Thanks for reading my Diary today.
As I write the market has continued to rally - and now S&P futures are an even 30 handles above the morning's lows.
Market breadth (18-11) is almost exactly where it stood an hour ago.
I am immersed in better understanding the disappointing ViacomCBS (VIAC) quarter and weak guidance so I have a few more calls to make and will leave you before the close.
ViacomCBS screwed up an otherwise good day for my portfolio.

I haven't looked at CNN's Fear & Greed Index for several weeks.Here it is!

Dave Newman

Doug, your rant on irrational exuberance is really quite good. The unfortunate truth is that policy makers and economists have become too ideological and not paid enough attention to structure, institutions, demographics, and behavioral changes and as a result, apply textbook theory to new problems. It is hard to model out China's ascension, global supply chains, service economies and how a top down command economy could impact policy effectiveness.

The point you make about CB's doing less is not the same as effectiveness. They can be effective doing the right thing at the right time. Instead, their actions have counter intuitively kept companies afloat. This zombification of economies, winner take all / network effects / automation, excess labor supply, exchange rate management has resulted in lower rates growing aggregate supply more than demand. And since suppliers are levered to this event lower demand, CB's are supremely and rightfully afraid of deflationary impulses taken hold. They have become activist / perpetual fine tuners because their is no choice and because admitting there are limits to their policies has important signaling effects. Why they would ever risk revealing their inefficacy (hello negative rates) is strange. But, they are stuck, and sucking in a generation of savers.

Smart people know there are system limits to debt, leverage and get that monetary policy does little to impact productivity and population growth - the seeds of GDP growth. As in the pension crisis, we know the only solution is shared sacrifice. It will be the same here.

The dip was bought again this afternoon.
S&P futures are now nearly 28 handles above the morning low.
Meanwhile breadth is a healthy 17-11 advancers over decliners.

I thought it might be helpful to briefly summarize some of my more meaningful moves in the market over the last few weeks:

* I eliminated Goldman Sachs (GS) around $240 (my year end 2020 target price) and reduced the size of my (BAC) , (WFC) and (C) longs. Lower interest rates for longer, some curve inversion, slowing C&I loan growth and a mature business cycle were cited as the reasons for these moves.

* I lowered my exposure to favorites Amazon (AMZN) and Alphabet (GOOGL) . (FANG +50% since October, 2019, while transports were flat).

* I eliminated Twitter (TWTR) based on a changing reward vs. risk view.

* I sold out my cannabis stocks after a January trading recovery (as tax pressure abated).

* I added to my (SPY) short over the last two weeks and reduced on this morning's schmeissing.

* I reshorted Apple (AAPL) at around $324 and covered (about $315) Tuesday on the company warning.

* I have been adding to (VIAC) and (FDX) .

The pomposity in the financial media knows no bounds:

From my friends at Miller Tabak:We were surprised by the amount of anxiety regarding financial vulnerabilities expressed by FOMC members at their January meeting. "Several participants" raised concerns over corporate debt levels, elevated asset prices, or weak underwriting standards. Some also noted that these factors "could amplify an adverse shock to the economy." This is a notable change from the December minutes when only a "few participants" brought up the potential that very low rates could encourage excess risk taking. Concerns over the macroeconomic outlook seem to have been partly replaced by financial concerns.

There is considerable heterogeneity within the FOMC regarding how much weight members place on these factors, and it can be hard to tell how likely they are to drive future monetary policy. Boston Fed president Eric Rosengren, for example, has been very vocal regarding the risk of excessive corporate debt. We had thought that overall, however, these were secondary considerations for the Fed. But these minutes move us partly off this position. We still don't think that the Fed will raise rates until core inflation measures return to 2%. But if it does, these factors could lead to a more sustained period of rate hikes than we previously believed.

The minutes discussed both debt levels and elevated asset prices as risk factors. Of these, we expect the former to be more important to the Fed. Not only do these pose a bigger macroeconomic risk, but the Fed will also want to avoid appearing to work against stock prices by hinting at a more hawkish policy.

Curiously strong action in FedEx (FDX) today.

I have covered a portion of my (SPY) short at about $334.30.
I plan to reload on the short side on any strength.

My pal Arthur Cashen recently broke his hip in an accident.

It was good to get this in my email account:

It is one week since the accident and broken hip. I am alert and awake. Physical therapy and pain management continue to be the two primary issues.

The family and I appreciate everyone's concern but please, we are being overwhelmed with hospital questions, insurance issues, etc.

I thank you for your interest and will get back to you once I am in working order.

Arthur

Virgin Galactic Holdings (SPCE) is pulling a Tesla (TSLA) now.
Through the first 90 minutes of trading, SPCE volume is 54 million shares - more than 1/4 of the total shares outstanding and a large portion of the float.
SPCE and TSLA are indicative of speculative excesses that often occur near the end of Bull Markets.
While sentiment is a poor trading tool, extreme sentiment (in either direction) is sometimes a good trading tool.
My bet is such is the case now.
I have added to an already large (SPY) short at $338.34 this morning in the face of these emerging speculative bursts and in light of downside market risk which I believe dramatically eclipses upside market reward.

Equities continue to pay no attention to the rise in bond and gold prices.

Despite my continued protests, Mr. Market continues to climb with dip buyers conspicuous and relentless in their actions.
Breadth is a good 2-1 advancers over decliners.
My only trade today was the purchase of more ViacomCBS (VIAC) at an average cost of $30.88 (I was a small scale buyer, with limited confidence, all morning in the belief that the initial reaction was inconsistent with the magnitude of the miss and the comments on the conference call).
That said, as mentioned, I will be spending most of the day in analyzing the quarter and the guidance.

I have covered my (QQQ) short trading rental at a small loss this morning.

ViacomCBS (VIAC) miss and weaker guidance is materially impacting the stock.
I will be working on this one most of the day.

* The near universal faith in central bank liquidity's ability to buoy stocks may be unjustified in the face of weakening fundamentals
* Time for another rant

I have recently made the case that the rise in financial asset prices has increasingly decoupled from the weakening fundamentals of the real economy and that the predictable spigot of central bank liquidity has encouraged excessive risk taking (and has contributed to too high valuations), raising corporate incentives to over borrow and over engineer.
Stated simply, the steady and relentless climb in stock prices has caused me to question how long and how far deteriorating fundamentals and historically high valuations can coexist.

Slowing Data as the Impact of QE Diminishes

There is now evidence of a clean sweep of the data in terms of the limiting effect (and diminishing return) of QE on real global economies: 

* As far as the Eurozone is concerned, five years of negative nominal interest rates and a renewed €20 billion ($22 billion) monthly asset purchase program has yielded nothing in the way of tangible results. Eurozone economic and inflation data remain moribund, as fourth quarter GDP grew 0.9% from a year ago, its weakest since 2013, while CPI inflation has averaged just 1.2% year-over-year in the last 12 months.

* As noted yesterday, Japanese GDP has been a source of continued disappointment.

* Low rates have gutted the Japanese and European banking industry. Japanese banks are -90% from highs and the Euro bank index is trading below its 2009 level. 

My strong view is QE and QE plus (negative rates, central banks buying equities) have been counterproductive, for a number of reasons - including the reason that its numbing effect takes pressure off politicians to make structural change. Though I cannot prove I am right, central bankers who believe QE and QE plus have been helpful, also cannot prove they are right. But the evidence favors me more than them. In fact there is no real world data that shows QE has helped, only hypothetical self-justifying analysis from the same Central Bankers whose programs resulted in missed GDP forecast after missed GDP forecast: 

* Every major economy that has embarked on QE or QE plus (negative rates, central banks buying equities) including the U.S. has MISSED the forecasts that were put in place for the improvement those initiatives were meant to garner 

* The only economy that saw any bump while this stuff was going on was the U.S., and just recently, only AFTER the last batch of QE ended and prior to the recent batch of QE started. That bump was due to a set of very different economic and structural policies that were put in place with a new administration. In fact the economic bump to the real underlying economy happened as liquidity was being withdrawn and rates were being increased. Goes back to my point yesterday that fiscal and structural policy is really where the focus should be, and central bankers should show more discipline with regard to trying to plug holes the other side of the house should be addressing. I am not trying to make any arguments as to whether the new policy set is good or bad, just stating the obvious that there was a change, and it has created a short term bump at a minimum. 

* Not one country where QE was implemented has made any real structural reform, with the exception of the U.S. per above point, due to a radically different administration. Maybe if Japan and Europe didn't put all their eggs in the financial engineering basket and focused more on structural reform, their economies would be better off. 

* In every country where QE was implemented, including the U.S., since these programs were implemented, measures of societal well being have plummeted. GDP does not proxy everything. It does not tell you how people feel. Across the U.S. and Europe, social/political tension is through the roof. A fair portion of that is due to the hyper wealth gap that has emerged, and QE has a lot to do with this. For all intents and purposes the rich (with large balance sheets) got richer from asset appreciation, the super rich got so much super richer that it even pissed off the normal rich, and the poor made little to no progress.

(1) If a side effect of QE is that due to push back against the super wealthy, investors must ask that if Senator Bernie Sanders becomes president, how will Democratic Socialism make the U.S. better off?

(2) Would the Central Bankers then put MMT (modern monetary theory) in place to fund giveaways of everything, which would for all intents and purposes make everyone equally poor as it is toxic central banking policy on top of toxic economic policy? 

In the face of all of this, any admission from Central Bankers that maybe they have been wrong and misguided? Nope. Their view is we just need to do more.

As an example, Janet Yellin was out yesterday with this little nugget (hey Janet you been paying attention to Japan and Europe???) - h/t Zerohedge: 

"It could be useful to be able to intervene directly in assets where the prices have a more direct link to spending decisions," she said, adding that buying equities and corporate bonds could have costs and benefits. Keep in mind that what Yellen said was merely a paraphrase of Ben Bernanke's famous April 2010 WaPo oped in which he defended easy monetary policy is facilitating higher stock prices, which would "boost consumer wealth and help increase confidence, which can also spur spending. Increased spending will lead to higher incomes and profits that, in a virtuous circle, will further support economic expansion."Of course, none of this "trickle-down" ever happened, and instead what did happen is that the top 10% of US society who own 93% of all equities got fantastically rich...while the bottom 90% who own virtually no stocks and owe most of the debt, got very, very angry as they watched how the Fed plundered their future and hopes to become wealthy, and resulted first in the election of Trump, and the upcoming election of a socialist candidate as America goes full-on populist in response to the Fed's catastrophic policies."

This is all absurd. Although I am not in favor of what I am about to recommend, if it comes to this rather than relying on very blunt and very indirect transmission mechanism that seems to disproportionately benefit the wealthy, wouldn't it just be easier and more direct to send money directly to those most in need? Ergo the poor and not the rich? Or a payroll tax reduction or other things of that nature? 

And if the politicians fail at this stuff, in come the central bankers right away, and the politicians never do what they should do. And at the end of the day we are worse off for it. 

My Solution

I wish there was a Supreme Court for Central Bankers.

When the U.S. Fed and Fed Mandate was put in place, something tells me it was never the intent of the founders of the mandate that it would be taken this far. By the same token, if Central Bankers lived in the real world where performance is measured against plan, they would have all been fired long ago. These guys get to fail, and just do more. Quite the job description! 

That said, there is one aspect of QE I am comfortable with. That is the portion of QE1 that was specific only to the bailout of the U.S. financial system. Fed balance sheet shenanigans beyond that, not good.

The lender of last resort role of the Federal Reserve is an important one. There are many bright people that argue that should be the only role of the Fed. Rates and everything else can be handled by free markets. Some bright people even argue the Fed should not have bailed out the financial system (certain large banks) and let the system fend for itself. They may be right, but in my view that is a bet you cannot afford to take, because if you get it wrong, the consequences could be dreadful. The mere act of only serving as a lender of last resort alone, and then stopping there, I think does not have much in the way of adverse consequences. Sure there are some (like people in banks continuing to believe they can lend with no regard to risk), but there are other careful regulatory ways of dealing with that issue. 

Yesterday I also referenced the notion that fiscal and structural policy are more effective at dealing with many of the problems modern economies are facing. What I neglected to mention is that capitalism itself was always an effective way of dealing with these issues. Cycles, while painful in the downcycle, really do cleanse the system. The U.S. became the best and most powerful economy in the history of the world while going through periods of sharp downcycles. 

With QE, there are no longer cycles. Interest rate suppression is a powerful numbing agent. I am not sure why the Federal Reserve believes it is important to remove cycles from the economy. There seems to be a pathological focus on never having a recession. By definition, that is no longer capitalism. I am not sure what it is, but it seems to have elements of a planned economy and is as close to communism as it is capitalism. I know Central Bankers have models that suggest GDP and trendline employment is better when there are no cycles (their models suggest strong upcycle does not make up for downcycle), but all the actual data shows otherwise. QE seems to certainly reduce volatility, but the data shows trendline growth has also been halved in recent years, and GDP is not too far from zero in the economies that have implemented QE and QE plus absent structural change. All sorts of excuses for this, secular stagnation, etc. How about every major economy has embarked on QE, prevented recessions, taken volatility out of the system, but at the expense of sharp recoveries and healthy growth, like we used to have! 

And Back to Reality and the Bottom Line

Speaking of the numbing effect on volatility, there is a major virus outbreak the likes of which has not been seen in our lifetimes, volatility sits near lows, and financial markets are at highs. 

We have a numb economy. That is what QE gets you. And that is the best case assuming nothing eventually blows up due to all the imbalances that are created in the process or the wealth disparity that has emerged does not cause massive social upheaval. 

All problems cannot be solved with monetary policy. When you try to do that, there are real negative and unintended and unknown consequences. Most of the change needs to come from governments themselves (elected officials as opposed to unelected ones) and from the natural mechanism of capitalism itself. 

Rant over.

On sentiment, yield curve and other overseas stuff:

Yes, we all see that the stock market is supremely confident that the short term impact of more than half of China shutting down will be quickly overcome but I still can't just ignore the US Treasury market. I know that's been a common thing to be saying now but I'm just going to say it again. The 3 month/10 yr yield spread is today inverted by 3 bps vs steeping seen over the prior two weeks and it's back to the inversion seen on February 3rd, about a week after the virus was just being heard about.

3 month/10 yr

And the US dollar is now knocking on the 100 level at 99.87 as it continues to benefit from worries about growth overseas with the euro in particular breaking below $1.08.

DXY

Following the more bullish sentiment seen in yesterday's II data, today's more fickle AAII numbers still reflect a lot of bullishness but a touch less so. Bulls fell .8 pts on the week but remains above 40 at 40.6. Bears rose 2.3 pts to 28.7. For perspective, over the past year Bulls have averaged 33.8 while Bears have averaged 30.3. While not extreme, the II and AAII figures reflect complacency creeping back in.

China again cut its loan prime rate with the 1 yr down 10 bps to 4.05% and the 5 yr was down 5 bps to 4.75%. This is all well and good but until more people start going outside again, what good will this do. What the Chinese are trying to do now via encouraging banks to extend loan terms, lowering rates and helping companies meet payroll is to buy time for businesses to get past the impact of this virus.

China also reported its January loan data and while rising more than expected, it's never worth looking at alone. It must be analyzed with the February data because of the influence of the annual Lunar Holiday and of course this time with the impact of the virus.

The Shanghai comp was up 1.8% but the H share index was flat. Because of the Chinese governments tendency to encourage and itself buy stocks to cushion declines, I'd be watching the more market driven H share index right now to better gauge sentiment towards its companies. It's down 2.3% year to date.

H SHARE INDEX

The Bank of Indonesia cut rates by 25 bps to 4.75% as expected as another central bank tries to mitigate the impact of the China driven slowdown. Again, this is all well and good since they have room to cut but if some industries are shut down because of virus containment, lowering the cost of money is not going to reopen them.

Shifting to Europe, UK retail sales ex fuel oil in January rose twice the estimate with a 1.6% m/o/m rise. This follows the December victory by Boris Johnson and follows months of political uncertainty where retail sales fell over the previous 5 months.

Out of the UK we also saw the CBI industrial orders number and that improved slightly to -18 from -22 and just above the estimate of -20. While they are past the election, Johnson now needs to negotiate the actual terms of a deal and UK industry now has to face the fallout from the virus. CBI said "It is encouraging to see manufacturers reporting some early signs of a turnaround in activity, but it's probably still too early to say whether we've seen the end of the slowdown in the sector." After trading up 5 straight days last week, the pound is now down for the 4th straight day. The 10 yr gilt yield is up for a 3rd day.

* Avoid the zeros.
* Cost of protection is ridiculously cheap.
* Why no one cares about deficits.

Danielle DiMartino Booth on the housing markets:

• Record warm temperatures have been credited with the surge in housing, but the strong trend in building permits indicates the story is deeper than weather; single-family permits rose for a ninth straight month, piercing the highest level since 2007
• The strength in housing permits is tied the South and West, the two regions least affected by wintry weather; buoyant homebuilder optimism is also attributable to the lack of supply of existing single-family homes, with December marking a new cycle low in inventories
• Homebuilders are wise to Fed rate cuts reinvigorating housing this late in the cycle; any shock could jeopardize the nascent rebound in housing as job openings continue to decline and layoffs threaten to grow if the coronavirus scare doesn't pass quickly

Investors have cheered the run by piling into homebuilder stocks which have enjoyed an extraordinary run. The S&P Homebuilding index clocked a 49.4% gain in 2019. Some might even say the performance has outrun the fundamentals. Caveat emptor. Even though they benefit from the environment of low -- and lower -- interest rates, homebuilders are not immune to financial market repricing.

In our view, the recession scare we've penned of in recent Feathers has not crested. As more hard data from the Coronavirus disruption is aired, investors will attain a better picture of its effects on individual company revenues and earnings. Recall that Factset predicated 2020 earnings growth on big multinationals taking the lead. Companies with more than 50% of their revenues derived from overseas were expected to see 13.8% EPS growth, while domestically focused firms would see half that level. That narrative has effectively been thrown out the window, at least for several quarters. Call this a micro theme that would rise to the macro level.

On a macro level, big homebuilders have economists on staff, ones who can inform their higher-ups that 75% of firms covered in the job openings data saw negative year-over-year prints in December. And they're also aware of demographics which have driven a massive catch-up on the part of builders as millennials finally break into the homebuyer ranks. In other words, they're wise to the Fed's lowering interest rates spurring this late-cycle renaissance in homebuilding activity. It is still late cycle, meaning we're just one shock away from layoffs rising in earnest.

Should markets reach a breaking point, the risk-asset correction likely will make homebuilder executives more hesitant to expand. That's when the streak for single-family building permits will be broken. It won't matter if you're a seer, sage, prognosticator, prophet or groundhog. Weather won't be to blame.