"Just one more thing."
-- Lt. Columbo

Another day, another divergence.

Market breadth only 8-7 positive while S&P Index +20 and Nasdaq +110.

Thanks for reading my Diary today.
I end the day small net long of exposure.

Enjoy the evening.
Be safe.

Texas Governor Greg Abbott's warning this afternoon may be the cause of the selloff this afternoon:"To state the obvious, Covid-19 is now spreading at an unacceptable rate in Texas. (See the Town of Palm Beach announcement earlier in my Diary.) Our goal is to keep Texans out of hospitals and to reduce the number of Texans who test positive... Covid hasn't simply gone away. We don't have to choose between jobs and health. We can have both."

"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

Friday's Daily Affirmations related to the selling likely associated with the day's end, June triple witching.

Today's Daily Affirmations relates to a high level of conviction on the part of both bulls and bears - delivered by the words of Bertrand Russell:

"The whole problem with the world is that fools and fanatics are always so certain of themselves and wiser people so full of doubts."

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."

* The Nasdaq strength has masked a decline in the S&P Index
* On a very short term basis the bias for most stocks has been lower, not higher
* Nonetheless, the abrupt "kick saves" from swift overnight and intraday drops have been noteworthy
We can debate the market - but, more than ever, it is important to modify what market we are discussing!
Some are pointing out to a continued Bull Market - but June's complexion is not all that perfect and, in some circles of securities, it has been a Bear Market.
Let's look at the short term direction of stocks - this is something that can not be debated:
On June 8, (SPY) traded over $323 and fell to $296 within seven days - a decline of about -8%.
Then, SPY rallied back to $315 late last week and fell to about $304 in today's early hours - a decline of nearly -4%.
Currently, SPY is trading slightly under $310 - at $309.80.
Throughout the last few weeks, the Nasdaq - with the remarkably strong leadership by Microsoft (MSFT) and FAANG - has been the world's fair and has performed far better than the S&P Index and most equities.
As the market has narrowed, many speculative issues since early June have fallen. Some, including many in my spec short basket of "worthless" securities, have dropped in dramatic fashion.
I have been profitably shorting the rips and covering the dips during the month of June.
Statistically, the S&P Index is about +12% above my "fair market value" calculation - so the reward vs. risk is unattractive.
"Something" is keeping me from being aggressive on the short side so I remain patient and continue to give Mr. Market a wider berth than is usual relative to my calculus.
That "something" may be market positioning (which still seems defensive) or the renewed belief in the Fed controlling the curve. Or the continued "kick saves" by some unknown force (Mnuchin?) that has been accompanied with some very sharp selloffs.
While I don't understand the confidence of the bulls (given the plethora of concerns expressed in my Diary) my conviction level is low for now - but the "red tickets" lie in front of me.
Stay tuned.

As of 2 pm, equities are at the day's high.

(SPY) is at $310.40 - about 45 handles above my Friday short cover (see below).

(QQQ) is at $246.30 - about 35 handles above my Friday short cover (also see below).

Jun 19, 2020 ' 05:00 PM EDT DOUG KASS

Calling an Audible

* And I will relax well this weekend!

At $306.1 I have covered the balance of my (SPY) short. (-$2.55 from close)

At $242.65 I have covered the balance of my (QQQ) short. (-$1.65 from close).

I plan to reshort both Indices on any strength.

I intend to give the market a wider berth than usual before I move back net short of exposure.

But move I will, as the markets distance more from "fair market value."

Market breadth turns flat.

THE MESSAGE BELOW IS FROM THE TOWN'S WEBSITE

THIS IS THE NEXT UPDATE SINCE 6/18/20

June 22, 2020 1:32 PM

Covid-19 UPDATE for 6/22/20

Covid-19 STATISTICS

• The sharp increase in reported new Covid-19 cases over the last 10 days, especially in Palm Beach County, is concerning. The rise in cases within Palm Beach County is putting stress on our hospital resources, as ICU bed availability has been reduced to approximately 10%, with several hospitals having no ICU beds at this time.
• As reported by Palm Beach County Health Director, Dr. Alina Alonso, at the time Phase 1 reopening began, the county averaged 68 new cases per day. That number has more than tripled to an average of 220 per day.
• As of 1:30 PM today, the following information was provided by the Florida Department of Health

38 confirmed cases in the Town of Palm Beach (15% increase in last 10 days), with 2 deaths.

8,094 confirmed cases in Palm Beach County (35% increase in last 10 days), with 468 deaths.

100,217 confirmed Covid-19 cases in the State of Florida (41% increase from 10 days ago), with 3,173 deaths.

2,281,069 confirmed cases in the US (13% increase from 10 days ago), with 120,044 deaths.

9,003,042 confirmed cases worldwide (19% increase from 10 days ago), with 469,122 deaths.

• It is important to note that the numbers above are cumulative and not in real time. Many of the individuals who tested positive for Covid-19 have fully recovered, including most of those who live within the Town.

FACIAL COVERINGS

• It is widely understood that the use of facial coverings reduces the risk of Covid-19 transmission. The Palm Beach County Commission is scheduled to meet on Tuesday, June 23 to consider implementing a county-wide mandatory mask order. If approved, it will include the Town of Palm Beach. 

• In the meantime, please be reminded that per Palm Beach County Order No. 8, all persons working in, patronizing, or otherwise physically present in grocery stores, restaurants, pharmacies, construction sites, public transit vehicles, vehicles for hire, and locations where social distancing measures are not possible should wear facial coverings as defined by the CDC. 

• All other persons physically present in any public place in Palm Beach County are strongly urged to wear facial coverings as defined by the CDC.

BEACHES, PARKS AND RECREATION FACILITIES 

• Beaches are open for use per the conditions outlined in Palm Beach County Order No. 6, which requires following CDC guidelines by limiting gatherings to no more than 10 people distancing themselves from other parties by more than 6 feet

• All public parks within the Town are open, but CDC social distancing guidelines must be followed. The Seaview Park playground remains closed until further notice. 

• The Town's public golf course and tennis facilities are open but usage must comply with restrictions outlined in Palm Beach County Order No. 7. Please be reminded that the Par 3 Golf Course is open for golfing only. Please refrain from using the cart paths on the course for exercising or walking dogs.

• Lake Trail temporary rules remain in effect until Phase 2 reopening initiated. From 9:00AM - 4:00PM daily, only walkers and runners are permitted. Cyclists and all other permitted uses can take place outside of these times.

* But looking to get back short given my numerous concerns
With my current book including bank and packaged foods longs and short a basket of speculative "worthless" stocks, short (AAPL) and (CAT) and long very small (SDS) -- I am still in a small net long exposure to the markets.
It should be noted that days ago (and up to late Friday) I was between medium and large net short in exposure!
I want to get very short as it is my view that the markets are between 10%-15% above "fair market value" - but I will remain disciplined, look to be a bit more reactionary in my positioning and give the market a wider berth than usual.
______
Long BAC (large), C (large), WFC (large), JPM (large), THS (large), SJM (large), KHC (large), SDS very small.
Short AAPL, CAT.

As the averages move higher (Nasdaq +73, S&P +12), the market's breadth continues to diverge from the strength in the overall Indices.

At noon, breadth is 4-3 negative.

Existing home sales in May, likely reflecting contract signings in January thru April, totaled 3.91 million annualized and that is below the estimate of 4.09 million, and down from 4.33 million in April. This is the slowest pace since 2010 but we of course know the main reason. The supply did increase which it always does in the spring but combined with the lower sales count brought the months' supply up to 4.8 from 4.0. First time buyers made up 34% of total sales vs. 36% in April, 34% in March and 32% in February. After pretty robust price gains in the first four months of the year (again measuring closings, not contract signings so pre-covid), the median home price rose +2.3% year over year.   

Bottom Line

This number is really meaningless in that the pace of contract signings certainly collapsed in March and April, and things were still shutdown in May in many places. We've definitely seen in the recent new home sales data and mortgage apps that the housing market is seeing better demand thanks in part to the desire for suburban living. At some point though, the pace of housing transactions will need to correlate to the underlying economy in terms of job and wage growth. 

Here is a 10 year chart of existing home sales:  

The S&P is about equidistant between Friday's high and last night's futures low.
I just purchased a small starter position in (SDS) (ProShares UltraShort) at $19.54.
As noted earlier, after the close on Friday I covered all of my sizable Index shorts.

My speculative short package of what I deem to be worthless shares hit a new low on Friday.
I expect more new lows.
I remain short June 26 (SPY) $314 calls (I shorted two tranches over the last week) - I am hopeful they expire worthless. (SPY cash is now $307.70).
All good, thus far.

Below is a copy of Thursday's note.

Several sessions ago, we reported that Ye Olde Traders Handbook suggested that the then present volatility would normally be followed by days or even weeks of zigzag type trading of various proportions as the market tries to resettle and reconsolidate itself.

So far the market seems to be following that pattern. Again, we assume that while Covid will be a market factor, it will be somewhat diminished. Early reactions to reports that it was almost 100% fatal like the Black Plague that, I think, seems to be diminishing and therefore the impact should vary.

As we go into this week, politics has not taken over as yet and so we will look for further Covid reports as more states begin to see their numbers coming up.

Post-solstice week has a very mild seasonal negative pattern. Doesn't look compelling.

Stay safe.

Arthur

* How big is the racial wealth gap?

* Rising seas threaten the mortgage market.

* Financial wizardry in private equity valuations. 

After going out for dinner Saturday night for the 1st time since late February, I believe this country can reopen safely but not without strict mask wearing. And that is just what the economic pace of the reopening is going to come down to. To my readers I'm just stating the obvious but I felt the need to say it again. Yes, we need a vaccine and effective therapeutics before safely going to a baseball game or concert but I believe the rest of the economy can power thru this but only with mask wearing. This all said, I still believe it will take years to get back to the GDP level of Q4 2019 and January and February of 2020 even with a vaccine as profit margins compress as the cost of doing business goes up in a post covid world, supply chains will take time to readjust, consumers save more and spend less, companies focus on their balance sheets, inflation comes our way and the Fed will need to reign in their waterfall liquidity spigot that will only be messy when they do considering how far they have gone over the past few months.

Proving that the runaway to a recovery is still long, South Korea said in the 1st 20 days of June, exports fell 7.5% y/o/y while imports were lower by 12% y/o/y. That is certainly an improvement from May however and helped by the reopening in China (exports rose 15% y/o/y) but this will take time. Exports to the US were down by 10% and to the EU by 14%. South Korea is a great proxy for global trade. The Kospi closed down by .7%.

Also reflecting this long road, the June UK CBI industrial orders index only improved by 4 pts m/o/m to -58 from -62 and that was below the estimate of a gain to -50. CBI said "Output volumes declined at a new record pace and export order books fell to an all time low, reflecting the significant fall in demand in the UK and abroad. Firms are again hoping that this will ease somewhat in the next three months." It will ease as more businesses reopen and consumers engage again with their pocketbooks so I'm not going to put much stake in this data yet but with the June figures coming out now when the global economy started reopening in May, there will be growing scrutiny on this economic news. While the pound is up, the 10 yr gilt yield is down by 3 bps to just .21%. The FTSE 100 is unchanged.

It's not everyday that you hear humility from a central bank head and one that thinks about the exit soon after going whole hog thru the monetary easing front door. It certainly is nothing I've ever heard from a Fed Chair who always seems to want to play the role of Superman and assumes no negative side effects of their actions. Andrew Bailey, the Governor of the Bank of England wrote an editorial today defending the actions they've taken but also saying "But the financial system mustn't become reliant on these extraordinary levels of reserves...the current scale of central bank reserves mustn't become a permanent feature. As economies recover, it's likely that some of the exceptional monetary stimulus will need to be withdrawn, including by reducing reserves. This wouldn't take us back to the very low levels of reserves before the financial crisis, which sometimes failed to recognize the role they play in ensuring the stability of the financial system. But elevated balance sheets could limit the room for maneuver in future emergencies." My bottom line, the cost of money printing and QE is not free. It's a dangerous drug to get hooked on and we've seen just how impossible it is to get off.

Howard Marks' latest commentary - The Anatomy of a Rally.

* C remains my favorite bank stock
* Though I continue to expect that money center banks will consolidate their recent gains, the intermediate term outlook for the shares of Citigroup and the other large bank stocks remains promising

I last visited Citigroup (C) comprehensively in my Diary (well before Covid-19 spread) on January, 2020 - expressing the view that the bank represented my favorite money center bank long position.

At that time (at the beginning of the year), I had reduced C and my other bank holdings as they hit 52 week highs as the reward vs. risk was diminished. Since then and into this decline I have moved back to large-sized.

Here is what I wrote:

-- I approach this group with some near-term caution after outsized gains (of between +40% and +50%) in 2019
-- Small earnings beats might be met with modest profit taking
-- Citigroup and my other money center bank holdings are now within 10% of my year-end 2020 price targets

Citigroup (C) leads off the earnings parade today.

I would caution on C -- and, for that matter, the money center bank shares as a whole -- as the bank stocks have had an especially good run over the last four months (and all stand within 10% of my year-end price targets). Even though I am expecting slight beats relative to consensus, there could be some profit taking. (Note: At current prices I recently reduced my positions from very large to medium sized).

Citigroup, like BankAmerica (BAC) and JP Morgan (JPM) should record a modest beat (my fourth-quarter estimate is $1.86/share vs consensus of $1.82).

In terms of the composition of the report, revenue should total approximately $18 billion (a +3% to +4% projected gain) and costs should be flat to +1%. Credit costs are trending slightly higher -- net loss rates should be steady and there should be a reserve build in the final three months of the year.

This should produce a return on tangible book value of 10.8% -- bringing full year ROTCE at 11.8%, close to meeting management's +12% target this year.

Follow up conference call commentary on the forward outlook will be important -- discussion of domestic and global economic growth, the state of the capital markets (including investment banking pipelines) and credit quality will be the topics that investors may react to.

It is likely that Citigroup will also review its medium-term financial targets of +2% to +3% revenue growth, continued market share gains (in credit cards, retail banking and investment banking), flat expenses (and operating efficiencies), continued deposit growth, and normalized credit costs -- with an intermediate-term objective of achieving a 14% return on tangible capital.

I continue to hold to my $87.50-$90/share year-end 2020 price target for Citigroup. (This compares to a $80.65/share Monday close)

I was previously looking for EPS of $8.80 and $9.60 for Citigroup in 2020 and in 2021.

These numbers fall down to $5.70 and $7.75 in my recession scenario.

Utilizing a similar weighted average valuation methodology that I used yesterday with Bank of America (and JP Morgan, above), and factoring in these revised EPS projections reduces my 12 month price target from about $89/share to $72.50/share (but still providing a large upside of over +60%).

This price target represents a reasonable (and conservative relative to history) 0.9 x stated book value and 1.07x tangible book value.

C in a Post Covid-19 World

Since then, the world has changed - and so have Citigroup and other banks' share prices.

2020 for Citigroup, as with other large money center banks, will be a year of transition in which large loan loss provisions in the year's first half will weigh on full year EPS forecasts.

In my view the reduction in valuations have more than compensated for the lower near term earnings hit and Citigroup remains very attractive.

My Citigroup 2020E is $3.25/share - about in-line with consensus.

For 2021 (a "snap back year") I am estimating full year EPS of $7.25-$7.50/share.

Assuming a (conservative) return to about +2% real GDP growth, modest loan growth, more normalized capital markets activity and improving credit conditions -- my 2022E is $8.50-$9.00/share, representing in excess of about a 11% return on tangible book value.

My projections for 2021-22 are above street consensus.

Importantly (in this +15%+ EPS projection) I am assuming no real change in interest rates and no alteration in the yield curve, the return of share buybacks and the continued exploitation of cost/expense containment opportunities.

Citigroup is currently trading at about $52.50/share. My 12 month price target, based on the same methodology discussed above, is $75/share, or about 44% above the current price. This price target equates to only 0.9x book value.

My long term (2022-23) price target exceeds $100/share (same calculus).

Bottom Line

Though I expect some continued back and filling for Citigroup, and the large money center banks stocks, the outlook remains excellent for the intermediate term.

Citigroup remains my favorite bank stock - as it is the most undervalued relative to "fair market value."

In the 2022-23 time frame, Citigroup could trade in excess of $100/share. 

* We are all day traders now
* After covering my short hedges after the close on Friday I am preparing to reshort the markets
* But I will give Mr. Market a wider berth than usual before I short

We are all day traders now.

I remain shocked how many are currently imitating Citigroup's (C) Chuck Prince, who in July, 2007 said:

""When the music stops, in terms of liquidity, things will be complicated. But as long as the music is playing, you've got to get up and dance. We're still dancing."

I remain surprised how many are ignoring the unique and growing number of adverse outcomes that have reduced the upside reward relative to the downside risk.

I am also surprised how many are partying with @stoolpresidente (I enjoy watching David Portnoy - especially his pizza reviews!) and Wayne and Garth and ignoring the concept of "margin of safety."

Not surprising is the confidence expressed by the bulls who seemingly are hanging on the unquestioned notion of "liquidity" as their guiding light to optimism. Many of those same optimists were quarantined in their bomb shelters at the March lows - fearful of stocks and the opportunities they then represented.

As for me, I have no clue what the markets will do on Monday or over the next few days, but I am increasingly confident that the outlook for the capital markets over the next few months is deteriorating.

* It is my full intention to reestablish my short positions on strength!

S&P futures were almost 35 lower last night but have reversed and are now +23 handles.

To reiterate, I covered all my Index shorts after the close and coincident with a whoosh lower in after hours late Friday afternoon:

Jun 19, 2020 ' 05:00 PM EDT DOUG KASS

Calling an Audible

* And I will relax well this weekend!

At $306.1 I have covered the balance of my (SPY) short. (-$2.55 from close)

At $242.65 I have covered the balance of my (QQQ) short. (-$1.65 from close).

I plan to reshort both Indices on any strength.

Position: Short SPY calls

As I stated in my Diary I still am short my (SPY) calls that expire this week.

My gross and net exposure is as low as I can recall in a while.

Danielle DiMartino Booth on the good deltas disappearing:

• Initial jobless claims' improvement from early April has vanished, coming in at -58,000 in the week ending June 13 vs. 29.2 million collecting unemployment insurance; in the last four weeks, C&I loans have contracted as lending standards tighten due to rising delinquency risk
• The recent spike in COVID-19 cases sets back reopening efforts reflected in Apple's re-closing some stores; a slowdown in reopening will add pressure to workers as layoffs keep rising even as extra unemployment benefits expire in five weeks and rent moratoria expire
• Since shutting down, New York City, whose economy equates to that of the 6th largest state, has lost every private sector job created since the financial crisis; U.S. firms' repatriated profits hit a two-year high as cash is brought home to shore up fraying balance sheets

The Fourth of July is just around the corner. Given our streaming movie existence, QI queued up action flicks with patriotic punchlines. Armageddon, Captain America, Independence Day, Midway, The Patriot, Saving Private Ryan...and of course, Delta Force. Wait...what? Call it a soft spot for Walker Texas Ranger (Google: Talladega Nights). Chuck Norris plays Major Scott McCoy, the best of the best (in a spoofy sense) in a crack U.S. commando unit specializing in anti-terrorist missions based (very loosely) on the June 1985 hijacking of a TWA flight and subsequent hostage crisis in Beirut, Lebanon. Who could forget this nail-biter?

Major McCoy:
"If we don't get out of here, we'll be speaking Arabic"

Col. Alexander:
"I didn't know you spoke Arabic?!"

Major McCoy:
" If we don't get out of here, we'll all be speaking Arabic"

As we approach the end of the second quarter, our chief concern is that the force of the delta done gone and disappeared. Feast your eyes on the right-hand chart. After ups and downs, the delta of the improvement in Initial Weekly Jobless Claims has flatlined. In the week ended March 28, initial jobless claims grew by 3.56 million, the worst post-shutdown seven-day stretch. But then the string of negative weekly deltas commenced - a good thing. In the week ended April 11, 1.38 million fewer Americans applied for unemployment insurance. That improvement (blue line) has since shrunk to -58,000 in the week ended June 13, a rounding error when there are 29.2 million collecting unemployment insurance.

The arrested advancement coincides with a general uptrend in Google Trends searches for "permanently closing" (green line) and a concomitant decline in searches for "temporary layoff" (yellow line). In the event you've been tuned out, the tie that binds is the rise in COVID-19 cases in 22 states. Rather than be all-inclusive beginning with Hawaii where contagiousness is the highest, we've carved out the hot spot states of Arizona, California, Florida, North Carolina and Texas, which collectively represent 33.3% of the U.S. population. In the two weeks ended June 18, the average 5-day case count in those five rose 71% to 16,000 from 9,300. If the national count rate north of 30,000/day is sustained, we'll have seen 2.5 million cases nationwide in a week's time.

The setback due to the patchwork approach to reopening presents the economy with its first two steps back since the virus onset. On Friday, Apple spooked the markets with the announcement that it would be re-closing 11 stores. Will this become a trend as hot spots multiply?

And then there's the other reopening, that of freezes on rent moratoria. Since shutdowns began, renters in 42 states and Washington, D.C. have been protected from eviction under statewide moratoria. The problem is more than a third have been lifted or are soon set to expire. Renters will have to cough up months of back pay or face eviction. According to Apartment List, 32% of renters missed their payments in June, up from 31% in May and 24% in April. The best news is most managed to catch up. Only 11% in May and 10% in April had still not paid by month's end.

And some states have extended moratoria with strings attached. In New York's case, the two-month reprieve only applies to renters who've suffered a financial hardship due to COVID-19 or qualify for unemployment. It excludes undocumented immigrants, certain gig workers or people working off the books, and renters with pending eviction cases. The Legal Aid Society estimates that 50,000 evictions will be filed today.

That will be a blow to a city that's reeling and a country trying to heal. At $838 billion for full year 2018, New York City was 4.1% of U.S. GDP ranking it 6th vis-à-vis all U.S. states. Since the City shut down, nearly 1,500 layoff notices from different firms have been filed with the state. In all, New York has lost every private sector job created since the financial crisis.

The stubbornness of both the coronavirus and joblessness combined with the potential for the onset of a delayed credit cycle being unleashed has not been lost on Corporate America. C-Suite occupants can do the math as moratoria on rent collide with PPP layoffs beginning in earnest this week followed by the extra $600 a week on unemployment insurance expiring in five weeks.

As highlighted in this weekend's Wall Street Journal, U.S. firms repatriated between $175-$225 billion in the first quarter, a two-year high only bested by the initial burst following the passage of the tax bill. Many executives also knew they're not paying their own rent - the delinquency rate on commercial real estate has ticked up to levels not seen since the last recession. Are Commercial & Industrial (C&I) delinquencies next? Banks sense this risk and have shrunk C&I lending for four weeks straight (orange bars). The good deltas are disappearing.