With breadth turning flat at day's end and the averages ending at the lows, I am unimpressed with the lack of follow-through in today's trading session.
Last night, I raised my short exposure modestly (to small net short) and remained so at the end of the day.
Normally this sort of action coupled with the elevated valuations would lead me to be more aggressive on the short side -- but, as I have emphasized, my conviction level remains low. 
I met with two interesting companies today and I hope they will result in some new ideas.
Thanks for reading my Diary and enjoy the evening.

From Peter Boockvar:


Cutting to the chase with the FOMC statement being about identical to the one issued in December, the Fed reiterated that they plan on continuing to purchase T-bills "at least through April 2020 to ensure that the supply of reserves remains ample..." They mention April so as to get them past the April 15th tax day and any possible disruptions related to that as bills are paid. They will also continue with their repo program. Where the balance sheet will inevitably settle out remains to be seen and could continue higher. 

Bottom line, the Fed's balance sheet expansion seems on auto pilot thru at least April as stated and we'll see what offset maturing MBS and repo will be. The Treasury market didn't respond much as a 1.44% 2 yr and 1.61-.62% 10 yr is pretty much where they were just prior. Stocks, like Pavlov's dog, just loves what the Fed is doing with their balance sheet, whether warranted or not. 

Hopefully we'll hear more from Jay Powell on this at 2:30 pm and he gets challenging questions.

A do nothing day for me.

Back to research!

I have to take a short trip out of town for a noon research meeting, back at around 2:30 pm.

This morning a CNBC commentator was ebullient about a Goldman Sachs projection (over the next three years) of a modest 13% ROI. The stock was barely up 1% in pre-market trading.
I (respectfully) tweeted that he was being hyperbolic and seemed to have simply bought the management's "optimism" hook, line and sinker.
Honestly, I continue to be surprised by the continued acceptance of "Group Stink" and the failure of the media to be independent and critical in view:

Charts still rolling over - in (DIS) and (CAT) (its still a DOG!).

From Peter Boockvar:

Pending home sales in December fell 4.9% m/o/m, below the estimate of up .5%. All 4 regions saw declines ranging from 3.6% to 5.5%. This takes the seasonally adjusted index to 103.2, the lowest since February 2019.

Bottom line, the shortage of homes and resulting persistent rise in home prices are mitigating the obvious benefit of low mortgage rates. The NAR said "Due to the shortage of affordable homes, home sales growth will only rise by around 3%." They expect home price growth of 4% this year. As stated here many times, the greatest demand for homes are for those priced below $300,000 and the NAR listed some markets where this is especially the case, Fort Wayne, Ind., Burlington, NC., Topeka, Kan., Pueblo., CO and Columbus, Ohio. The key therefore is for builders to bring more new homes in this price point and it looks like DH Horton and Pulte are making progress. I will also say that in the incredible search for yield, driven by central bank policy, investors hoping to buy and rent out are muscling out buyers who intend to live in these homes. No help for that first time buyer.

To this, the NAR said "The state of housing in 2020 will depend on whether home builders bring more affordable homes to the market. Home prices and even rents are increasing too rapidly, and more inventory would help correct the problem and slow price gains." I'll leave it at that.

PENDING HOME SALES

As I mentioned in my Diary early last night I moved into a small net short position (in the after hours):

Apple, Starbucks Report -- And That's It?

The subdued reaction to Apple (AAPL) and Starbucks (SBUX) earnings might be a tell that today's rally was a dead car bounce. I am putting on shorts in the after hours.

My conviction level is low, so the net exposure (on short side) is small.
Nevertheless, I would not be surprised if this morning's rally fails based on the above observation.

I reestablished a small Apple (AAPL) trading short between $325-$326 this morning.

Apple remains a metaphor for the market.

Bullet points on earnings: 

* Quarter and guidance was good.

* Might be discounted after sharp rise. (Everyone "knew" based on supply chain).

* But, still no cash flow growth from five years ago.

* The company raised the bar into a questionable macro period.

* Missed on aspects of biz worthy of growth multiple services (deceleration).

* Seems like buyback dollars not raised. (At current high prices much less accretive and fewer shares bought back per quarter - half the mechanical prop it was when the stock was lower 12 months ago.) Ergo, buyback (in dollars) must go up meaningfully to have the same impact. I doubt they will!

It will be interesting to see how Apple trades this week.

I would not be surprised if this morning's high marks the high for a long time.

What will Warren do? 

I will have more analysis on Apple in the next few days.

Here is a good synopsis of the quarter by Credit Suisse:

Apple Inc.  Information Technology Increase Target Price

C4Q19 Recap: Return to iPhone Growth Drives a Sizeable Beat

Rating:  Maintain Neutral
Target Price (USD):  290.00

• C4Q Recap: Apple delivered sizeable upside in the Dec Q, with better-than-expected rev. ($91.8bn vs. CSe/Street $87.9bn/$88.5bn) and EPS ($4.99 vs. CSe/Street $4.54/$4.49) plus a solid C1Q guide ($63bn-$67bn, ~2pts better than seasonal at mid-point), albeit with a wider-than-normal range due to supply/demand uncertainty related to the coronavirus in China. Positives: (1) iPhone ($56.0bn vs. CSe/Street $50.9bn/$51.4bn) was the clear standout, with broad-based strength from the 11 cycle driving an unexpected return to growth (+8% y/y). The base iPhone 11 was the best-selling model throughout 4Q, with continued uplift from trade-in programs (up 2x y/y at Apple retail) and 0% financing over 24 mo on Apple Card (launched in Dec.). (2) Outsized Wearables growth (+44% y/y) led by strength in AirPods (Pro still stocked out) and Apple Watch. (3) GM upside (38.3% and good C1Q guide), driven by Services (64.4%, +160bps y/y) and stabilizing Product GM (34.2%, -10bps y/y vs. -220bps in FY19). Drawbacks: (1) A shortfall and modest ~1pt deceleration in Services to +17% y/y; we recognize the magnitude is slight, but Services is key to the LT bull thesis and is often cited as a driver of multiple expansion. (2) iPad (-11% y/y) and Mac (-3% y/y) declines as both faced tough launch-related compares.
• Our View: Apple's very strong C4Q is clearly a positive, though with the stock up >30% over the past 90 days a fair amount of this was likely priced in. Investor attention is already shifting toward the highly-anticipated launch of a 5G iPhone in 2H20; key debates include the impact on the replacement cycle and Apple's pricing strategy given an expected uptick in BOM costs (CSe ~$10/unit sub-6GHz, ~$48/unit mmWave) + early evidence of price elasticity with the successful $50 price cut on the iPhone 11. We est. 7% iPhone revenue growth in CY20; however, this reflects more of a slowing in the extension of replacement rates rather than a snap-back to CY17/18 levels given limited initial 5G coverage/capacity and the lack of a "killer app" at launch. We remain on the sidelines, awaiting clearer line-of-sight to EPS momentum (particularly Services-led) to justify Apple's premium valuation.
• Valuation and risks: We roll forward valuation, with our new $290 TP now based on 18x CY21E EPS of $16.11 (vs. 20x CY20 prior). Risks: a slowdown in smartphone demand, Services monetization, regulatory issues, and the ongoing US/China trade tensions.

As posted a few months ago (after an activist took a position), I spent several days analyzing AT&T   (T) - I "wanted" to buy it but I had problems modelling EPS (for the next few years) and was concerned about the likely downtrend of those fundies and I took a pass:

Thomas C

Analysts shrug off AT&T's mixed quarter

• Evercore (In-Line, $40 target) notes that AT&T's NYSE fourth quarter pay TV customer loss was "higher than anticipated," but didn't see much in the report that should significantly move the stock.
• The overall print was modestly better than Evercore expected, largely due to organic performance at Warner Media.
• Morgan Stanley (Overweight, $42 target) says that the operational metrics across the entertainment group continued to miss estimates despite upside revenue and EBITDA.
• The firm also highlights that broadband net adds worsened, which AT&T attributed to heavily discounted IP broadband plans.
• AT&T shares are down 0.9% to $38.25. The company has a Bullish average Sell Side rating.

* I remain an intermediate term Bear
* But the near term market outlook is foggy to this observer
We live in a world of self confident opinions - especially in the financial media.
As I often write, opinions are like butts, everyone has one.
Perhaps expression of confidence by "talking heads" leads to more followers, subscribers or popularity. Or perhaps they have a genuine view based on their analysis and methodology.
Frankly, I prefer to be honest of view and honest in my current uncertainty.
I have strong views of some individual stocks, but, in terms of gauging the near term market direction, my conviction level is low now.
When I used to bet horse races, I would not bet every race - I would have gone broke.
I picked my spots - looking for horses who's odds were far higher than justified by performance factors and metrics.
The same applies to the markets - not all views are equal.
As to my current market view, I will stick with my comments from yesterday - I have little conviction over the near term market direction.

This is consistent with another one of my 15 Surprises For 2020:Surprise #2: The Fed is stuck and, not wanting to be political, ends its balance sheet expansion and makes no move on interest rates until after the election.
- Kass Diary, 15 Surprises for 2020

Surprise #9: General Electric's (GE) shares climb to $20/share as the company's makeover succeeds faster than expected. (Stan Druckenmiller reports that he made $200 million personally on his investment in GE and commits his $0.2 billion personal gain to expanding the reach of Harlem's Children Zone - Stan is Board Chairman of HCZ).
- Kass Diary,15 Surprises for 2020

General Electric (GE) topped sales and profit expectations, and the shares are +6% in pre-market trading.

I have made this point frequently:

* Hedge funds grow unpopular.
* Why market timing is appealing.
* What do Amazon (AMZN) , Google (GOOGL) and Salesforce (CRM) have in common?

Peter on the Fed, housing and sentiment:

So the Fed's balance sheet seems to have plateaued for now and thus the question for Jay Powell today is whether this is temporary or this is the level, around $4.2 Trillion, that it will settle out at. They will continue to buy T-bills but at this point maybe it just replaces the maturing MBS and rolloff of all the temporary term repo's they still have in place. I hope there is an answer because if there is not, it would imply that they still have no idea what the right size should be.

FED's BALANCE SHEET

We will also hear from Powell I'm sure that the US economy is in a good place but I'll argue what is not is the current range of the fed funds rate. Looking at every single inflation gauge other than PCE (which includes core CPI, the Cleveland Fed's trimmed CPI, the Dallas Fed's trimmed PCE, the NY Fed's Underlying Inflation gauge, and the Atlanta Fed's sticky CPI) has current policy with rates firmly negative on a REAL basis thus meaning it has taken this highly extraordinary policy to help contribute to just 2% GDP growth. While the Fed still has rates to cut (barely) if the economy softens from here, the impact will be about zero as the law of diminishing returns has fully kicked in. And if rates were to fall to the point where it negatively impacts bank profitability, policy would go from easy to restrictive.

With another leg lower in mortgage rates, mortgage apps responded positively. Purchases rose 5.3% w/o/w and are now up 16.6% y/o/y (an easy comp as we know what the state of the world was one year ago after the Q4 2018 selloff) while refi's rose 7.5% w/o/w and 146% y/o/y. The most positive thing I've seen in housing over the past week was the news from DH Horton and Pulte Homes this week in their earnings was that they seem to be figuring out how to make lower priced homes at a decent profit margin as homes below $300k is where the most demand is right now.

With the Wuhan virus taking over the news flow and the resultant sell off in stocks, sentiment cooled this past week according to Investors Intelligence. Bulls fell to 52.8 from 59.4 last week which was the most since early October. Most though went into the Correction camp as Bears only rose 1 pt to 18.9. The bears have been so mutilated over the past few years that they still can't get over 20. Bottom line, Bulls above 50 is still elevated as a level in the low 40's is more conducive to a good rally but at least this is a start from a contrarian standpoint. Keep in mind though that this only has short term implications while the Citi panic/euphoria gauge talked about on Monday has statistically significant evidence of being relevant over a one year time frame.

Japanese consumer confidence in January was unchanged at 39.1, a touch below the estimate of 39.5. While this is the highest since May, it remains well below the peak in this cycle of 44.6 back in November 2017. The Income Growth component fell .3 pts and this peaked in early 2018, more reason NOT to have inflation rise to 2%. This data point is never market moving but the Nikkei rallied on the heels of the US bounce but JGB yields were unchanged.

JAPANESE consumer confidence

Shifting to consumer confidence figure in Europe, Germany's rose .2 pts to 9.9. This peaked in February 2018 at 10.8 but this is still a high level because notwithstanding the anemic economic growth in Germany, unemployment remains low and the consumer strength has offset the industrial weakness.

Likely in response to the transit strikes flaming out in response to the proposed pension bill, French consumer confidence rose 2 pts m/o/m to just below the highest since early 2018. Macronomics is slowly but surely working I believe in some key areas like the labor market, taxes and pensions.

Lastly in Europe, despite all the best efforts of the ECB (in their opinion), money supply growth in December slowed to a 5% growth rate down from 5.6% in November an that was below the forecast of 5.5%. Loan growth to companies slowed to just 3.2% y/o/y, a 2 year low and down from 3.4%. You can bring a horse to water but... Loans to households though rose 3.7% y/o/y from 3.5% and that is the best in 11 years, helped by mortgages. Yes, easy money is creating housing bubbles all throughout Europe. Shocking I know.

Acknowledging what monetary policy has done to asset prices was ECB Executive Board member Yves Mersch two days ago who said "Asset prices are currently at very elevated levels." He still is a believer in their current policy stance but said "the Governing Council remains attentive to the potential side effects of those measures." The problem for them though is that they are in no position to do something about it because they are afraid of the repercussions. "A correction (in asset prices, particularly homes) would affect banks directly by reducing the value of collateral backing loans and indirectly by affecting confidence, leading to weaker overall economic activity. There is, therefore, no clean separation between the pursuit of monetary stability and that of financial stability in the medium term." In other words, the direction of asset prices everywhere are driving the economy rather than what should be, the other way around.

From Danielle DiMartino Booth:

• 3M's (MMM) stock decline yesterday provided a prism into faltering global demand punctuated by announced job cuts in its auto and electronics divisions; 3M's forward guidance, coupled with expectations within Germany's IFO survey, command caution on the global reflation front
• While Germany's auto oversupply has improved from September 2019, new orders are still well in contraction territory; as spillover goes, China's auto imports are likely to be negatively impacted as a base case and more severely damaged given the advent of the coronavirus
• While trade flows are noisy due to the Lunar New Year, expect China's trade data, due out in the first few days of February, to be especially noisy given the anemic global growth impetus that preceded the first coronavirus headline

The etymology of "Pangaea" is from Ancient Greek's pan ("all, entire, whole") and gaia ("Mother Earth, land"). The concept that the continents once formed a contiguous land mass was first proposed by Alfred Wegener, the father of the scientific theory of continental drift, in his 1912 publication The Origin of Continents. The distribution of fossils of similar and identical species across the continents is one line of evidence pointing to the existence of Pangaea. So is the discovery of the ancient "saber-toothed squirrel," the prehistoric critter "responsible" for the breakup of Pangaea. At least that's how the script was written for the lovable "Scrat" in 2012's animated adventure comedy, Ice Age: Continential Drift.

Micro meet Macro. 3M is a U.S. multinational company that produces over 60,000 products under several world-renowned brands covering a broad swath of industries - Automotive, Commercial Solutions, Consumer, Design & Construction, Electronics, Energy, Government, Health Care, Manufacturing, Mining, Oil & Gas, Safety and Transportation. For all intents and purposes, 3M has a large enough worldwide footprint that it can feel "continental drift," the tectonic shifts of the cyclical global economy.

In the here and now, 3M also is there to meet the demands of the Wuhan coronavirus. "3M Cranks Up Face-Mask Production Amid Outbreak" was a Bloomberg headline yesterday. CEO Michael Roman said that "we are focused on ramping up 24/7, not only in our China operations but in Asia, Europe and the U.S. to meet that demand." Despite this booming business niche, 3M's stock price dropped the most in nine months yesterday after it disclosed it received a grand jury subpoena in an environmental case. For good measure, job cuts will grow by 1,500, due to slumping markets for autos and electronics.

The global supply chain being just that -- global -- is illustrated in today's chart and links the three continents. North America's 3M is depicted against Europe's key auto export nation, of Germany and finally, the largest vehicle market in the world, Asia's China. It may be no Pangaea, but the picture painted undoubtedly brings the association of 3M's stock price together with forward expectations for auto exports out of Germany (from the IFO survey) to the trend in China's imports from Germany.

Much of the disappointment in 3M's earnings results stemmed from its auto business. The fall back in the blue line provides an early warning sign for what's to come in Germany's auto sector.

Diving beneath the IFO headlines uncovered the red line, a gauge of foreign demand for German autos. It's a straightforward enough indicator. But forward guidance for the export business doesn't quite square the circle for us. Not included in the chart is the short-run trade off between demand (new orders) and supply (finished good inventories). We've discussed the inherent insights derived from new orders to inventories spreads in past Feathers. Assigning it to the German auto sector is thus a worthwhile endeavor.

The good news: The imbalance between German auto demand and supply is past its worst point for the current downturn. September 2019 saw orders running at a -35.6% (net percentage) versus inventories at an elevated 22.8%, for a spread of -58.4%, a nine-year low. Since the September low point, orders have climbed to -22.2% and inventories are being worked down, printing at 3.7% (for a -25.9% spread).

Capitulation on the supply side is key to bringing conditions back into balance. Progress has been made, but more is clearly needed. The reduced pessimism from German auto export guidance illustrated above is hopeful, but tenuous at best, especially now that coronavirus is set to delay the progression.

A retrenchment in Chinese imports from Germany (yellow line) is the next shoe to drop. Movement is being clamped down in the second largest economy in the world. That's a domestic demand shock in the making. And Feather readers know full well that weakness in imports is an expression of weakness in domestic demand.

Of the three lines in the chart, the yellow lags, at least over the last ten years if you require a lasting trend. The ups and downs of 3M's stock price and Germany's auto export guidance have given useful foreshadowing for the performance of China's imports. The next leg is down.

What distinguishes China's trade data from other countries? It's one of the first in line globally to report monthly statistics. China's December trade report went public on January 13th. Compare this to the U.S., where we will only see an advance look at December trade today, January 29th (the full report is out February 5th).

Looking out over the hazy horizon, China's January trade report is due out February 6th or 7th. We warn that trade flows data during any Lunar New Year season are, by definition, noisy. Tack on the coronavirus in the heart of this season...you finish the thought. The continental drift is widening and not in a good way.