* Banks +8% as growth is in the red on the day
* Given the overweighting in portfolios, exchange-traded funds and jndexes of Microsoft (MSFT) and FAANG stocks -- a relatively small disintermediation could fuel banks and other value names. 
* Sell in May and go away? * Did I mention more hostility with China?
The pivot from growth (particularly in "shelter in home" kind of equities, like Shopify (SHOP) (-$57)) to value was conspicuous in today's trading session.
My substantially over weighted (some might say recklessly so) bank holdings were up by about +8% today (Goldman Sachs  (GS) a market leader, +$16) -- against QQQs (QQQ) , which closed in the red and were a full -$4 from my opening short sale. 
But, as pointed out by my pal (and golf enemy on the North Team) Dave, the recent underperformance of banks has been meaningful:Eurodollarguy frdgrouper1

Some perspective is in order here. Since late February, BKX has underperformed SPY (SPY)  by 2,300 basis points. Even with today's large price jump it is still below levels reached April 29 and April 9. You want to trade bank stocks, you can catch some big daily moves, but as an "investment," they have badly lagged other sectors and for my money the results of Europe and Japan's experiment with 0% interest rates do not give me any burning desire to overweight financials as an "investment."

Unlike some, I don't have the special sauce -- that helps to explain why I always am uncertain and "average in."

We will not know whether this is a cyclical or secular inflection point -- only time will tell.

There is a great deal of skepticism that the "old economy" stocks can begin a period of relative outperformance over "new economy" as a lynx-eyed Rev Shark expressed in his thoughtful market comments. 

But to this observer, the substantial consensus overweighting when coupled with the implicit optimism, expressed by many, if not the majority, could be a classic example of first level thinking. That is, we all understand and appreciate the tailwinds to Amazon's (AMZN) , Facebook's FB , Netflix's  (NFLX) and Alphabet's (GOOGL) forward growth - but is it already discounted in share prices (second level thinking)?

Finally, I would add that Mr. Market often does what is least expected and could hurt the most investors -- and an inflection from growth to value is such a ticket as, given that financials were at a record low 7.4% of the S&P Index. Stated simply, most investors are not positioned for such a development.

Sell In May and Go Away?

Given the remarkable rally and sizeable Index weighting of FAANG and MSFT (and also health care and biotech) -- that the recent leaders may be a potential source of funds that fuels value. And, in light of the overweightings of growth in portfolios, it wouldn't take too much selling of these growth-spiked "ATMs" to produce a few more days in banks stocks like today -- reversing what Dave observed earlier.

I use the term "may be," as we will only know with the benefit of hindsight. (Qualifiers and not confidence are my credos).

I am positioned for the pivot -- short the indexes and long value.

If the pivot and change of leadership does evolve -- it could, or at least, historically, it has, led to a lower overall market.

Did I mention, the increased hostilities between the U.S. and China -- which got very little press?

***

In other news, gold got clobbered (I recently eliminated my GLD (GLD) (-$2.20)) and bonds got hit (TLT (TLT) - $2.30).

Breadth, which was better than 10-to-one positive, ended the day only 5.5-1.

QQQ turns negative and is -$4 from opener!

A bullish technician, Rich Ross of Evercore, on financials, banks and technology this morning:

* Banks/REITs: The last of the cyclicals to join the rally can continue to lead tactically as they Double Bottom while the Economy REIT opens faster than anticipated. The BKX has Upside to 94 (73 last) and the RMZ 1,200 (991 last).

* QQQ/IGV/MSZZMOMO: Tech is tired after carrying this tape through the pandemic and while strong structurally likely lags tactically as the cyclicals overtake the secular tactically. Software is going to have a hard time with resistance and the breakdown in Momentum (MSZZMOMO) speaks directly to this point.

"Don't be obsessed with your desires Danny. The Zen philosopher, Basho, once wrote, 'A flute with no holes, is not a flute... A donut with no hole is a Danish."
-Ty Webb, Caddyshack

This is the time in the market's rally when FOMO replaces FEAR and when the confident "talking heads" who projected a market retest are equally confident that a new bull market leg is upon us.

To me, this is the time in the market's rally to reassess upside reward vs. downside risk in all of your holdings (hint: it is deteriorating) as many equities are up substantially from the third week of March.

It is the time to also consider margin of safety in your holdings.

Just as it was, with the benefit of hindsight, appropriate to dispassionately buy aggressively (and even recklessly) two brief months ago, now may be the time to sell without emotion and regard for those "talking heads."

We faded pessimistic "Group Stink" and a horrifically weak tape in March.

Today it might be advisable to fade optimistic "Group Stink" and the rip-your-face rally in late May.

Remember, that the shortest difference between two points is a straight line.

Don't be Mitch Cumstein.

Don't be caught night putting and don't be obsessed by greed or by your desires.

I am long what I perceive to be value (e.g. banks, ViacomCBS (VIAC) and others), which trade at a 2200 S&P equivalent (or lower) and I am shorting the Indices, with emphasis on the Nasdaq (which is heavily dominated by growth leaders like Microsoft (MSFT) and FAANG).

Positions: Long GS (large), C (large), PNC (large), WFC (large), JPM (large), BAC (large), VIAC (large), GOOGL (small), Short SPY (large), QQQ (large).

JP Morgan's (JPM) shares are now +8% (or by over +$7/share) today fueled by upbeat comments on company profits (trading, buyback and dividend comments were positive this afternoon).
JP Morgan is my Trade of the Week!

On May 8, I sold the balance of my (PZZA) long at around $84.

The shares are down by almost -$10 from the sale (trading at $75).

I would be a $70 buyer.

* Is it time to sell FAANG and MSFT?
* Is it time for a pivot from growth to value?

I wanted to repeat this column on a possible "pivot" from growth to value discussed some 10-11 days ago - as it explains my rationale:

May 15, 2020 ' 07:55 AM EDT DOUG KASS

Is it Time to Sell FAANG and MSFT?

* I am watching closely for a change in leadership and a pivot from growth to value
* A skeptical view of a bifurcated market led by a handful of high growth stocks (FAANG plus MSFT) that have done the market's heavy lifting
* Reviewing the attributes and negatives of The Big Six
* I had previously sold out my long investments in Amazon, Facebook, and only own a small position in Google

Yesterday it was interesting to note that, despite an epic intraday turnaround in stock prices, the key market leaders ( (MSFT) , (FB) , (GOOGL) , (AAPL) and (AMZN) ) had only modest day over day price gains. By contrast, the laggards (banks and industrials) had a field day.

Though I fully recognize that one day does not a market (or a rotation) make, we must keep a keen eye on whether the (unmistakable) market leaders will continue leading or whether a nascent pivot from growth to value is emerging.

Given the concentration, the overall market's fair value calculation may have less meaning these days.

The market is 5-6 stocks, and everything else is all over the place - victims of indifference and volatility.

Those 5-6 stocks, the FAANGs plus Microsoft, have been fortunate, have had their valuations reset (higher), have done the heavy market lifting, and have benefited from a perfect confluence of factors:

* The Fed's balance sheet expansion and low nominal global economic growth expands the net present value of cash flows of high growth companies.
* Lower interest rates and the aforementioned liquidity are fuel for FAANG and MSFT.
* The spread of Covid-19 cuts interest rates further making FAANG and MSFT statistically more valuable.
* FAANG and MSFT businesses are less susceptible to Covid-19 risks than most companies. (Let's add my fave (TWTR) to that equation!)
* With retailers falling by the wayside and home internet consumption rising from the enforced "stay at home" edicts.

But, are we at the point where "first level thinking" is growing long in the tooth (everyone owns and recognizes the above favorable variables) and "second level thinking" (has the market discounted this?) should be considered?

Six Stocks Have Done The Heavy Lifting

There really is no market multiple anymore.

Six stocks, everything else. Everything else consists of a few story stocks that have massive 1999 like valuations and are pinged around by CTA's and Robinhood, and then a bunch of stuff with no pulse and left for dead (banks, industrials, leisure time, airlines, etc.)

Mr. Market is a utterly bifurcated market inconsistent with itself - so we really need to go stock by stock. I never liked the market multiple thing. But I thought it had some value as a guidepost. Now I'm beginning to think it has no value as a guidepost given the structure of this market.

Now is a time for people not to use S&P index funds as the vehicle for investing in the market. It's probably dumbest thing you can do - far better to go stock by stock. Frankly I find the largest components uncompelling at this point. Let's quickly run through them:

Microsoft - Great company run by adults. They focus on the business, don't play politics, have real earnings and cash flow, and don't hand out stock options like candy. Only beef is valuation, but don't kid yourself, it's not fully decoupled from the economy either. Large firms are already deferring a ton of projects. Wouldn't you?

Facebook/(Alphabet) Google - Almost all of their business is advertising. And they have already taken massive share. Don't see them growing in a shrinking economy and do not see the rapid growth anymore in general.

Netflix (NFLX) - They sell their product for less than it costs them to produce it. And they have a ton of debt. Frankly they don't even seem smart - as they just sold more debt, instead of equity, at this valuation. Tiger King was a fun watch, though.

Apple - Not grown operating income for the last five years. Net cash position also significantly declined. They, too, were using debt to buy back stock. Great company, makes money, but not the pristine story it is made out to be. Also not sure what the appetite will be for $1250 phones when the (lower- margined) $400 ones are really good and virtually the same now.

Amazon -Great company, more than fully valued over the near term. Their growth is no longer coming for free either as the last reported quarter showed ($4 billion of Covid-19 related expenses). They struggle with growth and earnings at the same time. AWS is slowing due to competition. If they put everyone else out of business, who is left to buy stuff from them? (Dumb call to not continue pay increases for warehouse workers either).

Getting back to the issue of bifurcation, I still love the chart, below, that I presented yesterday in "Danny, This Isn't Russia" - its one of most fascinating ones I have seen:

"In 2008, the banking industry was essentially bankrupt and somehow they are now priced lower against earnings power, tangible book value, or as percent of deposits relative to the condition that existed 12 years ago.

Meanwhile, numerous other equities in the S&P are priced in such a discordant fashion to the high side -- that is how the relative valuation of the financials has fallen to the pits.

The markets simply cannot decouple from the financial sector for any sustained period of time. Either financials are way too cheap, or everything else is too expensive, or both!"

Bottom Line

I am increasingly skeptical that the market's bifurcation - which has benefited FAANG plus MSFT - will continue forever.

It may be time for "second level thinking."

Be on guard for a rotational move away from growth and into value.

Accordingly, with such a large weighting associated with FAANG plus MSFT, I would now stay away from S&P Index funds (e.g., (SPY) ).

For the most part, buying SPY is just buying the Big Six. If you like the Big Six (I don't!), buy them directly.

If you like everything else, buy them directly.

If you think everything else can't be owned, well then by definition the Big Six and the story stocks cannot be owned either, as they cannot indefinitely decouple from the economy and their valuation expansion may be limited.

Ss (S&P) over Ns (Nasdaq).
SPY (SPY) +$4.60, QQQ (QQQ) +$0.22.

I believe in the "pivot" and I am uber sizing my (QQQ) short now - as a way of capitalizing upon its potential.

New home sales in April, thus smack in the middle of the shutdown, totaled 623k, well better than the estimate of 480k, and actually up from 619k in March but down from 717k in February. It was homes priced below the $300k level that held up. Those priced above $500k slipped for a 2nd month. 

Smoothing out the last few months has the 3 month average at 653k vs the 12 month average of 690k and the 2019 average of 685k. 

Bottom Line

Considering an almost complete shutdown of the U.S. economy in April, it's pretty surprising to see sales hold up as well as they did. Maybe it's people fleeing the cities or whatever and a median home price of $309,900, the lowest since July 2019 (due to mix as stated). 

Here is a six year chart of new homes sales:

The Conference Board's Consumer Confidence index for May rose a touch to 86.6 from 85.7 and that was about the estimate of 87. The Present Situation slipped 2 points while Expectations rose by 2.6 points month over month with the latter certainly holding up better than the former. One year inflation expectations jumped to 6.2% from 5.4% in April and 4.5% in March. Again, my inflation worries showing up, this time most likely due to rising food prices.

I'll give the answers to the labor market questions but it's certainly more worthwhile when more businesses reopen. Jobs Plentiful fell to 17.4 from 18.8, the lowest since December 2014. After jumping by almost 21 points last month, those that said jobs were Hard to Get fell by 6.7 points. Employment expectations after a weak March only improved slightly while income expectations fell.

Spending intentions were mixed. Those that plan on buying a vehicle got back almost what it lost in April. Those that plan on buying a home fell to 5 from 5.3, the lowest since November 2019. Those that plan on buying a major appliance rose 1.1 points after falling by almost 2 last month. 

The Conference Board summed up by saying, "While the decline in confidence appears to have stopped for the moment, the uneven path to recovery and potential 2nd wave are likely to keep a cloud of uncertainty hanging over consumers' heads."

With respect to that inflation number, "inflation expectations continue to climb, which could lead to a sense of diminished purchasing power and curtail spending." 

Here is the six year chart of the expectations component:

Here is the current situation over the last six years:

And finally the last decade of one year inflation expectations:

Predicting a pivot from growth to value after a decade of the contrary is a tough task.
But I am focused on the developing possibility.
Today (in FANG terms), Facebook FB is up by one +1%, Amazon (AMZN) is barely higher, Netflix (NFLX) is under pressure, and Alphabet (GOOGL)  is the world's fair.
And, value stocks like banks are +++.
Viva la differencia!

* Moved to medium-sized this morning as reward vs. risk has changed

I have just right sized and reduced my Twitter (TWTR) position from very large to medium-sized (at about $33.70).

I have consistently bought wooshes lower in this name. I did so under $21 or so on the prior quarter's weak results about three to four months ago.

I have recently been arguing that Twitter would play further ketchup to its FAANG brethren.

And that is what Twitter's shares have done - as the ketchup is out of the jar.

At close to $34/share the reward vs. risk is far less attractive to me.

For about the eighth time in the last several years I have made a meaningful amount in this name.

My cumulative share price gain is now much more than a triple.

Mission accomplished.

I would be a buyer on any meaningful weakness.

Stocks managed to shrug off worries about Hong Kong and the new "cold war" emerging between China and US for a decent close on Friday. Over the weekend, bulls benefit from hopes of a second possible vaccine and/or the daily drug treatment that is emerging.

The primary boost in stocks, however, is how vigorous the resurgence was. People over-populating beaches and whatever indicate that the fear of the virus may not completely wipe out the hope for a vee rebound.

Bulls need a breakout to get above Dow 25100 and S&P 3060.

Stay healthy

Arthur

I have moved to large (SPY) short on the opening at $301.93, and I added to my large (QQQ) short on the opening as well at $233.44.

* Banks stocks are extraordinarily cheap today
* In 2008 financials represented a record high 26% of the S&P Index, today they stand at a record low (at close to 7% of the S&P Index)
* JP Morgan has a large war chest to absorb loan losses

Historically Low Valuations For Bank Stocks - In 2008, the banking industry was essentially bankrupt and somehow they are today priced lower against earnings power, tangible book value, or as a percent of deposits relative to the condition that existed 12 years ago.

Meanwhile, numerous other equities in the S&P are priced in such a discordant fashion to the high side - that is how the relative valuation of the financials has fallen to the pits.

In fact, by one measure, financials are the cheapest they've ever been relative to the market. The ratio of the price of the Financial Select Sector SPDR Fund (XLF) divided by the SPDR S&P 500 Fund (SPY) is at its lowest level ever. In 2008 financials represented 26% of the S&P, today its only 7.4% a multi decade low! ($22 divided by $295).

From my perch, the markets simply cannot decouple from the financial sector for any sustained period of time. Either financials are way too cheap, or everything else is too expensive, or both!

Some argue, as Catherine Wood of Ark Management did last week at John Mauldin's Strategic Investment Conference, that the banking industry has changed for the worse - that the competitive marketplace has shifted with innovative companies like PayPal (PYPL) , Venmo, Square (SQ) . They argue that not only are others gaining market share but, as well, the outlook for net interest income and margins is a huge bank industry headwind.

I disagree as JP Morgan (JPM) has invested ($8 billion) in technology and so have the other major banks - they all have the resources to compete against Venmo, Pay Pal and Square. Moreover, regarding yield curve fears, over 50% of banking industry profits are fee based. Finally, if all else fails, JP Morgan or someone else will just buy Square or one of its competitors.

The Banking Industry's Ability to Absorb Loan Losses Is Under Appreciated

* The robust level of bank industry "war chests" are being woefully underappreciated by investors
* The banking industry, as measured by earnings power (before LLP and one-time charges), reserve (and balance sheet) strength and loan diversification are well positioned to absorb loan losses in this cycle and to emerge strongly in the years ahead
* My assumption is that the recent and abrupt global economic downturn should prove relatively short-lived, maybe three quarters, especially compared to The Great Decession of 2007-09
* Banking industry share prices,valuations (absolute, relative and measured against book value) are at 70% of book value and are discounting an extended economic crisis and a cratering of shareholders equity
* Opportunistic investors might recognize that the conditions currently facing the banking industry might provide the exact time in history to buy bank stocks - just as it was buying savings and loan stocks in the early 1980s (in which some thrift stocks increased 3x to 4x)

To some, the recent poor price action in financials represents a threat and warning. But the decrepitude represents an opportunity to me.

In its extreme, it now seems to many investors, that we have entered a post Covid world in which somehow lenders are sacrificed and borrowers are in the driver's seat. Some are even looking at the next few months, and with consumers supposedly walking away from the financial obligations (even despite the Fed's aggressive backstops), they are surmising that a gruesome message is accompanying bank stock weakness.

I have to disagree - as the contractual obligations between a lender and debtor have not been repealed permanently. Investors, I believe, are responding to a moment in time and not to a permanent transformation in contract law. Moreover, we and they (the banks) have the Fed at their backs.

My Grandma Koufax, who taught me how to invest when I was 16 years old, used to say, "Dougie, every once in a while, the market does something so stupid it takes your breath away." To me, Mr. Market is doing something stupid in valuing bank stocks at near historic lows.

Let me briefly address the banking industry fundamentals and why I see the weakness in bank stocks as an extraordinary and possibly historic opportunity.

It is extremely important to recognize that 2020 will mark an earnings recession for the banking industry and not a balance sheet recession. Equally significant is, despite the expected earnings recession, Bank of America (BAC) , Citigroup (C) and JP Morgan will increase their book value in 2020 over 2019.

Coming out of 2020, and after the large money center banks demonstrate their earnings resiliency this year, I expect a valuation reset higher for the banking group.

There are profound balance sheet differences between today and 2009 - the seven largest money center banks have added over $1 trillion of new capital, cash is more than $2 trillion higher and deposits have grown by more than $3 trillion. Equally important, the cushion or gap between current capital levels compared to the present unfunded corporate obligations (and allowances) has never been wider and represent a far different picture than 11 years ago when The Great Decession almost bankrupted the global financial system.

I do not believe critics of bank stocks adequately respect the value of the industry's deposit base, excess capital and loan loss reserves (to absorb credit losses), profitability and earnings power.

The tale is a complex story but here are some of the key conclusions and factors that investors are not appreciating:

Bank results reflect the greatest front-loading of provisions for a recession in modern history.

Here is the math, as expressed in a recent analysis in my Diary:

For my analysis, I use five of the largest banks (C, JPM, BAC, (USB) , (PNC) ), assume a three-year time frame, 10% balance sheet growth and a decline in earnings of 30%+ in year one and still down 15% from 2019 by year three (even incorporating ZIRP). The result: the largest banks have $350 billion of loss absorbing capital, or enough for 13% loan losses vs. 8% cumulative during the Great Decession of 2007-09.

I recognize that earnings purgatory should continue in 2Q20. Yet, my forecast is that the large banks can still cover dividends twice over, have enough reserves this year for a "U" shaped recovery, keep an option to benefit from a "V" shaped recovery, and potentially get re-rated higher after this period by showing resiliency that remains underappreciated.

Let's highlight (with the help of bank analyst, Mike Mayo) the banking industry's sizable war chest.

1. As I have written, there is an estimated $350 billion of capital of the largest money center banks for loss absorption over the next three years.
2. That's enough capital to cover over 1/2 more losses than experienced in the Great Financial Crisis.
3. Reserve builds in 1Q2020 were $30 billion.
4. Reserves in 1Q2020 alone were already equal 42% of the Fed Stress Test Losses.
5. In 2020 models, banks are already reserved for 50% of the Fed's Stress Test Losses.
6. When using company determined stress test, banks in 1Q2020 are 54% reserved for bank stressed scenario.
7. When using company determined stress test, 2020 models have banks reserved by almost 2/3rds of the bank stressed scenario.


A Deeper Dive Into JP Morgan's Fundamentals:

JP Morgan has loss absorbing capital of $118.5 billion for 2020-22 - but even that may be understated. JPM currently has (+)$18.6 billion of excess capital, (+)$25.4 billion of current reserves, 2020-22 projected after tax earnings of (+)$93.1 billion and (deduct)( -)$15.6 billion of used capital for forward growth. If I used pretax earnings, which we really should (because loan losses/reserves are tax deductible), the coverage would rise dramatically.

JP Morgan's loss absorbing capital as a % of 1Q2020 end loans stands at a high 15.5%. This compares to peak Great Decession of net charge offs (3 years) of only 8.6%. So JPM is better positioned by 6.9% vs. the financial crisis a decade ago's experience.

JP Morgan had $18.6 billion of reserves at year end 2019 and built up $6.8 billion in first quarter reserves, bringing total reserves up to $25.4 billion. This represents 42% of the most severely stressed adverse government loan tests. Using a full year model, takes the 42% to over 50% of the government's most extreme stress . However, if we use the bank's most severe test it takes the current number of reserves to over 65% and, with estimated reserves made over the balance of the year, up to 88%!

The Bottom Line

Buying bank stocks is the quintessential contrarian investment.

Contrarian investing (and avoiding what I call "Group Stink") is simple but not easy. An intelligent and contrarian investor sometimes gets satisfaction from the thought that his investing is exactly opposite to those of the crowd. The contrarian's credo is to buy when most people are pessimistic as often the best values today are found in the stocks that have gone cold.

Humans are prone to herd because it is always warmer and safer in the middle of the herd. Indeed, our brains are wired to make us social animals. We feel the pain of social exclusion in the same parts of the brain where we feel real physical pain. So being a contrarian is a little bit like having your arm broken on a regular basis - as bank investors can attest to!

The most compelling investment opportunities are often borne out of bad news and unusual (but relatively short-lived) adverse business/economic circumstances that are likely to be remedied in a reasonable period of time.

With such low valuations (and large discounts to book value) today - outsized market gains could lie ahead for the large money center bank stocks and leading investment banking equities.

Just as the savings and loan stocks - facing stagflation, high interest rates and plummeting mortgage activity in 1980-81 - provided a unique entry point in 1982, the large money center banks -- with such low valuations and with a war chest consisting of healthy and growing deposits, good reserves, robust and underleveraged balance sheets and sizable earnings power -- may provide a uniquely timed investment opportunity today.

But there is an important difference - bank industry secular fundamentals and the value of their franchises (scale and technology) are a lot more solid than thrifts were in the early 1980s. The later ended up in crisis in the late 1980s.

Unlike the S&L stocks in the later 1980s, banks and bank stock prices will likely thrive as we move out of the current recession.

I expect a reasonably sizable reset (higher) in bank stock valuations over the next 1-2 years.

Something I have mentioned in my bullish case in early April - the S&P dividend yield relative to the 10 year Treasury yield is the widest since 1940:

Traders are very short S&P futures:

* Lofty market expectations that might not be met.

* Why talk about inflation?

* Our habits have changed.

The hall pass continues, but...

The markets hall pass continues on as more things reopen around the globe, patient counts slow and hopes for a vaccine grow. At least in one valuable sentiment indicator all this has now been fully reflected. The Citi Panic/Euphoria index has now reached a new high over the past year in 'Euphoria'. According to Citi, "Historically, a reading below panic supports a better than 95% likelihood that stock prices will be higher one year later, while euphoria levels generate a better than 80% probability of stock prices being lower one year later." As seen below, it was good at marking the top in February and bottom in the 3rd week in March.

We know big cap tech has performed incredibly over the past few months. I read this stat in Barron's over the weekend as to what extent. "The 10 largest stocks in the NASDAQ have gained, in aggregate, almost $900 billion. The other 2,600 or so stocks have lost about $300 billion."

Also in my weekend reading, the WSJ ran piece titled "New Costs Pile up for Companies." To my inflation theme to follow the article said "Prices of food and other items have risen. Employees need protective equipment at work. Rising unemployment, safety concerns and limits on the number of customers a business is allowed to serve are setting a cap on sales. Some have tried to raise prices to bridge the divide, but greeting consumers who have been staying at home with higher costs is a delicate proposition." Some businesses will have Covid surcharges if they can get away with implementing it. The article one business that had success and another one that did not in passing on their higher costs.

On the shipping side, "DHL Express said its costs have risen in part because cargo space it buys on commercial airliners has become scarce because of flight reductions. A spokeswoman said it has added an emergency situation surcharge during the pandemic on some levels of international shipping service."

There is growing talk that the ECB will increase its money printing. The Bank of France Governor Villeroy said today "It is in the name of our mandate that we will probably need to go even further." With negative yields throughout the region and banks suffering for years as a result, it's clear that NO lessons have been learned. Their plan is to just keeping doing more of what has failed. Somebody once said something about that type of behavior.

Shifting to the economic data, Singapore reported a 13% y/o/y increase in industrial production, well better than the estimate of down 1%. The key driver was a 101% spike in biomedical manufacturing which offset weakness in manufacturing and transport engineering. Electronics manufacturing surprisingly saw a slight gain, likely due to the openings in China, Taiwan and South Korea. The Singapore Straits index closed up by 1.2%.

The UK CBI retail sales index for May was very weak at -50 but that was up 5 pts from April and 15 pts better than feared. More evidence on my inflation theme, the CBI said "Our special COVID-19 questions suggest that supply disruptions have worsened since April, with a greater share of retailers now reporting shortages of some goods (58%), increased cost pressures (64%), shipping delays (44%) and capacity constraints (60%)."

CBI RETAIL SALES index

What will happen first?

* MLB Opening Day

* $NVAX Secondary

Danielle DiMartino Booth is not bullish on the future: 

• Implied volatility (VIX) has declined, converging on historical volatility in the S&P 500; expect implied volatility to increase relative to historical, which is another way of expressing downside risk in the broad stock market
• Two key technical indicators are expressing little upside for the S&P 500, which has failed to break through a key resistance level for the second time; the second failed attempt was coupled with the 100-day moving average crossing under the 200-day moving average
• The cost of hedging high-yield bonds has been increasing since April 9, reflecting rising default risk for low-quality bonds that don't qualify for Fed's bailout; an arrest in the decline of Google "unemployment benefits" searches signals a building second wave of layoffs

George McFly:
Uh... now Biff, I want to make sure that we get two coats of wax this time. Not just one.

Biff Tannen:
Just finishing up the second coat now.

George McFly:
Now Biff, don't con me!

Biff Tannen:
I'm sorry, Mr. McFly. I meant I was just starting on the second coat.

Time travel is richly rewarded in that last scene of Back to the Future. If it's as familiar to you as it is to QI and you're in need of a pick-me-up, commemorate the 35-year anniversary of Director Robert Zemeckis' July 1985 classic by fast-forwarding to its last scene. Nothing beats the transformation of Marty McFly's family from slouches to standouts followed by the former bully Biff's waxing the family's BMW.

To celebrate today's two-year anniversary of the Daily Feather, we too decided to travel back in time, albeit by a briefer two months. As you can see in today's right-hand chart, two months ago, a gap had opened up between implied and historical volatility on the S&P 500. The VIX we see quoted throughout the trading day is its implied, or projected, volatility that's priced into the market. The historical, or realized, volatility is what actually was delivered.

In the low volatility world to which we've become accustomed, implied volatility normally trades at a higher level vis-à-vis historical. Over the past two months, however, implied traded cheap relative to historical because volatility was expected to decline. Now is when things should get interesting as the two have converged. Upside in implied from here is a different way of expressing downside in the S&P 500. Several other indicators validate this view.

Up to this point, Federal Reserve intervention and fiscal stimulus have been the main supports for the risky asset rally. The aim: Buy time with bridge liquidity until the economy reopens and momentum regenerates. More recently, however, fatigue has developed. Two market technicals suggest upward momentum is limited.

The first technical is the Fibonacci retracement level of 61.8%, a level coincident with the S&P 500 at 2934.49. Two tests of this resistance failed in late April and again in early May. For perspective, Fibonacci levels -- based, as you'd suspect on Fibonacci numbers -- are horizontal lines that indicate where support and resistance are likely. Each level is associated with a percentage denoting how much of a prior move the price has retraced. These levels are 23.6%, 38.2%, 61.8%, and 78.6%; 50 is also referenced even though it's not a Fibonacci level.

The third test of the 61.8% Fibonacci brings us to that other technical. During the second test, the 100-day moving average crossed under the 200-day moving average. Last week's break above 2934.49 was met with new upside resistance. The gradually declining 100-day moving average, which is 2969.86 as of Friday's close, is the new short-term technical cap.

Illustrated in the left-hand chart above are two other corroborative fundamentals. The orange line depicts the Markit CDX North America High Yield (HY) Index, composed of 100 non-investment grade entities, distributed among two credit-rated sub-indices - B and BB. All entities are domiciled in North America. The HY CDX index -- the effective insurance premium on default risk -- bottomed on April 9th and has gradually become more expensive since.

You may recall that on April 9th, the Fed's added higher-rated HY to its corporate bond market bail out. The rising cost to hedge risk since April 9 reflects the increase in the number of junkland companies in the 'BB' and 'B' space that are most prone to default and don't qualify for the Fed backstop.

The purple line depicts the volatility of Google searches for U.S. "unemployment benefits." We use a seven-day rolling average to adjust for the 'ups' of the workweek and 'downs' of the weekend. Google search volatility provides a useful guide for emerging trends in the hottest real time data -- initial jobless claims, the weekly labor gauge of the Coronacrisis.

It's notable that HY CDX started to rise in late-February, well before Google search volatility spiked in mid-March. The price for this protection then topped out on March 23, the day the Fed threw the kitchen sink at COVID-19 and a week before Google search volatility peaked. The HY CDX premium stopped falling in April flagging the arrest in the decline in Google search volatility, which didn't arrive until May. Detecting a pattern, are you?

We're not conning you. HY CDX does indeed lead Google search volatility. And right now, a rise in searches among the newly unemployed appears to be in the offing. Increased credit events reflected by widening spreads coupled with stock market volatility poised to break out to the upside signal a more permanent adjustment in the labor market. With all due deference to the merrymaking at Robinhood, that does not make us bullish on traveling back to the future.

The Fed is buying hundreds of billions of dollars more than the Treasury is issuing in the last few months:

 Say what?