"Just one more thing." (actually two things!)

-- Lt. Columbo

In looking at the possible blowoff in FAANG -- Facebook FB , Amazon (AMZN) , Apple (AAPL) , Netflix (NFLX) and Alphabet (GOOGL) -- coupled with the weakening close, I decided to add to my defined risk SPDR S&P 500 ETF (SPY) puts (for July at $280) and expand my net short exposure to between small and medium sized.
In addition, Growth's outperformance of Value (something I will try to address in my opener) is starting to resemble the early 2000 condition/extreme -- which marked an important top in the Nasdaq Index.
Secondly, German auto manufacturer Daimler just warned -- making yesterday's GM short cover really dumb.
"Peak autos."
Again, thanks for reading and enjoy the evening.

I mention Starbucks (SBUX) at the end of the day not to pat myself on the back but to write that this short illustrates what I try to deliver in my Diary.
I am a contrarian more than I am a Bear - and there is a distinction.
My goal in my Diary is to deliver hard hitting analysis that runs counter to the consensus - that consensus is too often what I call "Group Stink."
I don't take shots, buy price (because a stock is cheap with lousy fundies) or rely on one dimensional factors. Rather I establish intrinsic value calculations of a company and come up with a risk/reward ratio based on the probabilities of varying outcomes.
I am not making recommendations - simply contributing, at times, a contrarian's point of view, which I hope subscribers weigh in their decision making process.
I don't restrict myself to being a short contrarian, as I consider myself a long contrarian, as well (e.g. Macy's (M) at $19, (DDS) at $50, (TWTR) at $15 etc.)
Being a contrarian has its advantages and disadvantages. It requires patience and if the turn arounds don't occur, it requires quick responses to changing conditions.
When I am wrong in my contrarian picks I bail and I try to be transparent in communicating that I was wrong and why I was wrong.
Thanks for reading my Diary today and have a fantastic evening.

I have just moved from a large sized position in Box  (BOX)  to a medium sized long.

I have made this sale based on the following:

* I am increasingly negative on the markets for the balance of the year. As a consequence I am seeking to reduce some longs.
* The S&P has made a move to the high end of my projected trading range (for the balance of the year).
* The FAANG move is looking parabolic and a reversal could be imminent. While BOX is not part of FAANG, in moves in a collateral manner.
* BOX has traded up from about $24 following its quarterly report on May 31, 2018 to $29.60 today.

Here was my brief analysis of the most recent quarter.

I placed BOX on my Best Idea List at $22.50.

I currently have no intention to sell any more BOX shares and I still believe in an upwardly trending market (though not expecting it) that a $40 price target is not unreasonable.

* A reversal will encourage me to expand my net short exposure
My guess is that we are approaching a possible blowoff phase (to the upside) in FAANG -- Facebook FB , Amazon (AMZN) , Apple (AAPL) , Netflix (NFLX) and Alphabet (GOOGL) .
I am very focused on FAANG, looking for a reversal day -- at which time I will likely raise my overall short exposure (by adding to my SPDR S&P 500 ETF (SPY) put position).

Some midday observations:

* Dillard's (DDS) is back on a tear (+$3.40) in an only slightly better retail tape. (I am out of the name but it remains on my Best Ideas list because I want to buy weakness).
* FAANG  -- Facebook FB , Amazon (AMZN) , Apple (AAPL) , Netflix (NFLX) and Alphabet (GOOGL) -- is back moving parabolically (My only long is tagends of GOOGL.)
* Twitter (TWTR) is moving in conjunction with the FAANG stocks. (No position, fully priced on fundamentals, in my view.)
* Slightly higher bond yields.
* Dropbox (BOX) is hot! (I moved to a large long on the dip under $25 two weeks ago.)
* Starbucks (SBUX) at day's lows (-$5.55).
* Kraft Heinz (KHC) is breaking out. (It was a recent add.)
* SPDR Gold Trust (GLD) stinks but I am adding.

I have added to my SBUX short and to my Comcast (CMCSA) long today.

I have also taken a position in July monthly SPDR S&P 500 ETF (SPY) puts ($280 strike) -- I am planning to add on any further market strength.

"I think it's because GE's financials were as opaque as you could have them be without having the SEC come down on the company and demand changes at the top. Uniquely opaque...The idea, for example, that this company had to take a $6.2 billion charge against earnings at the beginning of the year for long-term care contracts that were on the books since 2004, and then add a $15 billion reserve to GE Capital for more liabilities from these contracts, just makes you feel like it doesn't even matter what the real earnings are, not that you can tell what they are anyway. I say that because we had been told a few months before that the CFO Jamie Miller had told us that the company would likely take a $3 billion charge for these contracts."
- Jim Cramer, "With GE Its So Difficult to Believe We Are at the Bottom" 

This morning General Electric (GE) has been removed from the Dow Jones Industrial Average.
Jim "El Capitan" Cramer just posted a pithy piece on General Electric, "With GE It's So Difficult to Believe We Are at the Bottom," in which he points out the lack of transparency - something that I have repeatedly discussed over the last few years. (See above quote.)
I will repeat my previous thoughts (in April and May) on why investors should continue to steer clear of General Electric:Say No to General Electric

May 23, 2018 ' 3:46 PM EDT

Businessman: "It says one hundred percent guaranteed, you moron!"

Brad Hamilton: "Mister, if you don't shut up I'm gonna kick one hundred percent of your ass!"

-- Fast Times at Ridgemont High

I continue to receive emails from subscribers regarding General Electric.
I will just repeat my April thoughts:Today General Electric reports first quarter results, the company takes center stage and the business news networks will be laser focused on the report - likely committing a lot of time in the process to the discussion and give us all instant "analysis" of the company's operations. 

But why? What justifies the coverage and interest?

Very little in my view.

Remarkably GE still has an equity capitalization of about $120 billion and a market capitalization of $230 billion.

But, the company is still an opaque and non analyzeable collection of unrelated companies. Analyzing the company properly (rarely, if ever done) would require an analyst spending full time on that objective. Even that may not be possible because of its non transparency of operating results.

Given the company's poor execution of strategy and accumulation of far flung subsidiaries it appears the company itself can't manage itself - its sphere of influence still might be too broad and its hodgepodge of unrelated businesses too disparate.

I actually was short quite a lot of GE in the "good old days" in 2007-08 (as I had a number of issues at the time, including some significant issues with the company's accounting), and fared very well.

But, like publicly-held Chinese companies, the lack of transparency and poor disclosure policies at General Electric are now a nonstarter for me to get involved on the long side.

For now, when a discussion of GE hits the business network airwaves -- turn the channel back to ESPN or watch The View. And keep your children away from the analysts that profess to have a clear vision of GE's current results and future prospects.

There is "no there there" for the company and for the analysts that pretend to understand and contend they are able to properly analyze General Electric.

When asked whether to own the stock, analysts should just respond - as Jeff Spicoli did to Mr. Hand in Fast Times at Ridgemont High, "I don't know." At least, that is what I would say if asked.

I would pass on GE as an investment, for as Grandma Koufax used to say," Dougie, there are easier gefilte fish to fry."

* In isolation a steady diet of directional options and/or responding to unusual call volume is a mug's game
* Unusual activity in Starbucks calls was highlighted two days ago
* Opps they did it again

There are numerous options strategies that make a great deal of sense -- some of which I employ.

But I have been and continue to be a very vocal critic of a steady diet of buying directional options and in responding to unusual call activity (which is often quite usual) as sole determinants to a strategy of delivering trading profits.

Like Warren Buffett I prefer "to praise by name and criticize by category" -- it is the strategy that produces offensive results.

I highlight this because the strategy is a documented way straight to the poor house. Anyone who can show me empirical evidence to the contrary I invite them right up to articulate it.  But there is no evidence at all. The academic studies confirm the stupidity of the strategy when done in a continuous fashion.

Hardly a week goes by that this strategy -- used solely without any other variables -- blows up.

I am especially critical of the lack of accountability with the practitioners who routinely emphasize the winning call plays and sweep the losing calls "under the rug."

Case in point, two days ago a commentator in the business media touted elevated Starbucks option activity as a reason to buy the calls.

As I recently wrote in, "Call Activity Wont Tell You Anything":

A month ago I added Lowe's (LOW) to the many stocks that recently experienced unusual call activity -- and turned out to be non-predictive of further stock strength.

Other recent false tells included Walmart (WMT) , Disney (DIS) and Valeant Pharmaceuticals (VRX) -- but there are so many more. (All these stocks have collapsed within one or two weeks of unusual call activity).

Today we can add Masco (MAS) to the list of false tells of unusual call activity. (These shares were highlighted in the business media two days ago based on large call volume).

It is important to recognize the complexity of the investment mosaic and that there are numerous factors that can contribute to investors' decision-making processes.

I remain open to a plethora of different market and individual stock selection strategies that are founded fundamentally or technically and based on logic, reason, relationships and analysis. But, while some may disagree, solely basing a trade on unusual call activity is not a reasoned strategy that has consistently contributed to documented excess returns over reasonable time and through differing cycles.

Here is a tweet of mine from last month which points out something implicit in trading based on unusual call activity but is never directly addressed:

Douglas Kass¿Verified account @DougKass

More

Douglas Kass Retweeted Jason

The inference in "unusual options activity" is that there is smart (even maybe illegal) knowledge on part of the call buyers.
Of course no one says that - but its the case. That is not the basis for a trading strategy, at least to me.

Douglas Kass added,

Jason@JEG_Booth96

Replying to @DougKass@CNBCFastMoney and 3 others

Don't "smart money" investors trade options away from organized exchanges anyway, through OTC transactions? These "unusual" amounts appear like large retail trades, not institutional orders

1:06 PM - 20 Mar 2018

To me, buying stocks soley based on unusual activity is a mistaken strategy.

To me, buying stocks soley based on unusual activity is a mistaken strategy.

I added to my (SBUX) short on the opening.

My thesis. 

I am back to market neutral now.

I have moved back to a small net short exposure via the purchase of (SPY) (monthly) July $280 puts at about $4.68.
Defined risk.

The PBOC tries to calm down the markets:

Keep Calm and Carry On was the message from the PBOC overnight to the Chinese people. "We'll be forward looking, prepare relevant policies, and comprehensively use all kinds of monetary policy tools...China has room to face all sorts of trade friction." After trading down all morning, the Shanghai comp did rebound a touch in the afternoon with a full day .3% gain. The H share index was up a more modest .1% while the Hang Seng rallied .8%. The yuan was also higher on a stronger fixing also meant to calm nerves. 

To highlight the bifurcation in the global stock markets between the US and everyone else, the Vanguard All World ex US ETF yesterday closed at the lowest level since October. 

VANGUARD ALL WORLD ex US ETF

While mortgage rates were unchanged w/o/w at 4.83% on average, mortgage applications did rebound from last week. Purchases grew by 4.3% w/o/w and are up 3.2% y/o/y. Refi's were up by 6.1% w/o/w but remain lower by 31% y/o/y. We see existing home sales today and new home sales next week to gauge the push and pull in the industry where high prices and mortgage rates face off against a strong labor market and better wage growth. 

Germany reported a hotter than expected PPI for May. The y/o/y gain was 2.7% vs 2% in April and above the forecast of 2.5%. The matches the quickest rate of gain since September. A 5.5% rise in energy prices was certainly a main factor as PPI ex energy was higher by 1.7%. German inflation breakevens are within 5 bps of its recent peak which was a 4 year high. 

Yesterday the IFO Institute in Germany cut its 2018 growth estimate for the country to 1.8% from 2.6% previously. They said "The economy has developed far more poorly than anticipated in the first few months of 2018...Dark storm clouds are currently gathering over the German economy...We nevertheless believe that the upturn in Germany will continue but not at the same pace as in 2017." The same can be said for the whole region. We should still see about 2% growth this year, good for Europe but just not as strong as last year. 

There was improvement in UK industrial orders in June. The CBI's index rose to 13 from -3 and that was well better than the estimate of +2. CBI said the rebound was "broad based, with output growing in 14 out of 17 sub sectors, with growth mostly driven by 'Food, Drink and Tobacco' and 'Mechanical Engineering.' On the other hand, "Respondents anticipate that output growth will slow slightly over the next three months." On the inflation side, after a pretty robust run of pressure, they eased in June to the least since last summer. Bottom line, what is needed to sustain growth in the UK is clarity on the path to exiting the EU, stating the obvious. At the same time, Brexit has caused Mark Carney to be a deer in the headlights of monetary policy as inflation continues to run well above the BoE benchmark rate. We hear from them on Thursday. The data point did not help the pound as it is falling to the lowest level since November and that in turn is helping to lift the FTSE 100. 

Citigroup (C) was upgraded at Deutsche Bank (DB) . (Not the other way around!)

Starbucks (SBUX) past successes are unlikely to be duplicated going forward as the company's salad days as a disruptor in its US retail operations are over. 

This has future growth consequences that are still being underappreciated by investors.

There are several contributing factors to my view:

 * SBUX has had and will continue to have a difficult time of satisfying investors by building on profit margins that are well higher than their peers.

* Historical valuation metrics may no longer apply into the future.

* The law of large numbers represents the major headwind - as SBUX has saturated the domestic market.

* Starbucks initial role as an experiential purveyor of coffee (and associated products) has been challenged by production issues.

* In the U.S., less human interaction (mobile pay and more preordering slows down lines and leads to more congestion) has shifted some consumers back to independent coffee shops or even the home or office kitchen. (This trend could continue).

* Many smaller early stores as well as recent new stores are tightly configured and have become production challenged reflecting more preordering, a rising contribution from food sales and for other reasons.

* This has turned Starbucks into a lesser "human experience" as employees are caught up with pumping out product.

* As a result, the relationship driven experience of the past has suffered and has been transformed into more of a traditional "coffee shop."

* The proliferation of smart phones (over laptops) have reduced the value of the experience at SBUX - there are more alternatives than just "hanging out" at a Starbucks facility with your computer. Smart phones are mobile!

Consensus domestic comp growth and EPS growth estimates at Starbucks have been too optimistic for 2-3 years -- this has formed the basis for my investment short.

Those pressures are expected to continue in the 1-2 years ahead.

* There is no place for dogma and emotion (and sometimes even an intermediate term viewpoint) in developing a strategy to opportunistically trade over short term periods in the 2018 market
* The market's structure (and dominance of passive and quant strategies/products) provides exceptional near term trading moments
* Yesterday was another example of the value that can be extracted from premarket and aftermarket trading (I am a 'pajama trader' and proud of it!)

Yesterday I started the day with a negative outlook for the markets in my opening missive, "The Orange Swan Returns... Again."

Soon thereafter, in response to a -40 handle drop in S&P futures (seemingly induced by more aggressive trade rhetoric out of the White House), I covered my entire (and very large) short (SPY) position - as well as covering all my trading shorts in (ALL) and (GM) and adding to several long positions - and, I turned, moved from medium sized short exposure to small net long exposure in a matter of an hour or two.

For now, the move was the right one as, adjusted for the 9 handle rise in futures this morning, the Spyders are trading more than 30 handles higher than my short cover prices in premarket trading yesterday morning.

Price Discovery In a World of Machines and Algos

Some will say/write that Trump's aggressive trade tactics, throwing a hand grenade at China's trade policy, was another example of the market discounting the President's hard line of policy negotiations (so often seen as part of his negotiating approach) - and another "V" type recovery in the markets, that has "learned" to know better than to take the President literally.

To some degree, I respectfully disagree. To me it was the machines and algos that materially (and artificially) tanked futures and provided yesterday's trading opportunity.

The Trump pronouncement over the weekend of more tariffs targeted at China was simply the fuse.

The machines and algos were the dynamite.

Explaining the Juxtaposition of Short Term Bullish/Intermediate Term Bearish

How can one be negative in view and at the same time move into a net long position?

* Unemotionally trading around a "view" in a period of much more heightened volatility is a key component of my tactical approach to the markets in which passive strategies, products that worship at the altar of price momentum and strategies that allocate to risk (e.g., ETFs, risk parity and volatility trending)
* These products and strategies exaggerate short term market moves - often artificially extending bouts of depression and elation.
* If one has a view of "fair market value" in the indices, sectors or individual stocks - this is one heckuva opportunity to deliver exceptional trading profits (by moving contra to the moves) when the difference between that "fair market value" calculation and the current share price widens.
* Investors and traders have differing time frames. Even traders have differing time frames. Some trade hourly, others trade with positions (often held for several weeks) - and in times in between.

For me, given the new regime of volatility, it is consistent to have a bullish and very short term long exposure at the same time being intermediate term bearish. (Indeed throughout the first half of 2018 I have often been net long in exposure though holding to an intermediate ursine market view).

Depending on my calculus of the downside risk versus upside reward -- that condition can continue for "some time."

However, given my calculation of the bearish skew of risk versus reward it is not likely that I will even be small net long in exposure for very long!

I ended yesterday in a small net long exposure.

Downside Risk Dwarfs Upside Reward Now

Here are my reward/risk parameters:

Market Downside: 2400 to 2450
'Fair Market Value': 2500
Trading Range: 2550-2750 to 2800
Current S&P Cash (Adjusted for this morning's future rise): 2775

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 350 points of downside risk against only 25 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 (14:1).
2. Compared to 'fair market value,' (2500) there are 275 points of downside risk versus only 25 points of upside reward. That's a negative 11:1 ratio.
3. Against the expected trading range, there are 225 handles of downside risk and only 25 points of upside reward (to the top end of the anticipated trading range). That's a 10:1 adverse ratio.

Yesterday Underscored the Value of Opportunistic Premarket and Aftermarket Trading (I Remain a Pajama Trader and I am Proud of it!)

Investment opportunities take multiple forms and for the life of me I cant see missing market opportunities - whether they arise at 1pm or 1am.

If I blanketly rejected such an opportunity, some of my investors would no doubt reject me as an investment manager!

Some commentators on this subject - though I can't understand the logic - reject non market hours trading. Here is that view as presented by one of our contributors.

By contrast, as expressed in my March, 2018 post, I am a pajama trader and proud of it - as it routinely yields exceptional opportunities:

"Markets evolve -- and, to me, it is the responsibility of market participants to change with it.

I am a "pajama trader" (during outside of market hours) and I am proud of it!

I don't understand the objection, in some circles, to trading stock futures (and securities) opportunistically whenever the market is open -- whether it is 2 pm or at 2 am.

Does this mean the trades/markets are not real in the after hours? Trust me, they are real -- these trades importantly impacted by P&L.

Does this mean I shouldn't capitalize on extreme reactions to news (like the after hours Gary Cohn resignation)? That would be an extremely poor decision, in my judgment.

I try to capitalize on the inefficiencies or quick interpretations to news (and other factors) outside normal trading hours -- and so do many others.

It's an opportunity that Mr. Market affords market participants.

At least I try to exploit the opportunities -- with increased activity, particularly in a period of rising volatility.

That said, I now trade at least 40% outside normal trading hours, as I see expanding opportunities flourishing in these periods.

Do I care if the futures go to extremes in the after hours and may not be indicative of the next day and may not follow thru?

Who really cares if an opportunity is being presented in the after hours for me and other pajama traders!"

- Kass Diary, I am A Pajama Trader and Proud of It!

Bottom Line

Mr. Market has rallied from yesterday morning's lows and is now back in the middle of the upper end of my projected 2018 trading range.
While I am small net long in exposure I will likely cut back and move back into a net short exposure over the next few days given my calculation of risk over reward.
Be flexible in approach and avoid dogma as the market's structure is providing unimpassioned traders with exceptional opportunities in a new regime of volatility.
Finally, never limit your trading opportunities based on the time of the day or any other factor.