And to my last post, Look what American Airlines (AAL) just printed.

This is SECURED debt at 12%...they printed a five-year UNSECURED issue at 3.75% on Feb. 20, 2020. This is just not sustainable.

I wanted to leave everyone with one thought -- while the Fed can provide liquidity, it cannot repair the balance sheets and income statements of companies that have been structurally challenged by the virus.
Like vitamin and supplement retailer, GNC (GNC) (with 5,800 stores) who filed bankruptcy this morning.
As I put it this morning: * We are just fixing broken windows right now -- not seeding future growth. * It is my view that a lot of earnings capacity is being removed from the economy by the virus and protests.

The intervention of the Federal Reserve has propped up many companies and has made capital raises possible. But there is a limitation to the number of times a company, doing very little business, can tap the capital markets when operating conditions show little sign of meaningful reversal.

Enjoy the evening.

Trade and invest well.

Be safe.

See you back here on Monday.

$3.7 billion to sell market on close.

As mentioned yesterday, I will not be writing over the next two days.
You will be in the very capable hands of Chris Versace and Bret Jensen.
If I do anything major I will post in our Comments Section!

I do not think the liquidity market can hold as one of the sole bull arguments.
One and a half weeks ago I wrote, "We Are Caught in a Trap of the Federal Reserve's Own Making" - it deserves a reposte:* The Fed has now been hoisted on its own petard
* Even slightly more idiotic than our monetary (and fiscal) authorities is the Robinhood gang
* We are all J. Wellington Wimpy now
* Defund the SEC?The Federal Reserve is like the dope dealer on the corner - ever tempting its customers until it's too late and they fall into the depths of addiction.Throughout the last decade the Fed had ample chances to disconnect monetary policy from the capital markets - and has continually flunked as they have been unwilling to "take" the consequences of clearing the economy and ridding excesses. Stated simply, the Fed has favored the capital markets in the short term - an absurdly low risk free rate of return and interest rates which serve to encourage the substitution of debt for equity - and has sacrificed the long term at the expense of production and the expansion of productive assets.

The Federal Reserve, after years of delivering the band aids of ever lower interest rates has been "hoisted with his own petard". That term, a phrase from a speech in William Shakespeare's "Hamlet" has become proverbial. The phrase's meaning is literally that a bomb-maker is blown up ("hoist" off the ground) by his own bomb (a "petard" is a small explosive device), and indicates an ironic reversal, or poetic justice. The phrase occurs in a central speech in the play in which Hamlet has discovered a plot on his life by Claudius and resolves to respond to it by letting the plotter be "Hoist with his own petard".

The Fed has not learned from history - the history of the ECB and Japan who have gutted their economies and impaired their financial institutions with ZIRP.

Next up, we will be reading about the damage to the U.S. pension industry.

Meanwhile, we have left ourselves with no margin for economic error.

The necessary Covid-19 policy responses has caught us already deeply in debt as it has been accompanied by a bulging and record annual U.S. deficit - an estimated $3.7 trillion this year - and a growing debtload that is beyond our imagination. The only thing containing our debtloads, as a governor to domestic growth, are near zero interest rates - a condition not likely to be everlasting.

The policy trip we have embarked upon is dangerous and market unfriendly.

Our fiscal policy has become similar to Popeye cartoon's J. Wellington Wimpy, who famously said "I will gladly pay you Tuesday for a hamburger for today."

Making matters worse is that many industries (e.g., lodging, restaurants, education, travel, airlines, etc.) will be permanently impaired, even with likely therapeutics solutions and the emergence of an effective vaccine. (See: "broken window fallacy")

This morning, Danielle DiMartino Booth discussed the very real threat that many of the temporary layoffs will become permanent.

We are in, as Jim Bianco has said, a 90% economy, at best.

Most S&P EPS forecasts for 2020-23 seem too elevated - perhaps materially so.

My analysis suggests that it will not be until 2023 before we return to the level of 2019 S&P EPS - and that is not what the consensus expects.

Defund the SEC?

* The SEC remains effete in their protection of the trader and investor

While investors have become addicted to more and more Fed cowbell, speculation has run amok and as if Robinhood has left Sherwood Forrest and has entered the Wild West (or worse).

The stock market is not supposed to be a joke in which newbies speculate on worthless and bankrupt equities.

Those on Robinhood, including DDTG, simply don't understand the consequences of what they are doing (besides providing me with an unusual shorting opportunity in about 10-15 stocks they are levitating for no reason). They have not contemplated the thought of some stocks going down 50% to 95% - at which point some would still be materially overvalued.

They also probably don't even realize that Robinhood is screwing them by selling their order flow. Remember Robinhood trades are commission free and for now doesn't seem to be an advertising-driven revenue product. This means that they are like Facebook (FB) - where the trader/consumer is the product ("the power of free").

Quants make a killing front-running this stuff. (In addition to what they do pre-market to these stocks to goose them to get the Robnhood bandits excited.) Robinhood order in, lightspeed to the quants, they trade, then the Robinhood trade goes off. That is how these stocks get ripped up, especially because the retail guys don't even put limit order is and the quants are getting ahead of them professionally.

Instead, the Sherwood Forrest gamblers view stock trading in a binary fashion -- like playing the Green Bay Packers (with the points) or taking the money line on the Boston Red Sox.

Bottom Line

Before the Fed lost its way, the stock market had a real purpose - providing equity for growing companies in need of capital.

Before the Fed lost its way, there was natural price discovery.

Stocks are risky, long dated assets. That is why investors demand higher returns from them to compensate for risk. That also means they can become underpriced and overpriced.

I remain of the view that the S&P's "fair market value" is about 2750 (spot is about 3010 now) and that a trading range of 2500-3010 seems likely over the balance of the year.

A new regime of volatility seems increasingly likely.

For most, the best thing to do at the current time is to do nothing at all.

For now, watch the Robinhood traders flame out and hold larger than usual cash reserves in order to take advantage of what seems to be a likely uneven and southerly route for U.S. equities over the balance of 2020.

One of the stocks I will be buying if the market corrects is Twitter (TWTR) .

Trading at $31.69, I will be buying at $30 or lower.

Here is what I recently wrote on the company in "It's Time for Twitter To Change To a Subscription-Based Model":

* That strategy would reduce annual sales by approximately 30% but profits would soar and the stock price could double!
* I recently sold the shares but would aggressively buy them back under $30/share

Back in late May ("Goodnight Tweet Heart Its Time To Go"), I sold Twitter (TWTR) .

As Alphabet/Google (GOOGL) and Facebook (FB) have become ever more dominant (and profitable), Twitter has taken a backseat - in sales, profits and average revenue per user (half of Facebook).

Twitter's advertising model has failed the company. Twitter still doesn't have scale for an ad model and the ad tools they have are suboptimal.

It is time for Twitter to make a wholesale change and adopt to a radically different business model - one based on subscription fees.

As Professor Scott Galloway recently wrote:

"Their opportunity is to acquire distressed media properties, go vertical and move to a subscription model. Subscription fees should be based on the number of followers. If @kyliejenner can garner $430,000 per promoted tweet, she will pay $10,000 a month to maintain her revenue stream and @karaswisher (1.3 million followers) would pay $250 a month. Verified accounts with less than 2000 followers would remain free to maintain critical mass."

Twitter should also consider acquiring some of the very inexpensive media properties that remain independent (e.g., Conde Nast, Hearst McClatchy, etc.) which - like other streaming platforms, could buoy the aggregate subscription offering.

There is also a huge B2B market opportunity - after all, Twitter has now effectively replaced investor relations firms, marketing, news agencies and public relations firms. Many companies would be price inelastic to a monthly fee.

While Twitter would probably lose approximately 30% of its current sales, profitability and the stock price could soar in a move to subscription based services.

Professor Galloway goes on:

"The subscription model also has a free gift with purchase - identity. People are less awful when their name and reputation are attached. Ad-supported platforms are incentivized to allow bots and Russian interference, and to provide more oxygen to ideas that lack merit but are incendiary. Rage equals engagement, which translates to more Nissan ads. Remember that time when Netflix or LinkedIn really pissed you off? That was Twitter or Facebook."

The final point is that since the company is so bad in the advertising function now - Twitter would benefit of an upgrade to a subscription model as the company would likely forfeit much less advertising to Facebook and Google (both of which monetize users, as I mentioned, more than twice as Twitter).

Bottom Line

A move to a subscription-based model will inure to Twitter's bottom line and to its share price.

The time has come.

I also put on a short basket of casino shorts in addition to the aforementioned shorts this morning - for the obvious reason that it appears that the threat of Covid-19 is expanding.

This morning I moved from small net long to between small and medium net short in exposure:

* I have covered my short (SPY) calls.
* I have moved my (SDS) long to large.
* I have initiated an (IWM) short.
* I have added to my individual stock shorts:

1. Added to (CAT) and (AAPL) shorts.

2. Added to my speculative basket of "worthless/bankrupt" shorts.

3. Created a basket of large cap shorts of some high beta and recent leadership names that appear to me to be extended. This basket actually includes some stocks that I actually like analytically over the long term. They represent short "fillers" that might be vulnerable if I am correct about a near term correction. Look to recent market leaders, large percentage movers off of the March bottom and companies exposed to a new wave of Covid-19 spread - companies like Blackstone (BX) , Morgan Stanley  (MS) , Disney (DIS) , Microsoft (MSFT) , Alphabet (GOOGL) , Penn Gaming (PENN) , Hyatt (HLT) and Hilton (H) . Again, some of these stocks are attractive (at a price) as long term investments - but not at current levels. Color me transparent and flexible in approach. (Note: I will be quick to cover this short basket given the above characterizations.)

4. I have also shorted several retailers.

Rev Shark did a thoughtful and succinct job this morning in identifying what possible signs market participants should be looking to in determining a market correction in These 4 Market Warning Signs Will Tell You When It's Time To Take  Action

"I often write about a change in market character as the tipoff for more aggressive defensive action. A change of character can manifest itself in various ways depending on the market environment. Currently, these are the chief characteristics of the market that we need to watch.

1. A shift away from Apple (AAPL) and FAANG names. The big cap technology stocks have gone almost parabolic lately and are quite extended. Some consolidation is needed but if support levels do not hold, that will be a major warning sign.
2. A slowdown in speculative trading. As I discussed yesterday, there has been a number of sector themes working very well such as SPACs, electric vehicles, biotechnology, gambling, etc. If those pockets of hot action start to dry up, it will impact sentiment and money will sit on the sidelines.
3. Correlated selling action. The main signal of a market problem is when stock picking goes out the window and stocks are sold systematically without regard to individual merits. The sharp drops always occur on very lopsided breadth. When folks want out and aren't selective about what is being sold it is time to be careful.
4. Dip buying. Everyone wants to buy a dip when the market is in an uptrend. It becomes much more difficult when the bounces are not immediate. Buying into a downtrend is not nearly as appealing when the pattern of dip buying starts to deteriorate."

I am out of my large short (SPY) call position for more than a 90% gain in about a week.

* As we move from the March market lows to what I see as a maturing market rally* Amid heightened optimism and rising bullish sentiment I see threatening skies
* I am now net short "For the first time since mid May, we have a very minor divergence developing in breadth (blue line). The S&P (brown) is a fraction higher than last Tuesday's high of 3124, but the cumulative advance/decline line is lower. This is also something to pay attention to..."
- Divine Ms M, "If We Poke the Market, Will It Show Some Life?" 
My approach to this market since March can be shown in four stages since February:
* The February Breakdown - As the market began to break down and traded below my 'fair market value', I began to move into and materially raise my long exposure amid fear and panic around the spread of Covid-19 and its impact on global economic growth and U.S. corporate profits. The odor of Group Stink permeated the markets and my move to the long side was not a popular one!
* The March Lows - Slightly before the March lows I moved to a large net long exposure - citing that equities traded at a 20% discount to 'fair market value." I suggested, for the second time since December, 2018, stocks represented unusual value and that some stocks were trading at what could be considered near generational lows. Besides the undervaluation calculus I cited the likelihood of curve flattening, the improving prospects for medical and health inroads by the scientific community, and the liquidity prospects ("for as far as the eye could see") were exceptional based on what I expected to be a huge policy response. I went on to suggest "The Mother of All Short Squeezes and A Rip Your Face Rally" could be a surprising development in the months ahead.
* The Rip Your Face Rally - An unprecedented market rally ensued - something that the herd did not expect. I profited mightily - in fact during the two month rally I made far more than I did from the late 2018 lows and more than in any eight week period, ever. The S&P sliced through my 2750 'fair market value' and proceeded to rally by nearly another +15%, back to levels that no longer provided an attractive upside reward vs. downside risk. I moved out of my many longs, selling more than 15 core long investments.
* The Maturing Rally - As the S&P approached 3000 and went beyond, I increased my short hedges - moving to large net short exposures as upside reward was dwarfed by downside risk - at least using my methodology of five different scenarios (economic and profit growth, inflation, interest rates, policy, geopolitical, valuation, etc., and assigning a probability to each). I covered my shorts in the early June S&P move from about 3230 to 2960 and recently reshorted the next up move to about 3150 and covered on the move back towards 3000. Again, successfully.
My going forward concerns continue to warrant a conservative view of the markets.
As I have often expressed and summarized in my "broken window" post recently: * We are just fixing broken windows right now -- not seeding future growth. * It is my view that a lot of earnings capacity is being removed from the economy by the virus and riots. * A new Democratic Administration (and blue wave) is highly likely -- it will prioritize redistribution over growth.
* The markets are overextended and wholly dependent on the Fed stimulus and liquidity.* However that stimuli -- being used to stabilize businesses/the economy, employees' incomes -- is not likely to provide much of a catalyst for the future growth dynamic.
* That federal largesse has countered the Covid-19 economic shock by serving to weigh small businesses and large corporations with even more debt -- and that's a governor to growth.
* Meanwhile, paradigm shifts signal some permanence of job losses, a far slower than expected economic recovery and reduced economic potential and business "earnings power."

The signposts of an end to the spectacular market recovery are starting to surface.

In this morning's commentary Peter Boockvar notes the rising bullish sentiment:

"Bullish sentiment as measured by II is now approaching extremes as the Bull/Bear spread is just below 40. Bulls rose to 57.3 w/o/w from 54.9 and that is the most since January 22nd. Bears fell for the 13th straight week to 18.4 from 18.6 and compares with 41.7 in March. The spread of 38.9 is the highest since that January 22nd date. Bottom line, at least by this sentiment take from strictly a contrarian stance this reading is a negative for stocks."

Moreover, breadth is starting to wane (see Helene's quote at the beginning of the missive and see above Sentiment Trader tweet). And with traders' speculative juices awakened (Portnoy will start complaining?) and my above concerns growing in possibility - I am prepared to move to a net short exposure.

Two days ago, in "Where I Stand", I outlined my view succinctly:

* 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.Bottom Line
All the signposts, optimism and elevated valuations, rising speculation, breadth deterioration, as well as the likelihood of disappointing fundamentals relative to consensus of a maturing market cycle, are apparent to me.
I am now net short.

I am back to small net short.

Tuesday, stocks shot higher on the opening, led by the big techs and it looked like the bulls were about to begin a new leg to the upside. 

Late in the day, the rally faded a bit and the S&P actually closed at its possibly lowest point of the day. That requires a complete rethink and so we may be back into the post solstice dull-drums that we discussed. 

Overnight, futures pull back smartly on reports that the virus has begun to spread again. Prompting fears of economic slowdown or even enforced closures beginning once more. Weakness in crude is also a minor factor in the equity pullback but a minor one at best. 

Virus impact is also somewhat noticeable in a minor flight to safety as gold and other assets climb slightly. Bulls will need to hold their ground but this will make it look like the market is returning to that waffling pattern that we spoke of at the end of last week. 

Stay safe. 

Arthur

_______________ 

From Tuesday:

Overnight, markets whip-sawed initially on comments by Navarro that the trade deal might be dead then resurrected by comments from Trump and others that the deal was still in effect, although there was some trust problem. That has resulted in a good deal of short covering. 

Overnight, futures now indicate that the bulls may reassert control and may in fact decide to step out of the zigzag pattern and move back into a rally mode. So for now, it is up to them to prove and they need to rally the Dow slightly more than 450 points to take full control. 

We will see how it works out.

Stay safe. 

Arthur

My only Index exposure is short a large position in the June 26 (SPY) $314 calls and a small position long (SDS) (increased yesterday at $18.90).
I established my short call position in two tranches - and have a cost of about $5/share.
I have my fingers crossed that they expire worthless. (SPY is currently trading under $310.)

I will be travelling today so my posts will be shorter and less frequent.

* The everything is an expensive market.
* China is the bubble that never pops.
* Looking at the tragedy of the (TVIX) .

There is clear disappointment that the warmer weather has not been effective in slowing the pace of virus spread but what is clear is wearing a mask does. The good that will come of the increase in positive tests is that those who think it's cool not to wear a mask will start to get the message, whether voluntary or forced by the local/state government, that it is not. It is imperative that the anti mask wearers get the message because an increase in virus counts will dissuade the responsible ones from going out and spending and business will suffer.

Bullish sentiment as measured by II is now approaching extremes as the Bull/Bear spread is just below 40. Bulls rose to 57.3 w/o/w from 54.9 and that is the most since January 22nd. Bears fell for the 13th straight week to 18.4 from 18.6 and compares with 41.7 in March. The spread of 38.9 is the highest since that January 22nd date. Bottom line, at least by this sentiment take from strictly a contrarian stance this reading is a negative for stocks.

Coincident with the economic reopening, business confidence in both Germany and France improved m/o/m in June. The German IFO rose to 86.2 from 79.7 and that was a touch above the estimate of 85 with most of the gain coming from the Expectations component. The IFO said succinctly "German business sees light at the end of the tunnel." As seen in the chart though, there is still progress to be made to get back to where we were.

GERMAN IFO

The French business confidence index in June rose 18 pts m/o/m to 78, 6 pts better than expected. The services and retail sectors bounced the most with gains also seen in manufacturing and employment. For perspective, this index was 94 in March and 105 in February.

While both numbers exceeded expectations, a reopening gain was expected anyway and it's why the euro is little changed, bonds are as well and stocks are trading off the virus spread news and on our tariff threat on some European products.

This is what you get when central bankers kill the bond market. Austria is selling its 2nd 100 yr bond and if you're lucky enough to get an allocation for 2b euros of bonds you will get a massive yield of just .88%. In September 2017 when they last sold this maturity, the Austrian government paid 2.11%. Orders totaled for 13b euros. I see just about zero chance the owner of this new issue will make money over a 100 yr period on an inflation adjusted basis.

My friend Danielle DiMartino Booth says prepare for downside surprises (I agree, the current market celebration seems premature):

• The top two U.S. income quintiles who refuse to join in reopening due to lack of mask requirements constitute more than 60% of U.S. spending; COVID spikes in California, Texas and Florida are costly given the three account for nearly 30% of U.S. consumption
• Germany, which levied steep fines for non-compliance with mask requirements, is enjoying a more robust reopening vis-à-vis the U.S.; even so, Germany's reliance on exports is hampering the pace of recovery as major manufacturers continue to announce job cuts
• The United States is prematurely celebrating its post-COVID economic renaissance; real-time indications suggest investors will encounter downside surprises in the coming months as high-income consumers remain largely sidelined

The year was 1919. American pulp writer Johnston McCulley had just created the character Zorro. Little would he know of the reincarnation explosion to come in the heartthrob form of a litany of leading men. Over the last century, Douglas Fairbanks, Tyrone Power, Frank Langella, George Hamilton, Anthony Hopkins and Antonio Banderas have all donned the signature all-black costume with cape, sombrero cordobés and mask covering the upper half of his face. Walt Disney himself was the Executive Producer of the Zorro television series that aired between 1957 and 1959. As we're sure you know, the masked vigilante was a defender of the common folk, known for his trademark sword skills and signature 'Z' carvings on his defeated foes.

It's not the upper face millions of Americans are covering these days in defense of an unseen microscopic enemy. A recent Gallup poll revealed that 80% of those at the top of the education scale - college graduate or postgraduate - either always or sometimes wore a mask or cloth face covering in public. This same demographic translates to the top 40% of the income distribution that accounts for 61% of spending in the United States.

More importantly, this cohort accounts for 62% of spending at restaurants and 67% of consumption of alcoholic beverages - they're the ones who order Don Julio 1942 without thinking twice. Put another way, the top two quintiles of the income stack are one in the same with those who frequent the classy joints that require reservations of their patrons.

Speaking of planning ahead, if you're so inclined, download the OpenTable App in advance of your eventual escape. It's the perfect travel companion, offering extraordinary dining experiences in over 52,000 restaurants around the world, so you can find a local gem wherever you are. Since we're fantasizing about traveling, did you know that the same 40% of highest income earners comprises more than 70% of spending at hotels and for transportation, like airfares. You see where we're headed with this.

In a post-COVID world, if you don it, they will come - the biggest spenders, that is. If you don't don it, the Coronavirus spreads rendering the top earners prisoners within their homes...by choice. By the looks of the left chart, the shut-ins have already occurred as C19 cases surge in three of the most populous states - California, Texas and Florida - that account for nearly 30 cents of every dollar spent nationwide.

Back to that clever App. OpenTable's innovative reach has extended to higher-frequency big data to apprise reopening efficacy. OpenTable's Seated Diners dataset offers up a buffet of choices by country, state and city across the globe. We focused on two locales - the U.S. and Germany - and depict two scales to allow for U.S. population being four times its size.

The U.S. has seen a gradual grind higher from full shutdown a couple of months ago. The backslide in restaurant activity this week (green line, right chart) occurs against a backdrop of spiking U.S. COVID cases. Conversely, Germany has seen a major flattening in its pandemic curve (purple line, left chart) and a subsequent continuous improvement in eating out (yellow line, right chart). Germany is what a real coronavirus recovery looks like. And it can't hurt the restaurant trade if your Prime Minister is a modern-day fan of Zorro (and imposes stiff fines for those who refuse to wear masks in public places)?

But we digress...Let's shift to role reversal. The OpenTable trend in Germany looks more tied to the U.S. economic surprise index. And seated diners in the U.S. are tracking more closely to the Euro Area economic surprise index. What gives?

Pulling this web of kite string apart, the performance of the Euro Area surprise index has come back from the abyss of -304.6 reached on May 11 and continually beat consensus expectations since. As of yesterday's close, it had risen to a "more respectable" -92.2. Then there's the U.S. - euphoria personified at a record high 155.7 through June 23, boomeranged back from the worst ever -144.6 on April 30.

Are we to believe the U.S. monetary and fiscal responses to the Coronacrisis are solely responsible for the record run of upside surprises? Or was the collective of Street economists domiciled closest to the New York metro's outbreak skewing their estimates negative given their proximity to the hottest of hot spots?

Reality is what people do, like going out to eat, not how badly economists are off on their forecasts. Consumers in both the U.S. and Germany are betting with their stomachs. Germany is beating the U.S. in the recovery race. Watching the diner data will continue to inform us on each economy's respective near-term performance.

A wise investor would be channeling their inner Zorro. Like deft swashbucklers with rapier swords in hand, be ready to carve a 'Z' into the U.S. economic surprise index. Watch the German experience for a more realistic outlook where Daimler just announced plans to slash another 10,000 positions on top of last November's 10,000 in job cuts. Maybe upper management is wise to would-be U.S. buyers of their fine automobiles (still) sheltering in place, waiting for the masses to wake to the mask reality. Prepare for downside surprises.