Today I moved down all of my shorts (of an individual and Index-kind) to small and I kept all of my long positions at the same levels they have been at over the last week (except for Goldman Sachs (GS) , Google (GOOGL) and Amazon (AMZN) that I eliminated).

I am now quite liquid.

I plan to continue to trade and invest actively -- but as I wrote in the previous post -- I will be keeping those positions as small-sized.

Thanks for reading my Diary and enjoy your evening.

As the today's trading day comes to a close, it is apparent that, like the 1997 Long Boom paradigm expressed in a column in Wired Magazine during the dot.com bubble -- the current market is similarly viewed as in its own, new liquidity-based paradigm.
No longer is the market hostage to the real economy or sales and profit growth - stuff I have spent four decades analyzing. Instead, liquidity is seen as an overriding influence - actually it has become the sine quo non.
As such, historical valuations become increasingly irrelevant and price momentum is the lodestar.
There are many that are willing to play this game of musical chairs. I salute you - but that approach is not in my investing "DNA."
I am not willing - as I must admit to not having the conviction (in either direction) with knowledge that, in the fullness of time, buying high and selling higher will ultimately come to a brutal end. Equally important (and honestly), I currently don't have a real notion what to even look for as a signpost.
Accordingly, I have materially reduced my gross and net exposure today and I plan to stay in that state of suspended animation for a while.
This means, while I will be trading and investing actively (as usual), I will be doing so in much smaller size than in the past - both on the long and short side - as my conviction is simply not there.

In this afternoon's New York State of the Union address, Governor Cuomo vowed to legalize cannabis this year.

In all likelihood, legalization will be part of the state's budget - possibly establishing a framework in the next three months and certainly reducing the hurdle of a standalone bill. (Remember a legalization bill didn't get enough votes in the New York legislative session last year).

New York state's 19.5 million population could be a $3 billion to $3.5 billion market for the cannabis companies. Importantly, New York legalization will place pressure on Connecticut, Pennsylvania and New Jersey to follow suit.
Cannabis stocks have reversed their early morning weakness on this news.
I will have a lengthy position piece and analysis on cannabis stocks in the next 10 days.

Today I have taken down - from large-sized to medium-sized - my (GLD) long investment.

This move, along with the others today, puts me in a much more liquid position than 24 hours ago.

Given the likely volatility and uncertainties ahead this seems to be a sensible strategy as my conviction level is lower than before.

Twitter (TWTR) remains a laggard I would purchase.

From Peter Boockvar:

The benchmark 10 yr note auction was a mixed bag. The yield of 1.869% was higher by almost 1.5 bps from the when issued level (10 yr yield got to 1.70% overnight). The bid to cover of 2.45 was a touch above the year average of 2.42 but dealers were left with 29% of the auction vs the 12 month average of 25%.

Bottom line, I'm sticking to my belief that long yields are heading higher, more so because of a lift in European bond yields and to a lesser extent Japanese ones not because I expect economic growth to accelerate from the current 2%ish growth rate. The German 10 yr yield closed up by 8 bps today to -.21%, just below the least negative since June. Also, I do believe we are at a point where stocks and bonds need to do some reconciling here on what the outlook is for growth. A 10 yr yield of 1.87% is not signaling the extent of the bullish outlook that stocks are. Now granted the Fed's explosion in the size of their balance sheet is distorting everything and maybe we'll have to see how things go when they wind this down. And they will I believe in coming months rather than waiting until Q2. A $400b increase in the balance sheet deserves some explaining from Jay Powell when the FOMC meets at months end.

10 yr yield

SPX in orange, 10 yr yield in white

Governor Cuomo says that New York State will legalize marijuana this year - cannabis stocks reverse earlier weakness:

Market breadth +700 issues - it has been hanging there for a while.

PredictIt odds on the November election.

badgolfer22

12:28M Macy's: Telsey Advisory Group comments on Holiday 2019 sales; Macy's still has work to do to overcome secular headwinds (17.93 +0.26)

Analyst
Dana Telsey said, "Macy's 2019 holiday sales (for November/December)
result was better than expected, with comparable sales declining a
fairly modest (0.7%) on an owned basis (vs. our 4Q19 estimate of (2.3%)
and the Factset consensus of (2.5%)) driven by strong performance in the
Growth150 stores and its digital business. The company also highlighted
customers' positive reaction to its gifting assortment and marketing
strategy, particularly during the 10 days before Christmas. We note that
Macy's was lapping a +0.7% owned comp during the 2018 holiday season
when performance was pressured by a promotion misstep and a fire at its
West Virginia distribution center. Relative to performance this past
holiday season, the company did not provide any other incremental
details beyond those within the press release. While the holiday
results are certainly not as bad as feared and had baked in a
conservative plan post unexpected weakening trends in Q3, we believe
Macy's still has work to do to overcome secular headwinds." Market Perform, $16 tgt.

From yours truly:

The reversal from last night's lows continues apace.
I am watching in wonderment.

I have eliminated my Goldman Sachs (GS) (+$4 to $239.55) holding as it is approaching my 12 month price target.

I have continued to short on the rally from the morning's opener.
Expanding my short exposure.

I have sold the balance of my Alphabet (GOOGL) ($1402) and Amazon (AMZN) ($1907) longs.
This reflects my ursine market view and my (hopeful) expectation that I can reload on these longs at lower prices.
This is the second time in 13 months I have invested/traded in the two social media stocks and achieved a large gain - after aggressively buying weakness.
Google was placed on my Best Ideas List one year ago (December 26, 2018) at $1001.
Amazon was placed on my Best Ideas List one year ago (December 26, 2018) at $1383.
The stocks remain on my Best Ideas List - as I wrote I want to buy any large drawdowns. Those that don't share my downbeat market view might consider holding on to these positions.

Remember a Berkshire (BRK.A) (BRK.B) acquisition of FedEx (FDX) is one of my 15 Surprises for 2020. 

FedEx, much hated (based on our Comments Section(!)), continues to move higher on a steady basis.

Up another +2 1/2 today.

Seems apropos (!):

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."

Strip out the stock market and the Index of Leading Indicators has declined now for four months in a row and five of the past six (!) and has fallen into negative terrain for the first time since November, 2009.

My good buddy Peter Boockvar, chief investment officer with Bleakley Advisory Group, spans the globe in checking out the latest economic data: 

After the panic 50 pt decline last night in the S&P futures, I believe the markets response this morning is rational in the belief that these missile launches are likely the end of this spat rather than a further escalation. I'm no geopolitical expert but just my guess based on what Iran said immediately after the launches. I mean an oil price little changed at under $63 for the front month WTI contract, well below the $75 seen in October 2018 also says it all that the flow of oil is not going to be disrupted in any notable way.

The wage situation in Japan continues to be disappointing. In November, regular base pay rose just .2% y/o/y and when combined with declines in bonus pay and overtime, it fell .2% y/o/y. A tight labor market is being offset by a great reluctance on the part of employers to pay up likely in response to the still very uneven Japanese economy, especially after the VAT increase. Instead of trying to goose inflation and hoping that in turn lifts wages, the BoJ should be just focused on keeping inflation as low as possible which in turn would lead to higher REAL wages.

The industrial side of the German economy continued its challenging situation in November as factory orders fell 1.3% m/o/m, worse than the estimate of up .2%, partially offset by a 6 tenths upward revision to October. Versus last year, orders fell 6.5%, the 18th straight month of declines. There is hope though that they are close to bottoming out in orders. The German ministry said "business expectations in manufacturing have brightened somewhat. So the outlook for industrial activity has improved a bit." I'm sure some of this is due to the truce between the US and China but we're going to need more than just hope that things get better from here in 2020.

In December, the Economic Confidence index for the Euro region improved a touch to 101.5 from 101.2 and that was .1 pt above the forecast. Continued weakness in manufacturing was offset by an improvement in services. Retail and construction also rose but consumer confidence fell to the lowest since February 2017. Bottom line, expectations remain low for European growth in 2020 with estimated growth at around 1%, similar to the pace seen in 2019.

EURO AREA ECONOMIC CONFIDENCE

Even though it is still early there are two columns on our site that are important reads:
* Divine Ms M's "This Key Indicator Just Stopped Rising." In her post Helene cites renewed weakness in market breadth (something I have paid a lot of attention to and written about recently in my Diary), a possible McClellan Summation Index rollover, a stall out in banks, little progress in the S&P Index from December 26th, and that the Russell is not crowing.
* Jim "El Capitan" Cramer observes the importance of Core Labs' dividend cut and has hard hitting analysis of the price of oil. His demand/supply analytics explain why the energy space may not be a place to invest in over the intermediate term.
Both great reads.

I have moved from small-sized to medium-sized in both (SPY) and (AAPL) .
That was fast!
Will move back to large-sized on any rally.

Yesterday I reemphasized the case for Twitter (TWTR) .
I tweeted this a few minutes ago:

And from yesterday:

As suggested in "Night Moves," I am reshorting Spyders  (SPY) and Apple (AAPL) on the reversal.
Shorting SPY at $323.60, and AAPL at $298.90 - both with a working scale higher.

"Macy's performance during the holiday season reflected a strong trend improvement from the third quarter... Customers responded to our gifting assortment and marketing strategy, particularly in the 10 days before Christmas."
- Jeff Gennette, Macy's CEO
Macy's (M) reported a sales beat relative to expectations.
Comps declined by only -0.6% during November and December - indicating that the retailer may actually have gained market share relative to its peers.
I have been adding to both Macy's and Kohl's (KSS) over the last few months - they are both very large investment positions now.
In November (at $16.85/share) Macy's was my Trade of the Week: A few weeks ago I moved my only retail position, Macy's (M) , from medium sized to a large sized position - partly due to fundamentals (they stink but appear to have stabilized) and improving technicals.As well, the company's large (asset value of about $25/share) real estate holdings protect shareholders somewhat from the disruption that continues in the real estate space.And, so does the company's outsized dividend yield (though still vulnerable to a cut) protect shareholders from the downside.
Bottom Line
I expect a strong day for Macy's today and I am hopeful that the shares will trade over $20 in the near term.

* This pajama trader was active last evening!
* At the lows DJIA futures were -400 and S&P futures were -50
* I covered a portion of my Apple (AAPL) and Spyder (SPY) shorts in that panic
* I plan to reshort these positions on the reversal higher this morning
"Workin' on our night moves

Trying to lose the awkward teenage blues
Workin' on our night moves
In the summertime
And oh the wonder
Felt the lightning
And we waited on the thunder
Waited on the thunder."
--Bob Seger, "Night Moves"

Late yesterday afternoon, Iran attacked two U.S. military two bases in Iraq.  Immediately after the attack, Iran announced that if the U.S. retaliated, it would attack Saudi Arabia, Israel and any other nation that assisted the U.S. in attacking Iran.
For clarity, I wanted to deliver the events, my thoughts and my actions over the last twelve hours chronologically.
I initially posted the rumor of the Iranian attack on the Iraqi military base in my Diary:

Jan 07, 2020 ' 04:48 PM EST DOUG KASS

Iran Rumors Hit Futures

"Just one more thing."
- Lt. Columbo

Futures are getting hit on rumorsthat a U.S. Iraq base has been fired on.

For a few hours, the U.S. appeared to be on the precipice of igniting a regional war in the Middle East --  stock futures dived by as much as fifty handles.
Iran apparently phoned the State Department and gave the U.S. a "heads up" on the attack of the military base. Then Iran's Foreign Minister issued the following restrained tweet -- suggesting that their action was a "proportionate" action but that it was "concluded" and that Iran "did not seek escalation of war." However, he went on to say that Iran would defend itself if attacked:

Shortly after and about eight hours ago, President Trump also demonstrated restraint (by slowing down the reaction action) when he tweeted "all was well" and that a statement would be issued this morning:

My Tactical Response to Last Night's Attack Was to Cover Some Shorts

For now, we have a pause in the attacks and a salutary result in Iran and Iraq -- and that is far more important than my pajama trading last night.
We look forward to that statement by the President this morning. (What most of us want is to move away from military conflict in favor of laying out a diplomatic path).
Unfortunately, it is far too early to claim victory, as there has likely been irreparable damage to our relationship with Iraq (an innocent bystander in the U.S./Iran conflict). As well, the killing of a key Iranian leader has probably unleashed smoldering resentment against the U.S. by Middle East terrorists.
That said, I was active last night -- the magnitude of the stock futures dive necessitated my short-covering action (as I have learned that emotional moves of that magnitude have been typically erased in short order).
As reported in our Comments Section:

dougie kass • 10 hours ago

At about 745PM I covered a portion of my SPY shorts put on in the last few days at around $318.40.
Dougie

and I posted on Twitter:

I covered a relatively large portion of my SPY short at about $318.45 (as well as some of my Apple short at approximately $293.20).
When the speed of the crisis appeared to be turned down by both parties, stock futures bottomed at about 1 a.m. ET and climbed back and now stand above where they closed on Tuesday at 4 p.m. ET!
More likely than not I will shortly begin to reshort Spyders and Apple to replace what I covered in my pajama trading last evening.

Corporations' concerns remain very much alive according to Danielle DiMartino Booth:

• The Outlook Gap significantly narrowing in the fourth quarter, revealing the current expansion is not in a "mid-life crisis" as purported by Jerome Powell, but further along; the stress associated with late cycle is evident in gapping out of the CCC-BB junk bond spread
• Since the 1970s, during every business cycle Higher Unemployment Expectations inflect prior to the Outlook Gap; Utilizing Higher Unemployment Expectations as a leading indicator of the unemployment rate suggests pressure on employment
• Even with positive trade momentum, CEOs remain concerned about global growth, which equates to concerns about revenue growth; top line anxiety keeps cost-cut risk alive, which drives layoffs and is consistent with Higher Unemployment Expectations rising

Over the centuries, English maxims have been inspired by the wit and wisdom of the French, Spanish and Italians. Take the adage, "Fool me once, shame on you. Fool me twice, shame on me." The earliest recording of this proverb dates back to 1650's book The Court and Character of King James by Anthony Weldon, first published two years after his death. It reads: "The Italians having a Proverb, 'He that deceives me once, it's his fault; but if twice, it's my fault.'" Perhaps Weldon was inspired by his own shame. The former Clerk of the Green Cloth, who was knighted by King James, was subsequently dismissed in 1617 after James discovered racist writing by Weldon about the King's native Scotland.

Not all economic data hail such storied histories. Most of the time we scrap for series that overlap postwar business cycles to gain perspective. Sadly, not all of our wishes come true. Not even for our biggest 2019 innovation: the QI Outlook Gap.

For a refresher, the Outlook Gap is the difference between two opposing views six months forward - CEO Expectations for the economy minus Consumer Expectations. In data back to 1976, the Outlook Gap hit its widest on record in the third quarter, as bosses' views on what the future holds were never that depressed compared to the workers they lead.Outlook Gaps wides have historically occurred late in business cycles. This cycle is no exception. The sharp narrowing in the fourth quarter reinforces the notion that this expansion is NOT suffering a "mid-life crisis." It's a bit more advanced. (Sorry, Jay.)

In the original Outlook Gap Feather, it was plotted against the Output Gap - the difference between GDP and its potential, and the Unemployment Rate, the king of all lagging indicators. As you can see, today we've dropped the former and retained the latter and added our favorite labor leader, Higher Unemployment Expectations plus a key junk bond credit spread, the CCC-BB spread. The four metrics are normalized via z-scores, deviations from the mean adjusted for volatility.

We know today's illustration looks a little odd because not every series starts in 1965. Let's walk you through why we set it up this way.

If the Outlook Gap was available as far back as the late-1960s, we believe that it would have registered readings on par with those in the late-1990s and late-2010s. The common denominator? The extremely favorable labor market conditions manifested in unemployment rates UNDER 4%, rarified air in American postwar history. The labor market of 1967 was so strong, it produced all-time highs in Consumer Expectations that year. In an intriguing parallel, the escalating Vietnam War would have been worrying C-suite occupants back then as the U.S./China trade war drove the Outlook Gap to records in 2019.

Given the Outlook Gap guides U.S. labor cycles, juxtaposing it against the holy grail of Higher Unemployment Expectations, a leading indicator of the official unemployment rate, was a natural progression for cycle chasers like us. It's clear from every business cycle since the 1970s that Higher Unemployment Expectations consistently inflected before the Outlook Gap; z-scores for the blue line turned positive every time before those of the red line.

Why throw in high yield spread? They measure the gap between the highest and lowest rungs of junk debt, otherwise known as "dispersion." The cyclical nature of the CCC-BB spread reveals how high yield portfolio managers have shunned the weakest credits (CCC) for those at the top of the scale in their asset class (BB).

Since the spread is only available from the mid-1990s, its insight is limited to the last three cycles. That said, note that high yield investors blinked first in the lead up to the 2001 recession -- the spread's z-score turned positive before Higher Unemployment Expectations and the Outlook Gap, in that order. Conversely, the late-cycle period before the Great Recession saw the CCC-BB spread signal an end to expansion after Unemployment Expectations and the Outlook Gap. In the current cycle, junk-land lost the staring contest a la 2001 and is currently the only indicator of the four depicted sporting a z-score above the zero line.

The recent volatility in the Outlook Gap that saw two wide swings in 2018's fourth quarter and 2019's third quarter both were related to tariff cliff risks -- and both times we didn't go over the cliff, hence today's Feather title.

CEO's won't be twice fooled. As per the Conference Board yesterday, "While the abatement of trade and tariff issues has helped improved confidence, CEOs still remain apprehensive about global growth prospects in early 2020." Global growth prospects are code for revenues. If the boss is nervous about top-line prospects, cost cutting, including and especially that of labor, remains in play.