I am going to sign off early today.
With 10 minutes to go the S&P Index is trading at 2805 -- right on top of my intrinsic value estimate.
For the near term, neither a bear nor bull am I.
Thanks for reading my Diary today. I hope it had use to you.
Be safe.

I am again considering my former speculative basket of Hilton (HLT) Hyatt (H) and Vornado (VNO) -- that I previously profited from in a short-term trading rental.
The next leg lower I will be a buyer.

* Read it and weep...
* The worst investment of my life!

As I have often written, there is a tendency for talking heads and market pundits to emphasize their winners and to de-emphasize (or even forget and "sweep under the carpet") their losers.

So, in keeping with my message I wanted to reposte a 2015 column entitled "The Worst Investment Mistake of My Life":

Earlier this morning I commented on Danaher's (DHR) proposed acquisition of Pall Corp. (PLL).

Today, I wanted to weigh in on the worst trade of my life as it, too, relates to Danaher.

Like most subscribers I am on a constant search for the next "home run" stock.

This is truly an amazing and true story -- it is a story of buying a stock at $1/share, selling it at $3.50 (on the basis of a market capitalization of about $50 million) -- and watching (over the last 33 years) the shares rise to reach a market cap of $62 billion, a more than 1200x rise in the value of the company!

Move over Berkshire Hathaway (BRK.A, BRK.B) and Warren Buffett -- I am not aware of any more successful public enterprise in history.

I purchased a large and filing position (for about $1/share) in DMG Inc., the predecessor firm to Danaher, back in the early 1980s when I was a general partner at Glickenhaus & Co. I bought in for several of our clients and for our general partners' account.

At that time, DMG was an almost fatally wounded REIT, with an equity capitalization of only about $15 million. It owed about $40 million to First Continental and First Chicago banks. The situation was so bad that the bank had already written off the loan!

The company's assets were a hodgepodge of junk, from an underground refrigeration facility under Kansas City to a motor home park in Albany, N.Y. Its largest asset was a strategically positioned (!) second-home community about six hours outside of Houston.

The company did have, however, a $125 million tax-loss carry-forward that I valued at about $40 million, or several dollars a share. (The tax laws had not yet become so restrictive about usage of these credits.) That was nearly three times the equity capitalization at that time. I thought that if the company could clean itself up by selling most of its assets, it could merge some profitable businesses into it and utilize that tax-loss carry-forward.

DMG was based in Palm Beach, Fla., having moved from Boston -- a good move! My association with DMG ultimately formed the basis for my interest in moving there in 1999.

DMG's two principals were living the good life and earning close to $1 million each for running a REIT that was essentially in liquidation. the problem was that they wanted more and attempted to grant themselves (as outlined in the 1981 proxy material) a large commission on all ongoing asset sales.

After I purchased a position of nearly 10% in the stock, two other investors followed us in and filed form 13-Ds (indicating an economic interest of more than 5%). I felt that the idea of the two senior executives at DMG earning that much was appalling, given the company's position. The other investors agreed. We showed up at the annual meeting and took control of the company.

I became a member of the executive committee and the board of directors of DMG -- which was a NYSE-listed company. We threw the two managers out of the company. We then started to liquidate the company's assets over the next few months, in an attempt to pay the banks off.

I decided to leave Glickenhaus in 1982 (and undertake my own gig). I told the two other groups that since I was no longer going to have an economic interest in DMG, and my partners at Glickenhaus had no one to continue my efforts, we were going to sell the shares. The stock had risen from our purchase price of $1.50 to about $3. The two other groups said they too wanted to sell, since the team that was going to spearhead the effort of managing DMG's turnaround was no longer intact.

My recollection is that we all ultimately sold to Steven and Mitchell Rales within a few months for a price of about $3.50 per share. That put a capitalization on the company of around $50 million.

The Rales brothers ultimately hired investment bankers (I believe First Boston was the company's lead) to undertake a series of large capital raises. That enabled the Rales brothers to grow the company aggressively and externally.

After they gained control, DMG's name was changed to Danaher by the controlling shareholders. The origin of Danaher goes back to the root "Dana," a Celtic word meaning "swift flowing." The story goes that Danaher's principals were on a fishing trip on the Danaher River, a tributary in Western Montana, and conceived the name change.

In the beginning, Danaher acquired Mohawk Rubber and an automotive conglomerate, Fayette Tubular Products. Further smaller acquisitions in the specialty automotive component areas followed. By the early 1990s Danaher consisted of 10 diverse but cyclical companies with a strong emphasis on automotive parts. That mix was accompanied by a very low P/E ratio. By 1996, Danaher sold Fayette Tubular Products, which marked the beginning of a move away from cyclical businesses.

The company became more acquisitive as the bull market roared and accommodated its financing needs. In 1998, Danaher purchased Pacific Scientific (motion control), Fluke Corporation (electronic test tools) and Dr. Bruno Lange (water quality instruments). In 1999, it acquired Hach Co. (water quality instruments), Atlas Copco Controls (electronic motors) and Buhler Montec Group (water quality instruments). In 2000, the company added WWG (electrical testing and calibration), API (motion control), Kollmorgen (electronic motors) and Warner Electric (motion control). The acquisition spree went on and on.

The company has stayed acquisitive. Today it owns world class properties in five different business sectors: environmental (Hach, Chemtreat and Gilbarco Veeder-Root), testing and measurement (Fluke), dental (Kerr, Dexis), life sciences and diagnostic (Beckman Coulter, Leica) and industrial technology (Pacific Scientific, Kollmorgen).

From the humble beginning of DMG (with a market capitalization of around $15 million-$20 million), Danaher sports a market cap today of more than $62.0 billion -- by any calculation a remarkable feat. Consider that Danaher's sales stood at almost $20 billion in 2014. DMG had no sales in 1982. DHR's employees total 71,000. DMG had 36 people 33 years ago. DHR's earned $2.6 billion last year. DMG had a huge loss in 1982.

All in all, the Rales team has done a truly remarkable job in transforming DMG into Danaher and managing its asset base.

Steven Rales and Mitchell Rales are still on the board of directors of the company.

Finally, here is the long term chart of Danaher (previously DMG):

It makes me sick that I sold a 10% position in Danaher.

Selling the shares was the worst investment mistake of my life.

This is a superb post:

douglas cassel

"to understand Wall Street you have to learn to think like a thief". Some commentators may well be telling the truth about what they are doing, but I can't tell which ones. Some may be telling you to buy because they are selling, and vice versa. If you added up everyone's record my guess if very few would be much over 50% in getting things right, and might change very soon after they say it. Managing what happens after you make a move is more important. As smart as Druckenmiller might be, it is hard to trade off what he, or anyone else says. Covid news, which is coming fast and furious, is gonna be what moves things, and unless you are in a position to know when a vaccine is going to work, or how much antibody treatments impact death rates, you can't anticipate too much. I am optimistic, but I don't know what the base case that the market is anticipating. Trifurcated market, the Covid stocks are too high, some industries are going away, and some are waiting to see. Gotta be more flexible than usual.

Fed's Powell is not a factor in Wednesday's selloff.

"Lack of value" comments from high profile types (Buffett, Tepper, Druckenmiller) keeping some potential buyers away.

Technicals continue to be a problem. Potential Chinese role in election is also a backdrop.

Stay Safe.

Arthur

* Breadth still nasty at 10-1 negative.
* No real stability, yet.
* Oil down two bits.
* Gold +$9.
* Bond yields down three to four basis points.
* Energy, retail, financials, real estate, gaming, industrials broadly lower.
* The only green on my machine is (SJM) and (PG) .
* New low (CAT) .
* Apple (AAPL) -$7 after a big run-up.
I have added to the following longs: (VIAC) , (WFC) , (BAC) and (JPM) today.
I have added to my Apple short.
__________
Long SJM (large), PG (large), VIAC (large), WFC (large), BAC (large), JPM (large).
Short AAPL (large), CAT (large).

Regarding Mikey's observation it is important to note that:

* These guys can change on a dime.
* These guys will change if the health and medical community come up with therapeutic relief or a vaccine to Covid-19.
* Like all of us, these guys are often wrong but the key to their overall success is to respond to changing conditions.
* These guys are very wealthy and are generally in a preservation of capital mode.
* These guys are generally not net short, they are net long.
* Howard Marks is not bearish.
* Buffett is not bearish - he sold $6 billion net of stocks in 2020 (which represents an infinitesimal part of his portfolio) Its noise.
* Gundlach is a fixed income manager (a damn good one) not an equity manager.
* Cuban has a huge position in Amazon (AMZN) and some other tech stocks.

badgolfer22

Tepper...not bullish
Buffett..not bullish
Paul Singer..not bullish
Druck...not bullish
Gundlach..not bullish
Howard Marks..not bullish
Mark Cuban[who's been a perma bull forever]..not bullish

And I'm supposed to feel good about buying stocks because the fed is buying corporates?

oh, btw, we're in a depression that just started

I saw this on the internet a few minutes ago, support?

10-1 down day now.

(FDX) , (CMCSA) , (DIS) and (VNO) - all recent sales - are very close to or are under my buy levels this morning.

I have not yet reestablished these longs - and will await some market stabilization.

However, I have increased my (VIAC) holdings.

We are now exactly on top of my "fair market value" for the S&P of 2800.

Breadth has moved to almost 7-1 negative.

I added to ViacomCBS (VIAC) at $16.55 just now.

With industrials and financials being taken to the woodshed, please disregard Tweet of the Day (Part Deux) - that we could rally from the morning weakness!

Breadth is deteriorating further.

Spot S&P is 2830, just about one percent above my "fair market value."

No trades today.

Though the Nasdaq is +30 and S&P down by only 9 handles, breadth is poor at nearly 4-1 negative on the NYSE.

The Data

Producer prices fell much more than expected month over month in April. The headline figure was lower by -1.3% vs. the estimate of down -0.5%. The core rate was down by -0.3% vs the estimate of -0.1% but also taking out trade saw a price drop of -0.9% vs. the forecast of down -0.1%. On a year over year basis the headline figure is down by -1.2% while core is still up by +0.6%. 

Energy drove the headline decline down by -19% month over month while food prices fell by -0.5% (quite different than what consumers are seeing right now because of supply constraints). Food prices in PPI are partially reflecting commodity prices but with what we're seeing at the supermarket, beef and veal prices jumped by +12.6%.

Bottom Line

We know demand has collapsed and that leads to lower prices. However, the areas where supply constraints and bottlenecks have occurred has led to higher prices. Right now that is mostly in food delivery but as the economy comes back to life over the next 12-24 months, on top of all the monetary and fiscal stimulus, I expect we'll see that supply/demand mismatch broaden out and higher inflation to result. 

The 10 year inflation breakeven is lower by -1.5 bps on the PPI miss to 1.07%.

Here is the 10 year chart of headline PPI:

Here is the 10 year chart of core PPI:

We start the day with S&P cash (spot) at about 2860 compared to my "fair market value" of 2800.

So spot is +2% over intrinsic value (no precision intended).

Nothing to do for now on the Indices.

Jerome Powell was asked about his opinion on negative rates and I believe I'm close here on the quotes as I typed as fast as I could as he answered. "This is not something we are looking at." He repeated that ALL committee members in previous minutes said NIRP should not be used. "We think we have a good tool kit... and that is what we'll be using... effectiveness is mixed... there are plenty of doubters... it interrupts the intermediation process and hurts bank profitability. For now, not something we are considering."

I'm sticking to my belief, and certainly my hope, that we will never see policy induced negative interest rates in the US.

The caveat, at least for now.

Yesterday we wrote:

Traders assume range testing will continue. Look to Dow 24,400 to 24,600 and S&P 2950 to 3010.

Bonds move away from negative rates, which has helped stocks in the past.

Stay wary. Stay safe.

Arthur

*******************************

May 13, 2020

Dow topped out at 24350 and S&P 2945. While chart and churning wore down the bulls, the key story was late in the day.

Republican congressmen may have authorized censure of China on China's handling of virus. Also, further reports that the President may be setting up an election campaign as an anti-China virus theme. The financial media may have missed these stories, which we feel were an important part of the late selloff. Bears have been worn down by the charts and the bears now have the initiative.

Resistance may be at the recent highs in recent days.

Stay wary. Stay safe.

Arthur

CAT is still a DOG: 

badgolfer22

this should be good for a 20 point bounce..........

09:05CAT Caterpillar (CAT) reports rolling 3 month retail sales statistics (105.00)

April
sales for total machines -22% world (-27% in North America); resource
industries world sales -24% (N Am -30%) and construction industries
world sales -21% (N Am -26%)
Energy
& Transportation Retail Sales total April sales declined 19%

Break in!
Jerome Powell's sober tone (on forward guidance) could adversely impact the markets.

* Taking a macro point of view with micro trading actions
* How, why and when?
* Investing is more by the numbers and rules-based
* Trading, though still having the foundation of being rules based, requires more flexibility!
* Stay hungry, be opportunistic!

Trading (especially on the short side), to me, is somewhat different than investing - but there are important similarities.

At the core of my trading is the calculation of "fair market (or intrinsic) value" relative to current share prices. When the difference is wide the opportunities to trade intensify.

When "fair market value" is under the current share price, short trade opportunities are presented.

When "fair market value" is in excess of the current share price, long trade opportunities are presented.

My "fair market value", which I recognize is only as good as my assumptions, is about 2800 on the S&P Index (no precision intended).

Yesterday morning the S&P Index traded at approximately 2940, or 140 handles (5%) above my "fair market value" calculus - a short trade opportunity that must be weighed against the market's volatility to determine "conviction" and size/weighting.

I superimpose my trading decisions based on not only the calculus of "fair market value" but also on the basis of an assessment of a trading range (which at the current time is 2550-2950). This trading range doesn't come out of thin air, it also is based on my scenario analysis - taking the "most likely" scenarios (not the most pessimistic or most optimistic outliers) and applying a valuation multiplier to the S&P EPS that are spit out from my scenarios.

Thus, with the S&P Index at 2940 Tuesday morning, the "overvaluation" stretched, my confidence in a short trade rises.

Trading, unlike investing, at least from my perch, is not only a matter of reward vs. risk (stemming from "fair market value" calculation) or having a perspective of a trading range.

There are other requirements or foundations to my trading process:

* Be Dispassionate: The trading process requires dispassion and lack of emotion. Machines and algos produce wide market swings these days. The associated swings delivered by ETFs (rebalancing) and risk parity (chasing strength and selling weakness - "Buyers live higher, sellers live lower") are friends of the unemotional and opportunistic trader.
* Be Practical and Use Common Sense: When we see a 100 point intraday move in the Indices it is likely that there is either a material news event to respond to (maybe it was Druckenmiller sour tone last night which I chronicled in my Diary). But sometimes it is just the machines that exaggerate the short term moves. Act accordingly, the market will be there to serve us the next day.
* Be Opportunistic: Trading, unlike investing, is almost a spastic exercise that is not necessarily, at times, attached to the hip of models. Be opportunistic and don't look back.
* Trust Your "Gut": I have been trading for over five decades (I started at 16 years of age). A feel is developed - I can't define that feel very well to all of you in words. Sometimes that feel is important, other times not so much. I try not to be totally regimented in my calculus of "fair market value" and to trust my gut.
* I Almost Always Average In To My Trades: This is particularly true in a regime of heightened volatility. Unlike some others, I don't assume I can identify, with precision, ideal entry points. I average in more than averaging out (which tends to be more decisive).

Finally I want to distinguish short trading from long trading rentals.

My experience is that shorting requires more price discipline than long trading - thus, shorting is only for the few:

* The upside reward vs. downside risk of longs and shorts are asymmetric.
* Shorts have unlimited risk and limited reward (a stock can only fall by 100%), longs have limited risk (a stock can only fall by 100%) and unlimited reward.
* There is a gravitational pull of stocks higher (so shorts are going against the grain, daily).
* Investors are generally more bullish than bearish.
* Investors and traders are conditioned to buy not to sell or short - that's a force to be reckoned with!
* Policy makers are prone to "prop up" markets and not to hurt markets. (As an example the current fiscal bazooka.)
* Short interest produces "latent demand" that can surface at any time.

Why I Covered My Index Shorts Last Night

Last night I posted that I was covering all of my Index shorts:May 12, 2020 ' 06:19 PM EDT DOUG KASS

Calling an AudibleIn light of the magnitude of the after-hours move lower (bringing the S&P 500 within less than 2% of my "fair market value") I am calling an audible and I have covered my SPY (SPY) , QQQ (QQQ) and IWM (IWM) short hedges.I am doing this in the belief that I will be able to re-short at higher prices.I believe this is a prudent move.I have no Index shorts on now.We will see.

How We Doin?
As I write this missive, (SPY)  was trading at about $287.30, compared to the low of about $283 early last evening. I covered at attractive prices - reasonably close to that low.
"Mission accomplished" profitably as I move on to my next trade (which may or may not be profitable!).
I start the day between a small and medium-sized net long exposure.
Stay hungry, be opportunistic.

* Your home office is a hacker's paradise.

* The return of active managers?

* The case against value managers.

How do we get out of NIRP?

Ahead of the Jay Powell speech today, Loretta Mester joins Fed President's Bostic, Evans and Bullard in expressing their belief that negative rates is not a good idea. She spoke last night and said "I still am not thinking that would be a go-to tool for me...I think the effects on the banking system and on money market funds would make me not want to use that as a tool, so I'd rather focus on the other tools we have including forward guidance, including QE." I hope Jay Powell expresses the same today in an emphatic way so he doesn't leave it open even as a possibility.

If there is one thing we've learned from monetary policy globally over the past 10+ years is that it's easy to get into new programs and to cut rates. What we've also seen is that it's really hard to reverse this. Here are a few examples: The Fed kept rates at zero for 7 years and never was able to get it back above 2.25-2.5% over a multi year time frame. After expanding above $4T at the peak in 2017, the Fed's balance sheet never got back below $3.7T and now is of course exploding higher. The ECB has had negative rates since 2014, the Swiss National Bank since 2015 and the BoJ since 2016. The Bank of England beginning in 2007 cut rates from 5.75% to .50% by 2009 and throughout the entire recovery that followed never got it above .75%. The BoJ's balance sheet is on a never ending rise higher above and beyond the rate of nominal GDP growth. The ECB never stopped expanding its balance sheet once it started via QE and just imagine what will happen to the European bond market if they try to get out of negative rates. They're trapped.

Where I'm getting at here is now that the Fed is buying private sector assets with corporate bonds, aka nationalizing private assets, I really hope they realize that the deeper they get, the more difficult it will be for them to get out. I understand that in the context of an economic crisis which we are currently in, getting out is not top of mind, only getting in, but I believe it should be an important part of the current conversation before it's too late.

Keep in mind though that whatever the Fed is doing here is not going to increase a company's cash flow that is needed to meet their obligations. They can't print EBITDA needed to pay interest expense. They can't print jobs. They can't create anti virals and a vaccine and get people confident to shop without risk until then.

Not understanding the negative consequences of negative rates is the Reserve Bank of New Zealand which late yesterday said negative rates will become an option if needed as they kept their benchmark rate unchanged at .25%.

With mortgage rates still at near record lows, purchase applications rose for a 4th straight week, by 10.6% from the prior week but still remains down 9.5% y/o/y. Refi's though fell for a 4th straight week, down by 3.3% but is higher by 201% y/o/y. With the challenge of rising forbearance causing havoc in the mortgage market, the purchase side is under less pressure on the assumption that a new buyer is not going to immediately request forbearance has they've planned for this big purchase. On the other hand, the risk is higher for an existing homeowner that is looking to refi and thus is harder to pull off in the current environment at an attractive enough rate.

While it's old news, the UK economy contracted by 2% q/o/q and 1.6% y/o/y in Q1 with the last few weeks of the quarter the obvious weight. These numbers were not as bad as feared but we know Q2 will be the real mess. The pound is higher while gilt yields are lower.

From Knowledge@Wharton, here.

Danielle DiMartino Booth on the weakness in non-residential real estate activity (something I touched on in my Paradigm Shifts post yesterday:

• Global construction is contracting at record levels while real estate skids to GFC levels; these downturns may not be temporary but structural as construction investment, which has long benefitted from low interest rates, succumbs to the deeply leveraged post-coronavirus world
• The Dodge Construction Momentum Index, which leads non-residential spending, fell 6% YoY in April tied to weakness on commercial projects; continued weakness is anticipated in May and June as pre-COVID-19 projects are concluded but future plans put on ice
• Cement prices, which slid to six-year lows in the first quarter, are increasingly susceptible to deflation risks, which should be evident in this morning's April PPI report; the growing trend to work at home will pressure current office space and curtail planned office construction

Every horse put out to pasture. If only. But in 1916, that's exactly what Stephen Stepanian set out to accomplish when he developed and applied to patent the first motorized transit cement mixer. This "leap" in technology was designed to replace the horse-drawn mixers of the era. Wooden paddles churned the mixture as the cart's wheels turned, but efficient it was not; neither were engines and trucks in the early 1900s. By the 1940s, horsepower finally overtook horses with the advent of rugged vehicles that could transport thousands of pounds of wet, unset concrete. The large drum mixer used today hasn't changed much from Stepanian's vision over 100 years ago.

Cement is a vital ingredient in the building industry. In the United States in 2019, its production reached an estimated 88.5 million metric tons. Compare that to the 4.1 billion metric tons of cement produced worldwide. According to globalcement.com, the top ten cement producing countries in 2017 were (in descending order): China, India, U.S., Russia, Vietnam, Brazil, Turkey, Iran, Indonesia and Saudi Arabia. The largest cement companies, like Switzerland's LafargeHolcim, Germany's Heidelberg Cement and Mexico's Cemex, have operations scattered across the globe.

Wouldn't you know it, a Coronavirus cliff has developed for one of the upstream sectors that feeds global construction. According to IHS Markit's Global Sector Purchasing Managers' Index (PMI), in April, the Construction Materials industry posted the fourth largest decline in output to a level of 20.7. The forward-looking Construction Materials New Orders Index (illustrated in yellow) contracted by an even greater degree, to a record low 18.8, while the Construction Materials Backlogs Index (future demand) yielded significant weakening in projects to be completed, falling to 34.5. Walking hand in hand was IHS's global Real Estate Index which slumped to 24.2, the lowest on records back to October 2009.

It would seem that the unthinkable has come to pass -- after a long period of being decoupled from the trade-war-sapped industrial sector, low (negative) rates have stopped supporting (levitating) the construction sector in the core of Europe -- Germany.

The abrupt halt in the German Construction PMI was led by a record decline in New Orders. Weakness was widespread but most pronounced in commercial activity which underperformed housing and civil engineering, marking the worst contraction on record at 27.6 (red line). Markit warned "of potential longer-term repercussions from the virus outbreak, including a downturn in the general economy and a weaker appetite for investment."

Closer to home, the Dodge Momentum Index has caught wind of the global trend. Dodge Data & Analytics describes its Momentum Index as a monthly measure of the first (or initial) report for nonresidential building projects in planning. It's a reliable signal of what's to come for nonresidential building construction spending one year out.

The 6.0% month-over-month decline in the Momentum Index (blue line) was influenced more by the commercial component (-7.6%) vis-à-vis the institutional input (-3.2%). To put a face on those labels, new commercial projects in April included an office building in San Jose and (unbelievably) the $100 million Dream Hotel in Las Vegas. The institutional projects included two new medical centers, which makes much more sense to us.

Dodge noted that COVID-19 had not only had an effect in the here and now but that an extended down cycle will ensue. Its Momentum Index is a three-month average. Expect even weaker readings in May and June denoting a clear double-top in U.S. construction activity.

Swimming back upstream, domestic operators in the cement space are set to be buffeted by pricing and profitability headwinds from the reining in of future commercial projects. We would not be surprised if the PPI for cement manufacturing slipped into deflation in April in this morning's report. Cement pricing was already challenged before Coronacrisis; it had downshifted to roughly 1% growth over the prior year in 2020's first quarter marking a six-year low.

Cementing the weak outlook, COVID has revealed that working from home could become a permanent fixture of corporate best practices. Take Twitter. On Tuesday, CEO Jack Dorsey told employees that many of them will be allowed to work from home in perpetuity, even after the pandemic abates. At last check, forever is a mighty long time. What will those in other industries do to similarly contain fixed costs? Make the same benevolent offer to their most productive employees?

Add it all up. Not only does the Coronashock mean that cement mixers won't be delivering as much ready-mix concrete as they did in 2019, but for some, their drums will stop spinning indefinitely. Cyclical and structural forces are colliding in the commercial real estate space. Current projects will be completed. But a much-reduced slate of future expansion plans is now in the offing as cost-constrained firms worldwide contemplate a new world in which social distancing is the way forward.