"Just one more thing."
- Lt Columbo
I am bidding for Wells Fargo (WFC) on the news of a $3 billion settlement with the government, which was announced after the close.

Thanks so much for reading my Diary today and all week.

I hope you found value in my musings (ex-ViacomCBS (VIAC) ).

I am pleased that we had respectful debate on the markets and our respective methodologies in our Comments Section.

That's a good thing.

Enjoy the weekend.

TGIF!

Some Brief Late Day Observations
* Breadth negative 2-1.
* Crude down two bits and gold +$26.40/oz.
* Bonds strong -- with yields -5 basis points; the 10-year yield is 1.47%.
* FANG, fangless.
* Tech to the woodshed with Microsoft (MSFT) and Apple (AAPL) downside leaders.
* Financials -2%.
* Brick-and-mortar retail reversed yesterday's gains.
* Media/entertainment clobbered.
At 3 p.m., stocks are near the day's lows, but market's volatility on the ascent.

I have made no trades since my 10 am short covers ( (SPY) and (QQQ) ).

"You've got to be very careful if you don't know where you are going because you might not get there."
-- Yogi Berra

For 23 years I have endeavored to write hard-hitting, non-consensus and contrarian analysis that is transparent and, hopefully, profitable for subscribers. I tend to deliver more negative/short/sell ideas than most in the belief that there is value added to this as 90%+ of the investment recommendations you read or listen to are long ideas. I do this while managing money, teaching/lecturing and serving on several public board of Directors, among other business and charitable obligations.

In writing extensively every day I expose my investment successes and boners (which I always own up to and take responsibility) for all to see.

I provide the what, when, how much (small, medium, or large) and why of many of my trades and investments.

I clearly don't have a concession on the investment truth - no one does (or they would be living on a very big island in the Mediterranean Sea). As I recently wrote in "Horses For Courses,"  Though the business I have chosen is fundamental security analysis, I recognize that traders and investors can make money based on a host of differing fundamental and technical methodologies.

As previously noted, there are some positions I take that I don't discuss in my Diary as they might be too speculative, are sometimes based on "gut feel" (and on four decades of experience in assessing stages of a stock market cycle), insufficient information for a full analysis and for other reasons. Like many subscribers and contributors on Real Money Pro I even trade for a very quick buck (over a short time frame of as little as sixty minutes), as many will be surprised, based on looking at a stock chart! That approach to me, is more of a "shot" and doesn't differentiate my product (and I leave it to the technically oriented professionals like Bob Lang or Rev Shark) -- so I typically refrain from discussing these sort of trades as they are really out of my skill set.

In today'sSubscriber Comment of the Day my pal Mikey and I got into a (trading) style discussion. What Mikey doesn't write but should know is that, again, I do trade speculative stocks (both long and short) just like him but I have chosen not to disclose some of these for the reasons I just mentioned. (Unfortunately, as we learned this week with ViacomCBS (VIAC) it's hard enough to get it right with "thorough" fundamental analysis -- incomplete analysis or gut feel raises risks that I don't want to put on subscribers who deserve my full fundamental treatment.)

As I have noted, my Diary, Jimmy Cramer's columns and our thoughtful contributors' investment ideas and market/economic views should not be taken in isolation. Our contributions should be used in conjunction with doing your own homework as you hold the responsibility and pull the trigger to your own investment decisions -- we do not.

Our ideas should be seen as jumping-off points and investment input upon which more primary fundamental and technical research should be performed by all of you.

In keeping with those objectives in my Diary, and as we enter only the first treacherous week of the investing year, I wanted to reemphasize several additional points I have made over the two plus decades.

In "As The Investment World Changes," I wrote a few years ago:

The business and investment news feed has grown more and more real time in the last several years -- with the proliferation of Twitter (TWTR) , Facebook (FB) and host of other platforms.

In the "good old days" this was not the case. Wall Street sell side research lived in a vacuum, was more objective (as opposed to today's delivery of predominantly bullish pablum) and had tremendous clout. Trading flow calls, when active managers populated the investment landscape, also provided value to traders.

Today active managers are passe -- quant strategies (who tend to worship at the altar of price momentum) and ETFs (which now outnumber publicly traded company equities) dominate the investment landscape.

Years ago, absent live news feeds, the business media had selected "news breakers" - like Dan Dorfman at CNBC or Alan Abelson at Barron's -- who moved stocks, sometimes considerably.

No longer.

Today the business media is (structurally) late with the news (that is instantaneously published on Twitter, et al) and Wall Street's research is no longer market moving as (because of low commission rates and other factors) tend to be maintenance-based and rarely provides a contrarian view (this I call Group Stink). Moreover, the dominance of passive management has changed the trading and investment backdrop -- serving to de-emphasize a number of short term influences compared to the past.

We will never turn back to those "good old days" as the changes are permanent.

Which brings me to my Diary and my objectives.

I strive to provide opinion (often contrary) and hard hitting analysis which details when and why I am transacting trades and investments.

Far from "group stink" my approach is that I can often only provide value added information/opinion if I am nonconventional and creative in my fundamental financial analysis.

Many, justifiably, focus that I have been wrong directionally -- and that is accurate.

But I see myself, on Real Money Pro, as one of many voices that should be digested and analyzed before you make an investment decision.

That doesn't mean I relish in being wrong -- I clearly don't.

I relish, by contrast, in delivering a different and thoughtful perspective -- something that may have value in our changing investment world.

Back in August, 2015, I published an even more complete review of my Diary's objectives, in "The Unabridged User's Guide To Investing and The Diary":

Too many traders and investors are less thoughtful and more impulsive with regard to buying and selling securities than when they purchase a refrigerator or a television.

Too many want an easy path to investment riches -- ideas coming forth from business television, or books that purport to explain "how to make millions" in the market. Even stock ideas from friends, relatives or on Twitter are often seen as pathways to investment success.

But there is no easy path for consistently profitable investing. It requires a lot of hard work.

The investment and asset-allocation processes can hold more weight and is more complex than nearly any other business decision. A host of variables, known and unknown, contribute to the investment alchemy. As well, subtle and unconscious influences and personal biases affect the process as we all seek Mr. Market's metaphorical green jacket (like the one won by Jordan Spieth in this year's Masters golf tournament).

What follows are some basic tenets that form my investment consciousness, which are admittedly simple to write about but far more difficult to execute.

Know Thyself, Work Hard, and Don't Get Emotional

• If you don't know yourself, Wall Street is a poor place to find yourself. There is a reason why there was a church on one side of the old New York Stock Exchange building and a cemetery on the other.
• If you enter the hedge fund biz, remember Darwin. It is survival of the fittest, the smartest and the most practical. The hedge fund industry is populated by some of the most obsessive and idiosyncratic practitioners extant, most of whom are highly educated and possessive of a greater-than-normal cerebellum. Differentiate yourself by your process and by routinely working harder than anyone else (e.g., my day routinely starts at 5:00 a.m.). As John Maxwell wrote, "Successful and unsuccessful people do not vary greatly in their abilities; they vary in their desires to reach their potential."
• Do not get emotional in making investments, and however eloquent the strategy is, it is the results that count. The ecstasy of getting investment performance right is always eclipsed by the agony of getting it wrong. If you are uncertain or temporarily lack confidence, raise your cash positions and reduce your risk profile.

The Investment Process Is Methodical

• If you are a fundamentalist, write a brief synopsis of each investment analysis/conclusion. It will serve to crystallize your investment analysis, and it is an excellent personal and investment discipline. (It is the principle reason why I write my diary.) Moreover, an ex post facto reflection on why one achieved past success or failures is usually illuminating, instructive and often leads to fewer mistakes. After all, as philosopher Benjamin Disraeli once wrote, "What we have learned from history is that we haven't learned from history."
• If you are a technician, keep all your charts, just as the fundamentalist should write up a summary of each investment. Reflecting on past mistakes/successes is as important to a technician as it is to a fundamentalist.
• A combination of mostly fundamental and a dose of technical input is usually a recipe for investment success.
• Regardless of one's modus operandi (fundamental, technical or a combination of both), logic of argument and power of dissection are the two most important ingredients in delivering superior investment returns. Common sense, which is not so common, runs a close third!

Stay Objective and Independent

• Neither be a Cassandra nor a Sunshine Boy! It is much easier to be critical than to be correct, as financial disasters are always impending by the ursine crowd. Conversely, the outlook is never as perfect or clear as it is seen by the bullish cabal.
• Within limits, stay independent in view. Above all, remember equilibrium is rarely observed in the stock market. To quote George Soros, "Participants perceptions are inherently flawed" (at least to varying degrees).

Investment Discipline Is Key

• Let your profits run and and press your winners, as knowing when to seize opportunity is one of the basic principles to investing. But stop your losses, as discipline always should trump conviction. In "Reminiscences of a Stock Operator," Edwin Lefevre wrote, "I did precisely the wrong thing. The cotton showed me a loss and I kept it. The wheat showed me a profit and I sold it out. Of all the speculative blunders there are few greater than trying to average a losing game. Always sell what shows you a loss and keep what shows you a profit." Woody Allen put it even better: "I don't want to achieve immortality through my work. I want to achieve it through not dying."

The Past Is Not Necessarily Prologue to the Future

• History should be a guide but not a jailer. There is little permanent truth in the financial markets as change is as inevitable as it is constant. Do not extrapolate the trend in fundamentals in your company analysis nor in the trend in stock prices. Be independent of analytical and investment conclusions, greedy when others are fearful and fearful when others are greedy, but always remember that possessing a variant view has outsized risk as well as outsized reward.

Risk and Reward Should Be Assessed Properly

• In buying a stock remember risk/reward is asymmetric. A long can climb to indefinite heights and one can only lose 100% of the value of each investment. Buy value, but only with a catalyst. When longs have high short interest ratios, investigate the bear case completely.
• In shorting a stock, remember risk/reward is asymmetric. A short can only return 100% (a bankruptcy) but can rise to indefinite heights. Never make conceptual shorts without a catalyst. Avoid shorts when the outstanding short interest exceeds five days of average trading volume.
• Use leverage wisely but rarely as financial markets are inherently unstable. While the use of leverage can deliver superior investment returns when the wind is at your investments' back, it can also wipe you out when events fail to conform to your expectations. Only the best of the best consistently time the proper use of leverage.

Knowledge of Accounting Is a Must, but Meetings With Management Have Little Value

• There is no substitute for a thorough knowledge of financial accounting. Accounting can be misleading, opaque and unaccountable, but free cash flow rarely lies.
• If you must meet with management, do so to understand a company's core business but remember that managements infrequently, if ever, view their secular prospects with suspicion. In the late 1980s Warren Buffett wrote in his letter to Berkshire Hathaway's shareholders that "corporate managers lie like Ministers of Finance on the eve of devaluation."

Be Open to Others' Ideas, but Rely on Your Own Analysis

• Always be self-critical, and once your view is formulated, be open to criticism from others that you respect. Take their criticism and test your thesis (constantly). Avoid what G.K. Chesterton once mused, "I owe my success to having listened respectfully to the very best advice, and then going away and doing the exact opposite." Bullheadedness will get you into trouble in the investment world.

Only Invest/Trade When Distractions Are Limited

• Invest/trade/speculate only if you are not dependent upon the investment profits to maintain your standard of living.
• A stable personal and financial life, outside of investing, is typically a necessary ingredient to investment success.
• Take vacations and smell the roses. When you return you will be rejuvenated and a better investor/trader.
• Be well-rested and in good shape physically."Investing is 90% mental; the other half is physical" (another Yogi-ism).
• Keep your investment expectations reasonable and expect to make mistakes as perfection is not attainable. Nevertheless, by all means, try to chase perfection as the byproduct will be investment excellence.

Read As Much as Possible

• Learn from those investors who have excelled by reading and re-reading the classic books on investing.

In terms of my own contribution to your knowledge base, let me reiterate the objectives and goals of my Daily Diary:

To begin with, never lose sight that I "eat my own cooking." I trade and invest actively, sometimes in size, with real money from my investors. When I screw up and make trading and investment mistakes, it is financially painful to me. These are not paper trades like many other services provide. When my ideas go awry, I can't help but also be affected emotionally with regard to subscribers who have embraced my ideas. You should all know, I take this to heart.

Secondly, I work hard in delivering my Diary to you, starting my day at about 5 a.m. and often staying after 6 p.m. Maybe I don't work quite as hard as Jim "El Capitan" Cramer (who has a remarkable work elan and ethic), but I work damn hard for subscribers.

Here is what I try to achieve every day in delivering a value-added view:

• Above all, to keep subscribers engaged by providing profitable short-term trading and thoughtful investment ideas on both the long and short side.
• Deliver (an often) variant and non-consensus view based on hard-hitting analysis of individual stock ideas, sector work and market views.
• In doing so, at times I intentionally want to make you uncomfortable with some of your investments and with consensus notions -- playing devil's advocate -- for the purpose of having you often question your holdings. That's a healthy process!
• When appropriate, my individual analysis will be extensive. Other times I will highlight an investment case more briefly with bullet points and in summary form.
• Actively share insights and observations I gain from individual company management visits, telephone and conference calls.
• Communicate transparently what, why and when I implement trading and investment ideas.
• I try to deliver both fast money ideas and slow money ideas, depending on market conditions. I indicate the size (small, medium, large) of all my trades and investments so subscribers can recognize my relative commitment, conviction and weighting.
• Communicate, sometimes in detail, an analysis of macroeconomic events that might influence the capital markets.
• Pass on breaking business news that can impact markets/sectors/stocks.
• Write in an easy and even fun manner through the intersection of serious research and pop culture. I want to keep you informed AND entertained.
• Communicate special, one-off ideas -- for example, The Trade of the Week, Best Ideas list, Tell Me Something I Don't Know, The Most Important Thing, etc. (There will be additional different ideas and new columns in the near term).
• I endeavor to be objective and try not to be self-confident in view as I have learned over a couple of decades that Mr. Market is here to embarrass the most people, most of the time. Mr. Market doesn't exist to make us money -- that is our job.
• Interact respectfully with our subscribers in the Comments section and with other contributors in the Columnist Conversation area. In doing so, I encourage you all to challenge my/our views and theses. The only thing I ask is for you to be respectful, as I will be with opposing views.
• I will qualify my views, as the only certainty in this business is the lack of certainty.
• I will always admit my mistakes. More importantly, I will write about why I made boners, hopefully learning from each experience.

I hope this outline of my core investment tenets (that guide me) and objectives and goals of my Diary are both understandable and useful to all of you.

For those with a shorter term time frame I wanted to repeat:
* The massive outperformance of FANG since the October, 2019 lows vs. transports (+50% compared to +2%) and other cyclical areas suggest that profit taking is in order for Amazon (AMZN) and Alphabet (GOOGL) - my favorite FANG names.
* Given the weakening domestic and global economies, lower term structure of interest rates, some further inversion of the yield curve and moderating rate of growth in C&I credit -- banks, too, seem vulnerable.
As you all know, I recently took profits in the above names and sectors (reducing from very large to medium-sized) - but plan to weather the near term storms (given my very favorable intermediate term outlooks for Google, Amazon and the banks)... and to eventually buy on (meaningful, meaning 10% or more) weakness.
After taking in my Index shorts, my gross and net exposure is back to very low levels that I certainly can sleep with.

I am always in favor of and responsive to criticism.
Case in point:

badgolfer22

Just as pockets of speculation existed in 1987, 2000 and 2007, today ( (SPCE) , (TSLA)
, and other stocks that trade their float in a 24 hour span)
speculative conditions are conspicuously expanding - but are being
ignored. (I would note that I see this spec activity as clear as day in
our Comments Section where some subscribers are "taking shots" with
little fundamental understanding of their trading vehicles and with
their only "friend" a kindly stock chart. Taking one's guard down like
this typically has sub optimum trading results!)

I think I'll retort to my buddy Dougie on this since it seems this missive is mostly talking about me and a couple others on here.

I have read and chuckled for years at the debate that Dougie has almost every single week of the year with guys like, but not only, Rev Shark and Bobby Lang about 'trading' and investing. Dougie likes to rail that price isn't truth...I've seen the argument so often I don't need to read them anymore and I'm not gonna add anything to it here..you all know the diatribe.

What I do know is there are many ways to skin a cat as they say...and many ways to trade markets. Dougie has always looked down his nose at others who do not adhere to the classical tenets of investing and trading and he's always dismissed those of us who uses charts and PRICES in our buy/sell decisions. He views this almost as "lazy" and as 'gambling' vs his fundamental 'research' that somehow gives him all or most of the answers he needs to make a decision to buy and sell. He likes to say he uses a calculator to assess fundamental value and some sort of discount cash flow mechanism that tells him whether the stock is a buy or sell.

Now, he may regard my 'spec' trading in things like SPCE and DEAC and SDGR as gambling, dangerous..and mostly "non- rigorous" and that may be the case. But I've traded stocks for 35 years myself, I've been pretty successful at it as have other 'non rigorous, non fundamental' traders like Rev and Bobby Lang.

Now, I don't usually feel the need to defend what I do and how I do it...and I'm not doing so now. I don't need to defend anything to anybody. I'm using my money, my time and my effort on my own. I don't do things exactly as other 'price/chart' centric traders, but it's worked for me.

So let's talk about the 'sub-optimum' results that Dougie talks about. From where I sit, the sub optimum results I've seen lately has come from folks, not just including dougie, who think through their calculations of intrinsic value and balance/income sheet analysis and expectations for same in future years have led them to invest in dog stocks that have declined for months...and years in some cases. I know, I own a few of them..KHC anyone? WFC? and now VIAC? how about AGN as it declined for months on end and yet the value players kept buying..now bailed out by ABBV at lower prices than where it was a 'value'. I could go on and on here but you get the drift. I'm not hear to defend myself or attack others.

But I will end this by saying that if buying stocks like SPCE at 10 and DEAC at 10 and other momo stocks is slated to be 'sub optimum'..so be it. I've got value stocks that have been sub optimum for a long time.

Each person should decide who and what he/she is..a trader, an investor, a scalper, a momo guy. ..whatever. If you make money at it...good for you.

Dougie is right about one thing, this sort of momentum trading is signalling the final act of this bull. But by god I'm not gonna sit here and tilt at windmills and make fun of those making money from the madness. I know what I'm dealing with here. I'm riding what's working...and what's working is momentum. at some point value investing will work again.

but for now, those sub optimum trading results Dougie talks about, are being delivered by him and others like him who are dismissing Mr. Market's view of them day by day and trading only with their calculator and a belief that they know what income and cash flow streams will look like 2,3, 5 years from now. And they call chart/price trading voodoo investing. It's a crystal ball no matter how you trade..technically or fundamentally.

VIAC is only the latest. There will be more. trust me. I own a few myself I'm bagged in because I, or someone else, thought it was "cheap".

ok, back to momo trading. When it ends, I'll stop. It really isn't my game but it's working for now. FOR NOW.


dougie kassbadgolfer22

Mikey
1. I am acutely aware of the shortcomings of all approaches. In my case, fundamental analysis is only as good as what I input. (And in the case of VIAC and some others I have been wrong). I have had some successes in my approach over the years!
2. I wrote two sentences of caution and you responded in kind. All good and fair. Different approaches and views are welcome.
3. I have consistently stated that "there are a lot of ways to skin the market's cat." (the opposite of your observation about me)
4. I respect everyone's approach and appreciate their ability to trade based on their factors (volume, charts, etc.).
5. I also trade, using my factors. Made a bit on DDS (over $120 points), TWTR ($70 points cumulatively) and some others.
6. Specifically on your observation that I look down on other methodologies (I do not):

As expressed in a recent column, horses for courses:

Feb 19, 2020 ' 02:16 PM EST DOUG KASS
Horses for Courses
* A trader or investor is like a race horse - they perform best on a racecourse to which they are specifically suited

"The big difference now is that this is not strength that is driven by retail investor excitement. It is cold, bloodless computers and passive investment that is using the liquidity to drive the action. Human emotions are a handicap when dealing with this market right now. Logic and common sense are the enemies of strategical buying solely on the basis of liquidity... Some market pundits deal with this by predicting the obvious - that it won't last forever and will end badly. We all know that already and it doesn't help one bit in trying to navigate action that may last much longer than seems possible."
- Rev Shark, A Cold, Bloodless Market Rally
In July, 2007, Citigroup's Chuck Prince famously told The Financial Times that global liquidity was enormous and only a significant disruptive event could create difficulty for the equity markets:

"As long as the music is playing, you've got to get up and dance... We're still dancing."

Two or three months later the S&P peaked and began the long descent to 666 in early March, 2009 at "The Generational Low."

Fourteen months later Lehman went bankrupt.

We are at the point in time when investors are increasingly asking themselves whether they should continue to be disciplined in approach (consistent with their risk appetite and time frame) or whether they should simply join the chorus of market participants in the game of musical chairs described by Citigroup's Prince.

Again, back to Rev Shark:

"We all know that already and it doesn't help one bit in trying to navigate action that may last much longer than seems possible...The best thing you can do is simply be aware of what is moving the market. It isn't news or fundamental or even human emotions. It is liquidity that is being fed to computers and passive investment vehicles. Once you fully appreciate that then you can either play that game or just wait patiently for the game to end."

So, if you are a facile, disciplined and experienced trader with a relatively short term time frame (like Rev Shark) and you are comfortable that you can navigate the current environment, go for it (and follow your dream and stock prices higher).

Unfortunately, (bad) trades became investments for many back almost 13 years ago - and the trading community was essentially wiped out. To this observer, there is little question that the potential exists for a larger than expected downturn (just when nobody is looking!) that will catch most with their portfolios vulnerable (and with their pants down).

From my perch the decision is "still" to stick with my calculator (that determines reward vs. risk in the markets, in sectors and in individual stocks) and to add to longs and to shorts based on the opportunities provided by the changing market backdrop (and structure) and artificiality of prices in which ETFs and quant strategies rule the roost, and under the largess and liquidity of the Federal Reserve.

To me, and generally speaking, a trader or investor is like a race horse - they perform best on a racecourse to which they are specifically suited.

I know my favorite distance be sure you know yours.

* And registering gains
I covered the balance of my (SPY) short into the woosh lower.
I am no longer short any Indices.
I plan to reshort a rally.

I covered a portion of my (SPY) short ($333.71) and eliminated my medium-sized (QQQ) short ($231.55).
Trying to trade opportunistically, as I did yesterday in my shorts, covers and reshorts!

According to Peter, evidence of the emergence of cyclical inflation is rising:

I made the point the other day that I believe we are about to see an inflation spike beginning in the coming months due solely to the supply shock now being seen out of China. Yesterday, Reuters had a story titled "US manufacturers scramble for closely alternatives as coronavirus cuts Chinese supplies (h/t Carl Q)." It said "Illinois based Morton Industries is trying to find a domestic source for tooling and fixtures used to shape metal that is previously imported. But limited domestic supply and a rush to secure the supplies that formerly flowed from China have sent prices up as much as 30%, said Kevin Baughman, vp of operations at Morton. Baughman said the company has asked customers to shoulder the higher costs for the components 'as we couldn't absorb them.'"

Here's from another company, "Woodridge, Illinois based Morey Corp expects to face shortages for circuit boards and casting parts next month if the stocks are not replenished. The electronics manufacturer has reached out to vendors in the US, but its sourcing director, Tanveer Khan, said the price difference between domestic and Asian suppliers is as much as 30%."

One more, "A Moline, Illinois based supplier of Caterpillar and Deere that declined to be named said it is paying 40% more to domestic vendors for components that used to come from China, costs it is passing on to customers."

In another piece from Nikkei news titled said "Airfreight rates spike as China factories restart production." The article said "Companies shipping goods in and out of China are facing a doubling or more of airfreight rates amid competition for the limited capacity available after airlines slashed services amid the Wuhan coronavirus outbreak."

While the inflation jump in response will be temporary, it is why I don't think the 10 yr note yield will not be breaking the August low of 1.46%, although its in the process of retesting it now. The 10 yr inflation breakeven is still about 15 bps above its low last year.

10 YR US INFLATION BREAKEVEN

The PMI's started to flow out today for February and thus reflects the impact of the virus. Australia's manufacturing and services composite index fell to 48.3 from 50.2 but was driven by a drop in the services sector which fell 2.2 pts m/o/m rather than manufacturing which rose by .2 pts to still below 50 print of 49.8. Markit said on the overall results "Whilst this is clearly a disappointing result it is not altogether surprising given the two exogenous shocks that have hit the Australian economy - the bushfires and the coronavirus."

Japan saw weakness for both as its composite index fell to 47 from 50.1. Manufacturing fell 1.2 pts to 47.6 while the services component fell a sharp 4.3 pts to 46.7. Markit said "Japan's economy has gone into 2020 still reliant on services and consumer centered markets to pick up the slack from the industrial sector. However, Q4 disconcertingly showed that the sales tax hike and devastating typhoon in October severely dented consumption, and flash data indicate that domestic demand is still yet to fully recover."

We also saw South Korean trade data for the 1st 20 days of February. Exports did jump by 12.4% y/o/y but on a very easy comparison and the timing of the Lunar holiday in China added days to February shipments. Actual daily shipments fell 9.3% y/o/y. Imports were higher by 4.7% y/o/y.

Japan said its January CPI rose .8% y/o/y ex food and energy as expected. As seen by the deleterious impact of the VAT hike, the BoJ should not be still rooting for more inflation but you've heard me say that before.

The Eurozone manufacturing and services PMI in February did improve to 51.6 from 51.3 as both manufacturing and services rose although the former is still below 50. This improvement is good to see but they are of course being impacted by the virus and "the full immediate impact may not yet be apparent" according to Markit. They also said "In particular, the widespread delivery delays seen in February bode ill for production in March unless new deliveries can be secured." In response to the better number, the euro is bouncing after the recent rough patch while the German 10 yr yield is unchanged, not following US yields lower again.

The UK composite index was unchanged at 53.3, better than expected and thus hung in there in light of the global pressures with manufacturing in particular rising by 1.9 pts to 51.9. The UK economy is benefiting from pent up behavior post election. But of course, "Where there are positive signals for UK businesses on the domestic front, the latest PMI findings highlight a number of concerns from an international perspective following the virus outbreak. Service providers often commented on reduced tourism related bookings and cancellations from overseas clients in affected markets." On the better number, the pound is higher while gilt yields are little changed.

* The S&P Index will likely record its first down week since my Bar Mitzvah
* The first (mini) 'Flash Crash' occurred on Thursday - there will probably be more to come in 2020
* Too many (especially of an ETF- and Risk Parity - kind) are on the same side of the bullish boat -- much like in 1987, 2000 and 2007
* The outlook for 2020 S&P EPS is deteriorating (consensus estimates are woefully too high, again)
* I am growing more negative about the near term market outlook and I reestablished a larger net short exposure late yesterday

"Surprise #14 Market Structure Haunts Our Markets Throughout The Year: The dominance of ETFs and quant strategies (e.g. risk parity) shows its ugly side. The 2019 movie is in reverse this year - the ETFs and quant products and strategies that delivered a recipe for the relentless advance last year are reversed and, with so many looking to exit, liquidity evaporates. ETF prices, in particular, exhibit greater volatility than the underlying constituent holdings. The dominance of passive strategies is threatened and active strategies begin to garner inflows after a lengthy period of losing market share. Over one quarter of the listed ETFs are delisted. A 'Flash Crash' takes the S&P Index down by over -5% in one day. Volatility rockets to over 35 and stays elevated for most of the year."

- Kass Diary, 15 Surprises for 2020

Much like in October, 1987 (the advent of portfolio insurance), early 2000 (maturation of the dot.com boom) and late 2007 (the onset of The Great Recession), too many, today, are on the same side of the bullish boat - in part encouraged by the liquidity and suppression of volatility delivered by Central Bankers.

Just as pockets of speculation existed in 1987, 2000 and 2007, today ( (SPCE) , (TSLA) , and other stocks that trade their float in a 24 hour span) speculative conditions are conspicuously expanding - but are being ignored. (I would note that I see this spec activity as clear as day in our Comments Section where some subscribers are "taking shots" with little fundamental understanding of their trading vehicles and with their only "friend" a kindly stock chart. Taking one's guard down like this typically has sub optimum trading results!)

A changing market structure (the popularity and proliferation of ETFs and the dominance of quant strategies - like risk parity) is exacerbating the imbalance like no other time in history.

In my 15 Surprises for 2020 (see above) I warned that this rise of passive strategies and products coupled with the decline of active investing would lead to a series of 'Flash Crashes' when/if an inflection point lower in price momentum begins.

We saw Flash Crash 1.0 midday yesterday, in which the S&P swooshed lower in minutes - recording a 40+ handle decline on the day at one point. While percentage-wise most were not alarmed by the suddenness of the decline, I believe this is the first shot across the 'Flash Crash' bow.

Be forewarned, as every trader and investor should at least consider the consequences of our changing one-sided market structure in which positioning and trading is now dominated by price momentum based traders and investors that know everything about price and little about value.

The Weak (sic) In Review

I have spent this abbreviated Holiday shortened week expanding my market concerns in my Diary-

* Wednesday's "The Coronavirus May Expose Investors to the Fragility of Global Economic Growth," made the case that the virus is an unexpected cog in the wheel of 2020 global economic growth and potentially to the continued rise in the global equity markets. Here are the critical points made:

* The extent of the coronavirus contagion is being understated by Chinese authorities
* Supply chain interruptions and demand concerns (caused by the coronavirus) are being ignored and underpriced by the financial markets
* For the foreseeable future, China will likely no longer be the driver of worldwide economic growth
* Japan is moving towards recession and Germany may not be far behind
* The benefit of monetary stimulation is diminishing and continued easing policy is being questioned around the world
* Yesterday I covered my large Apple short but initiated a Nasdaq short (via QQQ) - as I continue to bolster my net short exposure even though, like Bruce Willis, this Bull Market "dies hard"
* It is questionable how monetary easing can address the kind of risk presented by coronavirus
* Regarding the impotence of monetary policy, Japanese bank stocks declined by almost -90% over the past three decades as a consequence of the BOJ killing it's bond market and yield curve

* Thursday's "Irrational Exuberance?" 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. 

Tactics

Despite ViacomCBS (VIAC) disappointing results (and awful stock reaction), proving again my knack for losing money the old fashioned way (by faulty fundamental analysis), I played this week reasonably well - expanding my short exposure on strength Tuesday/Wednesday, covering some Index shorts near the Thursday lows and reestablishing shorts after the close:

Douglas Kass @DougKass

10h
After the close and I as I suggested I would (if the market rallied) - I moved back to a large$ SPY short and reestablished my $QQQ (moved back to medium sized) short. I will discuss this further in the morning on @realmoney.

dougie kass • 11 hours ago

After the close and I as I suggested I would (if the market rallied) - I moved back to a large SPY short and reestablished my QQQ (moved back to medium sized) short.
I will discuss this further in the morning.
Dougie

Bottom Line

The S&P Index will likely record its first down week since my Bar Mitzvah.

While the Indices are only modestly off of their all-time highs, chinks in the market's armor are appearing.

The market may be losing its upside momentum, gold is advancing strongly (up another $16.40 this morning to $1637/oz), Treasury yields are collapsing (the 10 year U.S. note is down another 3-4 basis points to 1.49% today), the yield curve is inverting, growth stocks are way stretched vs. value (often a sign of a short term top and a change of leadership), speculation is arguably running amok in certain quarters and there are some signs that the Fed (which recently slowed down its buying) and other central bankers may be reconsidering the benefits of more rate cuts and could refocus on the adverse consequences of such actions.

The market's structure is one-sided and Thursday's mini midday 'Flash Crash' might be another warning sign of a market inflection point lower.

Beyond all these signposts and to this observer -- disappointing corporate profit and global economic growth as well as historically high valuations (based on many traditional metrics) remain the primary nemesises to be focused on in 2020.

* Leveraged long and when investing becomes speculation. 
* Corporation's garbage language.
* Italy on the brink.

More coronavirus concerns from Danielle DiMartino Booth:

• Given it's now more than 60% of China's GDP, Chinese consumption holds the key to the fate of the global economy; the coronavirus will have an outsized impact on the U.S. economy as China exports more services to the U.S. than it does goods
• The U.S.-China Business Council reports that China exported $56 billion to the U.S. in 2017; that level represents growth of 258% in the decade to 2017 compared to 49% growth for the rest of the world
• California tops the Chinese service exports chart, benefitting from more than $3 billion in travel alone from China; California's total trade with China supported nearly 153,000 American jobs in 2018

Pluck that.

At least that's how Horace saw it. Born dirt poor and a contemporary of Virgil's, Emperor Augustus was willing to forgive the destitute's lineage. But pride must have prevailed -- Horace demurred the offer to become the emperor's private secretary. Perhaps Horace was living his words "Carpe diem," which translates into "pluck the day." Time has adapted the phrase to be shorthand for "seizing the day." But we live in an instant gratification social media world. It's worth asking, if you're of Robin William's mindset: Has it come down to seizing the moment?

The world is now obsessed with seizing each day's coronavirus headlines. The once valued just-in-time delivery dynamic damns the globally and inextricably connected supply chain. We concur that a risk has been exposed of the over-reliance on NOT keeping back-up stocks on hand, defying the virtuosity of the just in time we studied in business school.

But we're a bit concerned that this singular focus on the industrial fallout, submerging as it is within the context of a global industrial recession, is short-sighted. There's a distinct possibility the service economy will suffer more than its factory sector counterpart.

As QI delved deeply in Wednesday's Weekly Quill, China's services economy is now north of 60% of GDP. As is the case with the U.S. consumer, Chinese consumption is key to maintaining global economic growth (which Capital Economics has just said will be negative in the first quarter for the first time since 2009). Put simply, China exports a ton of services. As difficult as it may be to wrap your head around, the needs of China's humanity are a major source of revenue to countries fortunate enough to be on the receiving end of said needs. We're talking the same places we love to visit and educate our kids.

But what happens if access is denied? Personal experience moment: this QI founder's son attends a boarding school with a decent size Chinese student presence. As per school officials -- no Chinese student will be allowed to travel home for Spring Break or have any family member visit them stateside. No exceptions. The school is not alone, not here in the United States nor on the global stage.

Yesterday, the International Air Transport Association warned that the -4.7% passenger-traffic contraction it expected in 2020 was a starting point. Not only would this mark the first contraction in air traffic since 2008-2009, it was a conservative estimate.

In the event you've missed the latest headlines -- with a hat tip to QI amigo Jim Bianco -- the coronavirus that had been confined-ish to Wuhan (population 11 million, as in New York equivalent, and the epicenter of the 2,223 reported Chinese deaths) has spread to the South Korean city of Deagu (population 2.5 million, as in Chicago equivalent). The South Korean authorities have told everyone to "stay indoors" after 156 new cases popped up in 72 hours' time. Meanwhile, back in Shanghai, 334 cases in the city of 24 million have placed the mega-urban center on effective lockdown.

The exacerbation of the global industrial recession has thus far been the focal point of the direct consequences of the coronavirus. And we've been right there on the front lines of the warning front. But a report we've just discovered has given us reason to angst. What if it's the service sector of the United States that's hit harder?

In today's table inset, you'll see data from the U.S.-China Business Council, which QI's Dr. Gates literally stumbled upon... fortuitously. Sadly, 2017 is the most recent year for which we have data. Nonetheless, there's no whistling past the $56 billion in U.S. exports to China which grew 258% in the decade to 2017 vs. 49% for the rest of the world.

Being the weed dwellers we are, we relished the detail in the report. At the highest level, did you know that Travel exported to China in 2017 was $19 billion, a bigger dollar figure than the top Goods export of Aerospace Products and Parts which amounted to $16 billion in 2018?

The deeper you dig, the more shocked you will be. California tops the service exports chart, with $3.1 billion in travel tied to Chinese tourists. And get this. In the aggregate, California exports to China supported nearly 153,000 American jobs. Massachusetts is another nifty case in point with 40% of its Chinese services exports tied to education. The bottom line is you need to be more concerned about the hit to the travel industry than you do beaten down industrials. Whether it's hotel rates or occupancy, it won't be pretty and will cost jobs in the nation's most populous states as the damage amasses. There is no Carpe Diem when you can't live and breathe the moment.

The next market/earnings concern might be the U.S. dollar, which hit a three-year high this week. Here is a great chart of U.S.-based companies that indicate the heavy weighting of global sectors/industries:

I recently reduced my exposure in Amazon (AMZN) and Alphabet (GOOGL)  from very large to medium sized, given the overbought (FANG +50% since October 2019 lows vs. +2% for transports) and this: