In the belief that the market is materially overpriced but the timing of a market drawdown is so difficult to predict, I am ending the day very liquid (with a bunch of investment longs and some individual equity shorts) and with a meaningful (SPY) put position (February out-of-the-money monthlies) providing me "gamma" (and more/rising exposure) if the market ever falls again.
Keeping it real and transparent.
Thanks for reading my Diary and enjoy your evening.

All time high in the equity markets and a two month low in bond yields.
To this observer it makes no sense...

Not so Ludacris - as the S&P moves into the red.

I have argued that with hedge funds at a decade high net long exposure, nearly everyone is on the "same side of the boat" and that some traditional valuation metrics (e.g., Enterprise Value/EBITDA or Price/Sales) are beyond that of the dot.com era.
This post incorporates a number of charts I have used in the past to make the above points.

I will be leaving right at the close today as I am speaking at a CFA Society dinner tonite - and it requires some travelling.

Caterpillar's (CAT) shares (-$2.50) continue to look like they are rolling over.

"Tesla's shares rise to $600/share before it poops out. Elon Musk marries Grimes, his pregnant girlfriend. The couple divorces by year-end. "
- 15 Surprises for 2020

Earlier today Tesla (TSLA) traded at $594.50 - within a few ticks of my $600/share surprise (see above).

The shares started the year at only $418!

Mark Cuban declared he was long Twitter (TWTR) on Fast Money Halftime today.

Market breadth is now only +200 issues.

Earlier in the morning advancers were better than 2-1 decliners.

I remain long XLE:

Thomas C

"XLE Whipsaws Into LT Trend Model SELL Signal"

(This is an excerpt from today's DecisionPoint Alert report on DecisionPoint.com)

Today's giant drop in the Energy Sector (XLE) was enough to negate a very young Long-Term Trend Model (LTTM) BUY signal. The LTTM SELL signal was generated when the 50-EMA sunk below the 200-EMA. With oil and gas producers, Exxon-Mobil, Chevron, ConocoPhillips, Phillips and Occidental Petroleum taking up over 50% of the capitalization on XLE, I wasn't surprised to see the drop. USO dropped .75% and I'm sure this could have affected these big companies. With price dropping well below the 200-EMA, I am expecting this LT Trend Model SELL signal to remain in effect. I would look for price to drop to test the November/December lows with the confirmations on all of the major indicators to the downside.

Things were really looking up for XLE. A declining trend was broken and price had managed to overcome resistance at the 43-week EMA. The weekly PMO was just entering positive territory. Today the PMO has topped and price dropped below both the 17/43-week EMAs. I would look for a test around $55.

- StockCharts.com/DecisionPoi...

I plan to reduce my medium-sized (SPY) short today in favor of adding to my (defined risk) February (monthly) $325 and $326 puts.

This chart of Tesla (TSLA) is why I rarely short high interest stocks (relative to float and average daily trading volume):

* Shorting more JP Morgan

I am pressing my (JPM) short hedge (against my medium-sized bank longs).

I sold my tag ends in my speculative cannabis basket this morning.
I will revisit and continue to watch the fundamentals.
Here was my rationale for this week's sales.

I infrequently make a Ludicris Forecast (and often embarrass myself in doing so!).

Today I will make one - the markets will reverse and swoon in the trading session.

A gut feel that I have not recently expressed.

My friends at Miller Tabak view Europe as a greater risk than China:

The reaction to Chinese GDP growing at 6.1% in 2019 has been overblown. While headlines pronouncing this as China's weakest growth since 1990 are factually accurate, they miss the more important point that China's economy is actually doing surprisingly well given the trade war and that its slower growth is only a small threat to the U.S. economy. Chinese growth has primarily slowed for two fairly benign reasons. First, much of it growth over the past few decades was due to its catching up with more developed economies and this was destined to weaken as China's GDP rose. Second, China's transition away from export-driven growth to a more consumption based economy was always going to be bumpy. The IMF has estimated Chinese trend growth around 6.5%. Given U.S.-China trade tensions in 2019, 6.1% growth is a surprisingly small miss.

Chinese growth around 6% is perfectly compatible with keeping U.S. growth near its 2% trend. We are more concerned about China adversely impacting the U.S. through its financial sector. Chinese debt levels remain concerning and the Chinese are ill equipped to deal with a modern financial crisis. Such an event poses considerable risk to the U.S. and we do not mean to downplay it. But there are not yet any signs that the current growth slowdown will lead to such an outcome in the near term.

We are much more worried about the weak European outlook passing through to the United States. Although the risk of a Eurozone recession has lessened over the past month, the outlook remains poor. Even moderately bad developments could push Europe from its forecasted 1% growth into recession, and neither European fiscal, nor monetary policy makers have any good ideas for how to offset such a scenario. And while 1% European growth isn't a big deal for the U.S., a European recession would have financial impacts that would reduce the appetite for risk in the U.S. as well as Europe.

Were Eurozone growth to fall from 1% expected to -1% (a mild recession), it would not be nearly enough to push the U.S. into recession. We have written before that economic shocks to Europe pass through to the U.S at a rate around 15-20%. A mild Eurozone recession could thus slow U.S. growth by about 0.3-0.4%.

My only trade today is adding to my large ViacomCBS (VIAC) holdings.

* Some similarities to the dot.com boom are appearing
Back in early late 1999/early 2000 rapid stock price moves higher were followed by narratives that tried to explain the climb (after the fact) rather than having a narrative that eventually is reflected in the stock price.
It feels like deja vu all over again.

Netflix  (NFLX) shares benefited modestly from a "better than feared" quarter in after hours trading yesterday. Nevertheless, my investment case to short the shares remains intact and I expect that gain to be lost in the days ahead.

I added to my short on that post market spike of about +$6/share.

From yesterday's "The Netflix Saga Goes On":

While Netflix's (NFLX) 4Q reported about a beat of about one million paid streaming sub adds, the forward guidance was weaker than expected. (It appears that the company's domestic sub adds missed again - by about 200k from the previously and already reduced guidance).

I believe my short thesis, which might be more clearly revealed over the next twelve months, is emerging in a fundamental context (see here) and that Netflix's growth story may be fading:



Here is an updated "free cash flow" table:

Given the large cash burn, the immense and growing content budget, rising population of competitors (and maturing domestic market), the lower value of non US subs and elevated valuation - Netflix shares seem vulnerable.

Hereis more from ZeroHedge!

Bottom Line
Again, 4Q global adds beat by 1.1 million subs (to +8.7 million) - that was flat with a very strong year ago increase. U.S. adds (+433k vs. already lowered guidance of +600k) for the reported quarter were nearly 200k below expectations and well below the year ago U.S. add of 1.5 million subscribers. Management cited the domestic Disney+ (DIS) launch as a a cause for the disappointing results. I suspect the market's positive reaction in after hours trading was a function that the 433k domestic sub print wasn't as bad as feared considering the better than expected and early Disney+ sub growth. (Remember that domestic subs are more than 3x more profitable than non U.S. subs)
Another worrisome issue is rising marketing expenses - which represented 16% of revenues in the recently reported quarter (compared to 13% of revenue in all of 2019 and 11% in 3Q2019).
The estimated +7 million sub gain for the upcoming 1Q is -27% year over year and almost 1.4 million below the consensus expectations.
The degree to which the company beats or misses the seven million add will likely guide the path of Netflix's share price in the next few months.
Neflix's enterprise value is almost $160 billion (it has about $9 billion of net debt). The stock trades at 7x this year's sales forecast and over 20x EPS projected 2023 EPS.

Delinquencies and commercial industrial loans as a percentage of GDP is starting to converge:

* Rules of a sell side economist.

* Monopoly power.

* How a herd of cows outpicked investors.

Peter on negative interest bonds, sentiment and other stuff:

As seen in the Citi Panic/Euphoria sentiment index which has risen to a hair below Euphoria, today's Investors Intelligence index is up to just below euphoria as well. Bulls rose to 59.4%, the highest since October 3rd 2018 when it was above 60% (considered euphoric) and that is up from 57% last week. All came from the Correction side as Bears were steady at 17.9% from 17.8%. The spread between Bulls and Bears is now at 41.5, the widest since October 2018. Just as we tell our kids, be aware of your surroundings.

For all the optimism about an inflection higher in economic growth with the recently signed trade deals and the ebullient behavior in the stock market, the 10 yr yield still just cannot get out of its own way. It fell another 5 bps yesterday to the lowest level since early December and is dead flat today. Again, if only it could speak out loud to us.

With post holiday schedules for many getting back to normal, the MBA said purchase applications fell 2% w/o/w but are still up 8.1% y/o/y. Refi's were down by 1.8% w/o/w but higher by 116% y/o/y. An average 30 yr mortgage rate of 3.87% is of course the help here as that is the lowest since September 2019.

30 yr mortgage rate

You've heard me a million times say the sovereign bond bubble is the biggest ever. Jamie Dimon on CNBC this morning, repeating that, was asking out loud who would buy this stuff with negative rates. You know who one of the buyers are? Americans, many I'm sure in their 401k, via The Vanguard Total International Bond ETF, ticker symbol BNDX. It's biggest holding is a German bund maturing on August 15th 2029 and currently yielding -.29%.

South Korea's economy performed better than expected in Q4 with a growth rate of 2.2% y/o/y vs the estimate of up 1.9%. It got a help from a lift in government spending. For 2019, economic growth was 2%, the slowest in 10 years and with government spending making up 3/4 of it. The Finance Minister said "Government finance should play a complementary role when the private sector is in trouble." It's now time for the private sector to start growing again. The Kospi rose 1.2% after yesterday's 1% drop.

The French business confidence index in January fell to 104 from 105 and that is the weakest since February 2019. While manufacturing bounced off a multi year low, retail and employment weakness offset it. The services component was unchanged. The expectation for 2020 growth in France is 1.2%. The CAC is flat after the .5% decline yesterday. Don't look to Europe for robust growth this year.

While the Bank of England is seemingly panicking on old news (pre election economic data), the CBI said business optimism in the UK rebounded sharply in January with its index spiking to +23 from -44. The estimate was -20. That's the highest level since 2014. Actual order growth was still punk with this component at -22 from -28 but CBI said "it's clear manufacturers are entering the new year with a spring in their step. Firms are now planning to invest more in plants and machinery, which will ultimately help increase capacity and output. However, this boost to sentiment belies poor trading conditions over the past quarter, with output and orders still declining. If we are to build on this rebound in optimism among UK manufacturers, it is crucial for the UK and EU to establish a trade deal that supports growth in this sector."

The BoE should sit tight. Rate cut odds in response to this number has fallen to 50% from 62% yesterday and 68% on Monday. The pound is rallying and the 2 yr yield is rising 2 bps.

CBI BUSINESS OPTIMISM

Danielle DiMartino Booth takes a deep dive on unemployment: 

• Unemployment Expectations lead labor turns as they're more reflective of the bad news of layoffs or firings at cycles' ends; given only 21% expected rising Unemployment to the 26% expecting lower unemployment, January saw the first "inversion" (good) in eight months
• Unemployment Expectations spread inversions tend to preclude falling unemployment rates in the subsequent 12 months; the current wide spread suggests the unemployment rate falls to 3.1% by 2021, a material departure from the consensus' forecast of a slight rise to 3.7%
• If the unemployment rate declines throughout 2020, the prevailing U.S. GDP growth estimates are understated; current Fed estimates cleave to their long-term trendline forecast, which everything but rare historic exceptions suggest are also played down

Ocean's Eleven is the 2001 American heist (re)classic that was the first instalment of the modern Ocean's franchise and a remake of the 1960 Rat Pack film of the same name. The blockbuster ensemble cast included George Clooney, Brad Pitt, Matt Damon, Don Cheadle, Andy Garcia and Julia Roberts. Critics described it as, "fast-paced, witty, and entertaining as it is star-studded and coolly stylish, Ocean's Eleven offers a well-seasoned serving of popcorn entertainment." The ever-lasting film residual: Cheadle's character Basher Tarr coined the internet meme, "You had one job."

One of our favorite leading men of the labor cycle is Unemployment Expectations. In theory, they provide forward guidance for unemployment over the tactical 12-month investment horizon. Each month, the University of Michigan (UMich) Surveys of Consumers asks households: "How about people out of work during the coming 12 months - do you think that there will be more unemployment than now, about the same, or less?"

Capturing the ups and downs of the labor outlook in real time is tricky business. In the past, we've leaned hard on the holy grail of Higher Unemployment Expectations as a recession flag; it's a more sensitive indicator to the bad news of layoffs or firings at a business cycle's end.

As per UMich, "The economic expansion is expected to be strong enough to continue to push the unemployment rate to new lows in 2020." They've got a point considering that at 21%, Higher Unemployment Expectations fell below Lower Unemployment Expectations of 26% for the first time in eight months. The "inversion" in Unemployment Expectations got us wondering how predictive this inversion is as it pertains to the future path of the official unemployment rate.

Since 1978, there've been 76 months when the Unemployment Expectations spread was inverted. We've excluded four of those months right off the bat - March, April and May of 2019 and January 2020. We've yet to harvest the 12-month forward change in the unemployment rate from all four months. That leaves us with 72 months, or 14% of the total distribution, of 505 months.

We hope you're sitting down for this next instalment. In 69 of the 72 months where the Unemployment Expectations spread was inverted, the unemployment rate declined over the subsequent 12 months. The math: 69 divided by 72 equals a 96% hit rate. We marvelled at the results as well. Only two months saw an increase in unemployment in the ensuing year; in the other month, the rate was unchanged.

As far as exceptions to the exception go, we'd caution that the Fed's current bout of stimulus also has no precedent. That exceptionality compels us to highlight one of these three outlier months amongst the 72: November 1980, the sole exception that preceded a U.S. recession 12 months prior. The good news is we can think of no parallels with that recession that started in July 1981 given its globality (#Sarcasm). For now, let's dismiss it as an event that can't be replicated.

Moving on, squint at the table insert on today's chart du jour. You'll note a proportional relationship between the Unemployment Expectations spread and the subsequent decline in unemployment. The smaller the inversion, the smaller the forward descent and vice versa (the larger the inversion, the larger the future tumble).

The -5 reading from January 2020 corresponds to an average drop for the unemployment rate of four-tenths of a percentage point. It suggests that unemployment could fall from today's 3.5% to 3.1% by January 2021. Of the 50 economists surveyed by Bloomberg that have first-quarter 2021 forecasts for the unemployment rate, only Goldman Sachs and Barclays are calling for such an improvement.

Market expectations center around a two-tenths rise to 3.7% by 2021's first quarter. And not one Fed official foresees the unemployment rate hitting such levels in 2020, 2021 or 2022. The lowest estimate in the Fed's own range is 3.3%.

If U.S. households' spidey senses are right about a further "rally" in the unemployment rate over the course of this year, we would expect U.S. GDP growth projections to underestimate the 2020 outlook. Recall, Okun's Law -- the trade-off between GDP and unemployment, where growth is used to project the change in labor. Via reverse engineering, a falling unemployment rate would be consistent with above-trend growth. Groupthink consensus GDP growth (1.9%) is right on top of the Fed's longer-run trend number (1.9%). U.S. households are saying, "Take the over."

Now for the hard part. We'll have to wait 12 months to discover if U.S. households were, yet again, on target with their prescient prognostications of Main Street's most visible economic indicator. That said, if U.S. households had but one duty -- to foretell the path of unemployment -- their past performance nearly guarantees future results.