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DAILY DIARY

Doug Kass

Lots of Research on New Ideas

With about 25 minutes to go in the trading session Mr. Market bent a bit but didn't break.
With exception of a (DDS) sale (moving me from medium-sized to small-sized), I did no trades today - just a lot of research on new ideas.
Thanks for reading my Diary and I hope it was value added.
Enjoy your evening.

Position: Long DDS small

Car Sales Plummet

More evidence of "Peak Autos."

Position: None

Fallen Angels ... and Lessons Learned

* There will be many more.

"Hello I Mr. Ed.


A horse is a horse, of course, of course,
And no one can talk to a horse of course
That is, of course, unless the horse is the famous Mr. Ed.

Go right to the source and ask the horse
He'll give you the answer that you'll endorse.
He's always on a steady course.
Talk to Mr. Ed."

- Theme Song to Mr. Ed


The rapid decline in Tesla's (TSLA) shares over the last month and the continued fall of two prior market darlings, Intel (INTC) and Micron (MU) , should remind us of the poisoned cocktail of "Group Stink."

Should the market fall, as I expect, there will be many more fallen angels.

I wanted, therefore, to reposte a recent column, "A Horse Is A Horse Of Course, Of Course" - which "bears" repeating because of the lesson communicated:

Rising stock prices have a way of changing sentiment (h/t Divine Ms M) 


Eleven years ago, as The Great Recession was bubbling up, market commentators were nearly unanimous in the view that the proliferation of those weapons of mass financial destruction (mortgage derivatives) would not produce a contagion.

Those commentators were famously wrong. Indeed, were it not for swift monetary and fiscal relief, the deep contagion that engulfed the global financial system would have bankrupted the entire worldwide banking community and companies like General Motors (GM)  , Bank of America (BAC)  , Citigroup (C)  and many others would no longer exist.

' Contrary to the view of some, a possible change in Washington D.C. leadership and policy may have broad investment ramifications on numerous market sectors (e.g. drug, defense and financial industries)'

- Kass Diary, All the President's Men (and Mess)

Today, though the body of the Administration has been diseased (in multiple ethical, moral lapses and in other ways), many of those same commentators who dismissed the mortgage derivative problem (a decade ago) suggest ignoring the indictments and guilty pleadings of multiple campaign members of the Trump team and the general culture of corruption that currently exists in Washington, D.C. -- that these considerations will have little impact on policy, the balance of power, the economy and our markets.

Many of the same "talking heads" also possess the same view that bearish market analysis rationale may sound superior to the bullish case - but, they too, in the main, are wrong. Instead, many of them quickly point to a chart or some other independent variable in support of their (non-rigorous) case.

As Ben Hunt wrote in this week's Epsilon Theory ( Death in the Afternoon):

"Where there's shame, for both investing and beekeeping, is not sticking with your process. And if your process is only for getting into an investment or starting a new colony ... sorry, but that's not a process. Investments and animals have a life cycle. Your JOB as an investor and a beekeeper is to be there for the entire life cycle, even for the really hard parts like culling a weak queen or getting out of a weak investment. Even if it's raining outside."

I remain an investor (and the author of my Diary) because I have profited over numerous stock market cycles over the last four decades.

I have consistently resisted (when appropriate) the notion of "Group Stink" and the commonly held view by many that superior investment performance can be achieved by a simplistic view or by a quick glance at "activity" or at a chart.

The investment mosaic is complicated.

Back in 1980 I entered the harness racing business - over time I raced, bred and drove trotters and pacers.

My first trainer was Pittsburgh's Delvin Miller. Delvin was a legendary horseman but he was much more than that, for those were the days when harness racing was a popular sport.

Delvin was the single most accomplished and popular trainer and owner in the world. He was a close friend of three presidents and Arnie Palmer's closest pal. (And for the first five years of my involvement in the sport, Arnie was one of my three partners).

One word of advice from Delvin that I have held on to over the last 30 years was something that he said to me while we were attending the annual and largest Standardbred auction at the Farm Arena in Harrisburg, Pennsylvania back in the early 1980s:

"Dougie, look carefully at the crowd bidding on the yearlings this morning. There is a reason why, every year, there are the same sellers, but the buyers seem to routinely change every few years."

Think about Delvin's pearl of wisdom - it holds investment weight.

Back to Mr. Ed:

"Go right to the source and ask the horse
He'll give you the answer that you'll endorse.
He's always on a steady course.
Talk to Mr. Ed."


Position: Long BAC small C small JPM small WFC small

My Book

Here is a list of the positions I own (long and short) that have been mentioned in my Diary:
Longs: (SPY) puts, (GLD) large, (BAC) small,  (BOX) , (C) small, (CBS) , (CMCSA) , (DWDP) large, (HIG) , (JPM) small, (DDS) small, (KHC) small, (M) small, (PZZA) large, (TWTR) large, (WFC) small.
Shorts: SPY calls, SPY large, (QQQ) large, (DIS) small, (FAST) tagends, (TLT) small, (SBUX) small.

Position: See above

Tell Me Something I Don't Know About Market Capitalizations

Regular readers of my Diary know I sometimes post things that replicate the theme of the "Tell Me Something I Don't Know" segment on MSNBC's "Hardball With Chris Matthews."

So... "Tell me something I don't know, Dougie."

Amazon's (AMZN) market cap went up in August by the entire market cap that is Costco (COST) .

Apple (AAPL) added Disney (DIS) in market cap in August.

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Source: Peter Boockvar

Position: None

AAPL's 7 Day RSI

Speaking of relative strength indices, the seven day RSI on Apple  (AAPL) is at 93 this morning.

Position: None

Parabolic AMZN

Amazon (AMZN) now officially in parabolic phase. I would add that the seven day RSI on AMZN is 90.

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Position: None

Today's Key Market Feature

The yield on the ten year US note is up by five basis points to 2.90% this morning.
It is interesting to note that the money center banks, seen as a beneficiary of higher interest rates, are flat to down on the day.

Position: Long BAC (small), JPM (small), C (small), WFC (small), TLT (small)

The Tale of Two Indices

From Peter Boockvar:

The August US ISM manufacturing index jumped to 61.3 from 58.1 in July and that was well above the estimate of 57.6. This pace is now at the highest since May 2004. New orders jumped by 5 pts to the best since January. Inventories were up too as they were up by 2.1 pts, higher for a 3rd straight month and at a 5 month high. Backlogs were up by 2.8 pts but still remain about 2 pts below their 6 month average. Employment was another bright spot, rising by 2 pts to a 6 month high. Export orders, a key focus was down a hair, by .1 pts to 55.2 but that is the lowest level since October 2017.

On the inflation and supply front, supplier deliveries rose 2.4 pts after falling by 6 pts last month (the higher it is, the longer the lead times). Prices paid fell 1.1 pts to a still elevated 72.1 but which is the lowest since December.

Notwithstanding the headline jump, the number of industries surveyed that saw growth fell to 16 from 17 of the 18 surveyed. In particular, 13 industries saw new order growth vs 16 last month and that matches the least since October. Those seeing Growth in New Export Orders totaled just 6 industries, matching the least since February 2016. Of note too, the number of industries seeing Higher Inventory rose 2 pts to 14, the most since January 2015 that I have data on.

The ISM summed up the report by saying "Demand is still robust, but the nation's employment resources and supply chains continue to struggle. Respondents are again overwhelmingly concerned about tariff related activity, including how reciprocal tariffs will impact company revenue and current manufacturing locations. Panelists are actively evaluating how to respond to these business changes, given the uncertainty."

My bottom line, the rise in inventories and new orders likely reflects this tariff uncertainty as companies scramble to get product and restock their shelves after the Q2 draw. The question then is what happens in Q4 after this product build takes place because backlogs are below their 6 month average. The moderation in export orders adds to the slowdown being seen overseas as stated this morning.

NUMBER OF INDUSTRIES SEEING GROWTH IN EXPORT ORDERS

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EXPORT ORDERS

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In contrast to the highest level in 14 years seen in ISM, the Markit manufacturing PMI for August is at the weakest level since November. With respect to exports, Markit said "Exports remain the key source of weakness for producers, with foreign orders barely rising in August after 2 months of modest declines." They said domestic demand is where the strength is. With respect to the supply constraints that ISM talked about they said "at least some of the slowdown compared to earlier in the year reflects production being curbed by widespread shortages of inputs, haulers, and labor, leading to a further build up of backlogs of work."

To the point I made on inventories, "Tariffs and trade wars were also commonly cited as factors behind companies building safety stocks of inputs to ensure supply or lock in lower prices, exacerbating supply shortages and also driving prices even higher."

MARKIT US MANUFACTURING

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Position: None

Dillard's Is DiLovely...But Taking Some Profits

I have moved (DDS) back down from medium-sized to small-sized this morning in light of the +10% rise from my recent new purchase.

DDS was initially put on my Best Ideas List in June, 2017 at under $51. Its now trading above $79.

I have made five trades in DDS over the last 14 months for cumulative gains of about $80/share.

Position: Long DDS (small)

Cortes on Nasdaq, FANGs

From my pal Steve Cortes:

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Position: Short QQQ (large)

Positioned Way Short

Short people got no reason
Short people got no reason
Short people got no reason
To live

They got little hands
And little eyes
And they walk around
Tellin' great big lies
They got little noses
And tiny little teeth
They wear platform shoes
On their nasty little feet

- Randy Newman, Short People
As I mentioned a week ago, I start the week at my largest net short exposure in the last few years.
I am sticking to my view that late January, 2018 marked the 2018 peak in the S&P Index and that the upside reward is dwarfed by the downside risk.

Position: Long SPY puts, Short SPY calls, SPY (large), QQQ (large)

Trade of the Week - Short Starbucks ($53.45)

Starbucks  (SBUX) has been a long time short of mine - its been on my Best Ideas List (short) for several years.
The stock was placed on the list in early 2016 at $60.60.
Responding to my expectation of saturation in its domestic market (slowing comps relative to consensus), the shares have been a serial underperformer in the interim interval.
Here are some of my recent analyses: * No Thanks A Latte, Starbucks (Part Deux)
* What Starbucks Illustrates About My Diary
* No Thanks A Latte Starbucks
* Schultz's Exit a Negative For Starbucks
* Starbuck's Dose of Reality
* Roger Lipton On Starbucks
Last week Coca-Cola (KO) announced the acquisition of hot beverages company Costa for over $5 billion - it is my catalyst to this Trade of the Week.
In the past, KO has had no exposure in this space. Costa's coffee houses compete directly with Starbucks and this transaction (Costa has over 3800 stores in 33 countries) seems to be directed towards SBUX.
Costa's store base is predominantly based in the UK (14% of the stores are in China) but plans are to focus on some of SBUX's core markets (like China).
Over the last few days SBUX shares have been unmoved by the announcement - I believe that response will be short lived as investors digest that Costa (with the large resource base of Coca-Cola) will prove to be a worthy competitor.

Position: Short SBUX (small)

The Book of Boockvar

I have spent a lot of time observing the weakness in the emerging markets compared to the steady and methodical rise in the S&P Index. This has continued this morning.
A la Marvin Gaye, Peter Boockvar writes what's going on and he observes the divergence as well:So many things going on, so many things to talk about. I don't even know where to start. 

I'll start with an important pressure point, outside of Turkey and Argentina, and that being Italy. Yields are down another 7 bps after falling by a like amount yesterday after Fitch lowered its outlook to negative which was widely anticipated but this pushes out a possible downgrade which was the fear. The 10 yr yield on Friday closed at the highest level since May 2014. Imagine all those Italian bonds the ECB has bought over the past few years all for naught. What will then happen when QE officially ends in 4 months? The MIB stock index is also rallying for a 2nd day and the Euro STOXX bank index is up also. This index has been highly correlated to the behavior in Italian banks. 

Keep a close watch on European banks, not just because of the Italian bank influence, but also in measuring what, if any, contagion will happen from Turkey and Argentina. This index on Friday closed at the weakest level since December 2016. It is down 35% since the ECB first entered the rate hole known as negative interest rates. 

EURO STOXX BANK INDEX


With the possibility of another $200b of tariffs slapped on China as soon as Thursday at the same time we await what comes of the US/Canada discussions (Canadian $ weaker today in light of the rhetoric), I remain watchful of what the impact of all this is on global trade. Thanks to Markit and their manufacturing PMI numbers, we got a bunch of news yesterday and these are some of the gleanings on August export orders:

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GERMANY (40% of its economy dependent on exports): "New orders...rose at a much weaker rate...which partly reflected the slowdown in export sales growth to the weakest since May 2016."

FRANCE: "Export sales returned to growth in August (after contracting in July), but the pace of expansion was only marginal and much softer than that seen for total new work."

UK: "Foreign demand decreased for the 1st time since April 2016, despite the continued relative weakness of the sterling exchange rate. Some firms linked lower inflows of new work from abroad to the recent weaker pace of expansion of the world economy."

SPAIN: "New export orders continued to rise, but the rate of expansion eased to a two year low."

ITALY: "On the trade front, Italian manufacturers indicated another rise in new export orders, although growth was the weakest in the current 68 month sequence of expansion."

CHINA: "New orders rose at the slowest rate since May 2017, while export sales declined for the 5th month in a row."

JAPAN: "Survey data indicated new business was primarily sourced from domestic markets, as export orders declined. Some survey participants noted weaker sales to Chinese customers."

SOUTH KOREA: "Export sales declined during August. According to anecdotal evidence, firms were struggling to attract new international clients amid softer growth in key foreign markets."

THAILAND: "Softer demand was not limited to domestic sources, but overseas markets as well. Having expanded in July, export sales declined August."

VIETNAM: "New export orders also rose again over the month, but to a lesser extent than total new business."

MEXICO: "Although order book volumes continued to increase, the upturn was the slowest in the current 10 month sequence of expansion. New export orders likewise rose at a weaker pace in August." 

The only two countries I saw that noted a pick up in exports of substance were Australia (thanks to its weak currency and whose central bank kept rates unchanged today as expected) and Taiwan, helped by its heavy reliance on tech. 

US exports only make up about 10% of US economic activity but 40% of S&P 500 company revenues are sourced outside of US borders. The August ISM is out at 10 am and I'll certainly be watching the export component. 

Here is a chart of the S&P 500 year to date vs the MSCI all world stock index ex US. This will need to be reconciled one way or the other in light of the data I just cited.



While the Eurozone CPI for August was one tenth less than expected both headline and core, the somewhat dated July PPI surprised to the upside by one tenth. Notably, PPI ex energy was up 1.7% y/o/y, the fastest pace of gain since January.

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Position: None

Recommended Viewing

"Trading is a psychological game. Most people think you are playing against the market, but the market doesn't care. You're really playing against yourself."
- Marty "Buzzy" Schwartz
Marty "Buzzy" Schwartz is an old acquaintance of mine. We belong to the same golf club in Florida and we occasionally play golf together (he is a much better trader than a golfer!).
This 3 year old You Tube video (moderated by Danny Riley) is a very worthwhile study for serious traders.
Buzzy "walks the walk" and is one of the greatest and most aggressive options traders in the business - often being short or long a large percentage of the outstanding options in any series and/or strike.
He has nerves of steel and has a remarkable "sixth sense."
In this video he suggests using the trading methodology that suits you, recognizing that your prior life experiences might sabotage your trading.
By the calculation of many, Buzzy has made well over $100 million in the options market - almost entirely be selling premium and almost never buying options (and not by gambling in directional put and call options).
Serious traders who want to make serious money should devote an hour or so to watch this video.

Position: None

Tweet of the Day

So you hate fiat currencies and prefer crypto currencies?

The proof may be in this pudding:

Position: None

Recommended Reading

Mark Cuban spends '4 or 5 hours a day' reading (something I have argued should be done) - here's what's on his list:

He spends several hours a day reading newspapers, learning new technology and staying up to date.

Here is what he reads every day and how he stays informed.

Position: None
Doug Kass - Watchlist (Longs)
ContributorSymbolInitial DateReturn
Doug KassVKTX4/2/24-31.13%
Doug KassOXY12/6/23-14.95%
Doug KassCVX12/6/23+12.40%
Doug KassXOM12/6/23+14.91%
Doug KassMSOS11/1/23-22.06%
Doug KassJOE9/19/23-14.08%
Doug KassOXY9/19/23-26.33%
Doug KassELAN3/22/23+28.94%
Doug KassVTV10/20/20+66.05%
Doug KassVBR10/20/20+77.71%