I ended the day in a slightly larger net short position relative to where I started.
Enjoy the evening.
Be safe.

I am back - it appears the main line water leak is bigger than I thought (so it will be addressed at 7:30 am tomorrow morning).

Today's market action seems so-so, with Qs (Nasdaq) over Ss (S&P). I just added to (QQQ) at $220.35.

Though new highs expanded, the breadth is a disappointing -700 on the NYSE considering the gap opening in the morning.

A key feature is the weakness in the bond market (with (TLT) -$3.10) and in the price of gold
(-$18.70/oz) (Note: I sold the balance of my (GLD) at around $162 - now at $159 - in mid-April). 

FAANG is the world's fair - led by (NFLX) (responsive to almost 5 million Disney+ (DIS) adds), FB and (AAPL) (+$5).

(Spec) (GE) is a dog with fleas.

Banks unresponsive to higher interest rates - I added to (BAC) and (WFC) yesterday.

I have a leak in my main water pipe that has to be attended to - it's not likely that I will be returning until tomorrow morning.

I will be on a two hour conference call (board meeting) shortly.

Stocks opened broadly stronger on Tuesday. They began to fade somewhat late in the day as concerns about energy and oil prices began to hit things that left most of the indices closing up on the day but only slightly off the day's lows.

That will raise new questions today on testing and retesting.

Oil may return to prominence. Texas attitude seems to hint we may have trouble cutting back on the supplies, which remain a problem. The key remains test and retest. We need to blow through yesterday's highs to regain the momentum.

Arthur

I start the day small net short in exposure. I shorted (IWM) , (QQQ) , and (SPY) late in the day yesterday.

Knowledge@Wharton on thePost Crisis World. 

* The stock market is not the economy
* Too much leveraging hurting the hedge fund community
* Is the unemployment rate a good gauge?

From Peter:

The ADP report today will be ugly with an expected decline of 21mm. But we know this will be. The question then is how many of these people get their jobs back when things reopen, where some businesses will open certainly faster than others and some won't reopen at all.

The average 30 yr mortgage rate ticked lower by another 3 bps to a fresh record low of 3.40%. This helped to lift purchases by 5.8% w/o/w and slowed the y/o/y decline to 19% from 20% last week and 31% in the week prior. Refi's though fell by 1.7% w/o/w and that's down for a 3rd week although is still up by 210% y/o/y. Refi's, more so than purchase mortgages, have been more clogged up by the rising forbearance situation and its impact of the origination of new mortgages. Lenders see the borrower risk as higher for someone who is refi'ing vs someone purchasing a new home. The latter likely won't ask for forbearance immediately as they are budgeting out their payments before they buy. The former is more at risk.

Bullish sentiment continued to increase in the weekly Investors Intelligence gauge. Bulls rose for a 6th straight week to 48.1 from 46.6 last week. Bears in turn fell for a 6th week to 26.9 from 29.1 last week. The spread of 21.1 between the two is the most since March 4th. The balance expect a Correction. Bottom line, while these numbers are not extreme, that Bulls are just a stones throw from 50 is not a good contrarian backdrop for the market here. We'll see the AAII measure of individual investor sentiment tomorrow.

We saw some more April PMI's from overseas. Singapore's fell to 28.1 from 33.3 while India's literally collapsed to 5.4 from 49.3 but we know their economy is almost completely shut. The Eurozone final read for services was 12 from 11.7 initially but down from 26.4 in March and 52.6 in February. We should assume that with things reopening in May, these numbers will only improve from here with the degree being the only question.

The euro is lower for a 3rd day to just above $1.08 and is at a two week low on the heels of the German court ruling yesterday where the ECB has 3 months to respond. I still don't think much comes of it but at a time when so many are reliant on the ECB, any change in policy in response has some worried. European bonds are down slightly. Why this matters is because the new Pandemic Emergency Purchase Program basically takes the limits off on the extent of ECB buying in terms of what percentage can be bought on each bond issue, how much from each country and boundaries on credit ratings. If those limits are put back on, the ECB can buy less things. Keep in mind, this court case can drag on for a while while the ECB might do what it wants.

And here is Peter's response to the data this morning:

ADP said 20.24mm jobs were lost in April, about in line with the estimate. Of this, 4.2mm came from the goods producing side, mostly construction and manufacturing. Services shed the balance with the biggest decline seen in leisure and hospitality as to be expected at 8.6mm. This was followed by a 3.4mm job loss in trade and transportation.

Bottom line, this is what you get when government forces business to close and consumers are fearful to go outside. We know however that as things reopen, many of these jobs will get restored but certainly to not anywhere near where they stood in February. Let's be honest, this is a healing process that is going to take years.

MONTHLY ADP

* Given my market and economic concerns I am a $90-$95 buyer
* If one subscribes to a more optimistic outlook I would buy the shares at current prices ($99)
* My 12 month price target is $115-$120
* My intermediate term price target (two years) is $135-$140

My interest in Disney's (DIS) shares has run deep over the years.

I have followed the company since my days at Putnam Management in the 1970s.

On my Diary, I turned negative on the shares, and shorted them on multiple occasions, over the last four years. The stock was on my Best Ideas List (short) as my conclusion was that the outlook for the company's core businesses would produce less than +10% annual EPS growth, some 40% below the consensus expectations.

I profited on these short plays since 2016 as investors were steadily disappointed by the lackluster profit trends.

When the Disney+ streaming product was introduced, the shares soared up to close to $150/share (without me being short) and I reshorted as I grew increasingly concerned about the debt load associated with Bob Iger's aggressive acquisition program. Furthermore, I felt that applying reasonable multipliers to the non streaming operations at Disney produced an unwarranted implied valuation of $50-$60 billion + directly to consumer streaming efforts, particularly given the number of years it would likely take to reach positive profits and cash flow.

Unlike previous periods, I now believe that the shares are a buy on the dip (ideally in the $90-$95 range, but I could raise this if Covid-19 doesn't spread as I fear and if I become more constructive on the markets) as my concerns have become to be more "appreciated" in the marketplace.

As it was the case in the time that Disney's shares traded in the $140s, investors seem to get optimistic when the company's stock is flying and concerned, like today, when the shares are plunging.

Again, I am a contrarian here - I want to own the shares.

Disney, considered one of investors' "most admired" companies has been met with skepticism as Covid-19 has spread. After all, many ask, who will attend the theme parks?

I believe many will attend the parks "in the fullness of time" (management 's presentation yesterday included a discussion of their surveys that suggest there is pent up demand for all of their products, including, most notably, cruises and parks) and the pandemic has created a catalyst to a falling share price that I will again take advantage of at the right price.

With a paralleled set of entertainment assets and the price falling in March, I placed Disney on my Best Ideas List at $93 on March 30, 2020. I bought the shares and late last week as the shares spurted to $112 (moving towards my $115- $120 12-month price target) I sold - as upside reward had deteriorated relative to downside risk.

Not surprisingly, Disney reported disappointing results both on the top and bottom line after Tuesday's close of trading.

Here are some of my takeaways:

* Disney planned for the worst while hoping for the best.
* The company is furloughing 120k employees (though still paying their health care costs), had eliminated the first half dividend ($1.6 billion save), and is cutting capital spending by almost $1 billion from the previous plan.
* Shanghai Disneyland is reopening (on a scaled program) on May 11th (a positive stock catalyst that I recently anticipated and mentioned in my Diary).
* Covid-19 had a broad and negative impact on all business lines.
* Depending on theatre openings, the company plans to maintain its July 24th opening of Mulan.
* Disney+ has 54.5 million subscribers - that's up by nearly five million subs since the update a month ago.
* Given the lack of visibility, management did not give any second half guidance.
* Disney is seeing demands for affiliate fee reductions in light of the absence of ESPN sports programming.

For the current full year (fiscal 2020), Disney will still be profitable - but barely so ($0.50-$0.60/share(e)) and compared to consensus pre quarter release of about $1.15/share higher (previous $1.65-$1.75/share). Analysts will likely cut Park EBIT by $1.6 billion+ and the division will now likely record a -$1 billion loss for the year. DTCI EBIT contribution, relative to previous expectations, will also get cut by at least $500 million.

Fiscal 2021 prospects - and the possible trajectory, are far more important than this year's depressed results. A broad range of $2.60-$3.00/share seems reasonable (down by about -$0.85/share from the consensus before last night's EPS release) for next year.

I am optimistic on fiscal 2022-3. I can see a hockey stick to EPS growth.

While the shares will likely trade in a relatively narrow trading range over the near term given the lack of operational visibility, the downgrade to current year earnings is now almost irrelevant and is probably embeded in the current share price.

The keys to the intermediate outlook for Disney's shares rest in (1) the degree to how much revenues and profits will recover 1-1 /2 years from now, (2) the ultimate success of Disney+, and (3) how do we value the aforementioned streaming business and the theme parks division.

I am optimistic on all counts but I will be price sensitive in gauging my next buy entry point given the concerns I have regarding the spread of Covid-19, broader stock market and domestic economy (addressed in yesterday's opener). 

My 12 month price target of $115-120/share uses conservative metrics (21x fiscal 2023 EPS ex streaming ($105/share), discounted back at a 8.5% rate plus about $65 billion of streaming value (4.5x revenues or $35/share). I can see the shares returning to $135-$140 over the next two years.

I am a buyer at $90-$95. For those that are more optimistic and have a long term time frame, I would consider buying the shares at current levels (below $100/share).

Danielle DiMartino Booth putting the "stag" in "stagflation:"

• Slower Supplier Deliveries Breadth in the Institute for Supply Management data hit an all-time high, with 35 of 36 manufacturing and services industries hindered; the pervasiveness of delivery delays in the supply chain is unprecedented
• Stagflation -- falling demand with rising inflation and unemployment -- is toxic to the economy; evidence of its existence was in Markit's April Services PMI as, at 37.5, business expectations turned pessimistic for the first time in the series' history
• Nondiscretionary inflation is much more highly correlated with delivery times' breadth vis-à-vis discretionary inflation; anticipate continued higher prices on essentials creating challenges for businesses and consumers alike as unemployment continues to rise

Before the Mayflower landed in the New World in 1620, it's estimated that well over one billion acres of the U.S.'s 2.3 billion land area were covered by forests. Today, forests only make up about 750 million acres. History buffs know that the root of the uprooting was the advent of a mighty agrarian economy, the 1850 to 1910 conversion of much of the country from forest to farms. What's left of the Lower 48's forests are distinctly split by the vast midwestern prairie. The Northeast has a mix of hard and soft woods, while the Southeast and West has a preponderance of softwood varieties. Nearly all of our domestic building wood is softwood, while hard woods feed hardwood panels, flooring and cabinetry.

Why single out the wood product sector which comprises less than a 2% sliver of the U.S. manufacturing pie? It seems it was the lone industry out of the 36 that the Institute for Supply Management (ISM) tracks in both its manufacturing and non-manufacturing surveys to report faster supplier delivery times in April. Flip that on its head, and you'll see that delivery delays occurred in a record 35 of 36 industries across the entire U.S. supply chain. Such pervasiveness was unprecedented until last month (red line).

Of the COVID-19 delays that have waylaid domestic and international supply chains which have been exacerbated by plant closures and transportation and logistics challenges, ISM Manufacturing noted, "Suppliers continue to struggle to deliver, at a much stronger rate compared to March." ISM Non-Manufacturing added that "Deliveries are slipping due to slower production windows" and "increased demand on delivery resources."

In tomorrow's Weekly Quill, we examine in depth the potential cost and deepening supply chain disruptions tied to Mexico's escalating Coronacrisis. Some 40% of U.S. auto supplies come from Mexico, where the case count has surpassed 26,000 elevating our neighbor to the south to the 20th most afflicted worldwide. Much to U.S. auto manufacturers' dismay, prospects for an early end to Mexico's lockdown, scheduled through the end of May, are dimming. That will thwart plans to restart production here on May 18th.

Closer to home, QI amigo Peter Boockvar highlighted the scourge of stagflation evident in another supply chain story that hit Dow Jones yesterday. We know thousands of flights have been canceled around the world. The upshot of global passenger travel being scarce: it's appreciably more expensive to send fresh food, mail and merchandise basically anywhere. In some cases, airfreight costs have tripled, "forcing businesses and individuals to choose between getting items to their destination quickly and getting them there at a price they are willing to pay."

To take but one example, May marks peak harvest for California cherries. How to transport them to key end markets in Asia and Europe will be complicated by travel restrictions that have reduced air travel given passenger jets typically haul the majority of this fresh fruit. Hence the risk of stagflation.

Stagflation is a toxic combination of weak demand and high inflation and unemployment. The high unemployment factor is supremely evident in the 30.3 million who have filed for unemployment benefits that should produce a postwar high double-digit unemployment rate when the April data are released Friday. Stagnant demand is in stark relief illustrated in today's chart via two competing sources of soft data: ISM and IHS Markit.

April's Non-Manufacturing ISM, the broadest proxy for top-line revenues for 89% of the U.S. economy, plummeted 22 points to 26.0 (yellow line), the lowest on record since the data debuted in 1997. Seventeen of 18 industries reported a decrease in business activity with the sole exception of the finance & insurance sector.

The potential for stagnation becomes more apparent when you add in Markit's forward guidance. Its April Services PMI revealed business expectations turning pessimistic for the first time in the series history, hitting a level of 37.5 (blue line). We add extra emphasis because it's the very nature of surveys to anticipate a brighter tomorrow, regardless of how bad today is. The unmatched dread centers on, "when the lockdown will end and fears surrounding the timespan of any recovery weighed on confidence."

As for that inflation component, we've depicted "needs" versus "wants" inflation in close proximity to slower supplier deliveries' breadth to prove a point. Since 2013, nondiscretionary inflation (what households must buy to put roofs over heads and food on tables) has a much higher correlation (~.70) with delivery times' breadth vs. discretionary inflation (~.10).

Knock wood, higher nondiscretionary inflation can be avoided. But that's exactly what we see in lengthening supplier delivery times in the second quarter's outset. Come Friday, we'll be faced with the hard-data income shock in the jobs report, a staple of recessions. Huge losses in jobs and hours against a backdrop of sticky nondiscretionary prices will put the "stag" in stagflation.