Today is a good example of why outside of consensus views should always be presented and debated. It shouldn't be just bull speak when the market is rising and bear speak when the market is declining. The existing market narrative should always be challenged and there is a place for that in both bull and bear markets.
We should always consider all outcomes - particularly given the plethora of uncertainties that exist today socially, politically, geopolitically, economically and in the markets.
Certainty of view should be frowned upon. That doesn't mean one should always be a contrarian when trading or investing. FinTV and FinTwit take note - respectful debate has immense value and so does the contrarian.
We would all be better served if the "popular" views are debated in every media forum -rather than ex post facto analysis which has little value.
Daily Affirmations With Dougie Kass: On Cryin' and Yellin'
"I am going to write a good Diary on Real Money Pro today... and I am going to help people. Because I am good enough, I am smart enough and doggone it, people like me."
Yesterday's Daily Affirmations questioned my pal Thomas Lee's 2021 EPS forecasts for the S&P.
Today's Daily Affirmations relates to a quote by Larry McCarthy:
"Higher prices bring out buyers. Lower prices bring out sellers, size opens eyes. Time kills trades. When they're cryin' you should be buyin'. When they are yellin' you should be sellin'. Takes years for people to learn those basics - if they ever learn them at all."
I am not a licensed therapist, though.
"I deserve good things. I refuse to beat myself up. I am an attractive person. I am fun to be with."
An Explanation of Wells Fargo's Challenges and My Bank Stock Strategy
* I remain bullish on banks * Wells Fargo is attractive * The back and filling I expected last Friday is now happening
One of the market issues I mentioned this morning was the appearance and comments of Wells Fargo (WFC) CFO John Shrewsberry at Morgan Stanley.
Here is the presentation - it only lasts 30 minutes and it's a worthwhile listen.
Based on Wells' presentation, there are three issues that have spooked bank and market investors.
Said Shrewsberry:
* Net interest income for 2020 will likely decline by -11%. * 2Q2020 loan loss provisions will exceed the first quarter reserves. * The dividend payout will be assessed later in the summer.
In terms of the anticipated decline in spread income - the drop is not surprising, nor is Powell's expectation for "lower rates for longer". My contention is, as WFC's low cost consumer deposits grow, as they have in the last year, the value of those deposits and Wells' franchise will expand mightily when interest rates rise. Remember, I think the upside opportunity in banks will be measured in years and not in weeks or months.
The possibility of higher loan loss provisions was surprising but, based on my bank management conversations, I believe it to be bank-specific to Wells Fargo.
So too is the issue of the dividends unique to Wells Fargo. I have previously written that Wells Fargo is one of the few banks that may not earn its dividend in 2020. This is a function of the company's management prior fee controversies which led to some caps on asset growth as well as its lesser fee based business composition versus the other large money center banks, which in some cases approach 50% of revenues. The full effect of this and other factors have reduced Wells' "earnings power" while that is not the case for the others.
As an example, in my most recent lengthy support of the banking industry's credit position, I detailed JP Morgan's (JPM) capital and profit cushion.
As mentioned earlier, Wells's big asset, of course, is its large and growing deposit base which will become much more valuable when interest rates rise - which they will in the fullness of time.
All this said, I have been of the view that the gap openings much higher (in the case of Citigroup (C) +$6) last Friday - may have marked a short term top for the bank space:
It May Be Time for Financials to Consolidate a Bit Now
* The large money center banks are as close to "forever" stocks for me * However, the recent rise in the sector - and near +10% opening print higher - have been almost vertical and some backing and filling would not be a surprise * Indeed, some consolidation would be healthy
My upbeat position on this space has been clear repeatedly - banks represent one of the best areas of value in the market.
Many - fundamentalists as well as technicians - were in strong opposition of this view.
That said, the trajectory of the recent rise has been even better than I expected. Moreover, the gap higher - on the opening (e.g Citigroup (C) and Wells Fargo (WFC) rose by about +10% on the opening prints) - might herald a short term top.
As posted, I have previously taken profits in (GS) , (MS) and (PNC) .
I still am holding large positions in (BAC) , C, WFC and (JPM) - and I plan to hold on to the them for years.
But some backing and filling should now be expected.
Those with a shorter term time frame (than I) may consider paying heed to my view and observation this afternoon.
Here are my buy levels for financial stocks, from my May 29 "Levels"post:
From my friends at Miller Tabak (and supportive of my view expressed earlier today):
The Fed Throws Cold Water on Hopes for a Rapid Recovery
Yesterday's FOMC announcement revealed a pair of dovish policy changes: ramping up QE and projecting that interest rates will stay at their effective lower bound through 2022. It is hard, however, to get very excited about these actions when they are attached to a bleak economic forecast. The median of the FOMC's SEP forecasts projects that 4Q2020 GDP will be 6.5% lower than it was at the end of 2019. Factoring in 2% growth in potential output, this suggests that covid-19 will still be causing an 8.5% reduction in output by year's end. This is much worse than the CBO's forecast of a 2.4% reduction by the end of the year. The FOMC similarly projects GDP gaps of 5.5% at the end of 2021 and 4% at the end of 2022, a highly pessimistic outlook. Chairman Powell was asked about these predictions in his first question and notably did not push back. We share the Fed's view that, despite the excellent May employment report (more on this later), the economy will probably bounce back quickly to the neighborhood of 10% unemployment as businesses re-open, but getting back to pre-crisis levels will likely be a long process.
We had hoped that Chairman Powell would spend more time discussing the risk of business insolvencies. This is critical to the pace of recovery and is one area where the Fed's data is much better than what is publicly available. Powell didn't say too much, but it is encouraging that he described PPP as working well.
I know the increase in covid spread is the worry this morning of markets and I have to ask whether some are just not respecting the need of wearing masks. Everything I've read and the evidence out of Japan, Hong Kong, Singapore, Taiwan, South Korea, China and others prove the effectiveness of wearing them in limiting spread. Reuters released this story yesterday, here.
We also know this worry comes in the context of a market that has been a runaway train to the upside and one that has resulted in stretched bullish sentiment and retail investors that love to trade the stocks of bankrupt companies. This article in yesterday's WSJ was pretty amazing describing those that are playing in this casino, here.
While we saw another increase in the level of bullishness in yesterday's II which joins some others like the Citi index and the put/call ratio, the AAII measure of individual investors saw no change with bears still above bulls. I still think the AAII data is reflecting more the feeling about the underlying economy rather than the momentum action in stocks. Bulls fell .3 pts to 34.3 while Bears fell .8 pts to 38.1.
Putting aside the Fed meeting and the zero rates forever again with massive QE, if there is one thing that it's good for are the precious metals and I'll again express my positive stance on them. One thing it is not good for is the profitability of our banking system and other financial companies. The BKX index yesterday closed down 6%. Doesn't the Fed see the experience of not only their own actions over the past 10 years but that of the BoJ and ECB before repeating the same ole playbook? Apparently not.
With yields falling in Europe following the US Treasury rally, the Euro STOXX bank stock index is lower by 3.5% today. After closing at its highest level since early March on Monday, the Japanese TOPIX bank stock index is down 6% over the past 3 trading days. Without healthy and profitable banks I don't see how any economy has a chance of flourishing.
Yesterday, we noted that some traders are beginning to grow slightly apprehensive about some divergences and anomalies that have begun to appear in this impressive and powerful rally that has lasted several weeks now. The Nasdaq is diverging to the upside, while the other averages seem to stall and are having some difficulty. The rally has been unequally strong.
The gurus at the invaluable Datatrek daily note said "we have just seen the largest ever 50 day rally in the S&P 500 and the Russell 2000. Past outsized run-ups like this (plus 3 standard deviation breakouts) typically stall here.
Breadth and volume have begun to show some divergence within each of the other indices. This is somewhat disturbing. Yet this rally has rebounded again and again. Despite these false starts, traders may hoist the caution flag again over the next few weeks. Will watch very carefully. The Fed offered very little different. So that probably means that momentum in the market will have to live on its own.
We are at a possibly unique place in stock market history. Development of a credible vaccine or even effective treatment for the virus could spark a massive short covering spike.
Conversely, the outbreak of a new and different virus would bring thoughts of a biblical plague and probably implode the market sharply.
Levels to watch - bulls need to protect Dow 26300 and then 25900. S&P 3000 and 3080. Record levels were 27008 and 3235. More weakness needs to be watched and also the relapse reported in China virus claims this morning are very disquieting. Stay tuned.
* Fundamental concerns and weakening technical signs might be converging now
In the last few weeks and days I have eliminated all my equity investments in my personal pension plan, I have personally shorted S&P futures (at 3202 Monday night), I have eliminated more than 15 long term long investments ( (GE) , (FDX) , (DIS) , (H) , (HLT) , (MS) , (GS) , (PNC) , (VNO) , (GOOGL) , (VIAC) , (BA) , (PG) , (VZ) , (HIG) , (CMCSA) , etc.), I have raised my short exposure in the Indices ( (SPY) , (QQQ) ), I have purchased a basket of speculative (and what I believe to be worthless) securities and, yesterday I went long volatility.
Yesterday provided at least five reasons for the markets to decline:
* Federal Reserve Chairman Powell delivered a cautionary economic message for not only this year but for several years to come. To me, this renders the rosy EPS projections of the consensus as well as a number of high profile strategists (like my friends Dave Kostin and Thomas Lee) - as being unrealistic. (I recently REDUCED my 2020-23 estimates) It also renders the Administration's (unsurprising) economic optimism as downright silly.
* Despite protestations from the Administration, there was rising evidence that Covid-19 is still not tamed.
* At a Morgan Stanley conference, Wells Fargo CFO John Shrewsberry said second quarter loan loss reserve builds would be higher than in 1Q2020. More specifics on this later.
* The Robinhood traders' objects of affection - stocks of bankrupt companies - took a sudden dive. It is not different this time - silly speculation is almost always evidence of a maturing bull market.
* Technical signposts are flashing red:
1. Investor sentiment has increased as stock prices rose as a bull market in complacency has quickly unfolded from the depths of March. From Divine Ms M (Helene Meisler): "On the sentiment front, we have the Investor's Intelligence bulls now at 57%, the highest reading since February. Over 55% and I consider it a yellow flag."
2. Market breadth has started to wane. Again from Divine: "Breadth has been weak the last two days and many stocks have given back the entire move up from last Thursday's close...So far, the two days of weak breadth has not been enough to halt the rise in the McClellan Summation Index. Remember, to see deterioration underneath we need to see this indicator stop going up and turn down with some persistence. In mid-May, it faltered, flat-lined and then resumed the upward move. Deterioration is what turns a correction into something more severe. I said the seeds are planted, but it's a matter of whether the seeds can take hold and grow. The jury is still out."
Position: Long TVIX, VIX options, WFC (large), Short SPY and futures QQQ
Macy's reported first quarter results that were in-line with their previous guidance - with net sales at $3 billion and EBIT of -$926 million.
Gross margins were disappointing at -2100 basis points but, on the positive side, inventory ended the three month period -7%.
Forward gross margins declines should match the second quarter sales decline.
Recent sales trends in reopened stores were down by about half but have improved on a weekly sequential basis. Its important to note that the company's largest stores (Bloomingdale's on 59th Street and Herald Square in NYC) - which represent a larger percentage of total sales mix - have not fully reopened and when they do they will suffer from the lack of tourism.
On a positive note, digital trends are robust -- +80% growth in May. Macy's expects a sharp slowdown after the physical store reopenings.
Second quarter EBITDA losses should mirror the first quarter (-$690 million) and could turn very modestly positive in 3Q2020 ($15 million) and by the all important four quarter should rise to $700 million+.
For the full year a loss of close to -$4.00/share - but much will depend on the timing of the reopenings.
The company's leveraged profile (which is now more leveraged after the recent debt financing) has profoundly wounded the retailer.
I expect the shares to remain "a hat size" (and trade between $5-$10/share) for some time - equivalent to about 5x calendar year 2021 EBITDA (excluding real estate) or 6x calendar year 2021 (also excluding real estate).
Macy's faces a binary outcome. Much depends upon the return to "normalcy" in travel, tourism and retailing.
A fall Covid-19 related setback would be disastrous for the company - while a steady improvement in the domestic economy could push the stock up a few dollars.
Unfortunately, I am not optimistic of the outcomes for this retailer who's real estate holdings (almost overnight) lost a great deal of value.
Late yesterday I reported that I purchased some volatility products.
I wanted to reposte for those that left early:
Vexed by the VIX
I hate trading volatility -- its tough.
And I even hate disclosing what vehicle I am trading, because these are such volatile and speculative products!
Since some subs are pissed, I refuse to mention my speculative basket of stocks I consider to be worthless (you all should be able to guess, as I have mentioned many already in my Diary), I guess I have to acquiesce and detail my volatility plays.
My principal vehicle is the leveraged exchange-traded fund, (TVIX) .
I have also purchase short dated VIX (June 17 and July 22) 28, 29 and 30 calls.
Solid comment from Divine Ms M in her opening comments (Will We Get Three Strikes ...) this morning:"I want to make a final comment about Nasdaq, which keeps going up. Yet for the second day in a row Nasdaq's breadth and net volume were negative with the index higher. It's a minor divergence now and the Summation Index is still rising, but clearly the tech stocks are no longer enjoying enough volume on the upside to offset whatever selling we're seeing in the other names. And that too is a change."
While gold is not a consistent inflation hedge, it has been highly correlated to the increase of global Central Bank Balance Sheet Assets; at .78, spot gold was also highly correlated to the rise of negative yielding debt from 2016 through its August 2019 peak
Gold has acted as a hedge in the Coronacrisis storm, as Central Bank balance sheets have exploded; the precious metal is also a driver of the 10-year Treasury risk-free rate, with the Copper/Gold ratio exhibiting a high correlation of .84 since 2010
The ratio of copper prices to gold prices indicates the COVID-19 driven Treasury rally is due for a reversal; the futures curves for copper and gold through the end of 2021 project the 10-year Treasury yield will back up to approximately 1.3%
As mythology has it, the Greek god Dionysus granted Midas, king of Phrygia, one wish in return for a good deed. Midas modestly asked for the power to turn everything he touched into gold. Rejoicing in his new power, he transformed a twig, a stone and every rose in his garden. So pleased was the king that he ordered the servants to set a feast. But he cursed the wish when discovering his touch turned the food and drink to metal. And there was Midas' daughter, distraught that the roses had lost their fragrance. In proffering her comfort, he turned her to gold as well. Horrified, Midas prayed to Dionysus, begging to be delivered from starvation and to reverse the golden touch. Much to the dismay of modern goldbugs, his prayers were answered.
Another myth tells the story of gold as an inflation hedge. To test this legend, we used the U.S. consumer price index (CPI) as the benchmark. The hurdle would be for the trend in the spot gold price, on a year-over-year basis, to exceed the annual increase in the CPI. There are many multi-year periods where gold prices outperformed inflation - 1977 to 1980, 1986 to 1987, 1993 to 1994, 2002 to 2011 - not to mention the last 12 consecutive months ended May 2020. But has gold consistently beat inflation over the long haul?
If you chose the yellow metal as a buy-and-hold strategy from 1976 to 2020, you would have outperformed inflation in 270 months and underperformed inflation in 263 months. Win-loss record: 51% to 49%. Myth busted. We would not recommend choosing to diversify your portfolio with gold as an inflation hedge. But that's not to imply it's not a different sort of hedge.
For context, we would dub the period from 2008 to present as the Quantitative Easing (QE) era. Put differently, this 12-year central bank experiment has led major central banks, like the European Central Bank and Bank of Japan, to adopt negative interest rate policy (NIRP) and others, including the Fed, to undertake large asset purchase programs (QE). In the Euro Area, for instance, both NIRP and QE are in place and core European bond markets have negative yields out to 15 and 7 years for Germany and France, respectively.
The stock of negative yielding debt began gradually climbing in 2014 and 2015. But it wasn't until the burst in 2016 when the tight relationship with gold began. As illustrated in the left chart above, from January 2016 to the peak in August 2019, negative yielding debt rose from $7 to $17 trillion. Over that timeframe, spot gold had a .78 correlation to the pile of negative assets.
Since then, gold and negative debt have diverged. Central banks have backed away from going deeper into the red with policy rates that would risk more permanent damage to banking systems. That said, the Coronacrisis has created the impetus for a massive bulge in global central bank balance sheet assets that ran parallel to the 10% rally in gold since the end of March.
Demand for the amber metal as a safe-haven asset during a worldwide pandemic seems like a logical portfolio diversifier. But gold isn't only a store of value - and a port in a storm - it's also a driver of the global risk-free rate - the U.S. 10-year Treasury yield. Just add the chemical element with atomic number 29.
The ratio of copper prices to gold prices has an excellent track record in tracing the path of the 10-year Treasury over the last decade. Behind steel and aluminum, copper is a primary input into the global manufacturing process. A rally in copper is a bullish development for industrial activity and global growth. Gold sits at the opposite end of the risk spectrum from copper.
Together, the copper/gold ratio exhibits a natural ebb and flow that corresponds to movements in global rate markets. Since 2010, the copper/gold ratio has a .84 correlation to the U.S. 10-year. That qualifies this factor model as a relevant way to use the metals market as one way to measure "fair value."
The chart on the top right uses copper/gold to project (in green bars) the 10-year yield (orange line). The results are robust, with some notable misses. We call out the 2018 trade war/supply grab that artificially boosted activity in the U.S. at the expense of a slowdown in China, the largest marginal buyer of copper in the world.
If copper/gold has the Midas touch in accurately judging the 10-year, then the COVID Treasury rally to below 1% should give way to a back up near 1.30% implied by the June 2020 ratio and the futures curves for copper and gold through the end of 2021.
Solid comment from Divine Ms M in her opening comments Will We Get Three Strikes ... this morning:"I want to make a final comment about Nasdaq, which keeps going up. Yet for the second day in a row Nasdaq's breadth and net volume were negative with the index higher. It's a minor divergence now and the Summation Index is still rising, but clearly the tech stocks are no longer enjoying enough volume on the upside to offset whatever selling we're seeing in the other names. And that too is a change."
