Over on CNBC there is a conversation about ESPN's continuing subscriber losses.
As I have written over the last two years (and partially my rationale for my investment short in Disney (DIS) ) -- here are some of my additional concerns about ESPN that lie even beyond the cord cutting issues:
* The American consumer is now over-saturated with sports.
* Professional sports ratings are down for the third year in a row.
* Consumers are no longer, with consistency, watching entire sports events. More and more, with less time available in the day, consumers are instead watching highlights on ESPN.com and elsewhere, rather than the complete games. (Participation in the sport of golf -- which takes over four hours for a round -- has faced the same problem for a decade now.)
* It seems as if every commentator on ESPN is vying to become the next Chris Berman. (There was only one Berman). To me that copycat approach is annoying -- viewers want to watch a game and not their commentary in which moderators are trying to outdo each other. As Steve Young once said, "Sports on TV is not calculus. It is authenticity. That's what you got from Chris."
* There is a high implied price for the ESPN portion of the cable/satellite TV bundle relative to the reduced need for the service.
Disney's shares have continued to perform poorly over the last few months.
Dougie, I'm stuck in NY (an hour outside of NYC) near Newburg and I was looking for something to do to kill time. Turns out, there's a "Harness Racing Museum & Hall of Fame" down the road in Goshen. Have you been there? Thought of you right away. Probably will drive by West Point as well.
Pictures of many of my horses are in the museum -- and here is a picture of me driving one of my horses at the nearby Historic Track in Goshen, New York! I believe I broke a Stakes Record in this race!!
Though bulls may may be even more emboldened today, I wouldn't make very many conclusions from today's stock price action as the large option expiration this afternoon has created a lot of noise. Next week is when things matter as QT starts. With machines, algos and ETFs, Mr. Market is less of a discounting mechanism and, if history is a guide, next week market participants might care about QT.
The 10-year U.S. note yield is lower by 1 basis point, to 2.19%, and iShares 20+ Year Treasury Bond ETF (TLT) is up again, approaching $127.
Again, a slightly negative market tell.
To repeat what I wrote yesterday, I expect the 10-year to yield in a range of 2.1% to 2.4% over the balance of the year. This is not likely a friendly number for financial stocks.
I added to my already large SPDR S&P 500 (SPY) short at $248.82 this morning (it is ex-dividend today).
I have no dog in the fight but for those involved with Equifax (EFX) , Sen. Elizabeth Warren has introduced an Equifax bill and is launching an industry probe.
As mentioned in the previous post, industrial production was far weaker than expected; a portion of that (though small) was related to Hurricane Harvey.
Here is an explanation from The Lindsey Group's Peter Boockvar:
Industrial production in August fell a large .9% m/o/m vs the estimate of up .1%. A key reason for this was the .3% decline in manufacturing vs the expected .3% rise. The impact of hurricane Harvey was all over this as we saw declines in petro refining, organic chemicals and plastics materials and resins according to the Fed. Mining fell too "as Hurricane Harvey curtailed drilling, servicing, and extraction activity for oil and natural gas." Utility output was also down a big 5.5% m/o/m due to "unseasonably mild temperatures, particularly on the East Coast" which reduced the demand for AC. Aside from the impact of the hurricane, motor vehicle/parts production rose 2.2% m/o/m after 3 straight months of declines but production here is still down 3.6% y/o/y. Machinery production fell for a 4th straight month but remains up almost 5% vs last year. After 3 months of declines in the production of computers/electronics, they rebounded by .8% and are up 2.9% y/o/y. As seen in retail sales earlier, the sales of electronic products has been declining.
Bottom line, the influence of Harvey in the data has begun. We'll now get a rebound and try to figure out what is organic activity and what's temporary.
The 0.9% drop in monthly industrial production is an exclamation point to my view that the core foundation of profit and economic growth is being overstated after years of pulling forward growth with near-zero interest rates and massive infusions of liquidity by central bankers.
These concerns of mine are being ignored by the global equity markets, but the fixed-income market, with a 10-year yield of 2.2%, is sending a clear message that disappointing growth lies ahead.
According to my calculus, bonds are telegraphing sub 1% real growth over the next four to six quarters, dramatically below consensus expectations and below my forecasts.
While the duel hurricanes will queer the economic data, I expect real GDP to be in the area of 1.25% to 1.75% compared to consensus of 2.0% to 2.75% in 2018-19.
That is a meaningful difference in opinion, and, If I am correct, will adversely influence the trajectory of corporate profits, which I also believe will undershoot consensus expectations.
The Lindsey Group's Peter Boockvar sees retail as punk but manufacturing as good:
Getting right at the core retail sales figure saw a decline of .2% m/o/m in August which is well below the estimate of up .2%. After a big lift to July due to Amazon's prime day, online sales fell 1.1% m/o/m after rising by 1.8% in July. The y/o/y gain is still great at 8%. Car sales fell 1.6% m/o/m as we know all about the slowing pace of this important category. Interestingly, the sale of electronic products fell .7% m/o/m and are lower for a 4th straight month and down 3.3% y/o/y. Building materials, which will get a big boost in September post hurricanes, fell .5% m/o/m. As August is a big back to school month, clothing sales fell 1% m/o/m and are up just 1.5% y/o/y. Also related to back to school, sporting goods sales were up just .1% m/o/m and are down 1.7% y/o/y. Department store sales were basically flat. Furniture sales remain pretty good, up 6% y/o/y and higher vs July. Eating and drinking out saw a .3% m/o/m gain and is up 3% from last year. The latter is very sensitive to gasoline prices that rose 8% in August and are up another 5% since for obvious reasons.
Bottom line, I can't tell you what the influence of Hurricane Harvey was as it came at the very end of the month of August. August also saw a post Amazon Prime decline and includes the important back to school season which seemed to be lackluster. Relative to last year, core sales are up 2.9% which is below the 5 year average of 3.3% and well less than the pace of gains seen in the past two economic expansions. Obviously the data from here will be highly influenced from the damage and rebuilding in Houston and Florida so we'll do our best to sift thru the underlying trends vs the temporary impact. At least going into the major impact of the storms, retail sales were again very mediocre in August.
The NY manufacturing index for September (the 1st September industrial figure out) was 24.4, down slightly from 25.2 in August but was 6 pts above the estimate. New orders rose by 4.3 pts to the best level since 2009. Backlogs jumped by 13.6 pts to a 5 month high. Inventories grew by about 10 pts. Employment was higher by 4 pts but the workweek was down by 5. As for the 6 month overall business outlook, it was lower by 6 pts after last month's 10 pt gain. Encouragingly (and follows the rise in the NFIB component) capital spending plans rose by 13 pts to a 5 month high. Also, expected spending on technology was much higher.
Bottom line, at least in the NY region, the month of September started out on a pretty good note, holding its August gain and with an improvement in the internals (the headline # is not a sum of its parts). Notwithstanding a moderation in the 6 month outlook, hopefully the plans for an improvement in capital spending actually turns into real activity as we know it's been the missing piece of this economic recovery. I'm sure the weaker dollar also is helping the psychology of manufacturers. We still have a slew of other regional surveys to see before making any broader conclusions about this last month of Q3 but at least we're off to a decent start. As for the Fed, I'll reiterate my belief that the Fed is hiking rates again in December if there is no major stock market selloff in response to QT.
Dougie, I share your 'rational, thoughtful and reasoned' view of the backdrops of the market..as I've stated way too often over the past several years.
At the risk of stating the 4 most dangerous words in investing, I truly believe 'it's different this time'. Because it truly is.
For the first time in capitalist history, Central bankers have printed money to directly buy assets from private sellers. They've held rates at zero..or even negative to FORCE investors into risk asset.
This low rate environment has caused MASSIVE misallocation of capital again. It's allowed corporations to float debt to buy back their own stock. It has caused prudent savers to buy assets further out on the risk curve with 90% of them, like my dad, having absolutely NO clue as to what they own and the risk they're taking.
Every time it looks like the market wants to correct, folks like me sell and hedge and then after a small pullback, the mkt gets firm and since we're not getting 4 or 5% in money markets this cycle to watch the madness, money finds its way back into the only class with any decent return.
We have seen this play out over and over and over again. What a ridiculous and stupid game this has become.
But this is a game the CB's have encouraged and they've built a monster, from which now, there is no escaping.
You and I both believe in regression to the mean. My contention for a while is with the 'unnatural' state of the markets and the manipulation of them, I'm afraid we're gonna see yet another 'super spike' top before EXHAUSTION finally ends it.
I firmly believe that when the end does finally come, the grind down and disgust with capital markets will do everlasting damage that could indeed spell the death of free markets. We don't have free markets any more.
The valuations that we'll see when the history books have been written on this 20 year cycle will rival or exceed ANYTHING from past Bear Market bottoms.
But I'll say again, I don't know how stupid this gets first. I'm afraid it COULD, not will, be the biggest, stupidest valuation yet.
Trying to time a top has been so futile for so long...because it IS different this time. And when this finally blows, it WILL be different that time too I'm afraid, because reversion to the mean will be just as nasty and prolonged as this up phase has been.
Oversold will mean nothing if the very system is in doubt.
And I'm afraid the central bankers and politicians of the world have almost guaranteed that outcome.
For now, I will dance while the music plays. We're at 1.25-.50 interest rates, I'm afraid it's gonna take a lot more to kill Frankenstein.
When we break, and break hard, I'll be watching the failing rally on weekly and monthly charts to determine if indeed the end has come.
But other than hedgiing or playing the occasional over bought situations, I'm not gonna try and call a top to a market that's not a 'market' any more.
doug
I fully recognize the roles: * central bankers * machines and algos * ETFs (skewed bullishly) And when the legions of investors recognize these factors (which they now have) - like in every speculative moment in time - it has been materially discounted. The fact is that the largesse you describe from central bankers has basically been completed - they have told us so already. It is simply a matter of timing. Mikey, history doesn't repeat itself, but it does rhyme. And speculative periods already end with acceptance. Dougie
The Scent of 'Group Stink' Is as Strong as It Was in 2000 and 2007
* In a paperless and cloudy world, are investors and citizens as safe as the markets assume we are?
--Kass Diary
Another provocative missile launched by North Korea and another apparent terrorist attack in London, England, are, once again, overnight and early-morning features of our reality as investors and as citizens.
The S&P futures fell a meaningless four handles from the time of the events, indicating even the machines and algorithms couldn't care less about much of anything impacting equities!
"Nothing succeeds like success."
--Alexandre Dumas
"Group stink" runs thick these days, as Dumas, a 19th century French writer, noted.
To this observer, our markets' resilience is all too reminiscent of former Citigroup CEO Chuck Prince, who kept on dancing because the music was still playing.
To me, the indomitable market is more a function of lemming-like behavior in a market, economy and profit setting that is far less secure and strong than many subscribe to.
Group stink is a powerful force in the markets, especially when the machines and algorithms and the ever-constant inflows into popular passive funds and ETFs dominate the investment backdrop. These factors exacerbate short-term trends and may contribute to the perpetuation of an ill-conceived perception of a daunting and inexhaustible virtuous market cycle.
Golfer Tom Watson once wrote, "Sometimes thinking too much can destroy your momentum." And most investors and traders, in a reactionary mode, seem to prefer to adopt such a strategy. But, I vividly remember the positive and incessant price momentum in early 2000 and late 2007 that appeared impossible to divert until, all at once, an important change in price trend occurred, seemingly overnight. The market consequences were ugly.
There is now a near-universality of view that stocks will move higher and that any dip is to be bought. Even the threat of a potential nuclear attack now brings on a market yawn.
The one-way action and lack of volatility have resulted in some of the greatest hedge-hoggers giving back tons of money (e.g., Seth Klarman's Baupost) and/or closing down completely (as chronicled here and here.)
If some of the greatest minds can't deliver alpha, we possibly should consider that things have gone awry and think about accepting something that Grandma Koufax used to say: "Dougie, something is rotten in Flatbush."
As I recently wrote in "The Market Band Plays On, But You Won't Catch Me Humming Its Mindless Tune":
Throughout the last six months I have expressed the view that the S&P 500 Index was in the process of making an important top and that risk was being underpriced.
Throughout the last month I have grown more bearish than I have been in several years. That negative outlook is reflected in the extreme condition that, beyond indirect holdings in my hedge fund, I am in the unique position of owning no individual equities in my personal account.
* Markets: The dominance and popularity of passive investing -- most notably ETFs and volatility-trending and risk-parity strategies -- are relatively new to the market's picture. I contend that the lack of price discovery from these influences may have spoiled stock charts and partially ruined the ability of some to rely on technical analysis.
* Valuations: Most valuation metrics are at least in the 95% decile, an occurrence that typically has coincided over history with the end of maturing bull markets or in the ninth inning of speculative eras.
* Corporate Profits: With the largest spread between GAAP and non-GAAP earnings in history, never has such liberal use of accounting standards been accepted by the masses of market participants.
* Central Banks: With $19 trillion ($1.5 trillion added in 2017 alone) in central bank assets, monetary authorities never have had such influence as they have in the past few years. Like quantitative strategies, the outsize role of central banks is new and its impact is great. It also has diminished price discovery. As I recently wrote, the "Debt Opioid Addiction Could Turn Ugly Fast."
* Economic: As the years go by it is increasingly clear that, despite the unprecedented role of central bankers reducing interest rates, secular global growth prospects have been reduced relative to the last several decades. Moreover, The Screwflation of the Middle Class has resulted in an income and wealth gap that has not improved over the last three to five years.
* Politics: The Orange Swan is a new factor, as articulated here and here. Like him or hate him, President Trump is unlike any POTUS in history. Another aspect of politics that is different is the degree of animus in Washington, D.C. There has never been such partisanship. Ever.
* Geopolitical: Markets have never been as exposed to such geopolitical acts and risks. Specifically, it has been 53 years since we faced a nuclear risk.
Respectfully, unlike some others, I belief the cause of the recent market indigestion -- and possible future market drawdowns -- likely has very little to do with seasonality or the month of August, nor will it likely be a function of the historical weakness often seen in September and October.
The market's issues run deeper and my concerns are based on both technical and fundamental grounds.
They have to do in part with the uncertainty surrounding various political, geopolitical, economic, market and monetary policy issues, many of them with potentially adverse outcomes. At least to me, the macroeconomic does impact Bristol-Myers Squibb (BMY) and Amazon (AMZN) and General Motors (GM) .
My concerns also have to do with the message of the bond market (this morning, the yield on the 10-year U.S. note is down by nearly five basis points to 2.11%), which indicates to me that the trajectory of domestic GDP growth and corporate profits is likely to disappoint for the fourth consecutive year.
Further adding to my concerns is the role of passive investing as the dominant influence on the markets. ETFs that rebalance daily and quantitative strategies such as volatility trending and risk parity exacerbate short-term moves and are, too often, the tail that wag the market dog. As I have asked, if the machines decide to sell, who is left to buy?
In part, these strategies have elevated valuation metrics above the 95% decile, alarming far too few market participants. Unfortunately, markets that are priced to perfection are vulnerable to exogenous shocks such as an Orange Swan, a missile aimed at Japan, a severe hurricane or a monetary policy mistake.
Meanwhile, there were technical breaks developing, starting with the outsize performance gains from the anointed FANG stocks. These conditions also were generally ignored by the bullish cabal.
Group Stink has ruled the day -- a condition often seen historically at or near market tops.
Few commentators and talking heads in the business media, many of whom counseled the lemmings who stood strong in equities in both early 2000 and late 2007, have been willful participants in the Bull Market in Complacency and have contributed to the potential of a Minsky Moment.
My bearishness also reflects my view that the business cycle is mature and that there are Peaks Everywhere. Most notably, low interest rates have pulled forward sales in various sectors. Industries such as housing, where affordability again has been stretched, and autos, where the cycle has peaked, are samples of my concerns. Meanwhile, the retail industry has been eviscerated, with ugly consequences for real estate and employment, by a Dark Star named Amazon, a recent target of my disaffection.
Nearly three weeks ago on Aug. 10, I wrote "To Heck With the Crowd, I Remain Manifestly Bearish," which underscored my multiple concerns (as they specifically relate to North Korea, see my boldfaced first question below that gnaws at me every morning).
It stated in part:
"I won't tell you that the world matters nothing, or the world's voice, or the voice of society. They matter a good deal. They matter far too much. But there are moments when one has to choose between living one's own life, fully, entirely, completely - or dragging out some false, shallow, degrading existence that the world in its hypocrisy demands. You have that moment now. Choose!" --Oscar Wilde
Sometimes you need to sit alone on the floor in a quiet room in order to hear your own voice and not let it drown in the noise of others.
I am sitting on that floor now, and thinking -- and shorting more.
Too many traders and investors think they know what will happen in the markets. They establish one, specific price target, usually clothed in certainty.
But the most successful traders and investors work with probabilities of outcomes.
I continue to maintain a historically high net short exposure because I believe we face numerous political, geopolitical, economic and market outcomes that could end badly -- very badly.
After yesterday's "fire and fury" ("TV-tough") statement by President Trump regarding North Korea, I repeated five of my concerning questions:
* In a paperless and cloudy world, are investors and citizens as safe as the markets assume we are?
* 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?
* 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?
"I wanted a perfect ending. Now I've learned, the hard way, that some poems don't rhyme, and some stories don't have a clear beginning, middle, and end. Life is about not knowing, having to change, taking the moment and making the best of it, without knowing what's going to happen next. Delicious Ambiguity." --Gilda Radner
Market views are like noses -- everyone seems to have one!
To me, investors are complacent, numerous outcomes of all breeds (many of them adverse) seem possible, the business cycle is mature, machines and algorithms have undue market influence (and if the movie goes into reverse, selling rather than buying remains an existential market threat), valuations are at an historical extreme and thus make markets vulnerable to external shocks, and the market's technical condition has been deteriorating for months.
And, in 2017, our interconnected, flat and networked world is unsafe on numerous fronts.
And, as I have expressed, after a lengthy period of quiet, volatility and uncertainty are likely to be great again.I plan to continue to err on the side of conservatism and I continue to maintain a skeptical view of the market's reward compared to risk and the limited upside relative to downside.
As it is said, we live in interesting (and challenging) times, influenced by a set of relatively new circumstances and actors that have led to a Bull Market in Complacency -- and the risk of a Minksy Moment -- in which numerous outcomes, many of them adverse, are possible.
Today, as I did in early 2000 and in the late summer of 2007, I pay heed to Woody Allen, who said:
"More than any other time in history, mankind faces a crossroads. One path leads to despair and utter hopelessness. The other, to total extinction. Let us pray we have the wisdom to choose correctly."
Be alert, consider the contrary and think about sitting out some of the market's dances, perhaps before your legs are chopped off.
