DAILY DIARY
Have a Good Evening
Thanks so much for reading my Diary -- I hope it was helpful.
Enjoy the evening.
The Good and The Bad
Good idea yesterday, thinking that FANG was due for an oversold rally. (Amazon (AMZN) +$41, Netflix (NFLX) +$6 and Alphabet (GOOGL) +$13).
Bad idea, selling my trading long rental in Alphabet.
Preparing For Next QQQ Short
I covered my large PowerShares QQQ ETF (QQQ) short yesterday at $180.80.
QQQ is now trading at $183.12, +$2.32 above the cover.
I plan to re-short the QQQ at $185-$186.
There Is an Alternative Now
Move over T.I.N.A. ("There Is No Alternative") and say hello to C.I.T.A. ("Cash Is The Alternative") -- as the yield on the 10-year U.S. note is 2.98% and 2.75% for the 2-year note.
Say No to Goldman Sachs
* I am not tempted to buy the recent weakness in Goldman Sachs' (GS) share price.
Goldman Sachs has been on my Best Ideas List (short) for quite a while -- since January, 2017.
From late August, the shares have moved down on ten consecutive days.
I would not bottom fish as GS is not your father's GS. Moreover, the likelihood that the administration's policies will put a dent on overall world trade remains a large cloud over the company and its profitability. That cloud will not likely dissipate until the next Presidential election (in 2020) at the earliest.
Here are my other structural concerns, as expressed recently and (repeatedly):
Despite a disappointing profits and guidance picture, and substantially below peer group returns, I am listening to an upbeat discussion of Goldman Sachs on Fast Money now.
Frankly, I don't understand the appeal of Goldman Sachs' stock at current prices.
Today GS shares are slightly higher than their previous peak in late 2007.
However, since the Great Recession 10 years ago -- GS profitability (and most metrics) have trailed badly.
Here are some compares from a decade ago:
In 2007 GS recorded about $46 billion in revenues. Trailing 12 month revenues (calendar 2016) are now about $33 billion.
In 2007 GS achieved operating profits of $17.5 billion (38.5% operating margin). Trailing 12 month operating profits are $11.5 billion (35% operating margin).
In 2007 GS printed $11.6 billion in annual profits. Trailing 12 month operating profits are $8.6 billion.
In 2007 GS recorded a 1.17% return on assets. Trailing 12 months return on assets is 0.88%.
In 2007 GS printed a 31.5% return on equity. Trailing 12 months ROE was under 11%.
In 2007 GS EPS totaled $24.73. Trailing 12 month EPS is $19.60.
In 2007 GS had a 34% effective tax rate. Trailing 12 month tax rate is 25%.
With the commoditization of a wide range of financial products offered, generally more competition, the imposition of less leverage (and less expansive functionalities) and considering the greater role of low return investment management (which arguably holds a lower valuation) -- I don't see the beef."
- Goldman Sachs: Where's The Beef?
SPY Cost Basis
Today's (SPY) cost basis is $288.74.
Be Patient on Bank Stock Purchases
A lackluster third quarter banking industry earnings may provide a good entry point for the group in mid October - but a lot will depend on capital market activity and investment banking in the current month of September.
Through the first two months of the quarter, the trends and earnings metrics are:
* A steady but slow improvement in loan demand (+1% quarter over quarter and +5% year over year).
* A much slower rate of growth in deposits than the rate of growth in C and I loans.
* With short term rates higher and the curve narrowing, flat to slightly higher net interest margins and income is seen in 3Q2018.
* Mortgage originations are weak.
* Higher credit costs quarter over quarter (seasonality).
* Aggressive share buybacks have been maintained.
The swing factor will be September capital markets activity. The quarter to date (first two months of the quarter), trading and investment banking are both lower with quarter over quarter down by at least -15% and about -5%, respectively.
My best guess is that this all should lead to about a -1% quarter over quarter drop in EPS on about a +1% rise in revenues.
Nothing to write home about but nothing to get scared about either.
I continue to favor banks over the intermediate term vis a vis most industry sectors.
Recommended Reading
Bear markets are borne out of optimism and bull markets out of pessimism. From the Wall Street Journal, see here.
My Thought of the Day
It's hard to think that there aren't Central Bankers in Europe and Japan and EM that aren't scared to death right now, given what's happened to their stock markets, debt markets, and currencies.
Stated simply.
TWTR Now
Twitter (TWTR) , the Trade of the Week , is acting well.
A Changing Market Complexion
The enthusiasm for Alibaba (BABA) , Tencent (TCEHY) , Micron (MU) and many other former market leaders is clearly ebbing.
Some of the most powerful market leaders are now in a Bear Market.
I remain of the view that the S&P made a late January, 2018 high and that an important top is in the process of being made.
Stated simply.
My Favorite Investment
What is my favorite investment for the next 12 months?
Hands down, it's the two year U.S. Treasury note that yields a risk free rate of return of 2.74%.
And it's by far my largest holding.
Tweet of the Day (Part Deux)
Avoiding Auto Stocks
This morning my pal Sarge makes the case that General Motors (GM) is attractive for a short term trade.
General Motors, still a favorite of several prominent hedge funds, was placed on my Best Ideas List (short) at $43.43 in October, 2017 and closed yesterday at $33.87.
While the stock is near term oversold and may have a dead cat bounce, I continue to view the shares of automakers as long term value traps.
This morning Goldman Sachs reinstated GM with a "neutral" (the prior rating was "underweight").
Here is the continued negative secular case I made on autos about five weeks ago, "Avoid All Auto Stocks":
* We are now past "Peak Autos"
* Look for much weaker auto industry shipments ahead (which will not be "economy friendly")
* GM and (F) are "value traps"
"Sales in the last month will underscore investor fears that auto sales have peaked and that, without ever-higher incentives to keep consumers interested, demand will continue to soften."
- Bloomberg
WARD'S Automotive reported a 16.7 million US SAAR for the month of July - that is the weakest July sales month in four years:
Source: Zero Hedge
Auto industry sales are likely to get much worse in the year ahead.
As I mentioned on yesterday's Bloomberg interview, this week's consumer confidence report was noteworthy for the depressed spending intentions. According to my pal David Rosenberg, "plans to buy an automobile (over the last two readings) exhibited the weakest back-to-back showing in over five years."
"Peak Autos" has been a theme of mine over the last 12 months (GM is on my Best Ideas List - placed on that list at $43.43 in October, 2017).
Cyclical stocks always look cheap at the top of a cycle.
Despite the hedge fund community's endorsements by Ed Wachenheim and others, and the business media's almost universal optimism on these name, it remains my view that GM and F are "value traps." (Note: Both companies recently guided lower in sales and profits.)
Despite stagnating real personal incomes and large household debt loads, the proliferation and the popular extension of subprime auto debt ("a dollar down and off to the races" and the perpetual extension of loan maturities) and large auto selling price incentives have served to lift car sales (over the last few years) well above replacement needs. For several reasons, the favorable gap previously seen between auto sales and replacement needs are likely to reverse over the next few years.
Most importantly, with interest rates rising (and likely to rise further) its getting prohibitively expensive for manufacturers to offer incentives and "deals" tied to loans - so the consumer will be faced with less discounts of new cars. Indeed J.D. Power reports that for the first time in almost five years the auto industry has recently cut back spending on incentives.
What makes things worse is the large number of cars coming off lease - and ending up for sale in the used car lots of dealers. The "lease bubble" (below) is providing auto buyers with lower priced alternatives to the new models:
Here are 10 troublesome charts on auto loans from Zero Hedge. If you are long the auto stocks read the material closely.
Perhaps the most significant is the record level of average vehicle new and used car loans ($31,100 and $19,500, respectively). But, with rates rising, so do payments/month (at over, on average $515/month on new vehicles) - stretching affordability for most borrowers. Meanwhile the average loan terms (of 69 months for new cars and 64 months for used cars) is also likely stretching limits.
Banks and other financial institutions are seeing the risks to the above loans and are aggressively slashing their auto loan origination activity - leaving captive OEM finance companies to fill the slack.
Look out below.
Bottom Line
Brace for a sharp fall in auto industry sales over the next year.
I would continue to avoid all auto stocks.
Tweet of the Day
Art Cashin's View
From Art Cashin's morning commentary:Negative But Not Quite Ominous Signs - Jason Goepfert over at SentimenTrader noted a cluster of negative market signals l week. Here's a bit of what he wrote: A week of warnings. Every day last week triggered a Hindenburg Omen or Titanic Syndrome technical warning signal. Whil they are much-maligned and not immune to failures, similar clusters of these warning signs preceded consistent weakness across stocks and sectors and were good for volatility Jason goes on to point out that, while these indicators are often scoffed at, such clusters are often followed by some mild weakness. Attention has been noted.
Remembering 9/11 and a Great Man
* I repost this opening missive annually with a heavy heart
* Death leaves a heartache that no one can heal but love leaves a memory no one can steal
"What do you want me to do,
To watch for you while you're sleeping?
Well, please don't be surprised when you find me dreaming too;
It's just a box of rain,
I don't know who put it there.
Believe it if you need it,
Or leave it if you dare;
But it's just a box of rain
Or a ribbon for your hair;
Such a long, long time to be gone,
And a short time to be there.
-- Grateful Dead, Box of Rain
Though 17 years have elapsed since the World Trade tragedy, it doesn't get easier.
As many subscribers are aware, on every anniversary of the World Trade Center tragedy on Sept. 11, I honor my closest friend who was lost 17 years ago -- Chuck "Brown Bear" Zion -- as well as the other victims of the terrorist attacks that day.
Sadly, Chuck Zion's dad, Rabbi Martin Zion, has recently passed away. He has joined his son in heaven after all these years of separation.
Please read this column, "Keys to a Life Well Lived," that I had written about Rabbi Zion, based on a letter he sent me in October, 2016, two months before his death:
"Who is wise? One who learns from every man ... Who is strong? One who overpowers his inclinations ... Who is rich? One who is satisfied with his lot ... Who is honorable? One who honors his fellows."
-- Ben Zoma, Ethics of the Fathers
Today marks 17 years since the Sept. 11 World Trade Center tragedy. (Please take some time that day to watch Ground Zero Rising, Jim "El Capitan" Cramer's brilliant documentary on the attack and the subsequent rebuilding).
Sept. 11, 2001, is a day that we will forever remember with clarity and disbelief. I lost my best friend, while members of TheStreet community lost one of our own -- the late Bill Meehan.
It still seems like only yesterday to me, and it's a day that I'll forever remember vividly. As I've written before, 2001 will for many of us forever be annus horribilis, the year of horror.
On this day, as has been the case for the past 16 years, my eyes remain full of tears. I'm drafting this column in memory of all of those I knew (and didn't know) who lost their lives in the World Trade Center, in Pennsylvania and in Washington, D.C.
As I've written previously, it's said that death leaves a heartache that no one can heal, but that love leaves a memory no one can steal. And so it will be on Sunday as we observe the 15th anniversary of the Sept. 11 attacks.
As I've done in each of the intervening years, I want to use my opening missive to repeat the thoughts that I've often expressed about Sept. 11. As always, I dedicate this column to those who were lost -- especially to my best pal, Chuck Zion (a.k.a., "Brown Bear"):
"Chuck worked at Cantor Fitzgerald, the brokerage firm that lost nearly 700 employees 14 years ago. It was the hardest-hit company in the World Trade Center tragedy, accounting for nearly one-quarter of the building's deaths that day. I lost many friends at Cantor on Sept. 11: Eric, Pat, Timmy -- too many to count. So did many others. And of course, we all lost one of TheStreet's own, Bill 'Budman' Meehan (the bearded fellow on the right in the picture down below).
In Cantor Fitzgerald's equity division, none had more of a presence (literally and figuratively) than Chuck Zion. He was known to his friends and clients as 'The Brown Bear,' a sensitive, giving and caring friend; father to Zack; son to Martin and Jane; and husband to the amazing Carole ('Cheezy'). His love was pure, and there was never any pretense -- not wordy, he was on point.
The largest producer over the past decade at Cantor Fitzgerald, Chuck was master of his universe. He was straightforward and clear-cut, a no-nonsense and respected partner who was remarkably generous but never, ever wanted others to know it. He gave often and substantially but always anonymously, without strings attached. Chuck, who also worked at Salomon Brothers and Sanford C. Bernstein, put on some of the largest trades in the history of the equities market. He was the player the 'big boys' went to when they wanted anonymity. And I am talking multimillion-share trades, the really big prints.
And it was Chuck who introduced me to Bill Meehan. He even had me fill in for Budman on a few occasions in the Cantor Daily News.
I cherished and loved Chuck Zion -- he was my confidant and a brother that I never had. When I moved to Florida in the late 1990s, Chuck introduced me to his father and mother -- asking me to take them out once or twice a year, to look after them a bit. In time, Rabbi Zion and Jane became more than casual dinner mates; they became my mother and father, so Chuck and I really were like brothers (though absent the same blood).
I spoke to Chuck every morning at around 6:15 a.m. If I didn't call him on my direct line to Cantor's trading desk by 6:20 a.m., he'd get angry and yell at me in no uncertain terms! Invariably, legendary money managers Neil Weissman, Stanley Shopkorn, Dan Tisch or Phil Marber (Cantor's former CEO) would interrupt our daily calls. He would take their calls, and then shortly, Chuck would call me back. We rarely talked about the stock market, preferring to talk sports and food (his favorite activity!). Sometimes Chuck would tell me to check out Maureen Dowd's editorial piece in The New York Times ('Dougie, she is mandatory reading'), or who was on Imus that morning. I got him to buy a couple of harness horses with me for fun and he got a kick out of them as we followed their losing races. 'We'll get him next time,' he would say (his credo) -- though we never did!
We played golf together (Chuck wrote the word 'Lost' on each of his golf balls because he lost so many of them that he wanted the other players to know they were his), usually with Phil Marber or SAC's Andy Smoller. We talked NCAA football and basketball, especially about Syracuse University's teams (his alma mater). But mostly we talked about our children.
The Friday before Sept. 11, 2001, was my last day in the office, as I was leaving for Europe for 10 days. That day we spent a lot of time talking about his son Zack, reminiscing about the trip Zack and I had recently taken to New Haven to Yale University, where he watched me lecture at Dr. Robert Shiller's class on short-selling. Chuck was so proud of the way Zack had become a man. And he was nervously awaiting Greenwich High's football season with such anticipation. (They had won the state title the previous year, with Zack playing the offensive line.) Every time he talked about the upcoming season, his voice would rise several decibels. He was the proudest father on the face of the earth.
That Friday morning, the last day I spoke to Chuck, I was playing a Grateful Dead song in the background and I had Chuck on the speaker. Chuck was never what I would call 'into' music. He was certainly not a fan of the Grateful Dead -- maybe Motown, but not the Dead. Surprisingly, in our early morning talk, Chuck remarked how beautiful the song was. The song was Box of Rain, and the lyrics captured the concept of how short life can be.
Chuck's New York Times obituary is still taped to my stock monitor in my office as an ever reminder of his loss. The paper is now aged, yellowed and torn, but the scars still seem fresh.
Today, after writing this missive, I will again share Chuck's memories with his mother (Jane), his many friends (like Phil Marber) and with numerous longtime subscribers to TheStreet and Real Money Pro (like Don Gher who has already sent me a note). They were all Brown Bear's business associates, recipients of his wise advice or just friends -- and who, as they have every year, will pass on their day's thoughts to me in e-mails or phone calls, which I eagerly anticipate and will always cherish.
Real Money Pro subscriber Don Gher mailed me a classic story [two years ago] about Brown Bear. Don was thinking about Chuck and relayed that one of his pals, ex-Cantor Los Angeles and Dallas trader Eddie Weber, told him that one day he was at Cantor's NYC office, and he and Brown Bear walked out of the World Trade Center to grab lunch. There was a hot-dog vendor there, and Chuck asked how many he had left. The guy said 12, and Chuck said, "Sold!" And then they proceeded to eat all of them. That was my brother, Chuck -- an original. ...
I will never forget Mark Haines' report on CNBC of the first, second, third and fourth incidents that day, as I watched the horror on a television on a cruise ship in the Mediterranean.
And I will never forget the real-time reporting -- the confusion and emotion -- at TheStreet on that fateful day, the revelation of the extent of the tragedy and the follow-up tributes by our contributors. (TheStreet's headquarters were physically very close to Ground Zero.)
Ironically or sadly, the Jewish New Year (Rosh Hashanah) and Yom Kippur (the Day of Atonement) quickly followed on the heels of Sept. 11, 2001.
The most poignant recollection on TheStreet was the following post by Jim "El Capitan" Cramer, who recalled an incident at his synagogue. To this day, it always brings me to tears:
'At our synagogue last night on the eve of the Jewish New Year, our rabbi asked us to shout out the names of friends and family that we'd lost that day. There were so many names, it was frightening and I was glad we had left the kids at home. I felt honored to yell out Bill's name. And I feel honored to have gotten to meet and work with him in his short time on earth. Oops, wanted to cry as I wrote that. Could feel it coming on. Nope, no can do. Not with that picture of him in my mind wearing that funny floral shirt. He wouldn't want us to remember him in any other way than with laughter. God bless your soul, Bill. God bless the Meehan family.'
-- Jim Cramer, Remembering Bill Meehan
Today, I will also share my fond memories of TheStreet's and Cantor Fitzgerald's Bill Meehan with his good pals Jim Cramer, Tony Dwyer, Herbela Greenberg and others, and we will all toast him as so many subscribers did in the fall of 2001.
All that's necessary for the forces of evil to win in the world is for enough good men to do nothing."
-- Edmund Burke
Fortunately, on May 2, 2011, some very good and courageous men gained revenge for Osama bin Laden's deeds some 10 years earlier. I hope bin Laden rots in hell, but revenge doesn't reverse the loss of so many.
As Samuel Johnson once wrote: 'Revenge is an act of passion; vengeance of justice. Injuries are revenged; crimes are avenged.'
I suppose that living and remembering are the best forms of revenge.
Thanks for reading this, and thanks for letting me wear my feelings on my sleeve.
... As you watch the annual tribute in downtown New York City, think about our lost loved ones and how lucky we all are. We all miss you, Chuck.
Below is a plaque memorializing Chuck at Temple Emanuel in Davenport, Iowa, where his dad Rabbi Martin Zion led the congregation:
Finally, I have dedicated my book, Doug Kass on the Market: A Life on The Street to Chuck Zion -- so that every time I pick up my book, I think about and feel ever closer to my pal."