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DAILY DIARY

Doug Kass

Fed Pats Itself on the Back for the Stock Market Rally

"Just one more thing."
- Lt. Columbo

From Peter Boockvar on the Fed minutes:

Sorry for the late review of the FOMC minutes which is the Fed's 2nd chance of communicating a message to the market outside of the official statement and Powell press conference. Don't mistaken these 'minutes' as actual minutes of what was said verbatim. Here are a few relevant points outside of the typical commentary on growth, the labor market and inflation.

Most importantly and what we already know, participants noted "significant uncertainties surrounding their economic outlooks, including those related to global economic and financial developments. In light of these uncertainties as well as continued evidence of muted inflation pressures, participants generally agreed that a patient approach to determining future adjustments to the target range for the federal funds rate remained appropriate."

I've said many times to insert "S&P 500" for "financial developments" because that is essentially what we're talking about here when its cited. So the Fed is referring to "significant uncertainties" with regards to the S&P 500. What uncertainties exactly now since the S&P 500 is just off all time record highs? They also acknowledged that their jawboning which shifted policy to one that is more "flexible" is what boosted the stock market. "In their discussion of financial developments (S&P 500), participants observed that a good deal of the tightening over the latter part of last year in financial conditions (S&P 500) had since been reversed; Federal Reserve communications since the beginning of this year were seen as an important contributor to the recent improvements in financial conditions (S&P 500). Participants noted that asset valuations had recovered strongly." Thanks Fed, high five and the parenthesis and underline are obviously mine.

While remaining "flexible", it seems that they believe that they've just about reached their fed funds target but aren't exactly sure. On one hand, "Several participants noted that their view of the appropriate target range for the fed funds rate could shift in either direction based on incoming data and other developments." On the other, "a majority of participants expected that the evolution of the economic outlook and risks to the outlook would likely warrant leaving the target range unchanged for the remainder of the year." This is the March meeting and already "a majority of participants" see no more rate hikes even though they are now "flexible."

Position: None

Wednesday's Key Takeaways

Here are my key takeaways:

* Watching the sausage being made in Washington D.C. is a nauseating experience. They are Fools on the Hill! 
* Banks ignored the B.S. and rose on the day.
* Late in the day, someone in the business media said that he expects first quarter EPS to likely exceed expectations. What? Given this. This is what drives me nuts and why I am watching less and less biz TV -- narratives are just made up. No one questions those narratives and the biz media fails to memorialize the recommendations made -- so viewers have no clue about the value.
 * Bond yields fell again -- the 10-year U.S. note yield dropped by three basis points to 2.47%. This is not a friendly economic growth message!
* Oil rose by two bits and gold increased by $4/oz in value (on top of yesterday's $6 gain).
* Breadth was strong -- 2,150 advancers, 875 decliners. This reversed yesterday's weakness.
* Not any group/sector themes that I can see in today's trading session.
* Amazon (AMZN) was the world's fair again -- and is now +$455 above my Best Ideas List inclusion late in 2018. 

Position: Long AMZN (large)

Tweet of the Day (Part Trois)

Position: None

Adding to SDS

I have added to (SDS) at $32.10 this afternoon.

Position: Long SDS

The World Can Live Without Stock Buybacks

Continuing my commentary on buybacks.

Buybacks were illegal until 1982.

The world can live without them.

The U.S. economy was certainly better back then in those times.

Position: None

Subscriber Comment of the Day

richfish823

In case you did not see this yesterday...

Why I do not like Apple

* Quality is in decline - The keyboard on my MacBook Pro is driving me crazy... it really sucks 
* Battery Scandal - slowing down older iPhones to avoid shutdown
* The Apple TV+ press conference was a disaster. Teens, twenty somethings and thirty somethings do not relate to Spielberg, Oprah, Aniston... everyone on the stage was a card carrying AARP member
* Without Netflix... Apple TV+ will be DOA
* Some companies go from "Good to Great" others such as Apple go from "Great to Good or Average"
* Steve Jobs is dead

Position: Short AAPL

The Fools on the Hill

"His head in a cloud
The man with a foolish grin is talking perfectly loud
But nobody wants to hear him
They can see that he's just a fool
But he never gives an answer.

But the fool on the hill
Sees the sun going down
And the eyes in his head."

- The Beatles, The Fool on the Hill

Not to be a bump on the log but I can't even laugh at today's House Financial Systems Committee hearings.

The system is clearly broken on both sides of the isle and when I watch it and consider other developments (e.g., the recent education scandal) I could care less as it only highlights the worst in our society and it is not surprising.

Like many, I am fed up with all it.

A very important question I now have is who is running our country with so many vacant cabinet positions? 

Sorry to be a downer but really these bankers in front of HFSC and the politicians are engaged in embarrassing performances.

I know the time is limited but this is an awful display by everyone.

Bottom Line

None of this will have any impact on our capital markets.

Position: None

Trades

No trades today.

Position: None

Quiet Open

Looks like a quiet opening and maybe a quiet day.

It's a good morning to do some research- which is my intention.

Position: None

How I'd End the Hubbub Over Stock Buybacks (Hint: Make Them Illegal)

* There has been little attention paid to the growing threat that corporate stock buybacks may be limited or banned
* I have a plan!

"Eliminating buybacks would immediately force firms to shift corporate cash spending priorities, impact stock market fundamentals, and alter the supply/demand balance for shares... The potential restriction on buybacks would likely have five implications for the US equity market: (1) slow EPS growth; (2) boost cash spending on dividends, M&A, and debt paydown; (3) widen trading ranges; (4) reduce demand for shares; and (5) lower company valuations."
--David Kostin, Goldman Sachs

The important role of share buybacks cannot be overstated.

In 2018 corporate share buybacks exceeded $1 trillion, in large measure because of the change in corporate tax rates implemented at the beginning of the year.

According to Goldman Sachs, buybacks are the largest source of share demand in the last decade.

There is a great deal of controversy that has developed over the role of buybacks, with some believing that buybacks create artificial and unnatural demand and that they even take away from more productive business fixed investment. Others believe an overly generous Federal Reserve that has contributed to a generational low in interest rates has abetted buybacks through increased debt offerings, thus raising credit and profit risks in the future when rates rise. Still others are of the view that buybacks are too geared toward buoying the incentive-based compensation of company executives via higher stock prices.

Some of those who believe in the need to limit or ban buybacks reside in the U.S. Congress.

Last month Sen. Marco Rubio (R-Florida) released a plan that would curb buyback incentives and Sen. Chris Van Hollen (D-Maryland) said he plans to propose legislation curbing executive share sales after repurchase announcements. Now the Senate is starting a hearing aimed at introducing legislation to prohibit public companies from repurchasing their shares on the open market.

My Plan

My plan is simple.

Make buybacks illegal.

Allow companies to dividend out cash tax free, like a buyback. This keeps companies out of the market and prevents them from manipulating their own stock, which often benefits company insiders who are selling.

Then the decision of what to do with corporate cash becomes more pure.

It no longer will be a choice of trying to prop up a stock versus spending it on the business. (No socialist intervention intended!)

Companies will still be left to do with their own cash what they want. 

This is the other big problem, the fact that dividends are taxed but buybacks are not.
That doesn't make too much sense to me.

Position: None

Tweet of the Day

Position: None

The Book of Boockvar

Peter Boockvar discusses sentiment and European data:

According to II, we saw more bullishness w/o/w. Bulls rose .5 pt to 53.9, matching the highest level since October 10th, while Bears fell .2 pts to 19.2, the least since mid November. The spread of 34.7 is the most since October 10th. While sentiment is not at previous extremes, with Bulls around 60 and Bears closer to 15, we're pretty close. Also, after Monday's close, the CNN Fear/Greed index was one tick from 'extreme greed.' As sentiment follows the rise in stocks, it's no surprise after the pretty amazing run we've had this year.

Before we hear from Mario Draghi today, we did get some better than expected February production data. The main focus of Draghi is what his timing and scale of announcing a new round of TLTRO's and how he'll respond to questions about the obvious side effects to everyone but him of negative interest rate policy. They'll eventually introduce a tiering of reserves that get penalized but the real cure to the poisonous impact of NIRP is to get rid of NIRP. The European bank stocks are little changed as they wait for some lifeline. I've seen an estimate that European banks are losing 9b euros per year to this 'tax.' Take that 9b in lost capital that could have been leveraged multiple times in the form of loans and it's real money.

We saw a rebound in industrial production in France in February thanks to an improvement in manufacturing. Manufacturing IP rose 1.1% m/o/m, well better than the estimate of down .4%, while January was revised down by 3 tenths and helped by a rise in transport equipment. We also saw an upside surprise in the February Italian IP figure, which rose .8% instead of falling by .8%, as expected. When we saw the better-than-expected German IP last week, good weather was part of the reason and maybe the case for France and Italy too. But, if it's more than that, maybe this is the first green shoots seen in a while in the region. Sovereign bond yields aren't responding by much though, as the French 10 yr yield is unchanged, Germany's is up by 1 bps while Italy's is lower by 2 bps. The euro is up a touch and European bourses are up about .4%.

There was also an improvement in UK industrial production in February helped by manufacturing. Manufacturing production was higher by .9% m/o/m, 7 tenths more than expected, and January was revised up by 6 tenths. As seen in the March PMI figure, some was likely stockpiling ahead of what was possibly a hard Brexit on March 29th according to the ONS. The ONS also said they could not quantify the impact.

This stock piling did help to lift GDP growth for the 3 months ended February to .3% 3m/3m, one tenth more than expected, and the 3 months ended January was revised up by one tenth, also to a .3% gain. Annualizing the February growth puts GDP up to 2%, but again, tough to say how much was front loaded. The 10 yr Gilt yield is up 1.4 bps after falling by the same amount yesterday, so not really responding much. The pound is slightly higher and the FTSE 100 is unchanged.

As for the Brexit drama, it is looking like the next delay could last a while and which will be finalized possibly today. Talk is about maybe up to a one year delay. So we'll have another 6-12 months to be talking about this. Ugh. Does business breathe a sigh because nothing negative is happening imminently or is this going to still cloud visibility until a final conclusion has been made to the UK exit? I don't know.

In Japan, its February core machinery orders index rose 1.8% m/o/m after a 5.4% drop in January, but that was less than the forecast of a 2.8% rise. Versus the same month last year, orders are down 5.5%, the 2nd worst since the summer of 2017. Capital spending will be a drag when Japan reports Q1 GDP. The 10 yr JGB yield fell 1/2 a bp to -.053%, a one-week low, in response.

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%