Thanks so much for reading my Diary today and all week.

I hope it was value added.

Enjoy the weekend!

More on the decline of active investment management.

"Dougie, you are a glutton for punishment."
- Grandma Koufax

I am about one third through my Kraft Heinz (KHC) analysis (I will be done next week).

Based on the output thus far I am picking at the stock under $27/share.

More next week.

My favorite short sector remains the investment management stocks - (BEN) and (TROW) .

The stocks are rolling over.

I am large-sized in both and recently added to BEN. 

BEN, in particular is now breaking down badly - down by another -3% to a new recent low of $29/share.

Here is my investment thesis back in May:

Spots of Vulnerability (Asset Managers - Part Trois)

* Some fund managers are so desperate to attract capital that they are offering a negative fee model (that will pay investors to manage their money!)
* A toxic cocktail is brewing in the money management space

About a month and a half ago, Tobias Levkovich hosted a Bull/Bear debate at Citigroup's (C) headquarters in New York City.

I represented The Bear Case.

One of the questions Tobias asked was:

"Technology is seen as generating growth but often at the expense of some others, such as online sales versus brick/mortar stores - is there a new area that you envision as being prone to major disruption?"

That was a great question from Tobias - though it is hard to predict areas that may be the next sector subject to disruption (because almost every area is subject disruptive change these days)!

Tobias' query renewed a project I was working on late last year - shorting the investment managers (e.g., T. Rowe Price and Franklin Resources) - and I have moved on my analysis recently and shorted several stocks in the space. ( (BEN) and (TROW) have been placed on my Best Ideas List (short)).

Here is my short thesis on the investment managers:

More and more money is going to passive products and strategies and away from active managers (who have failed to meet the returns of the Indices). Passive products are by definition not as energetic (it is a strategy that trades less actively) compared to active managers. More importantly, the fee differential between active and passive managers is wide - with passive providing an attractive low-cost (fee) alternative to active.

In summary, a toxic cocktail may loom ahead for investment managers:

* Lower stock market prices
* Less volume and activity (as low cost passive strategies continue to replace high cost active strategies)
* Lower transaction pricing (commissions) provided by on line services (like E Trade and Fidelity)
* Reduced investment management fees reflecting the continued share gains of passive products and strategies over the active ones

I don't believe investors are aware of how commoditized the money management business has become. As an example, a year ago, a boutique fund manager, Salt Financial, began to pay clients five basis points a year to manage their money!

Even many of the larger money management firms (including Fidelity and Vanguard) are offering some no-fee based ETFs.

I expect the competitive challenges to active managers like T Rowe and Franklin to intensify in the coming years.

Finally, those larger brokerages (e.g., Morgan Stanley (MS) and Goldman Sachs (GS) who are moving their business mix towards the retail investor) who have very high cost fee-based (wrap) products are particularly vulnerable to the trends discussed in the body of this column.

Bottom Line

Investment managers may be the next group to feel disruption... and may be headed for large share price falls.

I think I am ahead of the curve on this idea.

Both TROW and BEN are on my Best Ideas List (short).

Fox's Edward Lawrence's tweet might have turned the market:

The expected profit taking in gold may have started today. (Yesterday I moved from large- to medium-sized)

From an independent friend:

Four decades of investment experience, a degree in economics and ran a money center for a commercial bank for much of that cycle. All while putting my degree to practical use.

But to me these statements from "The Swan" are getting more and more delusional regarding China paying for the tariffs/taxes on the American people.

I am not making a value judgement on China as they are a bad player. But when he continues to spew crap it dilutes his message, I mean the question of the year does he really think China is stupid each time he blabbers this nonsense?

He needs to change the dialogue from trade to intellectual property as companies moving production from China to other less expensive producers does nothing for our trade, what he and Navarro are really after is China itself. China knows this and will not change their entire economic structure to appease America. With that said stealing our intellectual property is most of the story in my opinion and should be stressed as trade imbalance should be talked about much less frequently.

As I said I may be looney tunes but...."What The" is all I can say.

CBS shares are -5% after a bad earnings miss.

I would not bottom fish this name.

The shares are down to under $49 now.

Here is what I wrote about the stock in May: 

I'm Taking CBS Off My Best Ideas List This Morning

I recently sold CBS (CBS) shares at $51-$52.

Since then CBS stock has retreated to $47.25.

I have maintained the stock on my Best Ideas List because I intended to reestablish my long under $46.50.

However, given the turmoil at Viacom (VIAB) (which I anticipated would inevitably acquire CBS) - actually it's more like an unmitigated disaster - I am not certain an attractive deal between the two companies can be put together.

As a consequence I am taking CBS off on my Best Ideas List this morning.

I would note that 2020 will likely be the mother of all political spending cycles and at some point there will be a long trade in CBS. ( (SBGI) , (NXST) and (GTN) are other political spending plays I am looking at now).

I have pressed my (VXX) long and my (SPY) and (QQQ) shorts.
I am up to medium-sized net short in exposure.

Moving from small-sized to medium-sized in VXX at $26.25.

Alphabet (GOOGL) , our Trade of the Week, is +$30 during the last five trading sessions.

It provided us with some alpha.

This is a good supplemental read to my Avalanche of Debt opener from yesterday.

The article touches on my observation made months ago - 30 years ago it took only $1 to grow GDP by $1, today it takes nearly four times that amount.

Here you go.

"When you should buy, you wont."
- Wally Deemer

Tony is a dear friend and a smart analyst who I disagree with more than I agree with.

Our respectful debates have been common over the last two decades - we learn from each other.

Our subscribers feel the same as I do - his column and observations is among the most requested.

Tony sees a move back to recent lows and then he wants to reestablish an overweighted market position:

Tony's price target for the S&P next year is 3350 - and he often reminds investors that when it comes time to buy most are reluctant (See Walt Deemer's quote): 

Expect SPX move back to low - then buy it.

Ramp in bearishness a great signal when to add exposure. The American Association of Individual Investors (AAII) reported bearish sentiment among individual investors jumped to 48.2% from 24.06% in the prior week. This means that almost half of its members now expect the direction of the market to be down over the next six months. Both bullishness and neutral sentiment saw large declines by dropping to 21.66% and 30.15%, respectively. The spread between bulls and bears has fallen to -26.54%, the widest spread since the week ended 12/14/18.

We looked back since 2010 and found four other periods when the spread had fallen to at least -25 (Figure 1). Such a wide spread turned out to be a positive intermediate-term signal for the market, with gains every time three and six months' out and median returns of 8.32% and 13.00%, respectively. Importantly, it broke the SPX price on the date of the spread instance each time with a median loss of -2.91%.

Figure 1: AAII data strongly suggests buying any marginal break of recent low (Past performance does not predict future results.)

Summary - The current degree of bearishness vs. bullishness in the AAII strongly suggests adding to equity exposure but waiting for small break of the SPX price at the time of the occurrence. The heightened trade war with China, prospect of a hard Brexit, and last week's horrible Fed press conference certainly provided solid excuses for the market to pull back following the ramp off the May low. That said, our still-positive core fundamental thesis continues to suggest any weakness should prove limited and temporary and provide a more attractive entry point for a move toward our 2020 target of 3,350.

* Mr. Market is almost impossible to navigate on a day trading basis

"Television is our chief tool in selling our policy."

- Richard Hass, A World In Disarray

Given the "newsy" nature of the increasingly volatile markets, the unpredictable behavior (and policies) of The Supreme Tweeter, the unusual global interest rate setting (which too many are taking for granted), the absence of coordination between the leading economic countries, the deepening manufacturing recession that appears to be seeping into the services sector (creating the likelihood of more EPS disappointments, announcements and guide downs in 3Q19 and questions regarding central banks' ability to catalyze growth (the problem is not the availability and cost of capital) - the short term market gyrations seem likely to continue for some time to come in a market without memory from day to day.
Position trading (1-2 weeks) seems to be the ticket for the opportunistic and not day trading (1-2 days) - considering the lack of day to day forecasting accuracy given the active role of the above independent variables.
Intermediate-term it still looks like, after an upside overshoot a month ago, that an important market top occurred in January, 2018.
Long term, despite what John Maynard Keynes said, we will be fine!

The Fed is Pushing on a String and the fact that investors are not worried about the plethora of negative interest rates around the world is, in itself, worrisome:

As I wrote back in 2015, Don't Be An Earnings Twit: 

As we move deeper into the earnings report season, please keep the following in mind:

As a skeptic, I would compare the EPS season to Monty Python's "Twit Olympics," where contestants compete by jumping over matchbook covers.

In other words, investor relations departments manipulate consensus sell-side EPS forecasts so they can be beat by modest amounts, usually by a penny or so. This helps to explain why about 69% of reports are "beats" on a consistent basis.

The biz media is breathless about these reports, which are actually highly choreographed.

Among the dim-witted upper class depicted in Monty Python was Nigel "Incubator" Jones, whose best friend was a tree and who was a stockbroker in his spare time.

Remain skeptical of most earnings reports as they are judged against choreographed expectations.

Bringing us up to the present with Credit Suisse:

• Investors have been particularly kind to those companies missing on both the top- and bottom-lines. Stocks that have fallen short of both sales and EPS estimates have underperformed the S&P 500 by just -1.2% vs. -3.6% over the past 3 years.
• 5% of the S&P 500's market cap has reported 2Q results. Earnings are beating by 5.2%, with 68% of companies exceeding their bottom-line estimates. This compares to 5.5% and 71% over the past 3 years.
• 2Q expectations are for revenues, earnings, and EPS growth of 2.2%, 1.0%, and 3.4%, respectively. EPS is on pace for 3.7%, assuming a typical beat rate for the remainder of the season.
• Although aggregate S&P 500 EPS is expected to rise by 3.4%, the median company is expected to grow 6.0%.
• Companies beating on both revenues and EPS have outperformed the market by 2.4% vs. a historical average of 1.7%.
• Next week, 10 companies representing 2.4% of the S&P 500 will report results, including Cisco, Wal-Mart, Deere, Applied Materials, and Sysco.

In the market with no memory from day to day, S&P futures are -16 at 6 a.m. ET, based on this Huawei news. 
I start the day small/medium net short in exposure.
I bought the iPath Series B S&P 500 VIX Short-Term Futures ETN  (VXX) near the close of trading.
Bonds are one basis point lower in yield (10-year at 1.70%) and gold is +$5.60/oz, to $1515.

Danielle DiMartino takes it to Camp Kotok in Maine (I have been invited for years and one day I will make it!):

• Maine is ranked 27th in the nation based on its unemployment rate, job growth, per capita GDP, GDP growth, average weekly wages and wage growth. Its unemployment rate is 8th lowest, but its per capita GDP as of 2017's third quarter was the 10th worst.
• Maine's industry base is less cyclical versus the nation and Portland Maine is flourishing by attracting millennials. Maine is the top-ranked state for low jobless claims with applicants for unemployment insurance down 21% over the prior 12 months, vs. a nationwide 1.7% average decline.
• Job growth in the coming decade is projected at 33.7%, a smidge above the national average but higher income taxes and Maine's public education rankings may dampen the state's opportunities.

Mum's the word. At least that's the case here at QI through Sunday. We are traveling to Grand Lake Stream, Maine to attend Camp Kotok -- a.k.a. The Shadow Federal Reserve Committee. The beauty of this fishing mecca on the eastern edge of Maine can be captured in one word: pristine. The hatched bald eagles reaching their beaks up to their mothers for that fresh catch of fish. The amber sunsets that demand the silence of those blessed to be in their presence. The tug on the line that stirs the hand-carved canoe on the glassy lake. And the reward of the small mouth bass you reel in, netted with pride by a fourth-generation fishing guide who imparts so much more than guidance through his wisdom and poise.

But there is a whole different sort of peace on offer as we gather at Leen's Lodge. There is discretion. Camp Kotok is held under Chatham House Rules. As per tradition, "participants are free to use the information received, but neither the identity nor the affiliation of the speaker(s), nor that of any other participant, may be revealed." We 50 economists and veterans of the financial markets speak freely knowing we are in a safe place to do so. As such, we feast on each other's insights and views. It is indeed a rich experience.

As for the economic backdrop, the economy of the country's 23rd state as of 1820, is in in flux. Portland is a thriving city and magnet for millennials. On a recent trip into Portland, the hip driver gathering yours truly had just relocated from South Beach. And, while the rest of the state is not Portland, to characterize it as "in decline" would be unfair and unkind.

A 2018 Business Insider ranking placed Maine 27th in the nation based on its unemployment rate, job growth, per-capita GDP, GDP growth, average weekly wages, and wage growth. No surprise, Maine's biggest export is those delicious lobsters. But its unemployment rate was the eighth-lowest among the 50 states and D.C. That said, its per capita GDP as of 2017's third quarter was the 10th worst.

What's surprising is that agriculture, forestry, fishing and hunting (Moose Crossing!) only employs 2.4% of Maine's population. Setting aside the usual suspects of healthcare and education, Maine's largest employers are retail trade and manufacturing.

General Dynamics'  (GD) Bath Iron Works is the state's fourth-largest employer, boasting a stellar reputation among its workers for its pay and working conditions. And of course there's L.L. Bean, the state's fifth-largest employer with its iconic outlet in Freeport, about a third of the way to Leen's if you're driving up from Boston.

As you can see on our table insert, Maine is also a less cyclical play vis-à-vis the nation, a lovely departure from those states being wracked by the trade war. Lobsters and lighthouses make for much better diversions than Midwest factories pushing through layoffs.

As for what's to come, job growth in the coming decade is projected at 33.7%, a smidge above the 33.5% national average. That brings us to the best news on the Pine Tree State. Maine ranks #1 in QI's DEFCON jobless claims list. Applicants for unemployment insurance are down (good) 21% over the prior 12 months vs. down 1.7% nationwide.

We realize we are coming across like a Maine Chamber of Commerce advertisement. Lest you think we've donned rose-colored glasses, the state income tax rate is 7.2% -- north of the U.S. average of 4.6%. We say, why put yourself at a competitive disadvantage when your growth prospects are so bright?

Maine's public education system is another black eye, ranked 37th in the county. Since we've raised the subject of education, we would highly recommend you spend a moment of your weekend taking in QI's Weekly Quill, which we've shared with all of our Feather readers with good reason.

On Saturday evening, QI will take part in the only formal event at Camp Kotok, debating the merits of Modern Monetary Theory, affectionately known as MMT. Were it not for the leadership of Ben Bernanke, we doubt this subject would be front-and-center. Years ago, in a speech in Japan, Bernanke suggested issuing perpetual strips to finance spending needs. No maturity, no income. Does that sound like a yen to you?

We posit that every penny of quantitative easing Bernanke promised would be unwound is debt monetization and indeed the source of real-world inspiration for MMT proponents. We propose instead a Modern Meritocracy Theory, a harder pathway to ensure every American child is educated to a high enough standard to compete on the global stage. We hope the leaders of every state, including the great state of Maine, consider exploring this option. We look forward to reporting back -- after a bit of fishing, that is.