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DAILY DIARY

Doug Kass

Shorting More SPY on After Hours Rally

S&P futures rallied by about four handles after the close and I am aggressively adding to my SPDR S&P 500 ETF  (SPY) short at $255.69.

Amgen (AMGN) , -$7 was a post-market feature after the company's earnings release.

Thanks so much for reading my Diary today and enjoy the evening.

Position: Short SPY large

Something To Ponder

What happens when the next recession comes?

* The recession in the oil patch occurred when prices fell. Unemployment levels mushroomed and investment in automation followed.

* In the next recession will all industries lay off employees and invest in automation efforts?

* Looking at the last few decades, each downturn in economic activity resulted in a permanent shrinkage in the labor force. ("Peak Labor" occurred seventeen years ago).

Read this.

Position: none

Trade of the Week Update: Short Goldman Sachs

Goldman Sachs (GS) (short) was The Trade of the Week:

Trade of the Week: Short Goldman Sachs

OCT 23, 2017 ' 9:35 AM EDT

Shares of Goldman Sachs (GS) shares have prospered mightily over the last few weeks:

* Goldman had a reasonably large and unexpected headline beat in third-quarter results.

* The yield on the 10-year U.S. note has risen from about 2.15% to 2.39%, taking most financials along for the ride.

* The stock market has moved steadily higher as GS may be seen as a leverage proxy for the markets.

However, my Trade of the Week, shorting Goldman Sachs ($244.73), is based upon the following expectations:

* Goldman's earnings beat was "low quality," entirely based on non-recurring investment and portfolio gains.

* The lion's share of the rate rise is likely over, with some evidence that the domestic economy is not as strong as previously indicated.

* The equity market's advance is now extended; some overbought metrics are at multidecade highs.

Aggressive traders may consider short-dated options.

The shares are down -$3 today (at $242).

I plan to short more on any rallies.

Position: Short GS

Rebound Offers Shorting Opportunity

Nice rally from the market's low in the morning.

I am putting out more SPDR S&P 500 ETF (SPY) on the short side at $255.40.

Position: Short SPY large

Auction Action

From Peter Boockvar; 

Today's 5 yr note auction was as boring as yesterday's 2 yr. The yield of 2.058% was a hair above the when issued. The bid to cover of 2.44 was slightly below the one year average of 2.48. And, direct and indirect bidders took 72.5% of the auction, right in line with the 12 month average.

Bottom line, as said yesterday why are these higher yields not attracting more buyers? The 2 yr yield in yesterday's auction was last seen in 2008. Today's 5 yr yield is a 7 month high. I've said since August/September 2016 that the July lows of 2016 post Brexit in global bond yields will not again be seen in our lifetime. You will never see a 7 bps yield on a Japanese JGB (now at 1.08%). You will never see a German 10 yr bund yield at -.19% and you will NOT likely to see a US 10 yr Treasury yielding 1.36% again. So, based on this belief the bond bull market ended in the summer of 2016. The only question was the timing and degree of what was to follow.

The major reason for that bottom was that negative interest rate policy was not going to accelerate in those countries that implemented it (it became clear from them that enough was enough). Therefore the $12 Trillion of negative yielding securities was not then going to grow in size. Ever since, anything with a negative yield is just a hot potato liability and not an asset of the holder but that pie has shrunk to about $8 Trillion.

What has happened also since is the global economy has grown together, global trade has improved, the Fed is of course raising rates, QT is in place, the BoJ is in a subtle taper and the ECB is ENDING QE next year with the likely end of NIRP to follow in 2019. I'm of the definite opinion that Fed tightening will put the US economy into a recession at some point as it typically does (10 out of the last 13) and long rates will fall as a result but that will be from a higher level from here. My biggest fear, as stated many times, is what will be of the European bond markets epic bubble as tapering takes place and NIRP ends. That alone will drag up global interest rates regardless of the underlying economic fundamentals. What did Mario Draghi think would happen to the other side of the easing mountain and it was time to hike back down?

Position: none

What To Expect from Twitter Tomorrow Morning

At a price slightly higher than $18.45 I sold my Twitter (TWTR) recently. (Here was my rationale.)

Over the near term I expect the shares to trade between $15 and $20. 

But I am sanguine for the stock over the intermediate term and the shares remain on my Best Ideas List. 

Twitter will report before the opening on Thursday.

I don't feel that I have an edge.

EPS consensus is for $0.06 vs $0.09 a year ago. Revenues are projected at $586 million (a decline of about five percent, year over year).

Here was the third quarter guidance from the second quarter press release:

oAdjusted EBITDA to be between $130 million and $150 million.

oAdjusted EBITDA margin to be between 25% and 26%.

oStock-based compensation to be between $100 million and $110 million.

And for the full year (2017):

oTotal non-GAAP expenses to be down 3% to down 6%, compared to full year 2016 (Prior Flat to down 5%).

oStock-based compensation to be down 25% to down 30%, compared to full year 2016 (Prior guidance Down 20-25%).

oCapital expenditures to be between $300 million and $400 million (Reaffirm).

Investors will be paying attention to Monthly Average Users MAU (it was flat in 2Q2017 at 328 million) and Daily Average Users DAU growth. Wall Street is expecting about three million adds to MAU (331 million).

Position: none

The Only Undervalued Asset

Over the last two weeks I have suggested that risk is materially underpriced and that volatility may be the world's only undervalued asset.

Here you go!

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Position: none

Why Buying Calls Doesn't Work Long Term

The last two days are examples why I have opined that a steady diet of buying call options (especially buying on "breakouts") is not a successful long term strategy.

This strategy works until it doesn't. 

The strategy of buying calls works well in the sort of consistent (and unusual) uptrend that we have recently experienced.

For a while the strategy is supported and extended by strategies (passive ETFs and Quants) that worship at the altar of price. 

It does not, however, work in a choppy market or in a lower trending market.

In a "normal market" when stocks rise and fall (not the condition of recent months), most call options speculators simply go bust. 

Should today's market decline continue, and nobody knows for sure whether it will or not, near or out of the money call options will lose most of their value. 

Stocks and options don't grow to the sky.

Always consider your timeframes and risk appetite/profile in buying directional calls and puts.

Position: none

Stocks Vs. Bonds

Every bull, including Warren Buffett, has basically said that stocks are cheap relative to bonds.

I have argued that if most of these observers are of the view that interest rates are too low and speculation is alive and well in fixed income, why does it follow that stocks are cheap?

On Fast Money (and elsewhere) it is being argued, as many do, that it is the trajectory of interest rates that holds the key to stocks. Too fast a rise, it is said, is a negative for equities but a gradual rise in rates is healthy. 

But I disagree with this as well because the risk free rate of return (an interest rate) is part of every valuation and dividend discount model.

Rising interest rates, regardless of the reason -- and especially given today's nose bleed valuations, may now be viewed as stock market unfriendly.

Position: short TLT

Increasing Bond Short

I have been adding to my bond short -- iShares Barclays 20+ Yr Treas.Bond ETF (TLT) .

Position: Short TLT large

Cashin Musings: Spoiled Bulls

Midday musings from Sir Arthur Cashin:

Bulls are apparently spoiled with many calls coming in asking "What's wrong with the market?" Bit of a buyers boycott on so-so earnings and Washington gossip that Trump's "hands up" for Fed Chair was won by Taylor. Powell is best choice for market and for Trump.

Position: none

Amazon Investors' Biggest Mistake

The biggest mistake Amazon  (AMZN) investors may be making: 

Just because Amazon is disrupting someone else's profit stream doesn't mean that Amazon will earn that profit stream!

Position: short AMZN

More Risks to Google and Facebook?

From my pal Steve Cortes:

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Position: none

The Best Teacher is Your Last Mistake

Amgen (AMGN) is down by another $3.

It was a mistake in covering.

Position: None

Roll Over

Reflecting my bearish market view, in the last three days I have rolled over a large amount of three month bills into 3- and 6 month Treasuries.

Position: long 3- and 6-month treasuries

Ain't That a Shame

You made me cry when you said goodbye
Ain't that a shame
My tears fell like rain
Ain't that a shame
You're the one to blame

-- Fats Domino, Ain't That A Shame

RIP, Fats Domino.

One of the greatest.

Aint that a shame!

Position: none

Average Buy on Allergan

My average buy on Allergan (AGN) was $178.85 today.

Still medium sized.

Position: LONG AGN

This May Not Be a Dress Rehearsal

Tesla (TSLA) trading short rental working well now (+$20 on trade of late last week).

As to FANGs, the object of my disaffection  on Monday, I remain Short Facebook (GOOGL) Amazon (AMZN) and Alphabet (GOOGL) (a new one last week).

Position: short TSLA small AMZN small FB small GOOGL small

Recommended Cramer Reading

I love Jim "El Capitan" Cramer's "This Quarter Brings the Revenge of the Incumbent." 

Jim makes another stellar and professional observation in his analysis.

Bravo.

Position: None

I've Been Adding to My SPY Puts

I have been steadily adding to my SPDR S&P 500 (SPY) puts over the last few days.

I own the November monthly SPY $256 puts (as noted in "For Traders Only") and the December monthly SPY $255 puts.

Position: Long SPY puts

Allergan Slips, and I Buy

The dip of death for Allergan (AGN) , as the shares traded down to $179 this morning, may have been a successful test.

I added into the decline.

Position: Long AGN

Recommended Bubble Reading

Artemis Capital's "Volatility and Alchemy of Risk: Reflexivity in the Shadows of Black Monday 1987" might be one of the most interesting discussion of volatility and the bubble in low vol.

It's a must read!

Position: None

Are Junk Bonds Rolling Over?

Let's watch the high-yield market -- in particular SPDR Barclays Capital High Yield Bond ETF  (JNK) and iShares iBoxx $ High Yield Corporate Bond ETF (HYG) -- as further weakness could herald a swifter equity market decline.

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Position: None

A.P.B.: I'm Pressing All Shorts

Like the headline says, I'm pressing all shorts.

Position: None

Why I'm Hanging My Hat on CAT as a Short

Yesterday I added Caterpillar (CAT) to my Best Ideas List as a short at $141.60. Here are a few reasons why:

*  While a cyclically dependent CAT had a large beat on the top and bottom lines, I believe the rebound in profitability is more than priced into the shares now. CAT's relative strength index (RSI) is 77 today. Since 2006 this has been the third time that RSI exceeded 75. On the two previous occasions the shares fell dramatically from those overbought levels.

* The large increase in CAT's incremental margins -- 51% in the latest quarter -- could be short-lived and further earnings beats relative to consensus may be difficult to achieve. (I would note that CAT said despite year-over-year sales growth of 35%, the year-to-date margins will not be achieved in the fourth quarter.)

* The third quarter may be a high watermark for Caterpillar's margins in the face of higher planned expenditures (discussed in yesterday's conference call), higher input costs (particularly steel), a rising work force (CAT added 6,100 workers and 3,700 workers year over year and sequentially) and a growing competitive pricing backdrop (the company stated that near the end of third quarter product price gains became more difficult to achieve).

* The company's divisions -- construction, resource and E&T (energy and transportation) -- may be now facing maximum rates of sales growth.

* The ongoing government investigation of Caterpillar continues and could create headline risk.

My price target is $115, or 16 times estimated 2018 earnings per share of $7.25.

Position: Short CAT

The Book of Boockvar

My pal Peter Boockvar, chief market analyst with The Lindsey Group, discusses interest rates, sentiment (back to 1987 level), and German and U.K. economic data.

Also Peter mentions something that I posted yesterday on the valuation expansion since year-end 2012, compared to the consensus view that this has been an earnings-driven market.

Investors' Version of Hope and Change

OCT 24, 2017 ' 3:53 PM EDT

Today's mantra in the business media was yesterday's mantra -- that we live in an earnings-driven market.

Literally every "talking head" has offered this observation.

Yes there have been earnings beats and earnings misses

But, in the real world and since 4Q 2012, S&P earnings are only +30% while the S&P Index is up by more than +80%.

We live in a P/E and valuation-expanding investment world -- not in a profits-expanding investment world.

They know nothing!

This shared sentiment shouldn't be surprising because Peter and I communicate often, every day:

The US 10 yr yield is rising again to 2.44-.45% and that is exactly where it stood on the last trading day of 2016 and is smack in the middle of what was a 2.30-2.60% trading range for many months this year. The 2 yr sits at 1.60% and the 5 yr at 2.06%. For reference, the dividend yield on the S&P 500 is down to 1.94%. The CRB index by the way closed at a fresh 5 month high yesterday.

Now that we are in the midst of earnings season, I'm sure you hear every day and possibly think it yourself that this is an earnings driven market. I need to remind everyone that over the last 5 years it has been predominantly a P/E multiple driven market. Over the last 5 years earnings per share (goosed by huge stock buybacks and lowered interest expense) has risen by 30% vs the 80% rise in the S&P 500. If it was truly an earnings driven market, the S&P 500 would be at 1850 which is a 30% gain from the December 2012 close. I point this out to circle back to where interest rates are trending, the importance of what the ECB will announce tomorrow on QE and the continued tightening the Fed is conducting.

Ahead of the ECB tomorrow, the German 10 yr yield is up another 1 bp after rising by 4.5 bps yesterday. At .49%, it's at the highest level since August 1st. See comments on the IFO below. The UK 10 yr yield is jumping by 5.5 bps to 1.41%, a level last seen on February 1st. See comments on GDP below.

With price driving sentiment, Investors Intelligence said Bulls rose 2.3 pts to 62.3, the most since March 1st. Bears fell .1 pt to 15.1, the lowest since May 2015. The spread between the two at 47.2 is now at the highest level since early 1987. Stated before, when Bulls have gotten to 60+ this year, the market has stalled out and consolidated its gains for a few months. It then recouped and rallied when Bulls got down around 50. Over the past two weeks since Bulls got back to 60, the S&P 500 is up .5% while the NASDAQ, Russell 2000 and Transportation index are down. With the DJIA being a price weighted index and with half the stocks at a triple digit price, it's obviously bullied by a few stocks. Two stocks in the DJIA yesterday added 135 points.

US mortgage applications disappointed w/o/w as the 30 yr average mortgage rate rose 4 bps to 4.18%, the highest in 3 months. Purchases fell 6.1% w/o/w BUT still remain higher by 10% y/o/y. The millennial and the first time buyer remain the key to the health of the housing market in coming years (I define health as in a rising level of transactions as opposed to an excessive rise in prices which inhibits the pace of sales). The index level is at a 5 week low. Refi's fell 3% and are down for the 5th week in the past 6 and are lower by 36% y/o/y.

The German IFO business confidence index for October rose 1.4 pts m/o/m to 116.7 and that was better than the expected slight decline to 115.1. This is the highest level on record dating back to 1991, around the time of reunification. Both the Current Assessment and Expectations components were higher. The IFO said succinctly, "Germany's economy is powering ahead." What place does QE and NIRP have in Germany? The difficulty of a one size fits all monetary policy. The euro is up slightly while the DAX is flat.

The UK economy grew by .4% q/o/q (.3% est) and 1.5% y/o/y (1.5% est) in Q3, pretty much as expected. That y/o/y figure is the same as Q2 and has now averaged 1.6% growth over the past 4 quarters. Expect a BoE rate hike on November 2nd and the pound is up a full penny vs the US dollar as the q/o/q gain was the best since Q4 2016. The FTSE 100 is down on the pound strength.

It was September 29th the last time the Nikkei saw a down day but the 16 day winning streak was broken. It wasn't though without trying as the Nikkei was up the entire day but gave it back in the last hour of trade.

The Indian Sensex index closed at an all time record high after the government announced its own version of TARP into the state banking system where there has been a high level of non performing loans. I've been a bull on India ever since Modi was campaigning and remain so as it's one of my favorite emerging markets.

Position: None

Let Me Put This Put Strategy Out There

Good morning!

Let's assume you don't agree at all with my bearish views but you have a fully invested long portfolio and want to buy protection or insurance in the small probability event that I may be correct in my ursine outlook for stocks and that the possibility of a debilitating "flash crash" has risen exponentially in recent months, as I recently postulated.

Here are two simple, low-priced and inexpensive put spread strategies I think many should consider "putting" on:

* Buy January SPDR S&P 500 (SPY) $250 puts and sell January SPY $243 puts for only $0.98 (at risk).

* Buy January SPY $250 puts and sell January SPY $240 puts for only $1.30 (at risk). (For those that want more protection!)

I plan to do both today.

Position: Long SPY Puts (November $256 and December $255)

Morgan Stanley Downgrades GM

Morgan Stanley moves from buy to neutral on General Motors (GM) .

Makes sense to me!

Position: None

Recommended Apple Reading

Bloomberg's "Inside Apple's Struggle to Get the iPhone X to Market on Time."

Position: Short AAPL small

It's One Complacent Market

Consider this headline from Bloomberg:

U.S. Equity Newsletter-Writer Bull-Bear Spread Widest in Thirty Years

Position: None

Tweet of the Day

The rise in bond yields has been an important market feature this week, as Charlie Bilello makes note:

Position: None
Doug Kass - Watchlist (Longs)
ContributorSymbolInitial DateReturn
Doug KassVKTX4/2/24-32.96%
Doug KassOXY12/6/23-16.60%
Doug KassCVX12/6/23+9.52%
Doug KassXOM12/6/23+13.70%
Doug KassMSOS11/1/23-22.80%
Doug KassJOE9/19/23-15.13%
Doug KassOXY9/19/23-27.76%
Doug KassELAN3/22/23+32.98%
Doug KassVTV10/20/20+65.61%
Doug KassVBR10/20/20+77.63%