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DAILY DIARY

Doug Kass

Back to the Meeting

  • I have to go back into a meeting with the same company I was researching this morning.

If I don't get back by the close, thanks for reading my Diary and enjoy your evening.

Position: None

Baxter, You Are My Little Gentleman!

  • Baxter (BAX) acts like a dog with fleas.

I added today.

Position: Long BAX

Memo to the Business Media

  • On HFT.
  1. Peak HFT was 2008.
  2. Despite the reduced HFT activity/profits, cheating a little in high-speed scalping and frontrunning is cheating, period.
  3. A lot of the media criticism of Michael Lewis isn't about defending a corrupt system, it's about knocking a highly successful writer because he/she may look smart by doing so.
  4. There is also an element of jealousy mixed in to the criticism in the media of Lewis.
Position: None

Recommended Reading

Position: None

Genuine Voodoo

  • My contention is that there will be at least one and probably several deep oversolds this year.

I was watching "Fast Money Halftime" today and I believe that it was Downtown Josh Brown who commented about the strength of the breadth of the advance recently.

His observation got me to thinking. 

In the chart of the S&P Index below I chronicle the percentage of stocks trading above their 30-week moving average (in green).

I have circled the off-cycle, midterm election years. Note that each one has gotten a solid oversold (the percentage of stocks falling below at least 40% -- that's the yellow line) in either the second and third quarter and usually it's a fairly sizable drop.

While it is likely going to be a buying opportunity, I am still expecting to see a selloff into a EP over-condition.

Position: None

IBB Drop

  • In possible support of my dead-cat bounce thesis expressed earlier, the iShares Nasdaq Biotech (IBB) is now more than $6 below its intraday high.
Position: None

Whittling Down Apple

  • Taking off some of the position.

Now that Apple (AAPL) is being bundled in the value camp and has become something of a beneficiary of that rotation.

I am taking off some of my long position at $541.50.

The shares, still on my Best Ideas list, are up 10% since early February.

I am sticking with a portion of my investment position, but whittling it down in size.

Position: Long AAPL

Call It What It Is

  • Memo to guy on "Fast Money Halftime."

Call it what it is ... High-speed scalping and frontrunning.

Position: None

Recommended Viewing

  • Michael Lewis makes the rounds.

"I don't regard high-frequency traders as villains ... They are wired that way. I think the system is screwed up to exploit opportunities, exploit glitches in the system. They're not wired to say that this is moral or immoral. They aren't wired to say is this good for the world. They don't think that way." -- Michael Lewis

Michael Lewis (author of "Flash Boys") is making the rounds.

Here is his Bloomberg appearance.   

Position: None

Cashin's Midday Musings

  • Midday musings from Sir Arthur Cashin.

Unlike Tuesday, today's key indices move in virtual lockstep. Traders key in on two things so far.  First, is yield on the 10 year hovering around 2.8%, which dragged a bit on the rally.

The second is the Nasdaq Comp.  It was a standout performer yesterday but run of the mill today.  If Nasdaq goes negative, could pull on rest of the market, fearing the April resurrection was a one day event.

Run rate projection in half hour.

Position: None

Meeting on a Possible Home Run

  • I have my final meeting regarding one of the three home-run stocks I am considering.

Back at noon.

Position: None

Shorting Life

  • I am looking for a re-entry point on life insurance shorts MetLife (MET) and Lincoln National (LNC).
Position: None

Still Likin' MONI

  • I remain a $1.15 buyer of Monitise (MONI.L).
Position: Long MONI.L

More Short

  • With some additional shorts this morning I have moved to 15% net short.

Being short is not for everyone.

But, I am a short person

Position: None

Beta Bounces

  • Hi-octane/beta continues to bounce this morning.

I continue to believe the rally is of the dead-cat kind and will be short-lived. 

Strength is conspicuous in Priceline.com (PCLN), Tesla (TSLA) and Amazon.com (AMZN).

Little follow through from AAPL's $5 gain from yesterday.

Position: Long AAPL, short QQQ

Monsanto Beats, Agrium Misses

  • In the fertilizer complex, Monsanto (MON) beats and reaffirms guidance, while Agrium (AGU) is below consensus.

Potash (POT) still feeling the effect of a Cantor downgrade yesterday.

I am a buyer $33 or lower in POT.

long pot

Position: Long POT

Added TZA

  • I added to a small Direxion Daily Small Cap 3x Bear (TZA) at $14.93.
Position: Long TZA

Bidding for 3 Stocks

  • Bidding for these three.

I am bidding for more Bon-Ton Stores (BONT) at $10.80, Baxter International (BAX) at $73.25 and GM (GM) at $34.50.

Position: Long BONT, BAX, GM

At 10% Net Short

  • I start the day 10% net short.

Not taking into account my short bond exposure.

Position: Long TBF, short SPY, TLT

Goldman on Today's Data

  • Goldman Sachs on the jobs data.

ADP employment increased 191k in March (vs. consensus 195k). The distribution of job gains by industry was similar to that seen in recent months, although relative to the February initial print, growth in professional and business service jobs increased by 20k to 53k. Construction employment added a solid 20k. February ADP employment growth was revised up by 39k to 178k, matching the official private payroll figure of 162k a bit more closely. ADP has yet to prove itself as a reliable predictor of nonfarm payroll job growth, following methodological revisions in 2012.

Position: None

10-Year on a Mission

  • Looks like the 10-year note has a mission to breach 2.80% on the upside.
Position: Long TBF, short TLT

Boockvar on the Data

  • The LIndsey Group's Peter Boockvar morning commentary.

ADP said 191k private sector jobs were created in March, slightly below the estimate of 195k. February was revised up to 178k from 139k but puts it more in line with what the government said last month with its figure of 162k in the private sector. Of the 191k, 28k came from the goods producing sector of which 20k was from construction vs an average of 16k in the 3 winter filled months. Manufacturers hired a net 5k, unchanged with last month. Services added 164k jobs vs 153k in February with the breakdown among small, medium and large businesses about evenly spread. Bottom line, 191k was certainly a rebound from the past two months where job growth averaged 150k but 191k is little changed from the 2013 average of 187k and I think people were hoping for a bigger bounce back. Friday's payroll consensus is 200k for both the headline and in the private sector and the whisper is closer to 225k+ on hopes for normalization. We'll see what today's ADP number does to temper that whisper but anything around 200k will still be enough for another Fed taper at month end, taking it down by half since December.

With the average US 30 yr mortgage rate holding at the highest level since mid January at 4.56%, refi applications fell 2.9% w/o/w to the lowest since November '08 not including the seasonal drop at this past year end. Purchases though, responding to Spring time and the busier season (although is seasonally adjusted), rose by .9% to a 2 month high. As stated plenty of times, with private equity home purchases slowing down, the 1st time home buyer needs to come back in a bigger way.

According to the latest II data, Bulls fell to 50.5 from 54.7 but again most went into the Correction camp as they rose to 30.9 from 27.8. Bears did rise about 1 pt to 18.6, the highest since mid October but below 20 is still reflective of bears in hiding.

Ahead of tomorrow's ECB meeting, PPI in the EU fell 1.7% y/o/y in March, a bit more than the estimate of a drop of 1.6% with most of it due to a 4.4% fall in energy prices. Prices were down .5% ex energy. The ECB though will focus much more on the CPI measure and we'll see if they respond to the volatile influence of energy price movements or sit tight. Of the 57 people surveyed by Bloomberg, just 3 expect the ECB to change policy and the euro trades like it with it still near multi yr highs. With bond yields in Spain and Italy, to name a few, plumbing the lowest levels since the mid 2000's and the Greek 10 yr yield near 6%, the cost of money is not the barrier to European growth, structural reform and a stronger banking system is. On the possibility of a negative deposit rate to 'punish' banks for keeping funds at the ECB, European banks may just tack on the fee to the cost of a loan, thus providing no benefit. Bottom line, I believe the ECB should just sit tight, save what little bullets they have left and let the European recovery play out. Spanish jobless claims fell by 16.6k in March, more than the estimate of 14.5k. UK construction held steady near recent highs but was a touch below the estimate.

Position: None

Turning over Stones

  • Sir Mark Grant on opportunities.

This morning's commentary by Mark Grant talks about "A Decided Lack of Opportunities."

"Coming out of your comfort zone is tough in the beginning, chaotic in the middle, and awesome in the end...because in the end, it shows you a whole new world!!

Make an attempt..."

                    -Manoj Arora

According to data supplied by ValuBond the spread differential between a U.S. Treasury 10 year and a AAA corporate is a scant 37 bps. For an A rated corporate the spread is but 93 bps. These are telling numbers as we all wander around and look for yield and any advantage that may be found. The markets shuffle from one focus to the next but with the Fed still pumping money into the system and the taming of each momentary crisis the lack of decent places to put money is readily apparent. Equities continue to rise, risk assets continue to compress and beating one's peers becomes a matter of a hair's breadth.

When things become this way and you wish to win in the Great Game and not just play in it you have to begin to turn over various rocks and stones to find any sort of real value. To be successful in money management no one strategy works forever and the best and the brightest understand that you have to re-invent yourself continuously if you wish to remain on top of the heap. Lately I have had any number of conversations with some very large money managers who are searching for value; absolute value, relative value and intrinsic value. Any sort of value. The common tone may be summed up in these words, "Where did they go?"

Time to get out your spades and do some work. The first rock that can be turned over are the bonds of the gold miners. Many are investment grade and the ten year and the long maturities show some very good potential. Gold up or down or sideways we have thousands of years of history where gold is relevant for jewelry, economic calamities, inflation, speculation and a substitute for currencies. Gold at the current price or gold at $2,000 an ounce and it will still be mined. If gold rises in price at some point then the bonds will likely compress against Treasuries but these bonds are out of favor now and are, in my opinion, one of the best bets in the bond markets. Here is a stone unturned. Turn it over and take advantage of a good play now.

I have long recommended taxable Municipal bonds as a better play than corporates. Some of you have listened and have poked around. I still like this strategy though it is getting difficult to find good opportunities as many offerings have been gobbled up. You have to sift through the rubble now but there are still some gems that can be found. If you haven't embarked upon exploring this area of the bond markets I suggest you take some time and do so. The yields, in general, in my view, will make your time well spent. Pay close attention to the A rated and BAA rated bonds as they still, in many cases, have much better yields than corresponding corporates or mortgage backed bonds.

For those of you with a higher risk profile I would look at taxable hospital and airport bonds. Yields of over 6.00%+ and investment grade in many cases. These two classifications are almost always out of favor and I would stick to the larger projects but if you are scrambling for yield it can be found here. Also, in my opinion, the reward is much greater than the risk in many of these credits and they are often overlooked by the more vanilla among you who turn up their noses at the mention of either sector. Here is another stone worth turning over.

The difference between stumbling blocks and stepping stones is how you use them.

Position: None

Recommended Reading

  • HBR on Amazon.com (AMZN).

Here is an interesting article on Amazon from this morning's Harvard Business Review (online).

Position: None

Piper on Apple

  • From The Street of Dreams

For more than a month, Apple (AAPL) has been on my Best Ideas list and the shares are up 8% since then.

As Piper's analyst looks over the balance of the year, he likes Apples prospects and reiterates his Buy this morning.

We remain buyers of AAPL ahead of new products in the back half of 2014. The reasons for our optimism are two fold. First, given the low expectations for the iPhone 6 and any potential new products, we believe the worst case is that the stock doesn't move after the announcements and the best case is that the products are better than expected and the stock rallies. Second, we see shares of AAPL as defensible in the event of a market down turn given the company's balance sheet and likelihood of an increased dividend and/or share repurchase on the March earnings report (April 23rd). Aside from the psychology around new products, we continue to note that June Street revenue expectations continue to appear too high. The Street is currently looking for 10% y/y growth in Jun-14 vs. our 5%; however, we believe June will be largely ignored ahead of the updates in 2H 2014

  • Look For Mar-14 Toward High End Of Street. As a recap, Apple guided Mar-14 revenue to $42-44 billion, while the Street expects $43.5 billion. In the four quarters since Apple began giving its new guidance ranges starting with the Mar-13 quarter, the company has posted revenue ahead of the high-end of guidance twice and revenue slightly below the high-end of guidance twice. We expect the trend of reporting toward the high-end will continue in the Mar-14 quarter and are comfortable with Street thinking (in-line with our estimates).
  • Expect Modest Increase To Share Repurchase & Dividend With The March Earnings Report. Apple will report March quarter earnings on Wednesday, April 23rd. We expect, along with most investors, that at that time Apple will modestly increase its share repurchase and dividend. We believe this increase is mostly priced into shares given this is in line with current buy side expectations.
  • Investors Largely Believe Product Cycle Priced Into Shares/Remain Predominantly Underweight. Our meetings with investors over the past month suggested general skepticism that Apple's product cycle will have a meaningful impact on shares of AAPL. The logic is the iPhone 6 will be incremental and the new product categories will be less impactful than previous categories (iPhone/iPad). Given this widely held belief, we think that buy side expectations for the impact of iPhone 6 and new product categories are relatively low, suggesting upside to shares if the products ultimately are more meaningful. Worst case it seems that an in-line product cycle would mean that shares do nothing.
Position: Long AAPL

Opposite Mae West

  • Right on one, wrong on the other.

On stocks and bonds (bearish) I have recently written that I am at the polar opposite of Mae West, who once said "I only like two types of men -- domestic and imported."

I was right on one (short bonds) and wrong on the other (cautious on stocks) yesterday!

Position: Long TBF, short SPY

Kill the Quants

  • The narrative of the argument seems to have moved away from the substance.

"It seems to me the best way to explain high-frequency trading is that it is a business model that has nothing to do with investing or brokering but rather it has to do with professional scalping or skimming.

The high-frequency-trading community accomplishes this by having a time advantage and a knowledge of orders beyond that known by other participants in the general market.

By definition, that is wrong -- at least to me.

The very fact that a firm planning to go public has had but one day of losses in over 1,000 trading days speaks volumes that it is crooked

So, kill the quants before they kill us. "

 - Kill The Quants April 1, 2014

The  narrative regarding the unfair advantage and skimming (by HFT) seems to have moved to the word "rigged" - used by author Michael Lewis to describe the preferred competitive position of high frequency traders - and away from the substance of the arguments. 

Here was the spirited CNBC conversation from yesterday.

To me, those that support the modus operandi of HFT are deflecting the debate away from the real issue as the definition of "rigged" (according to the Urban Dictionary) seems to conform to an unfair advantage and does not seem, to this observer, to be hyperbolic. 

Here is the Urban Dictionary's definition of "rigged":

rigged

1. The word rigged is used to describe situations where unfair advantages are given to one side of a conflict.

2. Describes the side of the a conflict that holds an unfair advantage.

Respectfully, substituting the word "rigged" for "broken," as suggested by my buddy/pal/friend CNBC's Bob Pisani,  would not have changed the essence of the issue: a group of traders are cheating and have an unfair advantage.

Moreover the historical observance of the marked reduction in trading spreads being more beneficial to investors (having dropped from eights or quarters to pennies) seems to be a rationalization for skimming and is not relevant to the argument either. (There are many other reasons for the collapse in trading costs away from the influence of HFT.)

Finally it should be emphasized that the subject of quants is an old one and most in the business have been  aware of the argument that the playing field is not level.  The general observations made in Michael Lewis' book are not new. He just articulates it in written word better than most .

Here are two articles I have written about the subject over the last few years that lay out my views on the subject.

Kill the quants before they kill us.

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%