Following the unexpected Pelosi/Schumer deal with the president establishing a three-month extension of the debt ceiling -- market activity was generally subdued (also unexpected in light of the agreement).
But under the surface I am seeing a growing number of "head and shoulder" charts (yes you heard me right!) as a number of popular longs get schmeissed under the weight of weakening fundamentals.
Coming to mind are Starbucks (SBUX) , Comcast (CMCSA) , Disney (DIS) , General Electric (GE) , Goldman Sachs (GS) , Morgan Stanley (MS) , Leggett and Platt (LEG) , Fox (FOXA) , Viacom (VIAB) , Liberty Global (LILA) , Newell Brands (NWL) , Navient (NAVI) , DISH Network (DISH) and many others.
I started the day quoting comedian and movie maker Woody Allen.
I will end the day quoting Drs Venkman, Stantz and Spengler. Also, the Mayor and Winston Zeddemore.
Though Ghostbusters' Dr. Venkman, in a hyperbolic tone, suggested "mass hysteria" may lie ahead for New York City -- thus far there is no hysteria in the equity markets, just an eery calm in the face of political mayhem and uncertainty coupled with a slew of high profile profit warnings.
However, it remains my concern that the dual pillars of a "flight to safety" - gold and bonds - have been spectacular gainers all this week and, especially today.
So, while there is no mass hysteria yet (in the markets), perhaps an unsettled market backdrop seems increasingly possible.
As always, evaluate reward vs risk (upside vs downside) in your equity holdings. We can see clearly what has happened to consensus longs like Disney and Starbucks and many others in the past few weeks and months. More company and sector potholes may lie ahead.
Again, this is no time for hyperbole or hysteria, but an elevated cash position may make sense in order to take advantage of possible values that could develop over the balance of the year.
In the past I have ridiculed the idea that Disney (DIS) (-$4) may acquire Twitter (TWTR) .
Given the expanding and accelerating challenges at ESPN I am now not as certain in my belief.
Indeed, Twitter could now be considered as an outstanding complement to Disney's ESPN division.
Based on today's nice gain of +$0.60 for Twitter, the markets may be of the view that the probability is rising for a Disney/Twitter hookup in the future.
Though I didn't create Long TWTR/Short DIS as a pairs trade -- it certainly is working out well today!
"The medium is the message" is a phrase coined by Marshall McLuhan meaning that the form of a medium embeds itself in any message it would transmit or convey, creating a symbiotic relationship by which the medium influences how the message is perceived.
In the stock market, today, the media is the message, as Comcast (CMCSA) now breaks in with disappointing subscriber numbers (the shares are -6%). This follows the aforementioned Disney (DIS) warning.
Meanwhile the Wall Street Journal has just reported that the new Apple (AAPL) iPhone is being plagued by production glitches -- Apple's shares are falling in concert with the news. (It is interesting to note that the media's talking heads are dismissive of this news. While they might be correct, many of the same commentators have been enthralled with Disney over the last two years and many of them work for Comcast.)
As I have stated repeatedly, today I am growing more bearish (and given the momentum loss in key sectors and stocks I wouldn't be surprised if my pal RevShark, who likes to see the weak action before he acts, might chime in soon (at least I hope so!)
Here are my recent comments on this short investment:
For nearly two years I have been negative on Walt Disney Co. (DIS) based on the notion that the competitive landscape was shifting, thus serving to reduce the company's projected least-squared earnings-per-share growth rate from about 18% (actual) to under 10% (estimated). By contrast, analysts on the sell side still were holding on to the notion that 13% to 14% growth was achievable.
Disney as a short was my "Trade of the Week" in early June, when I outlined (again) my negative thesis, "Let it Go." The shares were placed on my Best Ideas List as a short in late 2015 at over $116. (I had covered most of my DIS in the low $90s.)
Disney's quarter was muddled by strategic issues, or vice versa. The shares were down by $4 to about $103 in after-hours trading.
Most noteworthy, DIS is buying BAMTech, which powers streaming for HBO, Major League Baseball, the National Hockey League and others, and is developing an OTT (over-the-top) content service to rival Netflix Inc. (NFLX) and CBS Corp. (CBS) . The former activity will cost close to $1.6 billion and will be slightly dilutive. DIS also is repatriating its content from Netflix beginning in 2019. The acquisition of BAMTech's "industrial grade technology" should prove problematic for NFLX, especially at the current valuation. (NFLX traded down about $6.50 in the premarket.)
Third-quarter revenue at Disney was flat. Ebitda declined 7% -- not a horrible number, and actually better than it looked due to an increase in NBA fees on the cable and broadcast networks. There was continued ESPN cord cutting, a factor that I have argued will hurt valuation. However, parks were strong and another "Star Wars" movie is coming. The decision to go OTT reflects brand power, pure and simple.
Disney trades at around 10 times 12-month trailing ebitda, possibly exposing the shares to a further decline.
And here is an expression of my more existential issues with Disney and why I have suggested to "Let It Go."
Disney remains among my largest individual shorts.
Lots of speculation on the floor about the sharp drop in 10 year yields. Some claim it is the result of a massive short squeeze. Others point to rise in gold and claim 10 year is just part of a haven play. In any case, they look like they're closing the gap with bunds.
Watch for a possible retest of today's post-opening lows in equities.
As I did a week ago (and given my overall negative market view), I plan to maintain a small to medium sized core investment long in this name, with the thought of selling the recent buys back where I did a week or so ago (at $230-$231).
Tactically, if I was more constructive on the markets, like some others, I wouldn't be selling AGN -- but I am not.
Meanwhile the profits in AGN, my most favored large cap long for 2017 are adding up -- with my dip buys and rally sales throughout this year.
Steve Cortes' chart (below) exhibits the breakdown in financial stocks.
Financial stocks -- Morgan Stanley (MS) , Goldman Sachs (GS) , Bank of America (BAC) , Citigroup (C) , JPMorgan Chase (JPM) , MetLife (MET) and Lincoln National (LNC) -- represent my largest sector short exposure by far. (I previously sold out my Hartford Financial Services Group (HIG) long at prices well above the current price; I plan to be a buyer under $50 a share.)
Position: Short GS, MS, BAC small, C small, JPM small, MET, LNC
A few weeks ago I wrote a column that compared Rev Shark's reactionary trading style to my anticipatory trading and investment strategy.
If action is a "tell" and price should be reacted to (according to RevShark's methodology), I want to call attention to action this week in the shares of bellwether Goldman Sachs (GS) .
I placed the very popular Goldman Sachs shares on my Best Ideas List as a short at $242 a share eight months ago. At the time the consensus was very positive on the shares.
In the market's schmeissing on Tuesday GS shares fell by $8 and rallied only by $1 on Wednesday.
This morning, against a slightly better market backdrop, GS shares are down by another $3 to around $215.80. The shares, stated simply, are breaking down.
While the decline in GS is a bit more exaggerated relative to the also-weak action in bank stocks this week, this sort of deep underperformance in a pivotal stock that typically anticipates a change in capital market activity and prices is another potentially quite negative tell.
Just as the bond market's strength could be an indicator of a slowdown in business and economic conditions relative to consensus expectations, the weak absolute and relative performance of GS shares should not be ignored.
At least I am not ignoring this short's weak action.
For these reasons and others, I am now adding a trading layer (short indices) to my core investment short position.
Position: Short GS, BAC small, C small, JPM small, TLT
In keeping with the trading -- and not a buy-and-hold -- strategy as contained in my opening missive below, about six weeks ago I published this column, "It's a Trading Sardine Market, Not an Eating One," which "bears" repeating:
"Into the eternal darkness, into fire and into ice."
---Dante Alighieri, "The Divine Comedy"
In his seminal book "Margin of Safety," hedge fund manager Seth Klarman tells an old story about the market craze in sardine trading. One day, the sardines disappear from their traditional habitat off the Monterey, California, shores, the commodity traders bid the price of sardines up, and prices soar. Then, along comes a buyer who decides that he wants to treat himself to an expensive meal and actually opens up a can of sardines and starts eating. He immediately gets ill and tells the seller that the sardines were no good. The seller quickly responds, "You don't understand. These are not eating sardines; they are trading sardines!"
Similar to Klarman's tale, today's market is a trading-sardine market, not an eating-sardine market.
The bull market is mature, as is the domestic economic cycle.
In the months ahead, much like Dante's "Divine Comedy," market participants are likely to be traveling alternatively through hell, purgatory and the paradise of heaven in the market without memory from day to day.
With quant-driven strategies' domination in a vacuum of disinterest on the part of the retail investor and a quiet fraternity of institutional investors (mutual and hedge funds), the market is growing increasingly illiquid and its foundation is weakening as fewer issues participate in the upturn
To paraphrase Dante Alighieri, the market may not have died but it might be losing its breath.
And with so many possible economic, political and market outcomes -- many of them potentially adverse -- the trading-sardine market is likely going to be with us for manymonths.
Bottom Line
Trade the sardines: Don't eat them!
Shorten time frames as it's time to hit for averages and not for power.
In terms of trading, more than ever, it's important to remember that there are two kinds of traders:
* Those who are humble.
* Those who are going to be humbled.
Remember those words because, despite the appearance of the many talking heads in the business media who regal in their consecutive winning trades (streaks) that would make Joe DiMaggio jealous, the stock market business (investing and trading) is likely to grow even more difficult and more narrow in the months ahead.
"To love is to suffer. To avoid suffering one must not love. But then one suffers from not loving. Therefore, to love is to suffer; not to love is to suffer; to suffer is to suffer. To be happy is to love. To be happy, then, is to suffer, but suffering makes one unhappy. Therefore, to be happy one must love or love to suffer or suffer from too much happiness."
As you all know by now, I have had eight questions that keep me up at night and form an important basis for my negative market outlook.
After this missive is completed I will have a total of 10 disturbing questions.
Last night I literally awoke at 3:21 a.m. with a new question that I recently have been asking myself and that I have added to my stable of market concerns:
* Was the world always this crazy, uncertain and unpredictable -- and we just didn't realize it because there was no social media?
This morning, for good measure, I will add another question (making it 10, in total). As you likely will recognize, this question has been on my mind for more than a year:
* With so many political, geopolitical, social, market and economic outcomes possible -- many of them adverse -- is it no longer safe, with most valuation metrics elevated into the 95% decile, to be a "buy and hold" investor? Do we all essentially need to become "traders"?
When I arose in the early morning today, I felt ever more insecure, remarkably like the state of Woody Allen throughout his movie career, as seen in this quote from the film genius: "Why are our (investment -- my emphasis) days numbered and not, say, lettered?"
For reference, here are the previous eight questions that I have been asking every morning:
* In a paperless and cloudy world, are investors and citizens as safe as the markets assume we are?
* In a flat, networked and interconnected world, is it even possible for America to be an "oasis of prosperity" and a driver or engine of global economic growth?
* With the G-8's geopolitical coordination at an all-time low, how slow and inept will the reaction be if the wheels do come off?
* Remember when the big argument in favor of President Trump was that he was a dealmaker who knew how to get things done? That was when he was doing real estate deals. Now he has to deal with 535 other politically partisan legislators in Congress -- on their own real estate turf.
* Does the administration have the depth of experience, understand the extent of the legwork and organization required for passing legislation or have a coherent idea or shared vision of what it wants to achieve and what problems it means to solve? (Reminding me of Woody Allen, who said, "Life doesn't imitate art, it imitates bad television.")
* If President Trump can't easily put through a health care package, what does that mean for more difficult regulatory reforms and his tax- and fiscal-policy agenda?
* President Trump took credit for the stock market's advance since his election victory. Will he take responsibility for a correction? And is it a slippery slope for an administration to use the S&P 500 as a barometer of success? And is a pro-business and anti-domestic programs (in education, the arts, etc.) agenda going to benefit those in the lower and middle class (largely his base) who have suffered the most over the last decade?
* With the specialist system now extinct, when ETFs sell, who will buy?
Bottom Line
"I am astounded by how many people who want to 'know' the universe when it's hard enough to find your way around Chinatown."
--Woody Allen
Today I remain astounded how so many are self-confident in a bullish view, given some of the issues and potential headwinds raised in this morning's column. But, let's not forget that many of those bulls took retail and institutional lemmings over the investing cliff in 2007-09 as they extrapolated economic and profit growth without looking to see how insecure the foundation of growth really was.
In the face of my 10 disquieting questions markets have moved higher and are within a percent or two of all-time highs as investors clearly are siding with the sentiment expressed a decade ago by former Citigroup CEO Chuck Prince, who said in a remarkably poorly timed July 2007 Financial Times interview, "When the music stops in terms of liquidity, things will be complicated. But as long as the music is playing, you've got to get up and dance. We're still dancing."
"Then again, maybe some of us are just too eager to call this boom a bubble. Yesterday Moody's reported that global defaults of speculative-grade debt (a.k.a. junk) in the second quarter were at their lowest level since 1995. I would bet that default rate is about to start rising, but still: The world's big corporations are doing spectacularly well at the moment. Can you blame Chuck Prince for wanting to throw more money at them?"
During that same time frame, philosopher Woody Allen hypothesized -- using a different subject matter, but perhaps drawing a parallel between the markets and sex -- "Love is the answer, but while you are waiting for the answer, sex raises some pretty good questions."
So I guess we can say that we are in the midst of an extended eight-year bull market that is sexy and filled with a lot of love-making and capital gains.
However, as you all know I live with the notion, instilled by Grandma Koufax, that the Cossacks -- and investment headwinds -- are coming and I constantly am looking over my investing and trading shoulder.
I constantly remind readers that the only certainty I see is the lack of certainty.
As Bertrand Russell wrote, "The problem of the world is that fools and fanatics are always so certain of themselves and wiser people so full of doubts."
To me, markets, sectors and individual stocks ultimately should be evaluated on a reward vs. risk basis, gauging upside versus downside and not through a binary and often dogmatic buy-or-sell basis.
More Woody: "I'm not afraid of death (or a vicious bear market -- my emphasis); I just don't want to be there when it happens."
My pal Peter Boockvar, chief market analyst with The Lindsey Group, writes that the stage is dragging on:
Today of course is all about Mario Draghi but we don't expect any firm decisions on what QE will look like in 2018 just yet. Bloomberg news yesterday reported that "The Governing Council has been presented with documents outlining multiple scenarios for adjusting QE, according to euro area officials familiar with the matter...The documents don't identify a preferred scenario and aren't intended as formal policy proposals, the people said, stressing that a decision doesn't currently look likely before the Governing Council's Oct 26th meeting." I've spilled enough email ink on Draghi and the ECB this year and I'll now leave it to him at 8:30 estbefore I say more. The euro is teasing with $1.20 vs the US dollar in advance. The German 10 yr bund yield at .35% compares with .25% the day before Draghi woke people up in Sintra, Portugal back in June but is well off its closing high in the weeks that followed at .60%. Bund yields are still negative out 7 years. European bank stocks, while well off their mid 2016 lows, still hate negative interest rates as the Euro STOXX bank index is still 20% below its 2015 peak.
China's FX reserves rose for a 7th straight month to $3.092T which is the highest total since last October but was slightly below the estimate of $3.095T. Keep in mind however that much of the rise is due to valuation changes higher in the value of China's non US currencies and recent strength in the yuan rather than outright inflows back into China. We of course have also seen an institutional crackdown on outflows, particularly the high profile blowback against some big Chinese companies and their foreign appetite for acquisitions (see Anbang and HNA). While reserves were just a bit below expectations, the onshore yuan is rallying for the 14th day in the past 16 and the offshore yuan has seen only 1 down day in the past 16. Chinese stocks though did close red. The Shanghai comp is up 8% ytd while the H shares are higher by 18%.
After yesterday's data miss in Germany factory orders relative to the estimate, they whiffed again with its industrial production figure for July after a below forecast print in June. July IP was unchanged after a 1.1% drop in June. The estimate was up .4%. Maybe it's the stronger euro, maybe its seasonality. The Economic Ministry said "In the summer, manufacturing couldn't keep pace with the performance in the previous months. Indicators still suggest a continuation of the positive trend in manufacturing. But in light of orders, the pace of expansion will probably slow compared with the second half." I said it yesterday but will again, the economic data out of Europe has gotten more mixed over the past two months. Hopefully it's is just a temporary lull because growth this year is on track for the best in years. The print for Q2 was revised to 2.3% y/o/y today from the previous one of 2.2%. Go back to Q1 2011 to see something higher.
As expected, the Brazilian central bank cut its Selic rate by 100 bps to 8.25%. It now sits at the lowest level since July 2013 as a sharp drop in inflation has given them a lot of flexibility. This rate peaked at 14.25% in 2015. On the reform side this year Michel Temer has successfully passed two of the important three key legislative goals when he took office. The first one was limiting government spending to the rate of inflation in order to slow the excessive rises in debts and deficits. Labor market reform also passed and this is a major step in liberalizing the Brazilian labor market. Within the bill, companies would be able to more freely negotiate with employees directly instead of thru collective bargaining. Also, union members would not be forced to pay union dues which instead would be voluntary. Having the ability to more freely fire an employee for cause without major repercussions makes companies more inclined to hire which results in a net improvement in job creation. The third key piece of needed change is reform to the pension system by extending out retirement ages and signs are that Temer will be able to pass this too. I remain bullish on Brazilian stocks, bonds and the Real.
