Skip to main content

DAILY DIARY

Doug Kass

Reflections Of...

* And lost in a world of distorted reality
* 21 years in this gig has passed more quickly than I could have imagined
"Through the mirror of my mindTime after timeI see reflections of you and me..."
- The Supremes, Reflections
One of the last songs written by the remarkable Motown team of Brian Holland and Lamont Dozier, Reflections was released during the Summer of Love (in 1967) and at the height of the Vietnam Mar.
With Mary Wilson and Marlene Barrow, it was the first popular hit to use the Moog synthesizer and provided the pivot for The Supremes' move away from the classic Motown sound.
We learned this week that markets don't grow to the sky and cannot be forever detached from the real economy - and that upside momentum has an evil sister called downside momentum.
We also learned that, as mentioned in my closer on Thursday, the value of independent views and the importance of evaluating the upside reward vs. the downside risk.
And that price, is not necessarily truth - a distorted reality and absence of price discovery (aided by machines, algos and near historically low interest rates) dominate the investment landscape more than any other time in history.
Thanks for providing me with this platform and for reading my Diary today - for that matter for over two decades.
As I peer through the window of lost time, looking over my yesterdays, this trip of writing my thoughts in my Diary, now celebrates its 21 year birthday - yup, that's right, 21 years of writing on TheStreet.
Enjoy the weekend with your families.
I need a stiff drink.

Position: None

Tell Me Something I Don't Know (About the Currency Market)

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."

Position: None

U.S. Growth Is Slowing

* A strong consumer? No
* Look forward, not backwards
* And at a rate far worse than the consensus expects
The payroll data this morning gave us a strong glimpse of deterioration in economic activity.
While jobs grew by +164k, the -0.3% decline in the work week (companies first cut hours worked and then bodies!), according to most economists, equates to a loss of -375k jobs.
Add +164k to the loss of -375k jobs and we get a -211 loss of jobs or a -0.2% decline in the aggregate hours worked index.
That means we are back to below March's levels.
This important economic datapoint, which I believe is responsible for today's market weakness, confirms yesterday's weak ISM report and, more importantly, augurs poorly for the upcoming industrial product release.
It also is a cautionary tale for the previously strong personal consumption expenditures data (was it an aberration?) - which grew by +4% in 2Q2019 after two consecutive quarters of only +1% growth. Moreover, the work based income data (average weekly earnings) moved to negative in real terms. Meanwhile, temporary labor data continues to stall - almost always a leading indicator of weakness.
Finally, the last three payroll reports have resulted in downside revisions - which typically is another signpost of lost
momentum.
A sub 2% GDP for 3Q2019 seems to be in the cards - and that's before the trade announcement of more Chinese tariffs yesterday.

Position: None

Are Deutsche Bank's Shares Washed Out?

An observation - though I am not sure what it means!
Deutsche Bank (DB) is showing good relative performance against its U.S. money center peers.
Perhaps the stock is finally washed out.
I have been a steady buyer over the last month of this speculative name.

Position: Long DB (large)

The Message of the Bond Markets

I have seen data that the trade tariffs with China could take a direct -0.5% hit to nominal GDP.
But the second derivative issues can be even more disruptive:
* Cause supply disruptions.
* Produce a dent in consumer and business confidence.
* Force accelerated trade breakdowns through retaliatory measures.
Worrisome, as previously mentioned in my Diary, is that this is coming when the decade old economic recovery is extended/mature and, at a point of time in which high frequency economic data is eroding as non U.S. economic weakness seeps into our economy.
That is the message of the bond markets.
Short TLT large

Position: Short TLT (large)

Trading Around Apple

As you know by now I almost always trade around positions.
I am doing this now in Apple (AAPL) , which is down by another -$5.50 today.
I moved from medium-sized to small-sized at $203 (they peaked two days ago at $220/share).
I plan to up my Apple short into a rally - so this doesn't diminish my negative view of the stock - it's just a reaction to the changing reward vs. risk.
Here was my critical commentary of the iPhone manufacturer this week.

Position: Short AAPL (small)

To the Downside

There is lots of open space to the downside now.

Image placeholder title
Position: None

Adding to CGC

Marijuana stocks are getting jiggy today.
I don't see any news.
I have been steadily accumulating Canopy Growth  (CGC) - based on risk/reward and taking advantage of the recent share price decline.

Position: Long CGC

Perma Bear?

I get a lot of criticism for being a perma bear.

However I have 18 long ideas on my Best Ideas List and only eight short ideas.

Case in point - I initiated a long position in Dillard's (DDS) yesterday at $67.10.

The shares are +$2.50 today.

Position: Long DDS (small)

Adding to GOOGL, AMZN

Buying more Alphabet (GOOGL) ($1199) and Amazon (AMZN) ($1836) now.
I especially like GOOGL at these prices.

Position: Long GOOGL, AMZN

Don't Put a Square Peg in a Round Hole

* I would continue to avoid Square
I have made money on both the long and short side of Square (SQ) over the last 1-2 years but I recently grew more bearish in view in my Diary.
It seems everyone likes SQ today - fundamentalists, technical analysts and even the unusual call activity crowd (who will likely not take responsibility for this week's "unusual" call, but what else is new?).
Here is my most recent post on this name.
The company's quarter, reported after the close, confirms my market share concerns and I expect the shares to return to the $60s once again.
Perhaps post haste.
Margins were pressured and the rate of growth in payments continues to decelerate (under +30% growth) as pressure in the large payment customer markets grow increasingly competitive (even before the amalgamation of First Data and Fi Serve).
Not only am I concerned about competition in the high-end but I also remain concerned that the formation of Square Capital - aimed at accelerating its business growth - places credit risk on the company (at a point of time that the credit cycle is maturing).
At more than 8x 2019 projected revenue, the shares are overvalued - despite the near universal optimism I see.

Position: None

Tweet of the Day (Part Deux)

* Mean regression may lie ahead* And when it does, look out below as it will be a bitch!

Back in 2006-07 I vividly remember my building concerns about the housing market and the slicing and dicing of derivative instruments (investors were in search of yield) that was exported to financial institutions' portfolios around the world.
Those concerns were outside of consensus - and I appeared weekly (sometimes three times a week) on The Kudlow Report to debate the bullish cabal who were as self confident in view as they are today.
By 2009 the world's banking system was virtually bankrupted - yet 2-3 years earlier concerns existed in only a handful of minds (The Big Short Group, Ritholtz, Roubini, Shilling and, of course, myself).

Abnormal and aberrant behavior, not relying on history's lessons, unbridled fiscal and monetary policy, the disproportionate role of machines and algos on our markets, hastily crafted (lacking depth) and random communication of policies (by tweets) and conditions (like $13 trillion of negative interest rates) have been normalized.
Like a decade or more ago, strange stuff is happening so fast we are not even questioning their very existence and, in the case of interest rates (for example), why this is not likely a permanent condition.
But when the history books are written and markets "normalize" we will likely shake our heads in looking at the current landscape - and ask ourselves, what were we and the markets thinking?
For example, this weekend ask yourself (and conduct second-level thinking) why these conditions (below) exist and what is the message of the world's fixed income markets?

On subject, the following was extracted from yesterday's opening missive, "The Stock Market Is Uniquely Vulnerable Now" - and questions, in part, the legitimacy of valuing stocks against the currently artificially low interest rates in the U.S. and around the world:"Lee's view on interest rates, as expressed in his CNBC appearance, is that while they might go down over the near term they are overvalued in the intermediate term. The later point is something I agree with wholeheartedly (and I am short (TLT)). I argued (as I have in the past with Lee) that comparing equities to bonds - which almost everyone recognizes to be an overvalued asset class (especially in an intermediate term sense) - represents a slippery slope to support current and elevated stock valuations. I went on to suggest to Lee that stocks don't deserve a higher multiple for lower interest rates if the reason for lower rates is slower growth. (Imagine what the price earnings multiples of European and Japanese stocks would be if the level of interest rates were a factor in their valuations!) I would remind everyone of consensus expectations for rates a year ago - not one single business media commentator, "talking head", or investment strategist was looking for lower interest rates. (I was looking for lower rates (15 Surprises for 2019) with a projected low in the 10 year US note of about 2.25%). Pure "group stink."Today almost everyone is calling for lower interest rates. But, bond traders and investors may be picking up nickels in front of a steam roller.As well our interest rates are depressed and anchored because of the proliferation of negative rates in Europe (something Lee also discussed on CNBC) - and we have to consider (as I suggested earlier) why those rates are negative "over there." Again, second-level thinking might be called for."

Bottom Line
I didn't' know the timing of the adverse consequences from what I saw in the housing markets 13 or 14 years ago but I knew that it was coming (relatively soon) and when it did, the economic and financial consequences would be devastating. These non-consensus concerns that I possessed and articulated (in 2006-07) proved to be bountiful and rewarding.
I feel the same today.

Position: None

Q1s Mea Culpa Moment

Dow Theorists, read Danielle DiMartino Booth:

  • * We humbly present this mea culpa after providing less-than-perfect guidance for ISM New Orders; without humility, we would underappreciate that we are mere mortals playing a difficult game
  • The first thing we noted about Thursday's ISM report was its bad breadth; focus on the persistent weakness in external demand because that's what's generated the collapse in breadth
  • Combining all three ISM industry breadth measures of exports, imports and backlogs proxies transport/warehousing payrolls; a surprise decline in transport employment today would ratify contagion fears through Dow Theory
Image placeholder title

Being cradle Catholics at QI, we're more than familiar with The Confiteor that falls just after the greeting at the start of Mass. You too may know this Penitential Rite's first two words, "I confess," by heart. Asking for repentance begins with Almighty God and ends with all of the Angels and Saints and our brothers and sisters. The "through my fault" that falls midway through translates into "mea culpa" as originally penned, which you repeat before the biggie, "mea maxima culpa" - my most grievous fault. Why not title today's Feather to the maxima after guiding you to listen for a miss in ISM New Orders? While we take our analysis seriously, we've never presumed to be perfect. Without humility, we would underappreciate that we are mere mortals playing a difficult game. We would also be wrong with greater frequency if we fancied ourselves infallible.

In the spirit of saving face, we licked our pride's wounds and moved on to analyze the day's data, as is our mission. Aside from New Orders ticking up to 50.8 from 50.0, the first thing we noted about Thursday's ISM report was its bad breadth. That raised a question. New Orders is reported on a seasonally-adjusted basis. But do businesses across the economy operate with seasonal adjustment?

Let's look back a year in time. Last July, the headline ISM was 58.4 and 17 of the 18 industries reported being in expansion. Thursday's headline of 51.2 marked a fourth straight decline and saw the number of industries reporting expansion sink to 9, the worst showing since September 2016 during the last industrial recession. For some perspective, positive breadth was 12 in June, right in line with the average back to the series' 2005 inception.

A stark reflection of the spread in perceived weakness was in new export and import orders, which slipped into contraction at 48.1 and 47.0, respectively. But that wasn't the last of it. Backlogs, a.k.a. unfilled orders or future demand, fell further into contraction, from 47.4 to 43.1, the lowest since January 2016.

Let's set aside the latest Trump tweet for a moment, which is hard to do - if he carries through on September 1st, the move will expedite the bankrupting of the weakest brick-and-mortar players to say nothing of pushing Texas into recession.

On a more fundamental level, trade wars compress both import and export volumes, exactly what we saw in the latest GDP and ISM data. Focus on the persistent external weakness because that's what's generated the collapse in breadth. Combining all three industry breadth measures of exports, imports and backlogs proxies transport/warehousing payrolls.

Why? This combination gauges the movement of goods and whether firms are facing capacity constraints, when the supply chain heats up, or not. How many times since 2005 have so few industries in the ISM reported rising exports, imports and backlogs? Today's number of SIX has been recorded in five other months, all of which fell in 2009.

You may have heard the ISM Employment index fell from 54.5 to 51.7, a near-three year low. No surprise, Backlogs lead Employment. But when combined with the soft spot of total trade (exports + imports), the risk rises that we see a surprise decline in transport employment, which would ratify contagion fears through Dow Theory which dictates weakness in industrials begets weakness in transports.

As for corroborating evidence, at 5,532 cuts, Transportation led all sectors in Challenger, Gray & Christmas July layoffs. No doubt, it's not as headline-grabbing to note that at 19,039, year-to-date Transportation layoffs are only up 67% over last year's 11,399. That's chicken feed to the 52,054 Industrials layoffs, which are 529% higher than 2018's 8,276. July was, however, the first month Transportation layoffs were higher than the 4,403 announced in Industrials.

Challenger was keen to point out that 1,053 job cuts were attributed to tariffs in July, bringing the year-to-date total to 1,430. But please, that isn't even a rounding error in the context of the 369,832 jobs that have been announced in this year's first seven months, a 35.8% increase over last year's 272,301. No, the category that intrigues is "No Reason Given." It flashed onto the scene last December and has since risen to rank third behind Restructuring (92,995 ytd) and Closings (73,402 ytd) in Challenger's rankings of "Job Cuts by Reason."

The ranks of pink-slippers who've been shown the door "just because" stood at 43,288 as of July, the seasonally slowest for layoff activity. Nevertheless, July makes it official: layoffs have risen over the prior year for 12 straight months. Add it all up and you would think Dow Theory would make an appearance in today's payroll report nicking those who dismiss the factory sector's meager contribution to GDP. But what do we know?

Position: None

Tweet of the Day

Position: None

Kill the Quants Before They Kill Our Markets

Having committed so much space in my Diary to the market influences and risks associated with quantitative strategies, I found this report about the evolving technological capabilities of Goldman Sach's trading operations quite worrisome.

Position: Long GS small
Doug Kass - Watchlist (Longs)
ContributorSymbolInitial DateReturn
Doug KassVKTX4/2/24-28.84%
Doug KassOXY12/6/23-11.54%
Doug KassCVX12/6/23+14.43%
Doug KassXOM12/6/23+17.98%
Doug KassMSOS11/1/23-15.70%
Doug KassJOE9/19/23-10.53%
Doug KassOXY9/19/23-23.39%
Doug KassELAN3/22/23+43.40%
Doug KassVTV10/20/20+67.81%
Doug KassVBR10/20/20+79.91%