The market is being elevated by a large $3.3 billion market on close buy order.

"Just one more thing"
- Lt Columbo
Consistent with my domestic economic concerns in my opening missive, Wells Fargo (WFC) has just announced that it is cutting back lending to independent car dealerships.
The business world is changing under the weight of changing paradigms.
Growth will come slowly in the next few years - particularly relative to the market's expectations.

Since I live only a few blocks from Mar-a-Lago in Palm Beach, Florida, I suppose I shouldn't be surprised to see helicopters over my house.

But it is eerie. And disconcerting.

I will be heading out early to a dentist appointment (finally!) - so unless something happens I might call it a day.

Thanks for reading and enjoy the evening.

Be safe.

One of the concerns I have and some others seem to share is whether the national protests are petrie dishes for the spread of Covid-19 during the summer months.

Breadth has slowly deteriorated throughout the last two hours.

From close to 4-1 to only 2.5-1 now.

Kate's Dad (Snake Plissken) @KASDad

Replying to @jedimarkus77 @DougKass

Having traded on the floor, you knew where the trade was coming from most of the time. The idea of "unusual activity" is nonsense 90% of the time IMO.

Shyam @___s_h_y_a_m__

Replying to @brianlantier @DougKass and 5 others

Agreed with first para. Don't know much about recommended experts.

Jedimarkus @jedimarkus77

Replying to @KASDad @DougKass

I remember a yuuuuuge one a few years ago and a FinTweeter that actually knew about the intricacies of the entire position explained it (with anonymous permission by the customer) really put a damper on the outright one-way directional belief "bets" that peeps seem to read into

Robert Ross @RobertTroyRoss

Replying to @DougKass

As a former options market maker, I have experienced "unusual options activity". I would say 80% of the time, it did not result in "unusual stock activity". Many times it's a hedge to some other large position.

David Starr @FWTrader

Replying to @DougKass

market makers will take the other side. Anyone acting on unusual activity should be looking at time and sales data to see if it was trading at the bid or the ask to assess whether the trader was a buyer or seller and also look to other strikes and series to see if it was spread.

Kate's Dad (Snake Plissken) @KASDad

Replying to @DougKass

Many, if not most, large option trades have another side, generally in the underlying security. Ur pt as 2 buyers & sellers is valid. The only way 2 get any feel 4 who initiated the trade is price, paying up or selling down. Things u learn after 45 yrs trading options 4 a living.

Jeremy Blosser @JeremyBlosser

Replying to @DougKass

Why would a professional trader feel the need to sell a book about trading? Are they not producing the desired returns? Must they look elsewhere for income? Is it really because they are nice folks? Prolly not. Seems fishy to me.

Peak Everything again @brianlantier

Replying to @DougKass

To your point, one of my old hedge funds was frequently the source of "unusual call activity" cited on TV.

Problem was they always spun it as a bullish indicator.

We were usually large call sellers collecting premium in a stock we thought was dead money.

Market breadth still a good 3-1 - about 12 handles off of the lows.

Financials are the cat's meow, at least for the day thus far.
A little profit taking in FAANG.
Gold futures are rolling over a bit, along with the price of bitcoin.

UBS raises General Electric (GE) price target from $7.50 to $8.

That's the first hike I have seen from the Street in a while.

From Canny and Rosie:

Canadjuneh

Some musings from David Rosenberg from today's Globe and Mail:

"We know what the market has priced in and what it is willing to ignore. If there is no vaccine success by the end of the summer, risk assets will have a very tough time with that, and what I now call the "benefit of the doubt" rally will peter out and roll over.

We have to tack on the added complication of a U.S. election in November. Donald Trump is trailing badly in the polls, even in some of the key battleground states, and I see in the betting markets that the Senate is now a toss-up. The market is not looking that far out, but I can tell you that a Democratic sweep would not be good news for capitalism or the stock market, and while top marginal personal, corporate and capital-gains tax rates won't go up immediately, they will be going up at some point. All the portfolio managers who are bullish today because they don't see the current situation as impairing the long-run normalized earnings curve will undoubtedly have to start making some permanent downward adjustments to that curve on an after-tax basis.

So, my advice here, given how much risk there is this fall, is to start thinking about looking for opportunities in the options market with an expiry in the September-October period."

My (SPY) and (QQQ) short cost basis today is $306.93 and $234.45, respectively.

Stocks continue to seek and test levels as traders sort through what news is climate and what is weather.

The looting hints at the chunk of demonstrations may be planned rather than random as noted in yesterday's response.

Demonstrations will probably be gauged as a possible election poll - - how the President's popularity fits in.

Things in the economy, ISM and the like glacially improve, which gives the bulls a bit of a foundation that things are improving slowly, steadily, coming back out kind of routine.

The China talks and response to demonstrations may begin to affect the tone of each day's trading.

For now, stay wary. Stay safe.

Arthur

"This is consistent with our views on TSM and Memory, anticipating weaker smartphone end market demand in 2H20."
- Susquehanna Research (this morning)

I have been adding to my Apple (AAPL) short over the last several days.

This morning, Susquehanna noted a "material reduction" in Apple's third quarter iPhone 5G builds.

The analyst highlighted:

• Recent checks suggest total iPhone builds for 2Q20 tracking to ~33-35m, slightly below our expectations of 36M and driven by weaker iPhone11 demand.
• Looking into 3Q20, checks suggest total builds for iPhone12 (the new 5G models) tracking to only 10M, well below our expectations of 25M!
• All in all, we believe the overall iPhone12 is now tracking to 50-55M, below our prior expectations of 55-60M and well below the consensus expectations of 70M.
• We don't rule out Apple introducing sub-6GHz and mmWave 5G phones, though Apple's mmWave option will be a dual-band and not really a true mmWave phone

* On the short side
* I remain dispassionate in my trading and investing
* With a calculator on my side and a contrarian streak
I further raised my net short exposure in the pre-market trading gap higher.
I am now very large in both (SPY) and (QQQ) shorts.
I am very large in my Index shorts.
My opening missive explains what I see on the ground vs. what is happening in the markets.

On Predictit, the betting odds on President Trump has fallen considerably over the last week.

* There is a change - it's not only about the lessened health and reduced demand of the consumer - but also of the attitude of the consumer and his channel choices
* Among other things, an unusual set of circumstances are leading to lessened demand for certain products, a permanent shift in behavior and an accelerated adoption of on-line and an adjustment to a new normal of lower growth -- rendering stores, hotels, airlines and numerous other industries more irrelevant, less productive and far less profitable.
* Many small businesses will not restart up and will close
* The U.S. economic recovery will be flat and slow
* Financial asset prices are decoupling again from the real economy


"Change does not roll in on the wheels of inevitability, but comes through continuous struggle."
- Martin Luther King Jr.

In the last two weeks I am struck by how polarized America is and how dangerous the world's streets have become.

This observation also applies to how we invest (technical/fundamental) and who we support politically (right/left) - we are deeply polarized.

How We Invest

As I have frequently observed, I am respectful and cognizant of how market technicians use their methodology in order to deliver superior trading results. Indeed, our site is dominated by technicians who skillfully and profitably are using their craft. However, the answer, from my perch, is not in the charts - unless during those times that my time frame is of a short term trader. Even then, sometimes the charts are not clear and the technical conclusions may be in the eyes of the beholder.

Frankly, those technicians that are critical of fundamentals and those fundamentalists that are critical of technicals - protest too much and fail to recognize the difference in trading and investing and of apples and oranges.

The most important thing, is to stick with the approach that serves your bottom line (and p and l) best.

My Diary and my investment methodology relies disproportionately on fundamentals and the value (dynamic) of equities as weighed against future streams of earnings and cash flows.

Fundamental input provided by security analysis (and the notion of value) provided some of us with a clarion call to buy stocks when, in mid to late March, 2020, the S&P fell to one of the largest discounts to "fair market value" in recent years, setting up the rip your face rally and mother of all squeezes. The charts looked awful at the time and many investors and traders panicked - and some of the same actors who missed the last +850 handle rise in the S&P Index are now proclaiming a Pyrrhic "victory" as the market has continued to advance above what some fundamentalists consider intrinsic value. (Futures continued higher this morning and I am adding to my shorts).

Dismissing the idea of intrinsic value is to dismiss the principles of Graham and Dodd(and that of value investing and security analysis) - who's investing precepts and tenets have catapulted Warren Buffett and other well known long term investors and money managers to fame and fortune.

That said, to me, the answer to the market's riddle is based on an assessment of the fundamental outlook, through security analysis, and weighing that calculus against current share prices.

It is of special importance these days to have discussions with small business owners, accountants AND the managements of large, publicly owned companies in order to frame the alphabet soup ("U", "V," "L" , etc.).

Towards that end I have spent more than 20 hours over the last 2 1/2 weeks having those conversations and the output is surprisingly bad both absolutely and relative to general expectations.

As I wrote in yesterday's opening missive, the cup is half empty: structural weakness in economic recovery will emerge over the summer and many small businesses, in particular, will not return.

As described recently, the paradigm shifts are deafening (and most are market unfriendly) as they are anti-growth.

This one shift, outlined yesterday, is important to reemphasize:

* Covid - Induced Shifts In Behavior - As a society will be travelling less and working from and eating at home more:

1. Safety - Consumers will spend more time at home - working at an office and travelling will be more limited. This means more eating at home and less eating in restaurants.

2. Recession - Consumers will probably become more frugal and risk averse after their experience in early 2020. With unemployment abruptly rising by record amounts and the economic outlook still uncertain, the consumer will spend less, save more and reduce the frequency of restaurant visits after their experience in early 2020.

3. Less Competition - More difficult access to capital, much more expensive cost of capital and higher costs of doing business (the $4 billion pandemic cost in Amazon's (AMZN) past quarterly report should be a wake up call) - particularly in a recessionary setting - will result and morph into a slower growth backdrop. This means that less sizable, upstart competition will be reduced (the death knell for small businesses) and Tom Lee's expectation for margin expansion may not be realized.

These three factors will contribute to a fundamental change and demand destruction in the travel, leisure, restaurant, hotel and non residential real estate industries (which represent a large swatch of U.S. employment).

All these industries will be operating less profitably at lower capacity.

Yes, as Tom Lee suggests, businesses will be using less labor than before Covid-19, but consider the impact on consumer demand as the many previously employed reinvent themselves in their search for new job opportunities reflecting a secular downshift in utilization rates in the aforementioned industries.

As Danielle DiMartino Booth writes:

* As the whole-economy Chicago PMI New Orders-Inventories spread hit a record low in May and backlogs' contraction accelerated, significant supply-demand imbalances persist in the supply chain; supply disruption via longer delivery times adds the risk of higher freight costs.
* While May auto sales will necessarily rebound off April's shutdown-forced lows, a sustainable recovery requires rising income expectations; with lending standards tightening, greater auto manufacturer incentives could spur sales growth but would pinch profit margins further.
* Major discretionary purchases will be dictated by consumers' ability to access financing and shoulder additional monthly payments as layoffs move up the income ladder; the added uncertainty brought on by the rioting will act as a further depressant on spending's revival."

Given these factors, the personal savings rate will likely be ratcheted higher for some time to come - at the expense of consumption. That is not the recipe for domestic economic growth.

The Political Fissure

While I have a lot to say about our political divide, I have consistently tried, and sometimes failed, to keep my Diary about investing.

You can go to my personal Twitter account if you are interested in my views, just as others freely present theirs.

I strongly believe that monetary, fiscal and social policy -- and even the behavior of our politicians -- hold weight in our investment decision making process and in our fundamental assessment of the future.

Bottom Line

While the near term direction of the stock market is based on voting, the intermediate term outlook is based on weighing.

While we all try to buy low and sell high, fundamental value investing is less based on timing and more based on the notion of "margin of safety" in attaining superior investment returns.

In that regard and based on my analysis and conversations, there is little chance for a "V" like economic recovery in the U.S.

The change and paradigm shifts are not only about the lessened health and reduced demand of the consumer but also of the attitude of the consumer and his channel choices

Among other things, the recent and unusual set of circumstances are leading to lessened demand for certain products, a permanent shift in behavior and an accelerated adoption of on-line, and an adjustment to a new normal of lower growth -- rendering stores, hotels, airlines and numerous other industries more irrelevant, less productive and far less profitable.

Many business will not restart or will be a shadow of their former selves.

Consensus forecasts for U.S. GDP and S&P EPS growth are far too optimistic.

The "fair market value" of the S&P, according to my scenario analysis, is about 2750 (2700-2800) - which means that the S&P Index (spot at 3060) is currently about 11% overvalued. (Again, precision is not intended, as my calculus is a guiding tool more than a line in the sand.)
Strictly based on fundamentals, equities are increasingly overpriced.

The dollar index is no higher than the level of 5 yrs ago.

The German DAX is leading the way today as Chancellor Merkel is said to be lining up another round of fiscal spending. That story came out a few days ago but more details might be revealed today with this tranche totaling between 50-100b euros. The money could be utilized in a variety of ways such as a 'cash for clunkers', adding to the wage pay support program in addition to cash to municipalities, maybe directly to families and tax breaks for companies. Add this to the 750b euro plan the EU is trying to put together and the euro is rallying for a 6th straight day to just below $1.12, the highest vs the dollar since mid March. The dollar by the way is weak across the board. The euro heavy dollar index is actually no higher than where it was in 2015. Exploding US debts and deficits is long term dollar negative. 

DXY


DAX

The Aussie$ is quietly rallying to the highest level since mid January vs the US dollar. This is a country highly dependent on the economic ups and downs of China along with being a commodity powerhouse. The Reserve Bank of Australia kept rates at a record low of .25% but highlighted the green shoots. "It is possible that the depth of the downturn will be less than earlier expected. The substantial, coordinated and unprecedented easing of fiscal and monetary policy in Australia is helping the economy through this difficult period...The rate of new infections has declined significantly and some restrictions have been eased earlier than was previously thought likely. And there are signs that hours worked stabilized in early May, after the earlier very sharp decline. There has also been a pick up in some forms of consumer spending." 

AUSSIE$

This dollar weakness is another support to gold and silver, along with low real rates. I expect commodities generally to be helped by this, particularly crude and copper, along with the growing supply demand imbalances that are setting up for the next few years. With oil, the front month WTI contract is at the highest level since early March as it looks like OPEC and Russia are going to renew their production cut agreement by another month. 

This said about the weaker dollar and the inflation that I see coming, along with an S&P 500 above 3000, I'm still amazed that the 10 yr Treasury yield is still only at .67-.68%. Either the stock market is dead wrong about its belief of a firm economic rebound or Treasuries are a huge short. Or maybe we're headed for some mean reversion for both. I'll argue for that looking at the 2nd half of 2020. 

US 10 yr

Danielle DiMartino Booth on China:

• Some of China's top Asian trading partners' May PMIs significantly underperformed the rest of the world, with Japan, South Korea, Australia and Taiwan weakening further; all four of these nations have close trading ties to China and reflect unreported weakness in its recovery
• Both South Korea's merchandise exports and imports declined more than 20% in May versus the prior year; there have only been six months out of 641 months of historical data in which both metrics declined by 20% or more -- May 2020 and five months in 2009
• The current two-month 14.5% rally in the MSCI World Industrial Index remains unconfirmed by PMI data thus far; current data, including that for the U.S and Germany, plus corporations pulling guidance invalidates investors' optimism for industrials

"Employee Paychecks Come on Tuesday?" "Every Person Comes Out Tired?" Disney (DIS) fans are familiar with both parodies referencing the iconic EPCOT Center. For those unacquainted, EPCOT is separated into two sections, Future World and World Showcase. In Future World, you get to see what's inside that huge golf ball and to experience the past and future of technological advancements. For thrill seekers, its home to the park's headliner attractions - Soarin', Test Track and Mission: Space. The World Showcase Lagoon lies at the center of an area that showcases the art, architecture and culture of 11 countries in a World's Fair-like atmosphere. It is, of course, accessible through the International Gateway.

As tantalizing as the prospect of roasting in the Middle Kingdom may have been when you gave the family the trip to Orlando for Christmas, there's a chance you've since opted for a staycation with the "fam." That doesn't mean you can't still take in the wonders of the Chinese pavilion's "Reflections of China." Just download the map and order take-out.

We've drawn our own "map" of the Chinese economy in today's chart, one that reflects trade with China. The six countries we navigate to glean cleaner, shall we say, data on China's reopening include the U.S., Germany, Japan, South Korea, Australia and Taiwan. All are key trading partners with China and account for 40 percent of World GDP. Most are global exporting powerhouses. In 2019, after China, which commands the top spot, the U.S., Germany and Japan are respectively the world's second, third and fifth largest exporting nations while South Korea is seventh-ranked.

Before expanding on these biggest hitters, the whole of the small world (after all) revealed that of the 31 countries that had reported May factory data, 27, or 87%, reported an improvement in their manufacturing PMIs over April. The reopening impulse is evident in this huge improvement over April when, of the full slate of 42 global PMIs, 39, or 93%, deteriorated over March. That said, the four that did weaken further - Japan, South Korea, Australia and Taiwan - speak volumes about China.

Closer to home, a tragic weekend in U.S. history was followed by a rally in U.S stocks. Put gently, the momentum trade has legs. The technical bounce associated with reopening has drawn the right side of a 'V'-shaped recovery. That risky assets can continue to rebound validates the "April was the worst month of the shutdown recession" narrative.

From a fundamental standpoint, things are not yet expanding. In May, only two manufacturing PMIs landed above the breakeven 50 mark that separates expansion from contraction - China and South Africa. The lesser rate notwithstanding, the other 29 countries' industrial sectors were still contracting.

Corroborating the survey data is hard data from bellwether South Korea which saw merchandise exports decline by 23.7% in May over the prior year while imports contracted 21.1% over the same period. This kind of weakness is very rare. Since 1967, there have been six months out of 641 when exports and imports both posted annual declines of 20% or more - May 2020 and five other months in 2009. That's what you call a 99th percentile event.

In today's chart, we combined May's four underperforming PMIs into the yellow line to illustrate the relative weakness of four of China's top Asian trading partners. As for the significance of the marginal upticks in the U.S. ISM (blue line) and Germany's PMI (red line)? Among the factory sectors that did bounce off their April lows, they improved the least, which smarts as it's also where the global economy needed it most.

Just as the global industrial economy is struggling to reopen, saber-rattling between the U.S. and China over Hong Kong promises to hamper the recovery's prospects. Yesterday's escalation du jour featured China ordering its state-owned agricultural firms to halt purchases of U.S. farm products, including soybeans. A further backsliding of the U.S./China trade deal clouds further the business investment outlook which is quite the feat when 36% of the S&P 500 has already pulled 2020 guidance.

The U.S. dollar is not trading that risk. The global down-in-quality trade has triggered a 2% decline in the trade-weighted dollar index (ticker DXY) over the week ended June 1. Yesterday's close of 97.83 took out the prior range and landed DXY back to levels before COVID-19 catalyzed a rush into the safety of dollar-denominated securities.

The global industrials rally is a cause célèbre. Alas, the March-May 14.5% vault in the MSCI World Industrials Index (green line) is not yet backed by fundamental improvement in global PMIs. It will take more than willing the glass to be half full to justify a 125% annualized two-month advance in global industrial stocks. If you are long this sector, you should ask yourself if such a short-run gain is sustainable.