Here's the Subscriber Comment of the Day:

"How perverse is it the 'sleep at night' stocks are AMZN and GOOG and the "squirm at night" stocks are KHC and VIAC? Reminds me of dot.com era."

-jesusishere 

"Just one more thing."
-- Lt. Columbo

I neglected to mention that UBS (UBS) has upgraded FedEx (FDX) .

FDX was +5% on Friday and up again today following a company announcement that it is improving its delivery efficiency and reducing costs.

I placed FDX on my Best Ideas List in late December 2019 at $153.50.

There might be a lot more upside in this name.

And, don't forget one of my 15 Surprises for 2020:

Surprise #7: Berkshire Hathaway (BRK.B) , with over $130 billion of cash, acquires FedEx (for $55 billion) in a spirited bidding contest against Walmart (WMT) . There are several important catalysts to the transaction -- Buffett understands FDX's business and the deal would expand his scale in transportation -- where he already enjoys a stronghold in rails with subsidiary Burlington Northern. Moreover, despite the recent Amazon (AMZN) issue, FedEx has a wide business moat with a vast distribution presence and a large fleet of vehicles. Finally, FedEx' shares have been pummeled (-20%) because of a difficulty in adopting to digital commerce and the company could be purchased on the cheap at under 20x earnings.

Imagine where the S&P 500 index would be if there were no coronavirus! Thanks for reading and enjoy the evening.

No trades since the early going (Amazon (AMZN) and Alphabet (GOOGL) ).

Doing research.

* I am!
The S&P Index is in orange and the price of copper is in white:

* I have learned a lot by looking back at my mentor, "The Chief's" investment observations and successes
* In a world starved for earnings growth I am back in Google and Amazon - that's where "The Chief " would be
* The next Tesla might be Amazon or Google
"Investing in a student is one of the great things you can do for humanity."
- The Chief
In my career I was initially mentored (for over five years) by "The Chief" at Putnam Management in Boston, Massachusetts during the 1970s. Fresh out of Wharton, "The Chief" was tough and demanding on me - it was one of the best things that ever happened to me professionally.
"The Chief" ran Putnam's aggressive funds and he ran them spectacularly for years.
As I observed from the early to late 1970s, "The Chief's" key strength was to identify the market leaders, overweight them and to let them ride!
He was extraordinarily successful in that endeavor and eventually ran his own shop with even more success than he achieved at Putnam.
I have seen "The Chief" successfully invest in energy stocks, recreational vehicles/motor homes, savings and loans (I had something to do with that investment as I was the financial stock analyst at Putnam!) and all the other leaders in the past market cycles. During the last decade he made scores in Apple (AAPL) , Amazon (AMZN) , Alphabet (GOOGL) and many other growth tech names. For that matter, he has had a decade long (almost) fearless ride being long stocks almost uninterruptedly since early 2009.
"The Chief" not only made a lot of money for himself but it is important for me to note that he gave back to others (especially Harvard University where he is an Overseer and supports 60 scholarships a year among other contributions).
The first to complete college in his family (Harvard University and Harvard Business School), "The Chief," who is very humble and authentic, will likely be angry that I complimented him because he is low key, self effacing and likes to keep his contributions to multiple communities and institutions quiet.
Watch this video clip and you will see what I am talking about in terms of the quality of his character.
But, back to "The Chief's" investment style.
It took a long time to for me to appreciate his strength in isolating the market leaders - like Amazon and Google. But I am still learning.Mr. Market Will Continue To Pay Up For Growth - Perhaps Extraordinarily So!
It seems very apparent to me that Amazon and Alphabet, in a world starved with earnings growth, will be the continued market's leaders (almost regardless of market direction).
Perhaps the lesson of Tesla's (TSLA) recent move to over $950/share is that Amazon and Alphabet will, too, soar to much higher (and even, at some time in the future, overvalued) levels.
That's an observation "The Chief" would make.

* With a $5000 intermediate term target I have reestablished an Amazon long near the opening this morning
* Amazon's shares have ignored over $3.5 billion of Bezos sales over the last week - and that's a good sign
* My new buy level is $2100

I recently raised my buy entry level for Amazon (AMZN) to $1950.

Given my $5000 intermediate term price target (Amazon may be the first $2.5 trillion company), this morning I paid under $2100 (well above my disciplined buy level!) to reestablish a small stake in Amazon.

I think I was too cute (by half) in selling recently - given the strength (and hockey stick) to EPS growth in the recently released quarter.

Here is my recent (January 31) update on the company:

Kass: Amazon at $3000? How About $5000? (Part Deux)

* Amazon, the "Supreme Disruptor," has established an insurmountable first-mover advantage and a deepening competitive moat.
* Amazon's profit runway is lengthy and (as witnessed by last night's report) underestimated.
* I previously saw the company about one year away from "hockey stock" EPS growth that I believed would far exceed consensus expectations
* Amazon is 12 months ahead of my schedule
* I continue I expect that AMZN, in the fullness of time, will become the first $2.5 trillion company
* Since late 2018 I have traded Amazon basically two times - with accumulated gains of about $800/share (starting at a base of under $1385/share)
* Given my market view I expect to see some profit taking over the near term (after Amazon's spectacular after hours run to more than $2120) - its currently +$196/share to $2065
* Next time (and hopefully following a broad market decline) I expect to buy and hold this name

"Based on my company analysis, Amazon is about two years away from "hockey stick" earnings-per-share (EPS) growth that will far exceed consensus expectations. The source of my profit optimism and above-consensus growth projections are several fold, but are keyed on an expansion in operating leverage and profit margins produced by a lower rate of growth in expenses and higher top-line results. The latter will be aided by continued above-expected core retail sales gains and the anticipated success in the company's high-margin advertising initiative as well as other emerging businesses."
- Kass Diary,Amazon May Hit $3,000 by 2021 and Surpass $5,000 by 2025


Amazon reported fourth quarter revenues and EPS that meaningfully exceeded investors' expectations.

Importantly, unit growth accelerated to (year over year) +22% compared to only +14% in the year earlier quarter (justifying the previous step up in one day shipping/fulfillment costs). AWS results were a standout (reflecting the $30 billion in performance obligations vs. $27.4 billion in 3Q2019 and $19.3 billion in 4Q2018).

Specifically, the "hockey stick" beat that I expected next year occurred this year - about 12 months ahead of expectations.

Fiscal year 2020 estimates will be dramatically raised (probably to over $43/share compared to $35-$36 previous consensus). Sell-side price targets will be increased based on what we saw 13 months ago when we first bought the shares - a boost in e-commerce operating margins as Amazon grows into its larger infrastructure, optionality for faster than expected free cash flow vis a vis its advertising segment and an upward bias to AWS sales forecasts and a likely more moderate deceleration path as suggested by ongoing capital intensity and rising performance obligations.

Here is my very bullish thesis on Amazon as expressed back in April, 2019:

I purchased Amazon's shares in December, 2018 and added to my Best Ideas List at $1388 in the last week of that year.

After reviewing the Q1 results, Amazon remains my largest and highest conviction long.

The company's profits were well above forecasts, aided by a monumental expansion in operating margins (of 355 basis points, year over year). This was driven by operational efficiencies as well as strong results in advertising (large share gains) and AWS (small erosion in rate of sales growth but a good improvement in division margins). Rising costs associated with the move to a free one day Prime delivery program will halt that expansion in margins in the current quarter (incorporated in slightly lower profit guidance) but it is a brilliant move, nonetheless - and it is supportive of the "hockey stick" improvement in profitability I see in about two years (see quote above from a prior column). The non consensus profit ramp I see is a reflection of operating efficiencies, the relatively early-stage shift of workloads onto the cloud, continued online retail penetration, an unthreatened (regulatory/government) horizontal acquisition strategy and large share gains in advertising (business is expanding at a rate that is about 7x the overall ad industry market growth).

I expanded on my Bullish thesis and raised my earnings estimates and price targets for the company last spring.

In the annals of U.S. corporate history there is no company that has as large and lengthy runway of opportunity as Amazon.com .

It is that prism of opportunity that supports my strong belief that Amazon's earnings growth will far exceed consensus expectations in the 2019-2022 period.

Here are the keys to my increasingly bullish case:

1. Amazon's first-mover advantage is now impenetrable; the company no longer can be caught by its competitors.

2. Amazon's broad product offerings and technological advantages no longer can be duplicated.
3. Nor is Amazon likely to be caught by regulators. Indeed, the existential threatof more regulation and the possible imposition of growth constraints seem to be sharply diminished probabilities unless a progressive Democratic aspirant captures the White House -- an increasingly unlikely event. (See my prior discussion of this.)

4. On the wings of a nearly zero cost of capital Amazon has expended enormous sums of capital to produce the massive and insurmountable competitive advantage that exists today. That "kindness of strangers"in such scale likely will never be duplicated again by a competing business entity, thus placing Amazon light years ahead of its competition. Indeed, in this marathon of disruptive growth (a marathon approximates 26.2 miles), Amazon is at least 20 miles ahead of its closest competitor.
5. Based on my company analysis, Amazon is about two years away from "hockey stick" earnings-per-share (EPS) growth that will far exceed consensus expectations. The source of my profit optimism and above-consensus growth projections are several fold, but are keyed on an expansion in operating leverage and profit margins produced by a lower rate of growth in expenses and higher top-line results. The latter will be aided by continued above-expected core retail sales gains and the anticipated success in the company's high-margin advertising initiative as well as other emerging businesses.
6. Based on our EPS models and our more optimistic assumptions of top- and bottom- line growth, I anticipated that EPS results for 2019, 2020 and 2021 will exceed consensus forecasts by more than 10% in each of those years -- and possibly considerably more! Also, 2021 is the year when the largest gain relative to expectations is projected. With more than one quarter of this year already in the rear-view mirror, it is not too early to consider results out two years.
7. The shares of Amazon have not been materially embraced and exploited relative to other peer stocks by institutional investors. As an example (and anecdotally), in my Bull/Bear debate with Tobias Lefkovich at Citigroup on Monday, the audience of large institutional investors was asked how many held the shares of Amazon. Only five out of about 30 investors answered the question affirmatively.In terms of the other three FANG constituents, Amazon has the lowest component of institutional ownership:

Institutional Ownership as a Percentage of Shares Outstanding* Facebook 75%* Amazon 57%
*Netflix 77%* Google 81% 8. In emphasizing Amazon's retail, emerging business and operating/financial strengths, I have not even discussed AWS cloud services, which I will save for a further discussion. It's the icing on the cake.


Background

After a series of forays on the short side (some profitable, some unprofitable) over the last few years, I purchased Amazon in late December and added the stock to my Best Ideas List as a long on Dec. 26, 2018, at $1,383. The shares are currently trading at about $1,820. I cited:

"Amazon's business franchise is secure and getting stronger. The competitive threats seem surmountable, and its market share appears to have a widening moat. The company's shares have also already materially discounted a modest threat of heightened regulation, which no longer seems as very threatening in any case."

- Kass Diary, "The Case For Amazon"

At that time, the broad markets were in disarray, there were concerns about the company's previous reporting quarter and the divorce of CEO Jeff Bezos raised vague questions about company control.

My bottom line:

"If a window of opportunity appears, don't pull down the shades."
- Tom Peters

With the risk of the company's growth expansion plans no longer in jeopardy, Amazon's competitive position is firming and its business moat has deepened. Its first-mover advantage and lead has multiplied over time and the company's competitive reach is not likely to ever be challenged.

It is now likely that a "hockey stick" in EPS results will gather speed over the next three years and that the company will produce sales and profit growth that substantially exceed investors' expectations.

I expect that Amazon, in the fullness of time, will become the first $2.5 trillion company.

Sometimes the best investment opportunities lie right in front of us, and Amazon might be the best example of this phenomenon today.

My new buy level is $2100.

I reestablished small longs in both Amazon (AMZN) and Alphabet (GOOGL) near the opening this morning.

In a world short of organic growers, Amazon and Google long to be standouts.

Columns coming out shortly!

* Sixteen weeks ago I introduced a new column in my Diary
* Rate of change -- both absolutely and relative to consensus expectations -- is likely the most important near-term determinant of stock prices
* On balance, last week's data-based changes -- five positive, three neutral and two negative -- remain positive in trend. (They have been consistently positive since I commenced this column over three months ago)

These days, change is happening oh so rapidly. It is leading to more of a sense of uncertainty and a heightened regime of volatility.

As a result, I initiated a new column about 16 weeks ago, "What Has Changed at the Margin Over the Past Week," which is meant to assess the changing landscape of the economy, politics, geopolitics, interest rates, inflationary expectations, and, of course, the markets.

For emphasis, this weekly analysis and summary is data-based as I am trying to be objective, interjecting as little subjectivity as possible!

Given the "newsy" market backdrop - the impeachment hearings, the continued Boeing (BA) production problem, the proliferation of the coronavirus, the Democratic caucuses and other issues - in which an announcement (on any one of a number of subjects) could cause a meaningful market reaction, I haven't updated this column in about a month.

I am now resuming it (on a weekly basis).

Here is what changed at the margin last week:

1.U.S./China Trade

Here are the positives

As mentioned recently:

The U.S. and China have FINALLY reached a Phase One trade deal. Hopefully, our biggest concerns about theft and forced IT sharing are addressed, but only time will tell. The U.S. farmer can breathe a sigh of relief that their once-biggest customer is back and one day can add to the pace of $26 billion per year of products they were buying before this trade spat. The December tariffs are off the table and the September ones get a reduction in the rate. Lastly, we hopefully have taken off the table the possibility of escalation along with this de-escalation and that will be enough to incentivize American business to do the things such as hiring and capital investment that they've been holding off on while tensions were high.

There have been no updates since Phase One was reached (see #10 below - "Overseas Economies" - section).

Here are the negatives

Again, as previously observed:

On the completion of Phase One of the trade deal, we are still left with tariffs on about $360 billion of Chinese exports that American businesses pay for. That tax totals $71.5 billion per year -- not much of a difference from the $80 billion they were paying before this agreement. Yes, some of that will be eaten by the Chinese, but much will also be absorbed by U.S. companies. And rather than taking off these remaining tariffs if China adheres to the Phase One agreement, it seems that the only time our enforcement mechanism might come off is upon a Phase Two deal. Call me skeptical on a Phase Two getting done. Finally, just as we were when this whole battle started, we are still reliant on China's desire and ability to deliver, but there is nothing we can do about that.

Though Phase One has been agreed to, this is still a neutral for the markets as the hard negotiations regarding structural reform remain ahead.

2. The Domestic Economy

Here are the positives

The January ISM services index was a touch above expectations at 55.5 vs. the estimate of 55.1, and up from 54.9 in December. The internals though were mixed with new orders up but backlogs fell to the lowest since July 2012. Employment moderated by 1.7 pts to 53.1 and that is the lowest since September. Of note, only 6 of 18 industries surveyed said they increased payrolls, down from 10 in December and 13 in November. In terms of breadth, of the 18 industries surveyed 12 saw growth vs. 11 in December and 12 in November. Six saw a contraction, the same number seen in December.

The January ISM manufacturing index got back above 50 at 50.9, up from 47.8 in December and that was better than the estimate of 48.5. New orders also got back above 50 for the first time since July, rising to 52 from 47.6. Backlogs remained at 45.7 but that is up 2.4 points from December. Export orders rebounded by 6 points to 53.3, the best since September 2018. Employment rose 1.4 points but is still below 50 at 46.6 and hasn't been above 50 since July. In terms of breadth, of the 18 industries surveyed, 8 saw growth vs. 3 in the month prior which matched the least since 2009. Versus 15 in December, 8 saw a contraction. The ISM said "Comments from the panel were positive, with sentiment improving compared to December...Global trade remains a cross industry issue, but many respondents were positive for the first time in several months."

The average 30 year mortgage rate fell 10 bps week over week to 3.71%, the lowest since October 2016. This only helped refi's though this past week as they jumped +15.3% week over week and are higher by +183% year over year. Purchase applications fell -9.5% week over week but are still up +11% year over year.

Here are the negatives

The coronavirus continues to spread and a huge chunk of the second largest economy is literally shut down, dramatically disrupting global supply chains, tourism, travel, etc....

Markit also reported its US January manufacturing index and said this in their release: "US manufacturing limped into 2020, with falling exports dampening output growth and causing a pull back in hiring. The survey data are consistent with factory production falling moderately...Weakness looks broad based. Rising demand from households has helped support production in recent months, but January saw a marked slowing in new orders for consumer goods." On the bright side, "More encouragingly, business expectations for the year ahead perked up, coinciding with an easing of trade tensions and the signing of new North American and Chinese trade deals."

Taken together, this is still a market neutral - but the momentum is negative.

3. The U.S. Consumer

Helped by weather and the construction trade, payrolls in January grew by a net 225k, 60k more than expected and the two prior months were revised up by a total of 7k. The private sector added 206k of that. On the flip side, the household survey saw a net loss of 89k led by jobs lost in the key 25-54 age group and when combined with the 50k person increase in the labor force, the unemployment rate ticked up by one tenth to 3.6% off its 50 year low. The U6 rate also rose to 6.9% from 6.7%. Positively, the participation rate and employment to population ratio's did increase both by two tenths m/o/m and the percentage of job leavers remained high but down slightly from December. Hours worked remained unchanged at 34.3 as expected but average hourly earnings missed expectations with its .2% rise vs. the estimate of up .3%. Combining the two puts average weekly earnings higher by +2.5% year over year, a modest rate. Smoothing out the monthly noise has the 3 month average at 211k vs. the 6 month average of 206k and which compares to the 2019 average of 175k, the 2018 average of 193k and the 2017 average of 176k.

Initial jobless claims totaled 202k, 13k less than expected and down from 217k last week. This lowers the 4 week average to 212k from 215k and that is the least since last April. Continuing claims, delayed by a week, did lift to a 3 week high.

This is a positive for the markets.

4. Foreign Policy

There was no change in the Trump administration's foreign policy/tactics, though the undertone (and controversies) at the December NATO meeting was negative. Moreover, as I previously wrote, our relationship with North Korea may be deteriorating post haste. (On watch!)

"Peak globalization?" (Let's watch for this, as it could mean higher inflation!)

This is still a neutral.

5. The Fed

While the Fed's balance sheet rose by almost $6 billion on the week, it's no higher than it was in late December after having peaked in mid-January. Nonetheless, the Fed's balance sheet continues to inflate - reminding me of the song words, "You can check out anytime you like but you can never leave."

Overall, a friendly Fed remains a positive for the markets, but let's watch "over there" (as the effectiveness of even lower interest rates are being questioned by some authorities).

6. Brexit

Done and over.

This is a slight positive.

7. U.S. Politics

As expected, impeachment hearings resolved little for the Democrats and much for the Republicans.

As to Senator Sanders continued rise in the polls, it can be taken both ways (positive in that Trump's reelection prospects are improved, negative if Sanders and the progressive left can get their act together and win the election).

This is positive for the markets but subject to change even over the near term.

8. Corporate Profits

Estimates and % "beats" continue to move lower. (It remains my view that the 2019 "profits recession" will continue through 2020.)

This is a continued negative for the markets.

9. The U.S. Stock Market

Though ending the week with some weakness, equities were up by almost +3% last week.

A positive for the markets.

10. Overseas Economies

On the positive side of the ledger

Hong Kong's PMI got less worse, rising to 46.8 from 42.1. Markit said, "that prolonged political turmoil continued to impact on the performance of Hong Kong's private sector, solace can be taken from the slowdown in rates of contraction in sales, output and input buying...Worryingly, however, companies remain downbeat regarding the year ahead outlook for business activity, with many expecting that political headwinds, social unrest and trade disputes will continue to harm output."

Singapore, a great proxy for both economic activity in Asia and global trade, saw its PMI little changed in January, rising to 51.4 from 51. New orders picked up but "economic and political uncertainty overseas led to a further sharp reduction in export sales and kept business confidence at a subdued level."

Japan's services PMI rose to 51 from 49.4 but that was a bit less than the initial print of 52.1. Markit said, "Looking ahead, while business remained optimistic of output growth in the coming year, the degree of confidence fell to a 29 month low. Concern towards the ageing society and weak economic conditions all weighed on the outlook."

India's services PMI in January improved to 55.5 from 53.3.

Taiwan's manufacturing PMI in January improved by 1 point to 51.8, India's jumped to 55.3 from 52.7, and the Philippines went to 52.1 from 51.7. Japan's was revised to 48.8 from 49.3 initially but that is up slightly from the 48.4 print in December.

Quantifying the major disruptions seen in Hong Kong, Q4 GDP there contracted by -2.9% year over year and -0.4% quarter over quarter, not as bad as the -3.9% and -1.5% decline that was expected. On a quarter over quarter basis, this is the 3rd straight quarter of declines.

The Eurozone services PMI came in at 52.5 vs the initial print of 52.2 but that is down slightly from the 52.8 seen in December. There was weakness in France and Spain and better growth elsewhere. Combining with the manufacturing sector has the composite index at 51.3 vs 50.9 in December. While it remains to be seen what the impact the renewed China slowdown will have in the short term, these numbers have stabilized. "However, the pace of output growth is still subdued, and firms remain concerned by existing headwinds as well as fresh risks. Although US-China trade war tensions have cooled, US trade rhetoric has now turned to Europe, with the auto sector looking especially vulnerable to tariff threats. Similarly, while the UK has formally left the EU, trade discussions will no doubt cause an air of uncertainty to hang over the continent. The Wuhan coronavirus meanwhile represents a new potential disruptor to business and trade" according to Markit.

The Eurozone manufacturing PMI for January was basically left alone at 47.9 from the initial print of 47.8 but which is up from 46.3 in December. This is now 12 months in a row of below 50 reads but the best print since early 2019 has given hope to green shoots. Markit said, "Most encouragingly, order books moved closer towards stabilization, falling to the smallest extent since late 2018. With the survey indicating the steepest fall in warehouse stocks since September 2016, the new orders to inventory ratio, a key forward looking indicator for factory production, surged to its highest for nearly 1 1/2 years."

The UK services PMI rose to 53.9 from 50 in December and this is another confidence data point reflecting the post election bounce in sentiment. Markit said, "A solid return to growth in the service sector was the main factor behind the recovery in the UK economy, with survey respondents commenting that a rebound in sales inquiries had quickly translated into rising workloads so far this year."

The UK manufacturing PMI was revised to 50 from 49.8 prior and up 2.5 points from December. That's the 1st time it has a 5 handle since April 2019, "as receding levels of political uncertainty following the general election aided mild recoveries in new order intakes, employment and business confidence."

The UK January Markit construction index while still below 50 was up +4 pts month over month to 48.4, 1.3 points above the estimate. That's the smallest print below 50 since May 2019. Commercial work showed the least slowest pace with residential also showing some signs of improvement.

Here are the negatives:

After seeing the December U.S. trade data, we see for 2019 that exports fell -0.1% from 2018 while imports were lower by -0.4%.

China's January Caixin index, not including the influence of the virus, fell to 51.1 from 51.5. Caixin said simply, "Manufacturing demand continued to grow at a slower rate, while overseas demand was subdued." There was though some light on the hopes that the U.S./China trade deal would result in clarity: "Business confidence continued to improve, with the gauge for future output expectations on the rise and tending to recover after two years of depression, due chiefly to the phase one trade deal."

China's private sector services PMI from Caixin fell to 51.8, a 3 month low from 52.5 and that was just below the estimate of 52. Optimism though from here picked up to the best since September 2018, "thanks to the phase one trade deal."

South Korea's January manufacturing PMI fell to 49.8 from 50.1, Indonesia dropped to 49.3 from 49.5, Vietnam's slipped to 50.6 from 50.8, Thailand's fell to 49.9 from 50.1, and Malaysia was down to 48.8 from 50.

The impact of the VAT hike really showed up in Japanese household spending in December which fell -4.8% year over year, worse than the estimate of down -1.7%. (Sorry to be a broken record here but this is the result of higher 'inflation' - this time tax induced - as consumers spend less when their cost of living goes up, especially faster than their wages).

With respect to Japanese wages, regular base pay rose just +0.4% year over year which is below the rate of inflation and inflation is still about half what the BoJ wants it to be.

German factory orders fell -2.1% month over month rather than rising +0.6% as expected, partially offset by a 5 tenths upward revision to November. Orders were particularly weak within the Eurozone, falling by -14% while domestic orders and non Eurozone orders rose. The Economy Ministry said simply "Overall, the outlook for the industrial economy remains subdued."

Still reflecting nonexistent global trade growth as of December, German exports rose +0.1% month over month, below the estimate of up +0.5%.

German industrial production in December fell -3.5%, well below the estimate of down -0.2%. Yes, the trade deal left better sentiment for what's to come but when the 2nd largest economy essentially shuts down, that will now have to be delayed.

French IP in December badly missed expectations too falling -2.8% month over month vs. the estimate of down -0.3% driven by a -2.6% decline in manufacturing production.

Spain's industrial output in December fell -1.4% month over month, more than the estimate of down -0.9%.

Let's move this from neutral to negative (given the uncertainties surrounding the virus).

Bottom Line

Rational people think at the margin.

It has been my experience that rate of change, both absolutely and relative to expectations, is likely the most important near-term determinant of stock prices.

On balance, last week's data-based changes (five positive, three neutral and two negative) produced a positive result/trend.

These short-term weekly changes also should be viewed in the context of one's intermediate to longer-term outlook and relative to one's risk profile/appetite and time frames.

* But...

"It's a beautiful day in this neighborhood
A beautiful day for a neighbor
Would you be mine?
Could you be mine?"

- Fred Rogers, Won't You Be My Neighbor?

Mid last week I raised my net short exposure to medium-sized. (I further reduced some longs and moved to large in my Apple (AAPL) and Spyder (SPY) shorts).

While my conviction still is rather low - the deterioration in market breadth has emboldened me a bit.

On Thursday breadth was flat and on Friday it turned negative (9 decliners for every 5 advancers).

It's a start for the ursine crowd but that erosion certainly is not definitive - in light of the 13 month long market rally.

I would give the chance of a double top (in this neighborhood) at about 40%-50% right now.

While Tom Hanks failed to win an Oscar for his performance in Won't You Be My Neighbor? - the market's neighborhood might be worsening.

In my next post I will resume my "What Has Changed At The Margin Over the Past Week."

Peter on stocks and bonds:

With us all playing the part of infectious disease doctors and analyzing the angle of ascent in the number of reported infections, I'm still amazed by the discrepancy in opinion of where the economy goes from here between the stock market and the Treasury market with the former at around a record high and the latter just above record lows. But just maybe the position of the former is because of the level of the latter or maybe not. I will say this, I do believe this virus peters out by the April/May time frame but can't ignore the dramatic economic impact in the meantime when the economic pace of the global economy is only running at around 3% prior to. Thus, there wasn't much of a cushion here for mistakes, especially as we are still living with almost all of the tariffs.

The key this week is how many factories come back on line and to what extent things are delayed again. Tesla is the first high profile company that said it will reopen. The question then is how many employees show up. The other thing to watch is what Jay Powell has to say in front of Congress Tuesday and Wednesday. I'll say for the umpteenth time, with rates already so low, any moves from here will not be a vaccine against an economic slowdown as the current rate cuts have proven to have also done little.

The virus impact is being seen in the sentiment in Europe, albeit modestly right now. The Sentix Investor Confidence index for February fell to 5.2 from 7.6 and that was below the estimate of 5.9. Sentix said "While at the beginning of the year there was still a clear upswing scenario for the global economy, the outbreak of the corona virus in China has changed the situation significantly. The drastic measures taken by the Chinese government for the Hubei region show the danger to the global economy if the outbreak cannot be limited regionally. So far, however, the effects on the economy have been relatively limited from the point of view of the investors surveyed by Sentix, even if they are significant for China."

SENTIX INVESTOR CONFIDENCE index

Following the disappointing December German, French and Spanish industrial production figures seen Friday, today Italy reported a miss in its IP figure. Production fell 2.7% m/o/m vs the estimate of down .6%. Versus last year it was down 4.3%, lower for the 13th month in the past 14.

Lastly, I saw Parasite this weekend, it was amazing.

Danielle DiMartino Booth on retail:

• While aggregate retail-announced job cuts fell 21% last year, layoffs within the nation's largest occupation tied to bankruptcies were 60% higher, accounting for a record 63% of retail job cuts; pre-Macy's (M) announcement, store closings accounted for two-thirds of January's layoffs
• January's 8,000 nonfarm payroll job losses were four times the past 12 months' average and total retail hours worked fell at the fastest rate exiting the last recession; further stressing the sector, 4.3% of S&P 500 retail revenues are in China and Hong Kong
• The plunge in retail managers' hours worked, more closely tied to brick and mortar retailers, has declined 36% thus far in the first quarter vs. 2019's fourth quarter; this record decline is much deeper than the Great Recession's largest quarterly drop of 15%

There is no such thing as a vacant Fifth Avenue. But that was the surreal serenity depicted in 2012's addition to the National Film Registry. As for the stunning Audrey Hepburn's window-shopping scene that opens the movie -- on an empty Fifth Avenue, in front of Tiffany's -- she was so unnerved by the throng of onlookers, she kept throwing her lines. She finally pulled herself together when a crew member nearly got electrocuted behind the camera. To this day, film buffs maintain that Hepburn was robbed of 1962's Best Actress Oscar. Sophia Loren was no doubt brilliant in Two Women, for which she walked away with the Oscar. But who could deny Hepburn made cinematic history in her tragically comedic portrayal of Holly Golightly in Breakfast at Tiffany's?

With the 2020 Oscars in the history books, we can return to focusing on the other Oscar-worthy performance, that of Wall Street, non-plussed as it's been with the coronavirus. Perhaps images of Shanghai's vacant streets this past Saturday will rattle a few nerves. Or maybe the virus' geographic containment will continue to be the sole focus. China has indicated its intent to re-open today, but we have our doubts. Respected journalists from the Economist, BBC and Singapore's Straits Times have reported that overzealous local officials are mouthpieces to the government's desire to reopen.

The truth is somewhere in between given what we've learned about the coronavirus -- it's much more contagious than SARS and much less fatal, if treated. With due deference to wishing it not the case, in QI's estimation, the WHO has done the world a disservice to laud China's handling of the outbreak. The impossible linearity with which cases are being reported is wholly disconnected from the scale of the quarantine and what we've learned of the virus' infectiousness via isolated cases.

In the coming days, we will explore which sectors will be most affected. China's economy is not what it once was. It is more diverse and interconnected in ways that stretch well beyond its supply chain. This Wednesday's Weekly Quill will build on last week's deep dive into China's economy by exploring how commodities worldwide will be impacted.

In light of Friday's jobs report and those empty Shanghai streets, today we explore the pre-outbreak starting point for U.S. retailers. As seen in today's inset, as of May 2018 (most recent data), retail is the country's largest employer with 4.48 million in the trade. We'd be remiss to not also highlight the second-most populous industry - food prep, including fast food. If there's one secondary victim to the overbuild that's amplified the Amazon effect, it's that restaurants have followed retail's overgrown footprints. Thank capital-heavy private equity for insisting on multiple locations rather than just those with viable economics.

As hardened as we've become to retail data, the latest Challenger layoff data were nonetheless alarming. At 48,733, 2019's annual total retail layoffs tied to bankruptcy (yellow bars) were 60% higher than they were in 2018. And retail layoffs in the aggregate fell 21% last year to 77,475. At a record 63% of retail job cuts, bankruptcies overwhelmingly dominate the layoff mix.

As for how the year started, of January's 10,444 layoffs, 2,631 were tied to bankruptcy while 6,924 were due to store closings, the slow-bleed bankruptcy. Bear in mind, these data preceded Macy's announcement that it was closing 125 of its 680 stores. We know there will be more of these announcements from J.C. Penney, The Gap and others.

And then there was the January employment report. At 8,000, retail job losses were four times their average over the last year. Aggregate retail hours worked (blue line) are defined as payrolls x weekly hours and proxy the sector's output by gauging labor's input. In January, they declined at the fastest rate since the U.S. economy was clawing its way out of the last recession.

But this is not where the bloodletting took place because e-commerce is part of the total. Retail managers' hours worked (in blood red) is a purer play on bricks and mortar. (Before sharing the data, Dr. Gates suggests you sit down.) This metric is down 36% so far in the first quarter vs. 2019's fourth quarter. For comparison, the largest quarterly drop in the Great Recession was 15%.

A 50-year shoe industry veteran informed QI that a best-case scenario entailed cargo hitting water in China in mid-to-late March. If that is the case, this will be the first season he has ever missed. Connect the dots to the deflationary impulse implied. Then factor in a weakening yuan.

As for those vacant streets and shopping districts, 4.3% of S&P 500 retail revenue is attributable to Hong Kong & China. Recall that it only takes one marginal straw to break a camel's back.