture, you will understand why.

Position: Long TBT

Ludicrous Forecast

  • We have seen the day's lows.

 Gun to my head: The market has made the low on the day with futures down 20 handles.

I am buying small.

Position: None

Added to TBT, Apple

  • TBT at $68.90 and a small tranche of Apple.

I am adding to ProShares UltraShort 20+ Year Treasury (TBT) at $68.90 now, and I bought a small tranche of Apple (AAPL).

Position: Long TBT and AAPL

United to Allow iOS Streaming

  • Slated to start next month.

Speaking of Apple (AAPL): United Airlines, of United Continental (UAL), will let flyers stream movies and TV shows on Apple iOS devices starting next month, according to the L.A. Times.

Position: Long AAPL

A Message From the Market

  • Risk happens fast in this environment.

The message of today's market: Risk happens fast when everybody is in the pool.

Position: None

Biting Into More Apple

  • Here at $530.

I am a $530 buyer of more Apple (AAPL).

Position: Long AAPL

On Crimea and the Alamo

  • Insights from David Kotok.

My friend/buddy/pal David Kotok, of Cumberland Advisers, writes about Crimea and the Alamo today: 

"So let's see. 

"Russia and Crimea are following the same roadmap that the United States and Texas followed when Texas officially left Mexico on March 2, 1836. TX became an independent republic. It subsequently joined the United States in 1845.

"How do you say 'Remember the Alamo' in Russian?

"New Ukrainian political chief visits the White House. President O supports democracy. What else is new? Coincidentally, the US Strategic Petroleum Reserve (SPR) announces a "test" sale of 5 million barrels. No comment is made publicly about the linkage of these two items. Strange timing, if truly coincidental. Otherwise, it is a very weak signal to send. 

"Oil prices drop on SPR announcement, but international prices tied to Brent don't change much. Libya, Nigeria, and geopolitics everywhere else in the oil patch are much more important to the Brent-based pricing mechanism than are US policy and the WTI-based mechanism. President O could really have made a big splash by announcing pipeline expansion, more and faster approvals of exploration, and an addition to US capacity in place. Five million barrels in a one-time sale is a smidge.

"(One note on language. When the Putin uses the word Ukraine, he does not include Crimea in its definition. When Sec. Kerry or President O uses the same word, they do. So their statements have different meanings.)

"The European Union's response has been no more effective than the US's in countering Russia's ambitions. And it is the EU that is critical here. They passed on an early opportunity in Ukraine but for good reason. They saw the corruption in place and the misallocation of resources and did not want to throw $15 billion down a bottomless pit. Now they face a dilemma. They are cornered by events and are committing the $15 bn after the fact. They will end up paying more and getting less now that the Russian takeover of Crimea is a foregone conclusion.

"So, the EU gets less and pays more, and the US says more and does less. Putin already won this round. Crimea will become formally tied to Russian in some way. The US appears weak. The US Congress blusters and looks silly.

"For EU and US leaders, the best lessons from history that apply here come from Metternich (the father) and Machiavelli and Teddy Roosevelt as in "speak softly and carry a big stick."

"It is a mistake to speak loudly and carry no stick.

"Stay tuned for an interesting weekend."

Position: None

Out of IWM Short

  • At $116.60.

I have covered all of my iShares Russell 2000 ETF (IWM) short at $116.90.

Position: None

How Long?

  • Repeating for emphasis: I am now 5% net long.
Position: None

Covered Some QQQ Short

  • Namely, the balance of yesterday's tranche.

I have covered the balance of my PowerShares QQQ (QQQ) short from yesterday at $89.55 just now.

I am now 5% net long.

Position: Short QQQ

Maverick Engaged!

  • I bought some TBT at $68.95.

Maverick has engaged in a ProShares UltraShort 20+ Year Treasury (TBT) buy at $68.95.

Position: Long TBT

Boockvar on the U.S. Stock Market

  • Here are his midday musings.

Good stuff on the U.S. stock market vis-à-vis other developed markets from The Lindsey Group's Peter Boockvar:

To quantify the extent the US stock market has been an island of tranquility relative to the number 2, 3 and 4 biggest economies in the world (SPX about flat on year even with today's weakness), let's look at the recent performance of China/Hong Kong, Japan and Germany. The German DAX is about to close lower by almost 2%, is down 3%+ for the week and is weaker by almost 7% since the Friday before Putin's war games. Today's close is the lowest since mid December. We know China has been weak because of growth concerns and the Shanghai index is down by 4.6% year to date with a 6.7% downdraft in the Hang Seng and a 14% drop in the Hong Kong China index to the lowest close since July. Japan closed overnight down by 9% year to date as we approach the consumption tax increase at the same time wage growth is lagging. Bottom line, decoupling seems to be the theme for US investors but that's not reality in our global world so either the rest of the world starts trading better and catches up with us or the US market will succumb to the weakness outside its borders.

Position: None

Why the Reversal? (Part Deux)

  • Another catalyst could be a BBC report basically stating that Russia's military is preparing for battle.

This could also be roiling the market:

Russia has begun military exercises, involving more than 8,000 troops, close to the border with Ukraine.

The ministry of defence confirmed artillery such as rocket launchers and anti-tank weapons would also be involved in the exercises.

It comes at a time of high tension ahead of Crimea's referendum on Sunday on whether to break away from Ukraine and join Russia.

Position: None

TBT Buy Level

  • It's $69-ish.

Check out the drop in ProShares UltraShort 20+ Year Treasury (TBT).

Interest rates are dropping.

I am a buyer of TBT at $69-ish.

Position: Long TBT

Out of SPY Short

  • I am now market-neutral.

I have covered the balance of my SPDR S&P 500 ETF (SPY) shorts, and I am now market-neutral.

Position: None

For Apple Heads

  • Leaked screenshots of iOS 8.

BGR has published leaked screenshots of iOS 8 operating on an iPhone.

Position: Long AAPL

Tweet of the Day

  • Today's honor goes to Pimco's Bill Gross.

Tweet of the day from Pimco's Bill Gross:

Position: None

Why the Reversal?

  • Reports that Chinese banks are cutting loans to Chinese industrial companies by up to 20% could be the catalyst.

I believe the proximate cause for the market's reversal this morning is a story that is circulating that Chinese banks are reportedly cutting loans to Chinese industrial companies by up to 20%.

This move would be consistent with Chinese policy, which has been aimed at slowing the credit bubble, reducing the growth in the shadow banking system and cutting the rate of property inflation.

China has appeared to be willing to sacrifice some GDP growth in order to reduce risk in the property and financial sectors.

China has been a significant driver to the world's economic growth trajectory, and the next few years' growth will certainly be less than the past few years' growth.

Whether this policy can be implemented without taking real GDP growth below 6.0% to 6.5% is the issue ahead.

A hard landing in China would not be pleasant for the U.S. stock market, but, if executed and growth in China remains north of 7% or so, the byproduct of a successful policy would be sanguine for global markets. Not only would a self-sustaining recovery be in place but China's policy could dent commodity prices further (which would be a tax cut for U.S. households).

Stay tuned.

Position: None

Top Priority!

  • Awaiting my granddaughter's arrival.

Heads up: Sometime in the next week to 10 days, my son Noah and his wife are expecting their first child (and my first grandchild!), Ava Dorothy Kass.

So, I am anxiously awaiting their call, upon which time I will be taking the first plane to New York City.

As a result, my trading activity is likely to be muted as we move closer to the due date (a week from Sunday).

Priorities!

Position: None

Ringing the Register

  • I am covering some of my earlier index shorts for some nice gains.

I am staying in motion and trading opportunistically.

I am taking in my SPDR S&P 500 ETF (SPY), iShares Russell 2000 ETF (IWM) and PowerShares QQQ (QQQ) shorts put on in premarket trading today for some nice gains.

This takes me back down to 10% net short.

Position: Short SPY, IWM and QQQ

Automakers vs. Homebuilders (Part Deux)

  • An updated illustration.

Steve Cortes updates his cars vs. housing pair trade.

Position: None

Negative Nasdaq Futures

  • QQQ is my largest short.

Nasdaq futures turn negative now

My largest short position is in PowerShares QQQ (QQQ).

Position: Short QQQ

Hanson on Housing

  • Here is the real estate maven's take on the Sacramento market.

Real estate maven Mark Hanson disses the Sacremento, California housing market this morning:

Add fresh Feb Sacramento, CA data to the Phoenix and Vegas mix I released yesterday (copied below) and the picture of demand destruction / generationally low house purchase demand in most all regions, in which the Fed's nuclear option capital was deployed first, becomes clear.

Like Phoenix, Vegas and a number of other regions I cover closely Sacto has always been a clear leading indicating market.  It was one of the "bubbliest" in 2006, one of the first to crash in 2007-09, one of the first to respond to the Homebuyer Tax Credit, was hit hard on the tax-credit sunset, and one of the primary regions that new-era investors armed with capital for their bond-replacement trades flocked first. Finally, about a year ago I began to really key in on the demand destruction settling into this market, not sure how long it would last but certain it was happening. Despite year ago demand beginning to seize, the investor cohort by and large by itself, pushed house prices here vertical through July 2013.  Since then, demand has plunged to generational lows, supply is surging, and prices have gone nowhere. Moreover, the fall and winter "weather" in these regions has been the most tame in a generation.

Bottom line:This stalemate won't end with a bunch of end-user buyers saying "ok, we concede. We will pay $50k more than we can qualify for".  That's because they can't. Nor, does it end with investors flooding back into the market willing to accept lower yields than on UST 10s.  Just like every other time a demand destruction / house price stalemate presented, house prices will likely lose..."volume precedes price".

By now, it has to be dawning on even the most ardent housing market bull -- who gives little credit for the past two and a half years to stimulus -- that 'this is not what escape velocity and a durable housing market recovery looks like'.   But, they more than likely haven't taken the next step to realize that this 'is' what a simtilus-induced, massive misallocation of capital into a single asset class -- that created a ton of incremental demand and pulled even more forward -- looks like; it's exactly what 2003 to 2007 was all about.  The primary difference between 2003 to 2007 and 2011 to 2013 is that the latter -- a small cohort of investors deploying all-cash using mostly subjective and often flawed house price models -- was more powerful than the former, when every ma and pa end-user in America was the speculative cohort armed with exotic loans.

And just like in 2006/07, when demand began to drop sharply mid-2013 -- because all the ponzi's were in the pool and houses had reached an average price level that not even Countrywide could rationalize the 'stated income' earnings of a w-2 DMV employee of $20k a month -- following an epic house price parabola in the preceding few quarters, all the speculators were in the pool, they couldn't push any further the inputs in their rental models to make a real 2% rental yields look good, and prices settled at levels at which the average end-user could not pick up the ball and run with it using a mortgage loan that requires 'qualification'.  This is a classic case of a asset pushed way past it's fundamental valuation and suddenly there is nobody to which to sell the bag.

1)  Sacramento CA Feb house sales the lowest in 6-years, down 18% YoY. Supply up 88% YoY meaning demand destruction can't be due to lack of supply.

This is a serious house price / demand stalemate that promotes lower house prices.

2)  Sacto Pending Sales are running at levels that almost ensurelower YoY prices in July.

And this is with the best weather in a generation.

Position: None

Goldman Lowers GDP Forecast

  • Here are the firm's notes.

As noted below Goldman Sachs is reducing its first-quarter 2014 real GDP forecast from 1.7% to 1.5% after reviewing the February retail sales report:

1. February retail sales rose 0.3% (vs. consensus +0.2%). Core retail sales―used by the Commerce Department to estimate the personal consumption expenditures (PCE) component of the GDP report―also rose 0.3% (vs. consensus +0.2%). By category, the strongest gains occurred in sporting goods (+2.5%) and non-store retailers (+1.2%), both bouncing back from weakness in January. (Non-store retailers mainly represent online shopping.) However, back-revisions to core retail sales in January (-0.3pp to -0.6%) and December (-0.2pp to +0.1%) were significant and widespread across categories, suggesting a trajectory of consumer spending in Q1 that was weaker than we anticipated.

2. Initial claims for jobless benefits fell to 315k in the week ended March 8 (vs. consensus 330k), a decline from the prior week's 324k. The four-week moving average of initial claims fell to 331k. Continuing claims dropped to 2,855k in the week ended March 1 (vs. consensus 2,903k), from a downwardly-revised 2,903k in the previous week. The Labor Department stated that no states estimated claims, and it did not note any weather-related distortions. That said, we hesitate to read too much into the report given the recent volatility.

3. Import prices rose 0.9% in February (vs. consensus +0.5%). Petroleum import prices rose 4.4% in February, autos and consumer goods prices ex-autos were both flat on the month, and capital goods prices fell 0.2%. Over the past year, overall import prices have declined 1.1% and ex-fuel prices have fallen 0.6%, suggesting no appreciable inflationary impulse from the foreign sector. By locality, import prices from the Middle East fell most over the past year (-4.7%), reflecting lower oil prices, while import prices from Japan fell 3.2%, reflecting a stronger U.S. dollar against the yen.

4. We reduced our Q1 GDP tracking estimate by two-tenths to 1.5%.

Position: None

Candy Apple

  • The shares continue to be sweet to me.

Apple (AAPL) is continuing to work.

I am staying long.

Position: Long AAPL

How Short?

  • I am now at 20% net short.
Position: None

Added to GM Long

  • At $34.70.

I added to my General Motors (GM) long at $34.70 this morning.

Position: Long GM

S's Over N's

  • S&P 500 is outperforming Nasdaq.

Nasdaq is slipping abit in the early going, with Amazon (AMZN) the only one of the Five Horsemen of the Nasdaq differentiating itself to the upside.

Position: Short SPY and QQQ

Added to Index Shorts

  • A delicate balance.

Over the past few days I have inititated a long in Bon-Ton Stores (BONT) and added to longs in General Motors (GM) and Citigroup (C).

On the other side of the ledger, I have added to my index shorts in SPDR S&P 500 ETF (SPY), PowerShares QQQ (QQQ) and iShares Russell 2000 ETF (IWM).

Position: Long BONT, GM and C; short SPY, IWM and QQQ

Grant's Take on the Fed

  • Here is his ursine view.

The ursine Mark Grant weighs in this morning:

In the last days of 2013 all thirteen of the lead banks called for higher interest rates as we headed into the New Year. All thirteen banks were wrong. We have had lower rates in Treasuries and we have seen a marked amount of compression in investment grade securities against their benchmarks. It is particularly pronounced in the short end of the curve and here we even find some credits that are trading through Treasuries. Therefore it should be asked, "Why was everyone wrong?"

In my opinion, like the buoyancy in the equity markets, it all rests upon one thing and that is the money minted by the Fed. The focus continues to be on "the Taper" but the larger reality is that all of the money that the Fed has created is still there floating about in the markets and must be put to use somewhere. Gossip may be idle but money is not!

Further, the Fed is still pouring a vast amount of money out every month and while it may not be in the same size as before it is still flowing. The spigot is still open. With maturities, calls and redemptions the Fed, this year, will have poured about $240-$255 billion into the markets by the end of this month. Interestingly enough, according to Thompson Reuters, companies have issued about $236.6 billion in debt so far this year which is a zero sum gain even though corporate borrowing in 2014 is a record amount. Therefore it can be said, with some justification, that the Fed has sopped up what corporate America has borrowed. Then when we take note of the $2 trillion that the Fed has previously released and which is still sloshing about in the various markets it should be no surprise that interest rates have not risen. The money is out there working and equities are underpinned and debt is being easily absorbed.

According to the latest data released by the Fed nonfinancial debt has ballooned to $13.6 trillion with 7.1% of that coming in the last quarter. Seen from a different angle this means that the Fed's money supports about 14% of all U.S. nonfinancial debt. Then there is the leverage utilized in both the debt and equity markets and here you will find another 20-25% of buying power. There is also another type of leverage which is going on which is corporate America buying back their shares to increase the value of their share prices. The number here is about $1 trillion in buybacks with $115 billion happening since mid-December according to data supplied by TrimTabs.

Corporate cash, according to the Fed's data, hit a record $1.98 trillion in the last quarter and is also supporting a good amount of the front end in the debt markets. The money must be put to work somewhere and the cycle of share buybacks seems to be slowing as we are just off record levels in many of the equity markets.

Missed the Point

It is the money created by the Fed which has caused, in my opinion, the lead banks and many in the financial press to have lost their way in considering the markets. We can have a slowdown in China or Russia trying to annex the Crimea or any number of disquieting events but until and unless we get some quite severe dislocating event the equity markets will continue to be supported and yields will continue to fall. The answer is simple: it is the money created by the Fed which is bigger in its impact than any other event or events. Hugely bigger!

"The spice must flow...He who controls the spice controls the universe."

-- Dune, Frank Herbert

In the "Hitchhiker's Guide to the Galaxy" Douglas Adams' Deep Thought super computer divined that the ultimate answer to "Life, the Universe and Everything was---42. 

Mark Grant, calculating in a far shorter time frame and on a much easier question, has divined that the ultimate answer to why the markets are where they are is---The Fed.                                                                                                     

Position: None

Recommended Reading

  • Run, don't walk, to read Jessica Winch's article in The Telegraph on the mobile payments industry.

Jessica Winch wrote a good article on the the mobile payment industry in The Telegraph (London). 

Position: None

Parsing the Data

  • Namely, retail sales, jobless claims and import prices.

February retail sales (+0.3%) beat expectations (+0.2%), but the prior month was revised by a greater amount.

Taken together, the data were softer.

Initial jobless claims totaled 315,000, 15,000 below the estimate and down from 324,000 last week. It's the lowest read since November and brings the four-week average to 331,000 from 337,000. Continuing claims fell to the lowest since December.

Bottom line: The figure is a definite positive for the labor market in that it has fallen to the lower end of the six-month range and is below the 12-month average of 339,000. Hopefully, this also points to a rebound in the upcoming pace of hirings off the tough winter for many that may have frozen (no pun intended) hiring intentions. If the case, not only will we get a Fed taper next week but it will be followed by another in April that will basically by that time cut the rate of asset purchases in half since December.

In the first of three important inflation figures out in coming days, February import prices rose 0.9% month over month, well above the estimate of up 0.5% and January was revised up to a gain of 0.4% from the initial print of up 0.1%. This gain is the greatest in a year and was led by a jump in petroleum prices. Prices ex-food/fuels were flat month over month and remain down 1.4% year over year. The PPI is out tomorrow and CPI next week, and we'll watch for what impact the recent rise in the CRB index has on the data, if any.

Position: None

Nasdaq Buoyed by Amazon

  • Shares are up $8 on a Prime price increase.

Amazon (AMZN) is up $8 on an increase in the fees for Prime service.

Nasdaq buoyed.

Position: Short QQQ

The Gospel According to Peter Boockvar

  • Here are his morning musings.

The gospel according to Peter Boockvar:

There was another round of softer than expected economic data out of China overnight. Combining the January/February timeframe to remove the new year holiday distortion, fixed asset investment, retail sales and industrial production all rose less than forecasted. Retail sales rose at the slowest pace since 2005, IP was up at a level last seen in 2009 and FAI was higher by the slowest pace since 2002. This data was released during trading hours and the market response was mixed as the Shanghai index rebounded 1% off the lowest since January (led by banks on a report that they may be allowed to issue preferred stock to help capital ratios) but the Hang Seng index fell .7% and the Hang Seng China index was lower by .4% after being up almost 2% intraday before the data release and falling to the weakest level since July. Copper is trading down slightly but back to July '10 lows again in the generic contract. Other Asian markets were mixed in response. The Nikkei saw no bounce after its 2.6% drop yesterday even after a better than expected machinery order number for January. The Australian ASX rose .5% after a stronger than expected jobs report where 47.3k jobs were created in February vs the estimate of up 15k. It's the biggest one month gain since March '12.

The euro continues its rip higher vs the US$ and is fast approaching 1.40, a level not seen since October 2011 and most European stock markets are seeing a feeble bounce after yesterday's weakness as a result. A recovering economy in the region, albeit slowly, a current account surplus, a central bank that is not printing money and a banking system that continues to pay back LTRO money are all the main factors for the strength. On the possibility of the ECB responding to the strong euro, ECB member Weidmann of the inflation obsessive Bundesbank said the euro "is not a target of monetary policy, but can affect the inflation outlook." On the inflation outlook, he's not worried on the downside as he said 2/3 of the disinflationary trend is due to energy.

In the US, February retail sales will be released today but will have weather as an excuse. We also see weekly claims, import prices and business inventories. The import price figure comes ahead of PPI tomorrow and CPI next week.

Position: None

Don't Worry, Be Happy

  • In a China kind of way.

China's economy continues to exhibit signs of weakness, and equity investors continue to ignore the region's slowdown.

Last night factory output, retail sales and capital investment disappointed relative to expectations:

  • Industrial production expanded by 8.6% as contrasted with consensus for a 9.5% expansion and the prior month of up 9.7%.
  • Retail sales grew at the slowest pace in three years, up 11.8% in January and February (consensus was up 13.5%).
  • Fixed-asset investment was up 17.9% compared to up 19.4% expectations.

This follows a much worse January-February export trade data release last week.

Curiously, or complacently, the markets have begun to ignore China's poor data.

As an example, JPMorgan writes this morning:

China's eco data fell short (once again) but stocks are taking the news in stride (equities globally have adopted a much more reasoned and balanced view towards China than some of the media reporting would suggest).  Japan ended in the red but Chinese stocks rallied (the SHCOMP actually ended the day up 1.07%).  In Europe stocks started the day w/small gains (the SXPP basic resource index, which is very China sensitive, is slightly in the green and actually commodity-linked stocks traded very well globally, esp. in Australia).  Other than China's eco numbers (retail sales, IP, and FAI) the overnight session was a quiet one as far as "macro" news is concerned.

In the interest of balance, here is the analysis of China from the "dark side." 

Premier Li says not to worry as he delivered remarks this morning and reiterated that China will keep growth at around 7.5% and he also downplayed recent credit market worries. (I wonder what his view is on Ukraine!)

Dont worry, be happy -- in a China kind of way.

I am raising my short exposure on yesterday's (and this morning's) reversal.

Position: None

Shorting the Indices

  • SPY at $187.80 and QQQ at $90.85 in premarket trading.

U.S. futures are ramping for no apparent reason.

I am shorting SPDR S&P 500 ETF (SPY) at $187.80 and PowerShares QQQ (QQQ) at $90.85 to raise my net short exposure back to 15% in premarket trading.

Position: Short SPY and QQQ
Doug Kass - Watchlist (Longs)
ContributorSymbolInitial DateReturn
Doug KassVKTX4/2/24-35.69%
Doug KassOXY12/6/23-14.96%
Doug KassCVX12/6/23+10.20%
Doug KassXOM12/6/23+12.04%
Doug KassMSOS11/1/23-28.97%
Doug KassJOE9/19/23-16.61%
Doug KassOXY9/19/23-26.35%
Doug KassELAN3/22/23+33.30%
Doug KassVTV10/20/20+63.03%
Doug KassVBR10/20/20+76.55%