I ended the day far more short than I started the day.
I am hopeful I made the right move.

S&P futures are -45 handles from the day's high point.

There is probably only one thing I am certain of -- that is, we will likely face heightened volatility in the weeks and months to come.

That helps to explain my low conviction and why my invested position in gross and net terms is low.

I will be leaving at about 3:30 p.m. for an errand today.
If I don't return, thanks for reading and enjoy the evening.

Those asking questions to Fed Chair Jerome Powell need to ask about a "wealth" gap as opposed to "income inequality." Why? Powell keeps dodging the issue by deferring to income, as opposed to wealth, which includes the stock market, which leaves a few people very rich, while doing nothing for the people who feel left behind.

Income Inequality

Powell was repeatedly asked by senators about economic inequality and the unemployment rates for low-income and Black Americans in light of protests sweeping the nation over police brutality and racial disparities... The Fed chair noted the disproportionate impact of job losses on low-income Americans and minorities saying the economic pain was hitting hardest on those who can least afford it. If not contained and reversed, the downturn could further widen gaps in economic well-being that the long expansion had made some progress in closing," he said.

-Bloomberg 

Thomas C

Mall of America misses debt payment for a third month - Bloomberg

One of the U.S.'s largest shopping malls missed another payment on a $1.4B on mortgage and puts the borrower more than 60 days past due, Bloomberg reports, citing people with knowledge of the matter.

The failure to make its ~$7M debt payment for June is its third straight month of missed payments on the property.

The 5.6M square-foot property, owned by closely held Triple Five Group, partly reopened on June 10 with reduced capacity at its restaurants and movie theaters.

Its indoor theme park remains closed.

The Ghermezian family owns all three of North America's largest shopping centers. Their American Dream mall, which features an indoor ski slope and a water park, in New Jersey hasn't yet fully opened.

One of things I keep asking myself is if the market belongs here why is the Fed, along with Congress, still looking to stimulate?

I know the answer because we are a few good sessions away from falling off a cliff - something that terrifies officials that we end up repeating the 2008/2010 time frame.

I short Index futures for one of several reasons:
* As an offensive tool. (In this case my position is typically of a short term time frame.) 
* As a defensive tool to hedge a long portfolio. (In this case my position is typically of an intermediate term duration.)
* As both an offensive and defensive tool. (Mixed media!)
The larger I get in size the more likely it is for both offensive and defensive reasons.
I almost always "trade around" a core offensive or defensive short position.

I added to (SPY) and (QQQ) at $314.12 and $243.45, respectively.

I am adding more (SPY) and (QQQ) shorts now, at $312.20 and $242.16, respectively.

My speculative short basket of Portnoy/Robinhood stocks is falling apart - and that's a good thing.

By my calculus, this morning's high represented as large a stretch relative to "fair market value" than I have seen in some time.
That is why - when combined with my numerous Fed and other concerns discussed recently in my Diary - I unemotionally shorted more aggressively this morning on the early gap higher.
As you all know, upside reward vs. downside risk is the way I roll from an exposure standpoint.

I argue that the main reason why the corporate bond market froze up in March was the inevitable result of the Volcker Rule which dramatically limited the ability of banks to make markets. The level of inventory that banks can hold is a fraction of what it used to be. Why did repo rates spike in September where a JPM for example couldn't commit capital to receive a 9% annualized overnight rate with US treasuries as collateral? Regulation. What's the Federal Reserve's answer? Print money to buy bonds and rationalize it as 'helping market functioning' when it really was just QE. What emergency exists that the Fed needs to buy the bonds of IG companies? No discussion seen on dealing with the actual result of punitive regulation on the functioning of markets.

So with the Fed now distorting private markets and nationalizing private assets what individual bonds will the Fed be buying? Well, looking at the holdings of LQD, which they are buying outright, the Fed will be buying Microsoft bonds and I'm sure they will buy some bonds from Apple and Amazon. Maybe Jay Powell will talk about this today during his Congressional visit about how he thinks this is necessary that he is now a FANG+M bond buyer. Here are some other company bonds in LQD, Anheuser Busch, Goldman Sachs, CVS, Wells Fargo, Bank America, Verizon, Visa, Comcast and even Berkshire Hathaway. This is the Fed's idea of an emergency situation that they think they need to be doing this. Are there not private investors that will buy these bonds? How much will markets now misallocate capital to just these bonds, further inflating their price and taking away capital from those companies that really need capital? Lastly, what's the transmission mechanism from buying Apple bonds to helping the US economy deal with a pandemic? Again, sorry about whining about the Fed but doesn't someone have to ask these questions and not just give the Fed a free pass to do whatever it wants?

The May Cass Freight Index came out late yesterday and shipments fell 24% y/o/y. They said "Following what we believe was the trough in April, the Cass Freight Index showed some, but only little, improvement in activity last month...We were surprised not to see more of an up tick; the reopening schedule appears to have unfolded slower than we anticipated - and also because the freight data reported by some of the public companies showed a more significant sequential jump and better y/o/y improvements than Cass showed." They forecast 2021 the year we get back to 2019 freight activity levels. I'll say lets wait until the July and August data before really judging the state of the economy as more businesses are still reopening and more people are venturing outside.

Reflecting still an alarming level but off the acute stage, UK jobless claims rose by 529k in May, about half the level seen in April and vs just about 5k in March and February. The numbers don't need explanation and expect the number to continue to fall as more businesses reopen.

The June ZEW investor expectations index for the German economy rose to 63.4 from 51 in May. That was 3.4 pts better than expected while the Current Situation at a still deeply negative -83.1 was about in line. ZEW said "There is growing confidence that the economy will bottom out by summer 2020...The expected earnings for the individual sectors in Germany still vary greatly. Earnings expectations are strongly negative for export oriented sectors such as automotive and mechanical engineering, as well as the financial sector. In contrast, forecasts are fairly positive for info tech, telecom and consumer oriented services." While European stocks are rallying, this number is never market moving. Sovereign bonds are mixed and the euro is unchanged but hangs in great vs the dollar at $1.13.

I have moved to between small and medium-sized net short.

* In his market forecast

Darling I don't know why I got to extremes
Too high or too low there ain't no in-betweens
And if I stand or I fall
It's all or nothing at all
Darling I don't know why I got to extremes
- Billy Joel, I Go To Extremes

I completely disagree with Scott Minerd's bearish market take (1600 S&P target) - but he is a smart, rigorous and a respected market observer.

His CNBC interview warrants a look... here. 

He usually doesn't go to extremes.

Well put, Thomas:

Thomas C

and speaking of DDTG...
who claims to be up 400% this year
and his mantra is: "Stocks are Easy!"

TC's take:

I would offer a word of caution that 'lazy investing' (void of any fundamental and/or technical research or analysis) has never and will never work on Wall Street (at least for any period of time). Financial success, as measured by consistently making money in both good and bad times in the stock market, requires far more than an 'easy button and a computer.' (with apologies to Staples...)

Every education costs money, as many may soon be fining out...

From Monday:

The market had a very sharp turnaround on Monday inspired by a variety of items. One was the announcement that the Fed would be buying bonds, which grabbed most of the headlines. Secondarily, there was a series of comments from a variety of veteran Wall Street gurus that a vaccine for the virus might be close at hand, and finally the Trump Administration seemed to lower the temperature of the dispute with Huawei, the Chinese technology company. 

Of these, I think the most important may have been the litany of vaccine commentary since much of the selling was based on the secondary outbreak of the virus. 

The market bounced off the March lows but as I said, the key was the feeling that the virus outbreak may not be as difficult. As for the Fed, we will hear more when Powell testifies at 10:00 a.m. But, what they announced yesterday seemed a bit more aggressive than it actually is. Part of it had been announced before. 

We will continue to need to keep an eye on both the virus reports and progress in potential vaccines and drug treatments. That probably will be the key issue. 

Market looks to open firmer then, as we said, the 10:00 Powell statement may impact things. 

We will look for the market to shift from the rally toward a consolidation as the day wears on and we will expect consolidation over the next several days. 

Stay safe. 

Arthur

Moved to small net short now.

I shorted the opening in (QQQ) ($243.78) and (SPY) ($315.48).
This moves me from very small to small in both, and my net exposure goes to market neutral.

* CAT is still a DOG

In pre-market, (CAT) had risen by +$9 on the infrastructure announcement.

I suspect the prospects for such a project is low now - in the face of a November election.

Here is my short thesis on CAT.

Stated simply, the construction company's end markets have been destabilized and will be slow to recover, if they recover at all.

My EPS estimates are well below consensus.

In early May I covered my CAT short at about $106.50 and have recently reestablished a medium-sized short.

I will now move to large-sized.

Core retail sales in May bounced back more than expected with an 11% m/o/m rise vs the 12.4% decline in April (revised up by 300 bps) and after a 3.2% rise in March. Amazingly, over these 3 months core retail sales are up about .8% from February as online retailing and food/beverage and supermarket sales offset weakness elsewhere. This said, looking at the y/o/y numbers there for sure is weakness elsewhere with a 23% drop in furniture, 31% decline in electronics, 63% fall in clothing, a 26% drop in department stores, 25% fall in misc stores such as convenience stores and 39% plunge in restaurant/bars. Likely in response to the need for outdoor activity, sporting goods sales spiked by 88% m/o/m and are now up 6% y/o/y.

Not included in the core figure, auto/parts sales fell 6.3% y/o/y after a strong snapback in May of 44.1% m/o/m and building materials rebounded 10.9% m/o/m and are up 10.8% y/o/y.

Bottom line, as things reopen, more sales take place and that will continue in coming months. Thus, while certainly better than feared, let's look at what sales look like in July and August after things have reopened and we get past the pent up demand behavior for certain product categories.

Post Script

We also know that retail sales have been supported by the income supports of the government via the direct payment in the CARES Act, generous unemployment benefits and the PPP program that has allowed companies to continue to pay their employees. Thus, what happens after these programs expire will be obviously key.

* I am net long but looking to move back to the short side
A combination of strong retail sales (and an upgrade to the short term economic forecasts) and some good Covid-19 medical news is buoying a spectacular rise in futures (+80 handles) in the pre-market.
If we go back to the March market bottom, my optimism was grounded on:
* A flattening in the curve.
* My optimism in the scientific community's innovation in therapeutics and vaccines.
Now that these events have apparently occurred and the markets have rallied by almost 200 handles from yesterday's lows - we can begin to consider the short side as I believe the markets have more than discounted the positive news and is failing to look at the structural headwinds (see previous debt comments this morning, etc.) that lie ahead.

"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."

- Daily Affirmations with Dougie Kass

Yesterday's Daily Affirmations was about the absence of natural price discovery.

Today's Daily Affirmations relates to the Fed.

The Fed's aggression seems limitless. I have a very strong conviction that this ends badly and the S&P Index will be lower in the next 3-5 years. There is too much debt going in so the answer is we double debt now that we know we are in a recession.

Huh?

I am not a licensed therapist, though.

"I deserve good things."

* An ideal short selling entry point lies ahead

There was an over reaction - that continues this morning in the futures market - to the Fed's purchase of corporate bonds which was previously explicitly announced.

There was no new money announced, just an announcement that it will start the buying - though the special purpose vehicle suggests a more systematic and perhaps somewhat larger approach.

Let's briefly touch on the insanity of the move. The Fed will be buying the ETF (LQD) - which includes bond holdings issued by healthy companies like Microsoft (MSFT) , Amazon (AMZN) , Wells Fargo (WFC) , Verizon (VZ) , Visa (V) , Bank of America (BAC) , Goldman Sachs (GS) , Apple (AAPL) and others. The list even includes Berkshire Hathaway (BRK.B) !

How does this buying of bonds of healthy companies help our economy recover from Covid-19?

But markets do what the markets do - and we never quite know what is priced into the market.

And the machines and algos and products and strategies that worship at the altar of price momentum ganged up on the markets - levitating it further.

The Federal Reserve's moves over the last 2 1/2 months have stabilized financial conditions. But, we are now near the end of the Fed's bullets of policy.

Stocks move based on marginal moves and the remaining programs available to the Fed are limited going forward, and at a time in which private and public sector debt loads are rising dramatically and are at immense absolute levels - placing a brake on future economic growth.

My view is that one of the best short selling opportunities will shortly be upon us.

While I am currently in a small net long exposure, if the current strength in the markets continues I will be moving back to a large net short position - likely sooner than later.

* Portnoy's antics will likely lead to big trading losses and complaints
* The Fed's latest move will likely spur more buying -- but it could be short-lived
* For short-sellers, patience is a virtue
* I remain net long but my next move will be to short more strength in equities

"What we have learned from history is that we haven't learned from history."
-- Benjamin Disraeli

With CNBC "legitimizing" retail bro (DDGT) David Portnoy last night (and providing him with a high-profile forum) on Fast Money -- it feels like deja vu all over again.

"A lot of the old timers don't know what is going on with us... Most of the stocks I bought have quadrupled... It's all documented... Right now, in this market, I am doing better than Warren Buffett."

-- David Portnoy on Fast Money last night

I do know what is going on -- the same thing that occurred during the dot.com boom. At that time the proliferation of day traders (ensconced in their basements with internet-laced laptops as opposed to the trading shops of yesteryear) buying worthless pieces of paper (much of which no longer exist) provided a speculative tone to the markets that ultimately flamed out with a 83% drop in the Nasdaq.

I am sure that CNBC's producers who booked Portnoy feel that they are attracting a market celebrity. From my perch, they are hurting investors by making (undisciplined) trading "look easy."

Easy it is not.

With only a gut feel to guide him (and without technical and fundamental moorings) he has no discernible value to trading -- save some entertainment.

In my Diary I have been quite early in highlighting the reasons behind Portnoy and Robinhood's activity -- "shelter at home" edicts, government checks and no sports to watch/gamble on.

And I have been quite specific in forecasting the demise of Portnoy and the Robinhood band from Sherwood Forest -- it will end badly, just as it did with the day traders on 1999-2000. (I have taken on a large basket of related shorts of bankrupt companies that are worthless or near worthless.)

The demise of many of Portnoy's targeted stocks could happen sooner than later.

Speculation (especially in markets) occurs with these typical conditions:

1. Debt is plentiful.
2. Debt is cheap.
3. A new category of trader/speculator appears.

History rhymes.

As it relates to the current market, the (up)beat action and reversal continued on Monday with a colossal reversal from the depressed opening, in large measure because of the Fed's policy move announced at around 2 p.m.

Having experienced previous periods of wonton speculation and government intervention I have learned -- from a shorting standpoint -- to give the market a wider berth than usual.

Add machines and algos, which exacerbate the market's short-term direction, and patience is called for now.

That said, an excellent shorting opportunity is probably developing -- the timing of which is really difficult, but I will try.
(That opportunity might coincide with a further buildup of bullish investor sentiment.)

But it is coming.

Unless the Fed purchases stocks, the full arsenal of that wayward body has now been announced.

Unfortunately, the economic optimism surrounding the fiscal largesse is a "broken window fallacy" and does not represent new money being committed to productive solutions. Rather, like the broken window pane, it is a cost of maintenance of doing business -- that doesn't promote future growth.

I start the day small net long (after taking a very small (SPY) and (QQQ) short during the rally phase yesterday).

Three related tweets:

Danielle DiMartino Booth on the important announcement of the day:

The Fed's Secondary Market Corporate Credit Facility will purchase a broad and diversified portfolio of corporate bonds; using an index structure provides an opportunity for companies in distress to receive funding without telegraphing to the market they are in trouble The spread between New Orders and Inventories in the New York Fed's Empire survey suggests a second half rebound in the region's factory sector; if other Fed Districts and regional PMIs echo Empire, it would send a signal for a much stronger than expected June The Dow Industrials are poised to trade within a range with a floor set by the current Empire Manufacturing spread and the future spread its ceiling; longer-term, the factory sector's sustainability will depend on the follow through that follows the re-opening surge.

We concur. It doesn't roll off the tongue. Charles Bergstresser was the proverbial 'odd man out' when he co-founded the publisher Dow Jones & Company with Charles Dow and Edward Jones. The Bergstresser legacy wasn't just left out of the company's moniker, it was excluded from one of the most recognizable financial market indices of all time - the Dow Jones Industrial Average. When the Dow was born in 1896, it was comprised of just 12 companies: American Cotton Oil, American Sugar, American Tobacco, Chicago Gas, Distilling & Cattle Feeding, General Electric, Laclede Gas, National Lead, North American, Tennessee Coal Iron and RR, U.S. Leather and United States Rubber. In 1928, that changed to 30 blue chip companies, where it remains today.

Speaking of the here and now, the DJIA completed a 10% correction from the June 8 intraday top to the low point of yesterday's trading session. By early afternoon, its rally was turbo-charged by news the Federal Reserve would backstop large companies, like the ones in the Dow 30. At 2 pm, investors cheered the headline: "Federal Reserve Board announces updates to Secondary Market Corporate Credit Facility (SMCCF), which will begin buying a broad and diversified portfolio of corporate bonds to support market liquidity and the availability of credit for large employers."

As a QI aside, it's great PR for the Fed to cite helping the workers. Truth serum would replace "employers" with "speculators" as this liquidity has no employment strictures a la PPP. That's especially the case in the factory sector. A recent Conference Board survey found that at the height of the lockdowns, 30% of manufacturers had conducted furloughs or layoffs, higher than the 18% among white-collar employers. Another 45% of manufacturing respondents expected to push through more of the same between May and July, more than three times the percentage of white-collar employers.

The Fed has effectively created a proprietary corporate bond ETF. The deployment of an index structure, as opposed to the Fed directly buying and holding individual issues within the Special Purpose Vehicle on the Treasury's balance sheet, negates the need for issuers to go through a certification process to prove they are eligible for the broad purchases.This was the big news of the day. The Fed relaxed qualifications by de-stigmatizing the facility. Companies no longer have to worry about signing up for the facility and, in doing so, signaling to the markets they are in distress.

Prior to the Fed's fanfare, the June PMI parade kicked off with the New York Fed's Empire State Manufacturing Survey posting the largest upside beat in its 20-year history with the headline nearing the breakeven mark of -0.2 in June. The consensus had guessed -29.6 consensus, still a huge improvement off May's -48.4 and April's -78.2. That's as close to a V-shaped bounce as you get.

The Empire being repeated across the remaining Fed surveys and regional PMIs will come as a pleasant surprise, indicating an early arrival of the ISM manufacturing index poking its head back above water. Bank of America's May Global Fund Manager Survey had a return above 50 in 2020's fourth quarter edging out the more optimistic third quarter (right-hand chart above).

The Empire's details always garner attention because they reflect company-level insights within the New York Fed District. Two series commonly used as a short-run demand-supply metric help frame near-term economic prospects - New Orders proxy demand while Inventories gauge supply.

The spread between these two series acts as forward guidance for industrial output. The current spread (blue line) rose back to breakeven in June from a -56.6 reading two months ago. The six-month outlook (green line) advanced to an 11-year high, sending a strong recovery signal for this year's second half. Today's May industrial production report (3.0% month-over-month consensus) will begin to reverse the damage of March's 5.4% drop and April's 11.2% plunge. The Empire hints at double or triple the expectations for June's reading.

The Dow Industrials (red line) tucks in nicely between the current and future Empire New Orders-Inventories spreads - the current spread acts as downside support while the future spread is upside resistance, bounding the Dow's year-over-year performance. From our technical vantage point, the Dow's selloff over the last week has been met with a floor.

That is not to say the sector is invulnerable once we get past reopening. Forget about collapsing profits. As per Factset's latest weekly tally, in the second quarter and after energy, at -26.7%, Industrials are expected to report the second largest top-line contraction across all 12 industries within the sector. Moreover, "Six of these 12 industries are projected to report a decline in revenues of more than 20%: Airlines (-87%), Machinery (-32%), Industrial Conglomerates (-30%), Building Products (-27%), Electrical Equipment (-25%), and Road & Rail (-21%)."

As for the Empire, it's the Bergstresser PMI - the first out of the gate but roundly disregarded. We would remind traders that the leading chemicals industry is New York's top factory sector. It is also home to industrial machinery, materials processing, optics software development, tech and electronics and transportation equipment manufacturing. Don't leave Empire out.