Thanks for reading my Diary today and all week.

It's been a long five days and I am going to sign off early.

This has been a difficult period for many and I have tried to unemotionally explain how I am navigating and coping with the markets (and life).

As you can read, I am trading more than I have in a long time.

I end the day in market neutral exposure -- as we sit on my intrinsic value calculus at 2800.

I covered my large (SPY) short today as we moved to the 2800 level.

I sold half of my SPY puts, for a nice gain as well. I tend to use puts with a very short term trading leash given the decay in premium if market direction moves against me.

This week I sold out of (FDX) , (DIS) , (MS) and all my energy trading long rentals.

My portfolio now consists of a very large exposure in financials (which I believe trade at a S&P equivalent of 2200 or less), several special situations (value oriented) longs and a medium-sized SPY put position against them.

My gross exposure is back to a low level -- not surprising considering the economic and health uncertainties and the closeness of the S&P to fair market value.

My guess is that I will be selling my SPY puts sometime next week -- win, lose or draw -- as these are intended as short-term rentals and not long-term leases. Also, I am short Apple (AAPL) and Caterpillar (CAT) .

Jesusishere

Doug, for a lazy f$%^ like myself your s&p fair market value and your price targets are invaluable.

dougie kassjesusishere

I use five different scenarios of a host of factors: inflation, interest rates (important risk free rate of return), profits, cash flow (dcf models), valuation etc - from very pessimistic to very optimistic.
I then weight them by probabilities to gain at a single point fmv.
The interesting thing is since stocks are long dated assets (and 3 quarters of lost earnings, as in 2020 dont have that much value - 15 years, 60 quarters, 3/60) that I have the same valuation I had late in 2019 even though short term eps have been badly impaired because the risk free rate of return has plummeted and is likely to stay low for longer.
As Rev Shark says my calculus is only as good as my input and he is correct.
But this discipline helps me deal with the volatility caused by machines, the Fed and by the pendulum of sentiment.
It allows me to be dispassionate and unemotional when panic hits and the Indices trade below my calculation of fair market value.
The drop below my intrinsic value (2800 S&P) in mid-March was only the second time in a couple of years (last one before that was late 2018) that the S&P cash sold at a discount to my fair market value.
Dougie

I have reduced my (SPY) puts in half... from large-sized to medium-sized.

I will sleep better this weekend.

I am now back to market neutral.

The S&P Index lies almost exactly on my "fair market value" estimate of 2800 now.

"I am going to write a good Diary on Real Money Pro today... and I am going to help people. Because I am good enough, I am smart enough and doggone it, people like me."

- Daily Affirmations with Dougie Kass

I have been writing a lot in my Diary about a pivot from growth to value since mid-April.

Today's Daily Affirmations is from Professor Galloway:

"The cardinal opportunity in this pandemic is the chance to repair and strengthen relationships. The majority of medals and recognition bestowed on our women and men in uniform is a function of one thing: grace under fire. Your character, and the perception of your character, is a sum of all your actions across your entire life. But the sketch of these actions is traced over with the indelible ink of the grace, or lack thereof, that you demonstrate in times of crisis... There are so few absolutes. One is that no one, near the end, wishes they had been less forgiving, less generous, or less loving during times of crisis. Time has slowed, for the moment, and we are given the opportunity to repair and strengthen in weeks what can take decades."

I am not a licensed therapist, though.

"I deserve good things. I refuse to beat myself up. I am an attractive person. I am fun to be with."

* How can any serious investor take a long term investment in Tesla (TSLA) ?

Regarding Elon Musk's latest tweet storm - wow!

Clearly the guy must have overdosed on something.

How that stock is only down 7% so far on this is beyond me.

Too bad Musk didn't give a price target.

$420 seems like a good number for starters, then go from there once people learn how to read a balance sheet, income statement, and 10-K (if there is anyone left that knows how to do that).

April 20th was also only about 10 days ago, maybe he mixed his leftovers with Imodium and that is why he lost what is left of his mind.

* As the expanding delta in my large SPY put took me to a too large net short exposure
* Let me explain...
At 1:30 pm the major indices are basically at their lows with the S&P Index -88 handles.
The declines in individual stocks from only yesterday morning have been conspicuous.
There has been breathtaking declines in a number of stocks I sold just a day or two ago including (FDX) , (DIS) , (MS)   , (XOM) , (XLE) , (HAL) , and others.As to my short positioning, the swiftness of the decline has taken me back to a large net short position as the delta on my SPY puts expand and many of the puts, which were out of the money are now in the money.
What I just did is to cover my entire (SPY) short hedge at $281.90 for a nice gain, taking my net short exposure down to between small and medium-sized - a level I will be comfortable with over the weekend.

I have not covered a short today.

Peter on the stat this morning:

The April ISM manufacturing index fell to 41.5 from 49.1 but that was better than the estimate of 36. The underlying details though matter here. The main reason for the 'beat' was the 11 pt jump in Supplier Deliveries to 76 and that is because of the broken supply chains, where an historical rise in this component would reflect strong demand that supply can't meet. This time it's different. ISM said on this: "Suppliers continue to struggle to deliver...The Covid 19 pandemic was the primary cause of global and domestic supply chain disruptions, with suppliers impacted by plant shutdowns, transportation challenges and the continuing difficulty in importing parts and components." Elsewhere, new orders fell to 27.1 from 42.2, backlogs declined by 8.1 pts to 37.8, export orders dropped to 35.3 from 46.6 and employment got down to just 27.5 from 43.8. Inventories rose and imports were up slightly to 42.7. Prices paid fell by 2.1 pts. 

In terms of breadth of the weakness, only 2 saw growth vs 10 last month, and that was in paper products (all those boxes used for e-commerce) and food/beverage & tobacco products. 15 experienced a contraction vs. 6 last month.

Bottom line, again the real measure of things will be likely what the June reading is as factories reopen in May.

SUPPLIER DELIVERIES

NEW ORDERS

*As I wrote yesterday, "Sell In May and Go Away"

"Can't touch this
Look man u can't touch this
You'll probably get hyped boy 'cause you know you can't u can't touch this..."
- MC Hammer, You Cant Touch This

This morning, S&P futures are -63 handles lower.

S&P futures are now more than 105 handles below Thursday's elevated pre-market levels.

In a lengthy missive yesterday morning, A Time to Plant And a Time to Pluck Up That Which Is Planted,I reversed my recent optimistic market view (and sold a number of trading and investment positions as well as adding to my (SPY) short and my SPY puts long), citing about 15 emerging concerns in the areas of corporate profit growth, health, valuation, implementation of effective policies to combat Covid-19, etc.

My last concern is listed below:

* Antagonism Between the U.S. and China Appears to Be Accelerating and Could Worsen in the Months Ahead - I would not be surprised that, particularly if the President's popularity slumps (and in light of his desire to strengthen his base), that Trump will look more to China as a Covid-19 scapegoat. A growing rift could undermine a global economic recovery especially if the Administration attacks China (and raises trade tariffs).

Indeed, yesterday afternoon (and on cue), President Trump threatened more trade tariffs against China.

The President's tariff threats, as described in Thursday's opener, is but one of a number of headwinds the market now faces after its robust, abrupt and unexpected rally off of the March lows.

Earnings at Amazon Reveal Another Market Risk

As mentioned in my tweet earlier, the large Covid-19 expense schedule at Amazon (AMZN) was startling. But even more importantly, it raises the question that, in an already uncertain and troublesome economy with little growth and a questionable trajectory over the balance of 2020 - whether we are underestimating the broader cost pressures and issues that many companies and industries will face in order to combat Covid-19.

Are my lower than expected S&P EPS projections for 2020-21 ($110, $135-$140) too optimistic?

Amazon's shares (which I recently sold) were -$153 in pre-market trading.

And So Was Apple's EPS Report Worrisome

Though I will have more on Apple's (AAPL) earnings on Monday, the reluctance to give guidance surprised some investors. As I posted late yesterday, I did not understand the post report stock gap to over $300 (I added substantially to my short at $299). The shares retreated in the after hours and were down by another -$9+/share in pre-market trading (at $284.50).

Tactical Strategy

While I have measurably grown my short SPY hedge (I actually sold some short in pre-market at $295 early yesterday morning -now $285!) I have also increased my SPY puts.

As I have mentioned, puts provide defined risk (you know how much is at risk, that is, the price you paid for the puts). Because of the dynamic of put option delta (expanding when market falls, declining when market advances), the puts position makes me shorter on weakness and longer on market strength.

This means that if the market falls further from the already depressed pre-market levels, my portfolio gets much shorter, and I will have to make some decisions.

For now, however, I cant touch this (long side) as there continues to be likely much more near term downside risk over upside reward for the S&P Index.

Though I start the day with a medium-sized net short exposure, the large down opening puts me shorter. 

Fed expands and more data from Peter:

If you didn't see, the Fed enlarged the eligibility of companies that can tap into its Main Street Loan Program. From no more than 10,000 employees and up to $2.5b of revenue, a company with 15,000 employees and revenue up to $5b now has access. Also, the minimum loan size will be $500k from $1mm when first proposed. And, the debt to EBITDA ratio could be as high as 6x. As I said earlier this week, good luck Fed in measuring EBITDA but we can assume in the current economic environment they will be not that strict with compliance. It will be really interesting on how this program plays out. To incentivize skin in the game, the Fed is requiring banks to hold up to 15% of a company loan on the hopes that the skin will result in good loans. But, if it was such a good loan, why would the bank off load the balance to the Fed? We can only imagine what the quality of the Fed's balance sheet will look like when all is said and done.

South Korea's trade data was poor as expected. Exports fell 24.3% y/o/y, a touch more than the estimate of a 23% decline. Imports were lower by 15.9% vs the forecast of a 14% drop. Any of us could have written this but the economy ministry said "Demand in export markets has plunged amid lockdowns and plant shutdowns in the US and Europe, while China's economic recovery continues to be protracted. This triggered a decline in exports across the board." There was particular weakness in auto's and auto parts and also smartphone exports which fell 43.6% y/o/y. Bottom line, measuring the pace of growth after the world reopens again is much more relevant than measuring the stats while it's still partially closed. The Kospi was closed along with almost every other Asian and Europe market due to May Day.

Ahead of the US manufacturing data today for April, we got some final revisions to some others. Australia's manufacturing PMI was revised to 44.1 from 45.6 initially and down from 49.7 in March. Japan's manufacturing index was changed to 41.9 from 43.7 in the first print and that is down from 44.8 in March and 47.8 in February. In the UK, its manufacturing PMI was lowered to 32.6 from 32.9 initially and that is down from 47.8 in March and 51.7 in February.

Measuring EBITDA but we can assume in the current economic environment they will be not that strict with compliance. It will be really interesting on how this program plays out. To incentivize skin in the game, the Fed is requiring banks to hold up to 15% of a company loan on the hopes that the skin will result in good loans. But, if it was such a good loan, why would the bank off load the balance to the Fed? We can only imagine what the quality of the Fed's balance sheet will look like when all is said and done.

South Korea's trade data was poor as expected. Exports fell 24.3% y/o/y, a touch more than the estimate of a 23% decline. Imports were lower by 15.9% vs the forecast of a 14% drop. Any of us could have written this but the economy ministry said "Demand in export markets has plunged amid lockdowns and plant shutdowns in the US and Europe, while China's economic recovery continues to be protracted. This triggered a decline in exports across the board." There was particular weakness in auto's and auto parts and also smartphone exports which fell 43.6% y/o/y. Bottom line, measuring the pace of growth after the world reopens again is much more relevant than measuring the stats while it's still partially closed. The Kospi was closed along with almost every other Asian and Europe market due to May Day.

Ahead of the US manufacturing data today for April, we got some final revisions to some others. Australia's manufacturing PMI was revised to 44.1 from 45.6 initially and down from 49.7 in March. Japan's manufacturing index was changed to 41.9 from 43.7 in the first print and that is down from 44.8 in March and 47.8 in February. In the UK, its manufacturing PMI was lowered to 32.6 from 32.9 initially and that is down from 47.8 in March and 51.7 in February.

I will be out most of the late morning and early afternoon as I will be at some routine medical examinations.

Danielle Dimartino Booth on a warning on consumer spending: 

• In late 2018, U.S. labor force momentum began to dissipate; fresh data revisions show job growth ground to a halt in 2019's third quarter, indicating the U.S. economy was sliding into recession prior to the coronavirus, an inconvenient truth for the sellside to concede
• The tally of all unemployment insurance programs is off the charts as millions and millions who have filed jobless benefits have become household news every Thursday; even short-term compensation for workers who have lost hours but not jobs are 6.5x last year's level
• Spending cuts exceeded income gains in March, generating a moonshot for personal savings; the backlog of unemployment filings signals a sustained improvement in consumption will elude absent a labor market recovery, as unapproved claimants are deprived of any income

Here at QI, we pride ourselves on our quirk factor, the originality with which we introduce each Feather and Quill before diving into the dismal science or financial markets. Wikipedia and clichés need not apply. As such, it is with reticence that we launch today with a quote from Jaws that's so commonplace as to have its own GIF. That said, sometimes in life, no substitute exists. As Dr. Gates and I grapple daily with charts that look as if they've been struck by lightning with lines spiking north and south, our only source of levity in this time of hardship for so many is a refrain we've tweaked from Chief Brody's original: "We're gonna need a bigger scale." And then we laugh and move on.Today's sibling charts are prime examples of needing bigger scales. Whether you're graphing unemployment ("Heads up!") or consumer spending ("Look out below!), the scales fail. Before we go there, we'd like to take a journey back in time to last year's third quarter, which may as be last century's third quarter. Though impossible to conceive, six months ago, we were already headed to a recession, albeit at a glacial pace.We know this because of a wonky release from the Bureau of Labor Statistics called Business Employment Dynamics (BED), a quarterly report released yesterday, clearly with a very long lag. Think of the word "dynamics" -- forces which stimulate change within a system. When you're talking about the labor market, those forces are job losses and gains, the marriage of which produces the Net Employment Change (NEC). Drawing from the Quarterly Census of Employment and Wages, which are derived from unemployment insurance filings, the 3Q NEC was ZERO -- both job gains and losses were 5.8%; one neutralized the other.To give you a feel for the trend as the economy ground slowly to a halt, 2018's last three months' NEC was 0.7% of total employment which was followed by NECs in the first and second quarters of 2019 of 0.4% and 0.1%, respectively.

QI amiga Philippa Dunne is splendid with the labor market weeds. She noted the handful of sectors that had slipped into negative NECs of Natural Resources & Mining, Manufacturing, Wholesale Trade, Retail Trade and serendipitously, Leisure and Hospitality. As for the specific states whose labor markets had begun to shrink, they included Vermont (-1.3%), Wisconsin (-1.0%), West Virginia & Michigan (-0.9%), New Hampshire & Maine (-0.8%), Illinois (-0.7%), Alaska, Massachusetts & Minnesota, (-0.6%), and North Dakota & Ohio (-0.5%). Her bottom line on the BED data (blue line): "Old news that would be welcome today, but not a snapshot of a vibrant labor market."The red line...that needs a bigger scale...is the 844% year-over-year growth of all unemployment benefits including state, federal, newly discharged veterans and a sleepy category that's woken -- Short-Term Compensation (STC) claims. A STC is generated when an employer files a claim for a worker, who keeps their job, to compensate for lost hours. Last year, their ranks numbered 9,472. As of April 11, STC hit 62,297.Perhaps this niche is a drop in the bucket compared to the 30 million who have filed for unemployment insurance. But we suspect this number could also need another scale as layoffs begin in earnest in business and professional services, a development that could in a matter of weeks, push millions to tap the savings they've amassed.If you'll indulge a second and third cliché, personal savings, the orange bar on right-hand chart, has gone through the roof as consumer spending (blue bars) and worker wages and proprietors' income (yellow bars) have fallen off a cliff.

Another QI amiga, Bank of America's Michelle Meyer, slices and dices credit and debit card on a weekly basis to decipher consumption trends. Discretionary spending saw an initial jolt tied to the distribution of $150 billion in CARES stimulus payments, but those gains quickly dissipated. In Meyer's view: "The good news is that consumer spending has stabilized. The bad news is that it is at low levels... a sustained improvement is unlikely until there is a recovery in the labor market.

"If stimulus-driven consumption holds the key for the moment, we worry about what's to come given a backlog that's hit a worrisome level. Since the week ended March 21, there's been a persistent backlog between the level of initial claims and the weekly change in continuing claims, which we wrote of in detail two Fridays back. Through the week ended April 18, this backlog has swelled to 10 million who have filed and have yet to be approved, or not.In Dr. Gates' view, this accumulation stems from one of two drivers - technological capacity issues as we know to be the case with Florida or applicants who are being denied. The truth is likely somewhere in between which still leaves millions upon millions of stranded unemployed with no source of income, a disastrous humanitarian and economic development.In no time at all, we'll be hearing, "We're gonna need a bigger stimulus bill."

I wanted to repost my late tweet on Amazon (AMZN) as it could have some broader and negative ramifications for market constituents: