To succeed in this market requires a bold and unemotional process, a sense of "fair market value," a contrarian flare and nerves of steel.
I reduced my long exposure today on an extraordinary, but not unexpected, gap higher in the averages.
As I wrote today, I am not particularly keen on this sort of rapid and spastic trading -- but when individual stocks like (Vornado Realty Trust  (VNO) , Disney  (DIS) , FedEx  (FDX) and others) have a year's performance in a day, I feel I am mandated to respond definitively.
Thanks for reading my Diary and I hope it had value to your decision making.
Be safe.

My pal Brian Wesbury explains "how we are going to pay for all of this":

The largest federal budget deficit since World War II came back in 2009, as slower growth and increased government spending during the subprime-mortgage financial panic pushed the deficit to 9.8% of GDP. This year's the budget deficit will, quite simply, blow that record out of the water.

The Congressional Budget Office recently totaled up all the legislative measures taken so far - as well as the effects of a weaker economy (payments for unemployment benefits would be going up even with the recent law) - and they estimated this year's budget deficit at $3.7 trillion, which they forecast would represent about 18% of GDP.

As if that weren't enough, the House of Representatives just passed a bill that would add another $3 trillion to the debt. Although a detailed year-by-year cost estimate isn't yet available on the spending provisions, and the bill is dead-on-arrival in the Senate, which isn't going to rubber stamp that proposal, it's likely Congress and President Trump will end up compromising on some sort of additional measures that drive the deficit even higher. As a result, we're guessing the budget gap for the current fiscal year ends up closer to $4 trillion, or about 20% of GDP, the highest since 1943-45.

Given the economic crater generated by the Coronavirus and related shutdowns, as well as the heavy-handed legislative response, budget deficits will be enormous in the years ahead, too.

In spite of these sky-high numbers, it's important to recognize that the US government is not about to go bankrupt. The debt, while large (and growing), remains manageable. Before the present crisis, the average interest rate on all outstanding Treasury debt, including the securities issued multiple decades ago, was 2.4%. Now, our calculations suggest newly issued debt is going for about 0.25%, on average, which applies to both the recent increase in debt as well as portions of pre-existing debt coming due and getting rolled over at lower interest rates.

When debt that costs 2.4% gets rolled over at around 0.25%, that's a great deal for future US taxpayers. The problem is, the Treasury Department has been decidedly stubborn about not issuing longer-dated securities - think 50 and 100-year bonds - that would allow taxpayers to lock-in these low interest rates for longer, making it easier to spread out the cost of the extra debt incurred throughout the crisis.

As a result, if (or more like when) interest rates go back up, the interest burden generated by the national debt could go up substantially.

The best move the Treasury Department could make would be to use the recent surge in debt to overhaul the kinds of securities it issues. One idea that deserves exploring is replacing all securities with a maturity of over, say, 2 years, with "perpetual" or "interest-only debt." No principal would ever have to be paid on these instruments; they'd just pay the same nominal amount of interest twice per year. If we want to mix it up a bit, some debt could pay interest with gradual adjustments for inflation, just like TIPS.

This is not a new idea. The British issued perpetual bonds starting in the 1750s, and the last ones were retired in 2015. And although they're called "perpetual" bonds, and they're not callable, the Treasury Department could always buy them back at market prices to retire them.

Liquidity should not be an issue. Every time the government needs to issue longer-dated securities, it could simply re-open that very same security. Then the private sector could slice and dice them, on demand. If someone needs a 10-year zero-coupon Treasury note, just take the interest payment due in ten years and package that into a stand-alone security. Want something like a traditional 30-year? An investment firm can package a stream of interest payments over the next 30 years and tie it to a big package of payments due in exactly thirty years.

But it's not only the debt generated by recent fiscal measures that will burden future generations. Overly generous unemployment benefits are disincentivizing many unemployed workers from re-joining the labor force, which slows the process of accumulating skills. Widespread government-mandated closures also hinder skill-formation, as well as risk destroying some (or all) of the know-how embedded in business's operations.

Yes, the debt is a burden on future taxpayers. In this way, the fiscal response magnifies the effects of other responses to the Coronavirus. So far, the age of the typical person who has died with the virus has been about 80 years old. Right or wrong, our government - and society in general - has taken enormous measures to contain the virus to save the lives of our elderly population, and these moves have imposed enormous costs disproportionately borne by the younger generations who are out of jobs, school, and business opportunities. The very same group who will be paying the costs well into the future.

Speaking of narratives... the day started with the view that Berkshire's (BRK.A) (BRK.B) sale of Goldman Sachs (GS) was a negative for the shares (something that I tried to refute in my first post of the morning at 7:45 am). 

GS is trading +$10/share today!

After the fact market commentary is nearly useless for traders and investors.

Yet it comprises most of the narrative on FinTV and FinTwit:

I added to J. M. Smucker (SJM) in the late morning.

Rapid trading and investing moves require an emotionless and opportunistic state of mind.
* And a willingness to move at the turn of a dime
Three weeks ago I wrote in my Diary that you will be seeing much more trading activity from me based on the "newsy" and volatile market backdrop.
Who would have thunk -- and little did I realize -- how true that statement would be!
I really don't enjoy trading with such rapidity as the markets have "caused" me to over the past four weeks. But we must take what Mr. Market gives us, and I am trying to adapt to changing market conditions. We are clearly in a heightened regime of volatility.
How else to explain that Disney's (DIS) shares have climbed by 19% over one trading session or FedEx  (FDX) , which has risen by 15%?
These are annual and not daily moves... from my perch.
So trade I must during The 2020 Battle Against Covid-19.

I have been scaling higher and I have moved to a large short Nasdaq position.
My average on (QQQ) short is about $227.80.
This takes me down to small net long in exposure.
QQQ short is my Trade of the Week.

I am sticking with my bond short.

I have added and moved to medium-sized in my (QQQ) short this morning at an average price of about $227.55.
I have several reasons for making this my Trade of the Week:
* The market is now at the top end of my expected trading range (as measured by the S&P 3550-2950).
* I expect a pivot from growth to value to be more violent in the time ahead.
* Value is more underpriced relative to the Nasdaq today than at any time since the dot.com boom.
* Who is left to buy (MSFT) and FAANG? (Here is my broader thesis.)

Neil S

Oaktree's Howard Marks Says Fed Support Isn't Forever, Distress Coming
By Erik Schatzker
May 18, 2020, 8:00 AM EDT
Co-chairman says bond prices are 'artificially supported'
Despite moral hazard, he says Fed was right to intervene

As successful as the Federal Reserve has been propping up corporate debt prices, the support is only temporary and distress will sweep through the credit markets when the central bank inevitably steps back, Howard Marks said.

"Can the Fed keep it up forever?" Marks, the billionaire co-chairman of Oaktree Capital Group, said in a Bloomberg "Front Row" interview. "Those of us in the markets believe that stocks and bonds are selling at prices they wouldn't sell at if the Fed were not the dominant force. So if the Fed were to recede, we would all take over as buyers, but I don't think at these levels."

I sold my Comcast (CMCSA) rental purchased on May 14 for a nice gain as well at $37.76. 

* The top end of my trading range (2950) has been reached this morning
* I have moved down to between small to medium-sized net long

With the S&P spot (cash) market now at the top end of my trading range (2950), I have to stick to my discipline and respect the changing (and deteriorating) upside reward vs. downside risk (which frankly happened sooner than I had expected).

I have just eliminated the following positions (which were taken only 1-2 trading sessions ago!):

* I have sold Disney (DIS) at $117.45.(+$8+ on the day)
* I have sold Federal Express (FDX) at $117.52. (+$10+ on the day)
* I have sold Boeing (BA) at $133.13. (+$13 on the day)
* I have sold Vornado (VNO) at $38.66 (+$3.30 on the day)

In light of the anticipated pivot from growth to value I have taken a small (QQQ) short at $227.78.

The May NAHB home builder sentiment index improved by 7 points month over month to 37 and that was 2 points above the estimate, but still about half the 72 print in March. Present Conditions rose 6 points to 42 from April and compares with 79 in March. Future Expectations were up by 10 points month over month to 46 and compares with 75 in March. Prospective Buyers Traffic rose to 21 from 13 and vs. 56 in the month prior. Keep in mind that 50 is the breakeven level between growth and contraction. 

The NAHB said, "The fact that most states classified housing as an essential business during this crisis helped to keep many residential construction workers on the job, and this is reflected in our latest builder survey." Also, "Low interest rates are helping to sustain demand." The caveat to all of this though: "high unemployment and supply side challenges including builder loan access and building material availability are near term limiting factors." Figure that out these two factors and the housing industry will follow. 

What could also help the new home construction market is the still limited supply of existing homes and in this current Covid time, people are much less inclined to be moving out of existing homes. Lastly, will the living habits of urban residents begin to switch to wanting the suburban life style? 

Here is the 15 year NAHB Builders Survey:

No trades today.
I am enjoying the big wave.

Overnight, U.S. futures are stronger due to several factors. Initial was the fact that reopenings around the globe have not proven sudden burst of contagion. Secondarily, (kind of anything) you need comment from Powell seems to help. Then crude bouncing seemed to have provided another strong bid, although traders doubt. Then lastly and most importantly, progress on the drug front for the virus is providing a spike.

Here are some of the numbers traders may be looking at, most of which relate to the early spring breakout attempt.

Likely resistance may occur in S&P 2950 to 2975 and the Dow 24250 to 24600. Most of the early burst may come on the opening but traders will follow the chart levels very closely.

Stay safe.

Arthur

From Gary US Bonds:

123gary

Kraft Heinz upgraded to Buy from Neutral at BofA
May 18, 2020 ' 05:59 EDT
BofA analyst Bryan Spillane upgraded Kraft Heinz to Buy from Neutral with a price target of $38, up from $32. The shares trade at a 40% discount to the packaged food group, Spillane tells investors in a research note. However, actions on its brands and its supply chain position Kraft Heinz to take advantage of changing consumer trends in the wake of COVID-19, contends the analyst.

* Reinhart and Rogoff see it taking five years before GDP recovers.
* Have a record level of investors lost their minds?
* Nothing quite fails like success in the markets.

* The bears' skepticism (and cautious market positioning) coupled with their collective cynicism towards medical and scientific innovation, and the inevitability of the curve's flattening along with an "all in" Fed, have fueled the market recovery from the March lows.
* I continue to be positioned for a pivot from growth to value
* MSFT and FAANG may suffer as market laggards (arguably trading at a 2000 S&P equivalent) play "catch up"

I am uncharacteristically without any shorts since I covered shorts in Apple (AAPL) , Caterpillar (CAT) and my Spyders (SPY) and QQQs (QQQ) in the recent move (over the last week) below my "fair market value" calculation of 2800.

Not only did I recently cover all of my trading shorts (generally profitably) but I reestablished longs in Disney (DIS) , Boeing (BA) , Federal Express (FDX) , Vornado (VNO) and others - all the while adding to existing long investments. (Importantly, as I will discuss shortly, I have no traditional growth stock longs - having sold Facebook FB , Amazon (AMZN) and most of Alphabet (GOOGL) ).

Again, I try to unemotionally trade and invest using a calculator and adopting a contrarian streak - all the while acknowledging the powerful influence of ETFs and risk parity (and other products and strategies that worship at the altar of price momentum).

When trading in this climate, it is helpful to have a sense, at least for me, of "value" - after all machines and algos know nothing about value and everything about price.

When the machines go wild and exaggerate mightily short term price action, I react opportunistically.

That was the case to the downside in mid-March when passive products and strategies vomited out stocks and I grew large long in anticipation of the Fed's aggressive largesse, the flattening of the curve and my confidence in the health and medical communities in finding theurapeutic and vaccine solutions to Covid-19 (see Moderna's (MRNA) news).

While the market may have launched the mother of all short squeezes in this rip your face rally, there will likely, again, be a time to pluck what we have planted as we investors deal with a broadening list of uncertainties.  

As we move back towards the upper end of my projected trading range (2550-2950) - fueled by negative market positioning and caution coupled with a remarkably expansive Fed (that is providing largesse never ever seen before), let's be alert to possible divergences and a potential change of market leadership as I wrote late last week in "Is It Time To Sell MSFT and FAANG?"

In keeping with the above healthy skepticism towards the continuation of the lengthy, multi-year leadership role of just six stocks, I am positioned in value - or at least what I perceive to be value (e.g., financials, ViacomCBS (VIAC) , some deep cyclicals, DIS and FDX, etc.).

I further anticipate, in the current rise, some vulnerability to the "shiny objects" that have been captured by the investing crowd who have, understandably adopted the "stay at home" theme. Perhaps too much so (as the obvious and consensus "first level thinking" (the outlook is bright) might be replaced with "second level thinking" (the outlook is bright but may have been already been discounted). As an example, Shopify (SHOP) is valued at $92 billion, and is worth more that Citigroup (C) ($87 billion). Shopify recorded 2019 sales of only $1.6 billion and lost $125 million. By contrast, Citigroup achieved $67 billion of revenues and $20 billion of profits.

This morning, S&P futures are +64 handles (likely reacting, at first, to Fed Chairman Powell's comments over the weekend and, in the last 30 minutes, to Moderna's positive vaccine results).

Adjusting for the rise in futures, S&P spot (or cash) is now about 2900 (again vs. 2950 top end of the trading range).

And I am digging it, to be honest!

The not unexpected Berkshire (BRK.A) (BRK.B) - Goldman Sachs (GS) news occurred Friday nite so I will reposte my interpretation of Warren's move:

May 15, 2020 ' 06:20 PM EDT DOUG KASS

Buffett and Bank Stocks

Wells Fargo (WFC) investors will likely be relieved (on Monday) that Berkshire Hathaway (BRK.A) (BRK.B) sold none of
its shares according to its just reported 13-F. (There were vague rumors that Buffett was selling).

Berkshire liquidated most of its Goldman Sachs (GS) position, a small portion of its JPMorgan Chase (JPM) but added to PNC Financial (PNC) .

On Goldman, Berkshire invested $5 billion in a perpetual preferred (which paid a 10% dividend) and included the receipt of (five-year) warrants to buy $5 billion (or 43.5 million shares) of GS stock at $115/share in 2008; Goldman Sachs redeemed the preferred in 2011 (and paid an additional $500 million early repayment fee). In 2013, Goldman and Berkshire renegotiated the warrants and GS paid Berkshire $2 billion in cash and Berkshire received 13.1 million shares of Goldman Sachs stock.

The GS sale is not surprising as Berkshire had previously sold over six million shares of Goldman Sachs in the previous quarter (4Q2019). It ended the year with about 12.4 million shares of Goldman Sachs.

In early 1Q2020, GS shares traded as high as $250/share and my guess is that Berkshire likely sold the shares in late February, early March after the stock began to sell off from January highs.

Peter Boockvar sees the reflation trade back:

The reflation trade is on today on further hopes of a better global economy as things reopen and Covid counts continue to decline. WTI is back above $30, copper is higher by 2.2%, silver is up for a 3rd straight day, up 3.6% today and up 13% over the 3 days. Aluminum, nickel and zinc are each up around 1% and gold is higher by almost the same amount. Platinum is jumping by 5.3% and iron ore is higher by 3.5%.

Silver, in particular, is my favorite asset in the world right now. I also like oil and believe the negative prices we saw recently is what bottoms are made of. BN is reporting today that "Chinese oil demand is all but back to levels last seen before Beijing imposed a national lockdown to fight the coronavirus outbreak, according to people with inside knowledge of the country's energy industry." China is the second-largest oil buyer outside of the U.S. I continue to believe that inflation will follow this self imposed deflationary period and if right, longer term interest rates won't be staying so low.

SILVER

Singapore reported its April non-oil export data and it was better than expected. It rose 9.7% y/o/y, much better than the estimate of down 5% and a lot of that was driven by a 174% y/o/y spike in the exports of pharma products, which is obviously not economically dependent. The shipments of electronic products fell by 0.6% y/o/y but that wasn't as bad as expected. The Singapore straits was higher by 0.6%.

Danielle DiMartino Booth analyzes two prominent income classes:

• The Conference Board's April Help Wanted Online Index flags weakness in future Job Openings data for Financial and Professional/Business Services; office job opportunities will continue to shrink as companies reduce costs and leverage the productivity of existing staff
• Preliminary May Consumer Sentiment revealed a split between lower (employees) and upper income earners (employers); 100% of the former expect steady income growth a year from now relative to the long-run average while only 8% of the latter are so sanguine
• While optimism exists for the lower income earners, their 17% contribution to consumption is significantly less than middle and upper-income earners; in 2019 middle and upper-income earners accounted for 83% of consumption equating to 56% to GDP growth

In between the Greatest and the Boomers is the silence. As children, their parents expected them to be seen and not heard. They respected that authority. Born between 1928 and 1945, at roughly 7% of the U.S. population, there are precious few of the Silent Generation still with us. That is a shame at times like these as we can learn so much from those who, having survived the Great Depression and World War II, have the sturdiest of work ethics and are undaunted by adversity. The mantra of "Waste not, want not" best characterizes their values. These octogenarians are called "Traditionalists" because of the emphasis they put on morals, consistency, security and safety.

As a mask debate rivaling the Spanish Flu rages across party lines, it's a safe bet those of the Silent Generation will become quieter still. Their parents not only lived through the Spanish Flu but the sharp deflationary Depression of 1920-21. Their grandparents recounted stories of the mask riots in San Francisco. Upon the arrival of the second wave in that city on January 15, 1919, masks were once again required. The day before the reinstatement, public health officials reported 510 new influenza cases and 50 deaths. By Jan. 26, that number was down to 12 new cases and four deaths.

Today's tragedy is twofold as millions in this generation feel they've no choice but to remain in lockdown even as the country re-opens. Many families yearn to see their Silent relatives but refrain from doing so for their safety. And then there's pure economics. In 2018, the average net worth of this generation was $264,750, roughly 1.3 times that of Boomers, twice that of Gen X-ers and 23 times that of Millennials. Not that it should be a surprise, but octogenarians are the least likely to be tech savvy. In other words, these folks' foregone consumption is not largely offset by online shopping.

Dipping down the age ladder to those still in the workforce, there's a different sort of silence that's set in, that of pulled job openings. In a recent study conducted by Morgan Stanley, Corporate America's top two priorities were "maintain investments in technology" and "maintain investments to drive organic growth." These were followed by "reduced spending" and "maintain liquidity." Coming in fifth "maintain employee count."

Just three months ago, C-Suite occupants were sweating the skills shortage. Today, they've got their HR departments studying spreadsheets filled with employee names to ascertain those who are most productive at the lowest cost - efficiency in living, breathing form. To get to this point, they've had to first slash budgets. Job openings slated in the current year have been silently closed, a precondition to getting to the next step of reducing headcount. Call this the silent wave of job losses for the roughly 150,000 monthly new entrants to the labor force.

The crash in the Conference Board's April Help Wanted OnLine Index (red line) was, by contrast, painfully audible, landing at 58.6 from March's 99.4 level, a 44.6% bungee jump from a year ago. We will look to this to manifest in coming months in the lagged Job Openings data in two sectors - Financial and Professional/Business Services, a.k.a. office jobs(blue line).

We doubt we're alone among those with these expectations. Friday's University of Michigan Consumer Sentiment preliminary May data revealed an unprecedented divide had opened up between employers and employees, if you'll indulge the respective proxies of the lower and upper thirds of income earners. In May, median income expectations for the lowest third of income earners (0.7%) relative to the long-run average (0.7%) were 100% (green bars); they anticipate income growing a year from now at a normal rate.

Contrast this blanket sanguinity with middle income earners, who expect to earn a below-normal wage of 1.2%, 46% of the norm of 2.6%. And then there's the third at the top of the income stack, the decision makers in the economy, who anticipate median income expectations of 0.3%. This compares to a 3.6% long-run trend, just 8% of usual and well below normal. Again, this is a median figure meaning that some on the upper-income spectrum expect their incomes will decline.

Clearly the federal rebate checks and increased unemployment benefits have brightened prospects among recipients. And we fully anticipate a bipartisan push to extend unemployment benefits in an election year which pushes the expiration date to December 18th for the first claimants. But in a consumption-driven economy, these offsets can't make up for the fact that the lowest third of income earners only account for 17% of U.S. consumption. The middle third makes up 29% of the pie while the top third weighs in at 54%.

Combine the quashed buying power of the Silent Generation that's literally shut in with the dashed expectations for income growth among those responsible for 83% of U.S. consumption which equated to 56% of U.S. GDP in 2019. No amount of enthusiasm can make up for the repressed spending of these two cohorts.