Another win for da Bulls as the market bent but didn't break after the four-month-long advance:

* Market breadth was +200 (at 3:30 p.m.) -- again not bad, all things being considered.
* Oil was flat and gold -$4.
* Bond yields dropped by 2-3 basis points as fixed-income prices lifted.
* Banks, fueled by ++ results at JPMorgan Chase (JPM) and Citigroup (C) were the upside leaders. (I continued to cut back, though still medium-sized, adding a JPM short hedge against my longs)
* Cannabis stocks continue their slow January grind higher -- something I have been banking on.
* FANG got hit, with Amazon (AMZN) leading the way (down by nearly -$30). As posted, I have been out of my FANG longs for a few days.
* Individual stocks (except banks and some FANGs) generally showed little daily price changes.
* Apple (AAPL) had a rare "down day."

I used the midday strength to purchase defined-risk (SPY) puts expiring in about 5-6 weeks. The move gives me gamma, making me shorter in exposure as the market declines.

Enjoy the evening and thanks for reading my Diary.

See you bright and early tomorrow.

Break in!
FedEx (FDX) +3% on a report that Amazon (AMZN) is lifting the ban on FDX for third party ground delivery!

"Investors, realizing that corporate profits have essentially been flat since 2014, begin to panic at the "new normal" of subpar economic growth. Another year in which earnings growth fails to recover reverses the valuation upwards reset (so conspicuous last year) as market participants grow increasingly concerned about the real economy's secular growth prospects. Much of the more than +25% 2019 reset (higher) of valuations is reversed in 2020 - as price earnings multiples decline by about -15%, producing a modestly larger full year decline (-17%) in the S&P Index. 2020's market drop is the worst since 2002's fall of -23%. The S&P Index closed at 3265 on Friday. The year's high is made in the first month of the year (at under 3350), the 2020 low in the S&P Index is 2550, and the close is about 2700."
- Surprise #2 Disappointing Global Growth, Weakening Corporate Profits, a Fed Pivot and Political and Geopolitcal Instability Produce a "Garden Variety" Bear Market in 2020
In keeping with one of my 15 Surprises for 2020 I am buying a large amount of (SPY) $325 and $326 Feb 21 (monthly) puts.
These puts have 38 days until expiration.

I am not sure why the market initially rallied hard on the reports that some Chinese tariffs will stay on despite the Phase One "agreement."

Actually I would have thought that the market would retreat on such news!

Anyway, I added to my Index short on the 10 handle rally in the S&P Index and shorted more (SPY) at $328.15.

Thomas C

Nikolaos Panigirtzoglou of J.P. Morgan notes that institutional investors continued to ramp up their exposure at year end. "These positions had risen steeply last year, propelling the equity market during the course of 2019, with an additional steep increase in December," he writes, adding that "as a result, these spec positions on US equity futures stand at even higher levels than the beginning of 2018."

Meanwhile, short interest on (SPY) recently declined to levels consistent with the lows in 2018.

The Long/Short crowd's beta "increased sharply during November and December," he says, noting that when you take a look at monthly reporting Equity Long/Short hedge funds, "their beta to the MSCI AC World index stood at 0.53 in October 2019." That's close to the historical average. But, as the broad market began to run, their beta rose rapidly to 0.65 in November and 0.76 in December, which JPMorgan remarks is indicative of "a significant OW position." Indeed, if you look at the December 2019 beta of 0.76, it's "close to the 0.81 beta seen in December 2017," Panigirtzoglou observes.

In January of 2018, "not only had momentum signals reached extreme territory across all major equity futures but also across a wide range of asset classes ranging from the euro to oil prices to the 10y UST," he says.

That, in turn, set the stage for momentum strats to get shelled across a variety of positions, causing forced exits and massive losses across a 4-day span in February of 2018, when the VIX ETNs blew up.

Speculative institutional investors increased their equity exposures significantly over the past two months, implying that their current equity exposures are not far from their previous January 2018 levels. As a result, equity markets, particularly US equity markets, look vulnerable to negative surprises...

I want to take you back to January 2018. The S&P 500 had been screaming for four months. The index had tacked on almost 14% in that span. Everyone was bullish.

Could we go higher? For sure! The momentum is electrifying and the stock market's rise has begun to capture the public's attention with stocks like Tesla and Apple gapping higher every night.

Indeed. And therein lies one of the main worries.

The Nasdaq 100 is trading at ~23X on a forward multiple.

That's the highest since 2007.

- J.P. Morgan: "Flows & Liquidity"
- Morgan Stanley
- Nomura / Charlie McElligott

I was interviewed in two places this week:

* The Financial Times, here.

"I think upside for most of the stocks is only about 5 per cent to 10 per cent," said hedge fund manager Douglas Kass of Seabreeze Partners Management on the outlook for bank stocks this year. He predicted that commercial and industrial loan growth would be "sluggish and constrained by the length of the economic cycle - now going into the 11th year". He added: "Earnings per share will be buoyed by continued buybacks as the industry is vastly overcapitalised."

* MarketWatch, here.

Canopy Growth (CGC) is getting jiggy.
Finally, back to break even (after buying - "the funnel" - at $14.60).

Though I have no specific (or immediate catalyst save the obvious considerations - price and valuation!), I moved back into a small net short exposure with a (SPY) short at $328.32 just now.
My Spyder short moves from small-sized to medium-sized - representing my only medium-sized short exposure (in an Index ETF or in individual stocks).

Good stuff from Peter:


Car prices vs. what CPI says they are

Last week Edmonds.com said the average price of a new vehicle sold in 2019 was $37,183, a new record high and up 30% from where it was 10 years ago. Within today's CPI, the price of a new car reflected a 2% increase in TOTAL since 2009. This is magically done via hedonic adjustments which discount the value of new add ons with each subsequent iteration of cars. Unfortunately the actual buyer of a car has to pay what the price is and that is why delinquency rates are rising (according to the NY Fed, loans 90 days late totaled 4.7% in Q3, the highest since 2011) and the average length of a loan is at a record high (Experian said in November that 7 yr auto loans amount to 31.5% of new vehicle sales vs 10% in 2010). The average price of a car is about 60% of median income in the US and incentives in December was a record amount of $4,600 per vehicle on average according to JD Power. 

The Fed relies on hedonically adjusted data points and not the price that people are actually paying out of pocket. I make this point to highlight just another flaw in how the Fed views inflation which in turn drives monetary policy. Think about this the next time you hear from a Fed member who expresses concern that inflation is too low.

CPI NEW CAR PRICE INDEX as of December

There's something happening here
What it is ain't exactly clear
There's a man with a gun over there
Telling me I got to beware...

- Buffalo Springfield, For What It's Worth
For what it's worth, I have eliminated all equities from my personal pension plan.

Disney's (DIS) chart continues to show some signs of rolling over.

By contrast, FedEx (FDX) (+$2.80/share yesterday) is a welcome upside surprise.

(TSLA) and (BYND) (see below) are very good examples why one of my basic tenets of short selling precludes me from shorting companies that have a large short interest relative to average daily trading volume or float.

I am very liquid, in gross terms now.

For emphasis, a week ago (posted in "Long No More") I sold out my Amazon (AMZN) and Alphabet (GOOGL) longs: 

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.

Speaking of Howard Marks, here is his latest commentary.

I have added to my (JPM) short hedge (at over $140/share) and I have reduce (modestly) my (C) long (still at medium-sized where I will likely stay ) at $82.40 (given my year end price target of $87.50-$90.00).

Howard Marks believes that now is not a great time to invest.

* Core CPI has a 2 handle for the 21st consecutive month

Both headline and core CPI rose one tenth less than expected, higher by +0.2% and +0.1% month over month, respectively. The headline number though rose to +2.3% year over year from +2.1% and the core rate held at +2.3% year over year which was as expected due to rounding. 

Again, services inflation is being mitigated by the lack of goods inflation. Services inflation ex energy rose +0.2% month over month and +3% year over year again due to rent and medical costs. Medical costs jumped +0.6% month over month and are up +4.6% year over year. Remember, the PCE doesn't include this as it instead measures Medicare and Medicaid reimbursement rates. The PCE would be much higher if they didn't. Not captured either in the PCE was that health insurance prices jumped another +1.4% from November alone and are up +20.4% year over year. Rent of Primary Residence was higher by +0.2% month over month and +3.7% year over year. Owners Equivalent Rent, which is a much bigger component, rose +0.2% month over month and +3.3% year over year. 

On the goods side, prices ex food and energy were unchanged month over month for a 2nd straight month and are basically flat year over year. From last year, new vehicle prices rose +0.1% while used car prices were down by -0.7% (See my surprise list!). Apparel prices rose +0.4% month over month but were still down -1.2% year over year. 

Bottom Line

For the 21st straight month, core CPI has a 2 handle and at +2.3% is just shy of an 11 year high. Since we don't yet have Medicare For All with the government paying all the bills, the Fed needs to stop relying on the flawed PCE and instead revert back to CPI which measures out of pocket healthcare expenses. But if they did, they'd have less flexibility with monetary policy. Either way, with wage growth good, not great, keeping inflation as low as possible is what lifts REAL wages and would be the best contributor to economic growth. Wanting inflation to go higher is a depressant on growth, particularly if the Fed tolerates a +2.5% inflation rate in order to meet their symmetry goals.

The 10 year treasury yield fell about ½ a basis point in response to the slight CPI miss. It's still amazing to me that with the parabolic run in the tech led U.S. stock market along with a rise in German bund yields that the U.S. 10 year yield is still below 2%. Part of this is likely QE4 on the short end rippling thru the yield curve but I also believe part of it is due to muted expectations for economic growth. 

Here is the chart of CPI:

Bravo BlackRock (BLK) CEO Larry Fink and bravo Jim "El Capitan" Cramer ("Larry Fink Is Showing What True Leadership Looks Like").

Peter on (JPM) comment, China and NFIB:

The NFIB small business optimism index for December slipped 2 pts m/o/m to 102.7 after rising by 2.3 pts last month. It's just below the monthly average in 2019 of 103, down from 106.7 in 2018 and vs 104.9 in 2017. Digging underneath saw Plans to hire falling by 2 pts to 19 but that is in line with the 6 month average. Job openings fell 5 pts after gaining 4 pts last month and at 33 is below the 6 month average of 36. Compensation plans fell slightly but remain elevated. Capital spending plans fell 2 pts but is within the 6 month range while plans to increase inventory was unchanged. There was deterioration in 'Earnings Trends' as they fell a sharp 10 pts but only after rising a sharp 10 pts in November. At -8, it matches the lowest level since February 2019 and I'll continue to point to the falling profit margin story that we've seen in corporate earnings in 2019. One of the ways of offsetting cost pressures is to raise prices. Those seeing Higher Selling Prices rose 2 pts to 14, a 5 month high.

As for some of the forward looking questions, those that Expect a Better Economy did rise 3 pts to a 5 month high, likely in response to the trade deal. Those that Expect Higher Sales also rose 3 pts but only after falling by 4 pts in November. Notwithstanding the rise in both, those that said it's a Good Time to Expand fell by 4 pts.

Bottom line, small business optimism peaked this cycle in August 2018 right around the time when the tariff fight with China started to ramp up and today sits only 4 pts above where it was in November 2016 in the initial reaction to the election. Finding qualified labor remains the number one problem for small businesses but as seen above, the number of job openings and hiring's fell m/o/m.

NFIB SMALL BUSINESS OPTIMISM INDEX

JPM said this in their press release on the macro situation: "While we face a continued high level of complex geopolitical issues, global growth stabilized, albeit at a lower level, and resolution of some trade issues helped support client and market activity towards the end of the year. The US consumer continues to be in a strong position and we see the benefits of this across our consumer businesses." There wasn't much said on business lending and the demand for it.

The December trade data from China was better than expected. Exports jumped 7.6% y/o/y, above the forecast of up 2.9%. For the full year, exports were above flat from 2018. Exports to Europe and Asia offset a decline to the US. Imports grew by 16.3% y/o/y, higher than the estimate of 9.6% and helped by a 67% spike in soybean imports. Imports of iron ore also jumped.

Bottom line, the comparison's with December 2018 are easy and thus flattered these figures but hopefully with trade tensions easing, things are beginning to stabilize. We are still stuck though with almost all of the tariffs so we'll see to what extent. China's markets didn't respond positively to the trade data beat as they fell overnight with the Shanghai comp down .3% and the H share index lower by .4%. The yuan is taking a breather after the big run its had vs the dollar. Copper is slightly lower.

I just received a nice response to my 15 Surprises for 2020 from my pal Byron Wien:

Dougie

Nice, well-thought out, provocative job. Some similarities with ours and some important differences. As always.

I look forward to seeing you in Florida.

Byron

Byron R. Wien

Vice Chairman, Private Wealth Solutions

Here are By's Ten Surprises for 2020. 

IT sector and EPS reinforce sticking to game plan
There has been nothing in either the tactical or fundamental data to suggest we take a different approach from our current plan. The market continues to be in an extreme overbought condition that indicates the recent gains could be temporarily given back, while the fundamental backdrop driven by our core thesis and EPS suggest buying any meaningful weakness. Our favorable intermediate-term view is driven by low inflation, accessible credit, positive economic activity, improving EPS and slightly higher valuations. Despite the longest economic expansion in modern history, there has yet to be broad enough deterioration in the fundamental backdrop to warrant anything more than a 5-10% tactical pullback.
Two indicators pointing to near-term Info Tech slide followed by new highs. The Information Technology has led the market over nearly any time period since the Q4/18 market low. The gains have caused the sector and NASDAQ 100 to see some true extremes:
• Info Tech sector extended above longer-term moving average. The Info Tech sector closed 18% above its 200-day moving average for only the third time this cycle. We looked for prior instances when the sector closed more than 15% above the 200- day and found most instances saw pullbacks that were potentially nasty but quickly followed by new highs (Figure 1).
• Very few weekly oversold NDX components. Each week we track the percentage of NASDAQ 100 (NDX) components that are overbought or oversold on a 14-week stochastic indicator. The NDX is dominated by large cap Info Tech and as of 01/10/20 only 4 NDX stocks were in oversold condition (Figure 2). This is an indication of a broad move higher that could be overdue for a pullback that eventually leads to even more new highs.

As I mentioned in my (C) post, I expect some profit taking in the banks stocks - even in light of slightly better than expected fourth quarter reports.

Upon review of its earnings report, I have taken a small trading short in JP Morgan (JPM) at $139.20 (in pre-market trading) - to offset some of my long exposure in C, (BAC) and (WFC) .

--I approach this group with some near-term caution after outsized gains (of between +40% and +50%) in 2019--Small earnings beats might be met with modest profit taking
--Citigroup and my other money center bank holdings are now within 10% of my year-end 2020 price targets
Citigroup (C) leads off the earnings parade today.
I would caution on C -- and, for that matter, the money center bank shares as a whole -- as the bank stocks have had an especially good run over the last four months (and all stand within 10% of my year-end price targets). Even though I am expecting slight beats relative to consensus, there could be some profit taking. (Note: At current prices I recently reduced my positions from very large to medium sized).
Citigroup, like BankAmerica (BAC) and JPMorgan (JPM) should record a modest beat (my fourth-quarter estimate is $1.86/share vs consensus of $1.82).
In terms of the composition of the report, revenue should total approximately $18 billion (a +3% to +4% projected gain) and costs should be flat to +1%. Credit costs are trending slightly higher -- net loss rates should be steady and there should be a reserve build in the final three months of the year.
This should produce a return on tangible book value of 10.8% -- bringing full year ROTCE at 11.8%, close to meeting management's +12% target this year.
Follow up conference call commentary on the forward outlook will be important -- discussion of domestic and global economic growth, the state of the capital markets (including investment banking pipelines) and credit quality will be the topics that investors may react to.
It is likely that Citigroup will also review its medium-term financial targets of +2% to +3% revenue growth, continued market share gains (in credit cards, retail banking and investment banking), flat expenses (and operating efficiencies), continued deposit growth, and normalized credit costs -- with an intermediate-term objective of achieving a 14% return on tangible capital.
I continue to hold to my $87.50-$90/share year-end 2020 price target for Citigroup. (This compares to a $80.65/share Monday close)
In late November I updated my analysis of C, raised my price target and increased my EPS estimate.
C remains my favorite money center bank stock.

Morning commentary from Danielle DiMartino Booth:

• While U.K.'s November GDP disappointed, the breadth of industry declines fades recession risks; industries exposed to global trade were hit the hardest, with Wholesale/Retail posting the steepest fall in 11 months and Transportation/Storage's decline the worst in three months
• The Transportation industry of this island nation is highly correlated with monthly GDP backing the Bank of England's dovish rhetoric; retail sales for 2019 declined, the first in 24 years, while job postings fell to a decade low, adding to traders' cautious positioning
• Rate-cut presupposition is premature, given resurgence in post-election U.K. business confidence; British CFOs are registering peak optimism as Brexit concerns pass, and back this with planned capex for the first time in four years, despite continued defensive posturing

"My family and I are entirely supportive of Harry and Meghan's desire to create a new life as a young family. Although we would have preferred them to remain full-time working Members of the Royal Family, we respect and understand their wish to live a more independent life as a family while remaining a valued part of my family. Harry and Meghan have made clear that they do not want to be reliant on public funds in their new lives. It has therefore been agreed that there will be a period of transition in which the Sussexes will spend time in Canada and the UK."

~ Queen Elizabeth II, 13 January 2020

We can't help but think, "Will Megxit be a bigger deal than Brexit?" Given gossip is not our forte, nor (thankfully) our mandate, and nary a mention of the U.K. economy in the Queen's communique, we'll take it from here.

"Soup to nuts" is how we describe the data dump that hit U.K. newswires Monday. Included in the line-up: Monthly Gross Domestic Product (GDP), Industrial Production, Construction Output, Service Activity and Global Trade Data.

The key takeaway is that November's disappointing GDP result -- -0.3% month-over-month compared to the 0.0% consensus -- raises the risk that the U.K. economy contracts in the fourth quarter for a second time in the last three quarters.

The surprise drop in the top line was broad-based driven by underperformance in manufacturing production (-1.7% versus the -0.2% consensus) and service output (-0.3% versus the 0.0% consensus). But looks deceive. Upon closer examination, a minority -- seven of 20 industries, or 35% -- posted monthly losses. On a smoothed year-over-year basis, the breadth of declines -- nine of 20 industries, or 45% -- still wasn't sufficiently widespread to raise our recession antennae.

What did give us pause was that the downside surprise in GDP could have been worse save the perversity of trade gap math we've spoken of in recent weeks. The record positive swing in the 'visible' merchandise trade deficit drove the total trade balance to a record surplus.

Because the U.K. issues a monthly GDP series, we can observe how an 11% monthly decline -- not a typo! -- in imports played out at an industry level. Focus on the distribution channels where soft services were most perceptible.Wholesale/retail posted the largest monthly drop in eleven months, and transportation/storage registered the biggest drop in three months. Both of these areas are integral in the logistics of global trade.

Need we mention Great Britain is an island? Trade flows into and out of the country are vital to assessing the health of the U.K. economy. If your country is an island, it follows that transportation, which sports the highest correlation to monthly GDP, is a critical real-time guide for growth. Since the series inception in 1997, year-over-year growth in transportation output carries a 0.82 correlation to top-line GDP. For comparison's sake, manufacturing has a noticeably smaller 0.67 correlation and construction an even lower 0.59.

Given what we know, is the recent dovishness out of the Bank of England (BoE) justified? Rate cut probabilities currently priced into the overnight indexed swap (OIS) market stand at 48% for the January 30 BoE meeting and 55% for the March 26 gathering.

And yet, BoE officials have fallen over each other to communicate their intent to cut rates. QI's favorite FX trader, who must tragically remain unnamed, raised an eyebrow to the BoE's overtures suggesting that it would be vastly more prudent to gather more reconnaissance from households and businesses before making rash commitments. "It seems unnecessarily hasty to me," he added. We concur.

Yes, the import compression bolsters the doves' case as it speaks directly to domestic weakness. To that end, yes it is troubling that retail sales declined in 2019 for the first time in 24 years amidst thousands of stores closures. And yes, the 59,000 decline in job postings was the worst showing in a decade. But mightn't it be wise to nonetheless assess how households react to Brexit clouds parting?

Look no further than the lifted spirits of those in charge of hiring and firing decisions. Deloitte's latest U.K. Chief Financial Officers survey revealed that post-election business confidence soared in the fourth quarter. The key findings:

1. A record increase in optimism
2. Brexit was no longer a top concern
3. An expected increase in capex for the first time in four years despite a continued emphasis on defensive strategies

Despite the surge in C-suite soft data, rates traders haven't yet bought into the hype, preferring to wait for confirmation of stronger growth prospects via PMI data before shifting their rate-cut stance. If growth rebound hopes are validated, Her Majesty will no doubt take solace despite Megxit.