Today we experienced an extremely narrow trading range.
For the second day in a row FANG and retail stood out to the upside (though it faded late in the day from the highs) and financials were generally weaker.
Gold managed to uptick - on no news or catalyst.
Oil slightly higher and ag commodities were mixed.
Bond yields fell by 1-2 basis points.
Thanks so much for reading my Diary and I hope it was value added.
Enjoy the evening.

* In my portfolio and at the Olympia Diner they are not serving Coke"Cheeseburger, cheeseburger, cheeseburger...Pepsi, no Coke."
- John Belushi, Gilda Radnor, Lorraine Newman, Jane Curtin, Dan Akroyd, Bill Murray Saturday Night Live
Bruce Kamich presents a well documented and upbeat technical view of one of my larger short positions, Coca-Cola (KO) - a serial underperformer since 2016.
Many sensed a positive technical turn when the shares moved to $48 in late January, 2018. That turned out to be a false tell. Let's see if this technical message hits the target in the months ahead!
That said, I remain short this name on fundamental grounds.
KO was placed on my Best Ideas List (short) over two years ago (March, 2016) at $46.44.

I am now at a very large Comcast (CMCSA) long based on my perception of a favorable reward vs risk.

Don't know if it's true, but high above the Alps my Gnome is hearing that Macy's (M) may be considering monetizing some of their real estate assets.

The shares are flying, trading near $40 (+$3) - I recently added.

Macy's was put on my Best Ideas List on November, 2017 at about $19.39.

* DB woes are actually a positive for US money center banks that are rapidly gaining share in fixed income trading and retail and corporate lending* I am adding to my already large bank exposure now

Why are the bank stocks so weak?

My guess is the continuing carnage and uncertainties associated with Deutsche Bank (DB) continue to weigh on the money center banks' shares (which have recently lagged).
I have written quite alot about DB over the last year (its shares are -40% year to date) - calling it the next Black Swanfor the EU economy.Deutsche Bank is the Sears Holdings of the global bank industry.
Why do I write this?
Like Sears (SHLD) , Deutsche Bank has no current profits, is in a state or operating flux, is being forced to sell assets, has an extremely low equity capitalization and a large and leveraged balance sheet.
Consider that DB's equity cap is only about $23 billion, compared to $170 billion for Citigroup (C) - even though both have a comparable amount of assets on their balance sheet ($1.75 trillion).
Deutsche Bank generates less than $50 billion in revenues (which is moving lower as it jettisons losing or capital intensive operating assets) compared to $65 billion for C.
By contrast, JP Morgan (JPM) has $2.5 trillion in assets, $200 billion of equity and generates almost $100 billion of revenues.
Reflecting operating losses and a toxic asset book (of European loans and sovereign debt), DB trades at only one third of (overstated) shareholders equity compared to Citigroup at 90% of shareholders equity and JP Morgan at 1.8x capital.
If all this wasn't enough, Deutsche Bank has an opaque derivatives book - probably at about $40 trillion with an estimated net exposure of approximately $100 billion.
Based on discussions I have had with bank managements I dont believe BAC (BAC) , C, JPM or WFC (WFC) have much counter party exposure to Deutsche Bank.
Perhaps most important is that Deutsche Bank's financial and operating woes (as well as those of other equally challenged EU banks) and concentration on cost savings instead of business building have and will continue to inure to the benefit of the large US money center banks who stampede towards gains in corporate and retail market share as well as taking share in global fixed income trading. (Those multi function market share gains remind me of the enormous deposit base increases achieved 8-9 years ago via acquisitions of weak banking sisters that positioned the large industry players well today).
I view the current underperformance in banks stocks as an important intermediate-term opportunity to acquire valuable long term investments in the financial space.

Retailer Dillard's (DDS) has smartly outperformed FANG.
Jim, shall we now call the acronym...DFANG?

Peter Boockvar on if only the curve could talk:If only the curve can talk and tell us what it's thinking. The US 2s/10s spread is down to 42 bps, a fresh 11 year low. This after a slew of economic data was seen overseas and before key data in the US later today.

Ahead of the US ISM services index at 10am, we saw some more PMI's overseas. The private sector weighted services PMI in China was unchanged in May with April at 52.9 as expected. The internals were somewhat mixed. Caixin said "The employment index continued to rise, while the new business index slipped slightly, indicating a positive change on the supply side and marginally weaker demand across the service sector. The changes led to a softer rise in prices charged, easing the upward pressure on service prices. However, input costs rose at a faster pace after slowing for 3 consecutive months, suggesting that the upward pressure on costs has not completely eased."

Hong Kong's PMI softened to 47.8 from 49.1 and that's the weakest since July 2016. The report did not read well. "The weaker headline reading reflected a faster decline in inflows of new business. New work not only fell for a 2nd month running in May, but at the steepest rate since August 2016. Anecdotal evidence suggested that weak demand conditions, high competition and client losses were reasons for decreased sales. Furthermore, export orders from mainland China fell sharply in May after a 6 month period of growth." Employment also fell. While input prices eased, "A range of reasons were cited for inflation, including higher prices of raw materials, suppliers' price hikes, and salary adjustments."

HONG KONG PMI

On the other hand, Singapore's PMI improved to 56.8 from 55.6 and that is the best in this survey's history dating back to 2012. It did though come with rising inflationary pressures. "The strength of the upturn is pulling prices in general upwards. Overall input prices rose at a survey record rate, suggesting that wider inflationary pressures may intensify in coming months" according to Markit. 

The services PMI in Japan softened by 1.5 pts 
m/o/m to 51 and dropped below 50 in India. In Japan, Markit said "There were worrying signs of deteriorating demand conditions, with new sales increasing at the softest rate in 20 months."

Overall, a mixed economic picture was seen in Asia in May. Stock markets there overnight were as well. 

The Eurozone services PMI in May was 53.8 vs the initial print of 53.9, estimate of 53.9 and is the lowest level since January 2017. The high number of holidays in May was cited as a reason "but many other companies reported that demand has softened compared to earlier in the year." Markit also said "Crisis torn Italy has meanwhile reported the weakest expansion of the four largest euro member states for the 4th month running." Price pressures for the regions also picked up in May. 

The services PMI in the UK improved to 54 from 52.8 and 1 pt better than expected. The comments here were also mixed. "new business volumes continued to rise at a relatively subdued rate, with survey respondents noting that Brexit related uncertainty remained a key factor holding back decision making among clients. At the same time, tight labor market conditions placed upward pressure on staff wages and difficulties recruiting suitably skilled staff in May." It's not just an issue in the US. The pound is higher on the headline beat but who knows when the BoE will hike rates. The odds out to September are 50-50. 

The bottom line on the European data is not clear in that some of the softness is holiday related but we also know that there has been some moderation otherwise. I still expect a good economic year in 2018 but a slower rate of growth than in 2017. 

Italian bonds are selling off after a 4 day rebound. It will be most interesting what Mario Draghi has to say next Thursday at the ECB press conference on the situation. The new Italian PM Conte spoke today and reiterated exactly what the Italian bond market is most worried about, budget busting policies, particularly a universal income for the poor. I am supportive of the proposed 2 tier flat tax as it would be growth stimulative and would reduce tax evasion, a big problem in Italy that has a large underground economy. The euro is down and is now moving in the direction of Italian bond yields. 

The Reserve Bank of Australia kept rates unchanged at 1.5% as expected and doesn't seem ready to raise rates anytime soon. They were optimistic on growth as they expect about 3% growth but remained concerned about consumer spending as "Household income has been growing slowly and debt levels are high." They also have a massive housing bubble they are trying to quietly deflate. The Aussie$ is lower as there will be no rate hike coming just yet. 

Surprise #2: The Trump Election Victory Establishes an Important Precedent and Is Followed by a Broad and General Movement in Which Prominent Businessmen, Celebrities, Sports Figures and Others Without Prior Political or Military Experience Consider Political Office. Among the individuals who initially express an interest in putting their hats in congressional and senatorial contests are Mark Cuban, George Clooney, Neil Patrick Harris, Ashton Kutcher, Justin Timberlake, Ellen DeGeneres, Oprah Winfrey, John Bon Jovi, Kevin Hart, Garth Brooks, LeBron James (who announces his 2018 retirement) and Peyton Manning.

Late in the year, Starbucks Executive Chairman Howard Schultz makes initial (and overt) plans aimed as an early attempt to become the 2020 Democratic presidential candidate and becomes a big favorite for the nomination as major donors, high-profile party operatives, powerful former politicians and leading current Democratic congressional members begin to rally around him.

- Kass Diary, My 15 Surprises for 2017

Yesterday's announcement that Howard Schultz is leaving Starbucks (SBUX) has important political and company wide ramifications.

From a business standpoint, Starbucks faces continued operating margin degradation and a maturing domestic store base. For some time I have felt that these factors would contribute to disappointing EPS results - and that has proven to be the case.

The loss of Schultz's management expertise (he already once turned the company around) is a negative for the company (and represents a further risk to the company's ability to execute through its challenges and headwinds) and I remain short Starbucks.

I initially placed Starbucks on my Best Ideas List (short) in January, 2016 at $60.60. (SBUX closed at $57.07 yesterday).

Here are some of my (negative) write ups on Starbucks over the last year in my Diary:

* Adding to Starbucks short.

* Starbucks' dose of reality.

* Starbucks losing steam.

* Starbucks rolling over.

* No thanks a latte, Starbucks.

* I'm not drinking Barron's latte-est on Starbucks

* Starbucks remains a core short.

* Starbucks has one disturbing problem that even its biggest fanboys would admit is a major issue

As to Howard Schultz, a potential political candidate - he has been a catalyst for social change in his role at Starbucks and away from the company.

Schultz's family foundation has been committed to the support of two successful programs: Onward Youth (aimed at promoting employment for young people between the ages of 16 and 24 who are not in school and not working) and Onward Veterans (which support post 9/11 military to successfully transition into civilian life).

For over two years I have suggested that Schultz would be among the leading candidates for the Democratic presidential nomination in 2020.

I still believe this to be the case.

And if this sounds like a personal endorsement... it is.

* For now I am long
* I am committed to staying reactionary and not anticipatory (Hat tip to Rev Shark)
* My three measures of reward/risk are all negative (several materially so)
* My finger is on the (short) trigger

The markets are displaying good upward momentum after last week's inconsistency.
As we move towards an anticipated top of the newly revised trading range (see below) I am maintaining a trailing (short) sell stop (today at (SPY) $274) as a means of benefiting from the climb and, at the same time, protecting my long book in light of reduced upside reward versus downside risk.
As an observer of the "quality" of the recent run higher I am growing somewhat concerned that the advance is as narrow and has become so selective. Additionally, the spirited move into retail and tech (especially of a FANG-kind) is growing panicky - a signpost that this is not the beginning but probably near the end of the move.
Let's update the market's reward versus risk.
I recently changed my 2018 price targets for the S&P Index: Previous S&P Forecast:

Market Downside: 2200
'Fair Market Value': 2400
Trading Range: 2550-2725 to 2750 New S&P Forecast:

Market Downside: 2400 to 2450
'Fair Market Value': 2500
Trading Range: 2550- 2750 to 2800
Here are the current reward versus risk parameters (based upon the +5 handle rise in S&P futures, 2750 S&P equivalent):
1. There are 325 points of downside risk against only 50 points of upside reward (compared to the top of the expected trading range) in my new pessimistic case (2400-2450). This is an overwhelmingly negative reward vs risk ratio (6.5:1).
2. Compared to "fair market value," (2500) there are 250 points of downside risk versus only 50 points of upside reward. That's a negative 5:1 ratio.
3. Against the expected trading range, there are 200 handles of downside risk and only 50 points of upside reward (to the top end of the anticipated trading range). That's a 4:1 adverse ratio.Bottom Line
The market's momentum remains positive though it is increasingly selective.
We are in a brave new investment world, one that is dominated by machines and algos - who are agnostic to balance sheets, income statements and private market value. As such, I am trying to adapt and to hold, given an investment mandate of delivering alpha, by taking advantage of what Mr. Market provides us rather than what we believe "should be."
However, for the multiple reasons mentioned in "The Hotel Europa", I believe the outlook for the markets in the second half of 2018 is poor.
In other words, though currently long, my finger is on the (short) trigger - watching patiently for a change in price momentum.

The ambiguity of the trajectory of economic growth -- previously seen in the EU -- is now filtering into the U.S.:

Source: Zero Hedge