* Mr. Market often does its best to confound the most investors

* It may be doing it again, right now

* I am large net long

The most distinguishing feature of today's market action (nearly three-to-one advancers over decliners) was the excellent pin action of value over growth.

I am hopeful that the pivot continues.

Nasdaq was up by less than one half of 1% and the S&P rose by +1.3% -- but value stocks stood out.

The Vanguard Value Index fund (VTV) rose by 1.9% while Vanguard Small-Cap Value Index fund (VBR) was +2.4%.

Financials were up about 1.8% to 2.0% -- with the Financial Select Sector SPDR fund (XLF) ("Trade of the Week") +1.9%. Caterpillar (CAT) , Smucker  (SJM) and the energy space (with most stocks +3%) were upside standouts. 

On the other side of the coin was absolute and relative weakness in growthy names -- Amazon (AMZN) , Square (SQ) , Zoom (ZM) , Carvana (CVNA) , Twitter (TWTR) (discussed today in my Diary) and Apple (AAPL) .

Bond prices firmed (I am short), as did gold (I am long).

This morning, I added to my net long exposure, which is now large-sized.

In Thursday's "Be Fearful and Fearless, but Trade and Invest Dispassionately"I made the case that while we should never be overly confident in view and that it is incumbent to maintain flexibility as an opportunistic trader/investor in a heightened period of volatility in which machines and algos dominate the investment landscape.

I continue to see a Biden Bump.

Today Biden gained some ground against Trump on the betting site Predictit and in Nate Silver's "538" election forecast.

Unlike some, I see the European lockdowns and more health restrictions domestically as a positive -- the virus will be more likely contained.

If the election is uncontested (as I assume in my base-case expectation) and assuming normal seasonal strength, rising investor pessimism (you just have to read our comments section to see how cautious many are) and my confidence that the scientific and medical communities are ever closer to a bonafide vaccine and therapeutic remedy -- could all augur well for the markets over the near term.

Most importantly, a Biden win and "Blue Wave" would spell a substantial stimulus bill as early as mid-February.

I currently have the fewest gross exposure to shorts in quite a while.

Thanks so much for reading my Diary today -- I hope it was helpful to your trading and investing process.

Enjoy the evening.

Be safe.

I have added to my value based ETF holdings.

The October ISM manufacturing index was 59.3 vs. 55.4 in September and above the estimate of 56. We are finally seeing the rebuild in inventories show up in the inventory category which rose +4.8 points to 51.9, the highest since April 2019. Customer inventories though remain extraordinarily lean at 36.7. This could mean more ordering as new orders recovered what it lost last month, rising by +7.7 points to an elevated 67.9. Backlogs were up a touch but at 55.7, the highest since November 2018. Export orders rose +1.4 points month over month to 55.7 and imports were higher by +4.1 points to 58.1. Assume the export data didn't include the European shutdowns just announced. Employment also rebounded, finally getting back above 50 for the first time since July 2019, up to 53.2. This all came with greater pricing pressure as prices paid rose for the sixth straight month to 65.5, the highest since October 2018. 

Of the 18 industries surveyed, 15 saw growth vs. 14 in September and 15 in August. Two saw a contraction vs. four last month. 

The ISM said simply, "The manufacturing economy continued its recovery in October." I continue to believe that we're seeing inventories rebuilding with still an open question about the pace of growth after this process takes place. A machinery company in the commentary said, "Business is almost back to normal levels; however, customers are still cautious with capital spending." Another said "Business levels have just about returned to pre Covid levels. Our company is remaining conservative with fixed cost spending, knowing the uncertainties that lie ahead with Covid and its potential impact globally."

Markit also reported its final read on U.S. manufacturing and it rose a touch to 53.4 from 53.2. With respect to the outlook they said, "Business expectations remained positive in October, improving on September's four month low, as firms foresee a rise in output over the coming year. The degree of confidence was historically muted, however, as fears regarding the pandemic weighed on optimism."

There was no response in Treasuries to the upside ISM as yields are lower after last week's jump where the 10 year yield again teased its 200 day moving average. 

Here is a six year chart on the ISM Manufacturing Index:

Here is a six year chart on inventories: 

Here is a 20 year chart on customer inventories:  

Here is a six year chart on prices paid: 

Richb

This is not meant to be political but is additive (I think) to the level of confidence in a short term bullish market view. Historically, the prediction markets have been more accurate than the polls, and while the odds could change (they are updated real time) between the time I type this and when anyone clicks on the link, Predictit would currently suggest a 290-248 Biden victory, so very close. Polls have states like Florida and Georgia as a toss up but the prediction markets have them both as favorable for Trump as Pennsylvania is for Biden. Looking at the map, a flip of Pennsylvania and Arizona (both of which went for Trump last time) would make Trump the winner. My takeaway is that there is a higher risk of a protracted and ugly election battle past Wednesday so in my retired state I am likely to take some profits this morning and be in a more defensive positioning. If Doug is correct on his expected outcome, I am certain to leave some money on the table but this will help me sleep at night! Guilty as charged with first level thinking and following (some of) the herd.

https://www.predictit.org

dougie kass Richb

good post.
dougie

Dr. Kent Daniels

Dougie - I'm also looking at financials as a value play and since I have a mostly Technical approach to markets I made a 1 year chart comparing the Regional Bank ETF (KRE) to the XLF. Here's the chart if you're interested: http://schrts.co/XESzsfWE. Maybe it's time for relative bounce in XLF compared to the Regionals but as of last Friday the Regionals have a strong and clear cut advantage!

dougie kass Dr. Kent Daniels • a few seconds from now

thank you!
Dougie

Again, the pivot from growth to value is conspicuous this morning. 

Look at strength in "value" stocks like Caterpillar (CAT) , Smucker (SJM) , selected financials (XLF) and ETFs, like (VBR) and (VTV) . 

By contrast, growthy names like Apple (AAPL) , Amazon (AMZN) , Zoom (ZM) , and Carvana (CVNA) are weak.
__________

Long SJM (large), VBR (large), VTV (large), XLF (large), AMZN (large).

Short AAPL (small), ZM (small), CVNA (small).

I sold my Twitter (TWTR) position at around $50/share recently - a few days before the company reported weak quarterly metrics. 

The shares quickly fell to the low $40s - it is now trading at $40.65, so I spent some time on Twitter's quarterly release over the weekend. 

As a result of that analysis and given the weak growth in the last quarter's usage, I am reducing my Buy Level from $40-$42 to $37-$40. 

I have been very optimistic regarding Twitter based on "The Twitter Election." 

The election is tomorrow and though there will continue to be the potential - especially if President Trump loses - for an active Twitter account from Donald Trump, the opportunity for the company has come and will be gone tomorrow. 

The weak daily average user growth could spell some problems or questions about future advertising growth. It also raises continue questions as to Jack Dorsey's focus and/or management skills. 

For now Twitter is a "show me" stock and I will only reestablish my long position if the discount to the company's private market value increases.

Break in.

I have moved to large-sized long in exposure.

For emphasis. 

As mentioned in the Comments Section on Friday and, again, in today's opening missive I am back to medium-sized in Alphabet (GOOGL)  - after buying more at $1610 Friday. 

And I am small-size in shorts: Zoom (ZM) , Apple (AAPL) , Carvana (CVNA) , and Square (SQ) . I plan to build back up my short positions on strength, which I expect.

* America's elections are more secure than you think. 

* Geothermal energy is poised for a breakout. 

* On valuations.

* The stars, fundamentals, "the pivot" (from growth to value), bond prices and charts might now be aligning to produce a strong short term rally in bank stocks

The case for a near term rally in bank stocks may be (finally!) improving: 

* Fundamentals - As expressed below, third quarter EPS results indicated that despite record low interest rates (margins and net interest income) and unprecedented loan loss provisioning, the major money center banks have scaled a lot of their profit headwinds and will still likely record an expansion in tangible book value in 2020 over 2019. Investors should now begin to focus on the "easy credit compares" and nadir of net interest spreads next year. 

* Bond Prices Are Firming: Bond yields are approaching the highest level since June. Bank stocks are the most asset sensitive sector and directly benefit from rising fixed income yields. 

* The Charts May Be Aligned: Surprisingly to many the relative performance of banks stocks has been flat since July. Look closely and a breakout to the upside (of the BKX) could be at hand:

Source: The Divine Ms M

Moreover, on Thursday, in "Have The Charts of Financials Begun to Turn More Favorable?, I pointed out that the chart of JPMorgan (JPM) and other banks looked deeply oversold and similar to the favorable set up of a year ago - right before the group had a strong absolute and relative move higher: 

However, this time, the relative strength line has been okay.

* The Pivot From Growth to Value May Finally Be At Hand:

Banks are value stocks and should be a prime beneficiary of the pivot.

As a perspective, I recently highlighted what I believe to be a very strong longer term case for financials in "Bank Stocks Are Almost Universally Hated - Perhaps Providing an Unprecedented Longer Term Opportunity for Investors."

I wrote:

* I remain very optimistic about the 2-3 year sector outlook
* With individual add on buys, new positions in GS and MS and a large XLF position taken last week, my exposure to financials now exceed 25%
* This week's EPS announcements will show clear signposts that better profits reports lie ahead in 2021-23

Everyone loves Raymond, but nearly everyone hates bank stocks. As an example, this morning, Jim "El Capitan" Cramer came down hard on the banking group and questioned whether the space can ever perform well.

I respectfully disagree with all the naysayers as, to me, the intermediate term outlook for bank stocks remains solid and this week's EPS announcements may even encourage investors over the near term:

* A strong $2.2 trillion Democratic stimulus bill in February is positive for banks and the extension of bank credit, especially as it is likely that U.S. corporate profits will be reduced by higher tax rates in 2021. A grander stimulus package will likely shape the yield curve and cause interest rates to rise. This is not priced in and could be a surprise factor to the upside.

* One of the largest asset class mispricings, which has held back financial stocks, are the current level of interest rates. With inflation breakevens rising and with unbridled fiscal spending, and given other factors, interest rates may have nowhere to go but higher.

* Rising interest rates is important to bank profitability - and the leverage off of higher rates and much larger deposit bases is not appreciated. Bank deposit growth has been enormous over the last decade but the deposit balance gains over the last 12 months has been even more extraordinary. The leveraged impact of higher interest rates on much higher - and low cost - deposit balances will be enormous.

* Given the likelihood that there will be a "Blue Wave," corporate tax rates will move higher. This means that companies will need more, not less, access to bank credit in 2021.

* Higher corporate tax rates (from 21% to 28%) will only modestly reduce bank earnings - by about -7% - about the same reduction in industrial earnings.

* But the marked reduction in loan loss provisioning in 2021-22 will lead to a material outperformance of bank earnings per share relative to the rest of the S&P Index and market.

* While many are concerned about more regulation from a Democratic administration, it is clear to me that a Biden White House will first have its eyes first on controlling technology through regulation and antitrust. As a consequence I feel it is unlikely that banks will not be subject to a major legislative effort over the next few years. They are already heavily regulated!

* From a near term standpoint, third quarter will likely indicate a topping in loan loss provisions, a continued improvement in fee based income lines (e.g., mortgages) and strong capital market activity's contribution to overall revenues and profits.

* While there is still net interest margin pressure, 3Q results will indicate, and bring on commentary, regarding a bottoming in non fee margins and income.

* Industry balance sheets remain remarkably strong despite Covid's impact on business and personal credit. Most banks will survive an unprecedented rise in loan loss provisioning - with a large income statement hit but without any significant balance sheet damage. Despite the P&L hit, most large money center banks will INCREASE their book value year over year (2020/2019).

* Very low valuations reflect the gross skepticism towards banks and, a valuation reset higher could provide a low hanging fruit factor to much better bank stock prices.

I have written quite a lot on the banking industry over the last six months:

* Looking For Love In All The Right Places

* Daily Affirmations: Short Bonds, Buy Banks?

* Bank Buy Back Ban Extended

* Buy Entry Levels in Banks

* Fine Tuning JPMorgan Earnings Estimates

* It May Be Time For Bank Stocks To Trade Higher and Move Out of the Recent Trading Range

* The Report of the Banking Industry's Death is Greatly Exaggerated

* Bank of America Remains Attractive

* The Intermediate Term Case for Bank Stocks Remains Strong and Intact

* An Explanation of Wells Fargo's Challenges and My Bank Stock Strategy

Bottom Line

Despite the near universal hatred towards the group, the relative earnings momentum of banks (against the non financial components of the S&P Index) will begin improving materially in the quarters ahead. That positive momentum and change in the rate of growth will accelerate as 2021 progresses.

Not content with my already large financial holdings, I have recently added to my four money center bank positions, and established new positions in (GS) (at $190, now +$5/share on the day and trading over $213 this morning).

Finally, let's remember that in a market dominated by products and strategies that chase price and momentum, "buyers live higher"- should bank stocks make a move higher from here, the machines and algos will be following and buying bank stocks.

Post haste.

And the same cabal that is bearish on banks will then turn positive on banks.

* The contrarian view (and 'second level thinking'), which I hold to, is that tomorrow's election could bring us a surprising short term rally in equities

* Last week I continued the move of increasing my long net exposure to (close to) large-sized

* This morning's upside futures action - up 40 handles in the S&P and +130 handles in the Nasdaq - is unexpected by many

*Bond yields are at the highest level since June - a signpost that the "flight to safety" concerns are being resolved

Friday's action was awful, but a very late in the day rally resulted in a "kick save." So, at the conclusion of the trading day it was only a "miserable" session, well off (about 50 S&P handles) the low of the day. 

I was out at a Board of Directors meeting all day and I didn't write, but I outlined in our Comments Section that I further covered half of my individual equity shorts late in the day (I have no Index shorts on):

dougie kass•3 days ago

Covering some shorts - moving all from medium sized to small sized:
* Square at $154
* CVNA at $184.30
* ZM at $459,60
* AAPL at $108

Dougie

And I further added to several of my individual equity longs: 

dougie kass•3 days ago

Making some late day trades.
* Bought back some of the Google (at $1610) I sold yesterday- bringing me back to medium sized from small sized.
* Adding to Amazon now.
Dougie

Throughout last week I consistently raised my long exposure - especially at any sign of market weakness. These actions took me from between medium-sized to large-sized net long to very close to large net long by Friday's market close.

This Morning's Strength

At 5:30 am S&P and Nasdaq futures were +40 and +130 handles respectively, confounding a number of observers. 

In terms of a thin reed indicator - over the last week, my Tweeter thread has been composed, in the main, of tweeps who are either pessimistic, very cautious and unwilling to take risk going into tomorrow's election, and in the face of a further spread of Covid-19 in the U.S. and Europe. 

I am of the view that the most pessimistic market development would have been an uncontested election and, in all likelihood, no new stimulus package. By contrast, I believe that the recent firming of Biden's and the Democratic party's position in the polls and betting odds could contribute further to a another, or second "Biden Bump." I still believe that this is the case, which, in turn, would raise optimism towards a larger than expected early February stimulus package. 

As to the global health crisis it is a "first level" concern, my interpretation is "second level." The Covid-19 crisis is something that I, and others, believe could have been prevented by earlier precautionary moves. But, it seems to me, that the newly announced lockdowns in England, Portugal and elsewhere in Europe, as well as tightening up of restrictions in the U.S., will serve to flatten the curve over the next 1-2 months. 

Finally, remember the other conditions of "The Biden Bump" in "Will We See a 'Biden Bump' Which May Levitate Stocks Throughout the Balance of the Year?": 

But there are other factors that argue in favor of a "Biden Bump" and continued market advance. Specifically:

* We are ever closer to a vaccine and therapeutics than we have been at any point in 2020. I said in March (one of the reasons I grew very optimistic on stocks) was that I have a strong belief in our health and scientific communities. (See the Regeneron (REGN) news from last evening.) I still do.

* We are also approaching normal seasonal strength in equities.

* The Federal Reserve will not change course. Our central bank has been committed, like never before, to fuel domestic economic growth.

* If the market gets moving (higher) in the month or two ahead, a changed and embedded market structure (passive investors that chase strength) could exacerbate the short term recovery in stock prices.

Bottom Line

I continue to transact more and pontificate less because opportunities are born out of uncertainty. 

Not surprisingly, many are frozen into inaction because of election and Covid concerns - that is only a decision you can make based on your risk appetite and profile. 

Last week the S&P Index fell within 10% of its "fair market value." This means that many stocks were likely undervalued - hopefully my portfolio is filled with some of them! 

Bond yields rose to their highest level since June (see below) - a signal that "flight to safety" concerns may be evaporating:

I added to my long exposure into last week's weakness. 

While I have no concession on the truth, I believe that, based on the growing evidence delivered by the election polls and forecasts, which now clearly favor a Biden victory, there is a growing chance of a "Blue Wave." 

Like the Trump victory in 2016, a "Blue Wave" could be viewed as a near term market friendly development.

* Political IQ ' Florida Final Poll: Biden 51% Trump 47%: Rasmussen is one of the most pro-Trump polls out there. This poll surprises me. If it prices accurate it's over for the President. 

* Predictit: Biden and Trump odds have been stable over the past week. 

* Nate Silver's "538": This forecast has also been unchanged, still favoring Biden at 89% probability. 

Two from Charlie:

This is one of the reasons I grew more bullish late last week:

From Danielle DiMartino Booth: 

• Most U.S. retail investors are invested similarly, with 60% of 401(k)s in target-date funds and 88% of investment advisors recommending ETFs to clients; despite massive Fed support, these passive strategies will be put to the test as the renewed global shutdown acts as a drag
• Upper-income buying conditions continue to lag for large household durables and autos, per UMich's Survey of Consumers; the only recovery seen has been for home-buying conditions, with the Fed, FHA, Fannie Mae, and Freddie Mac helping drive record price appreciation
• Income uncertainty for the purchase of large durable goods, autos, and homes, as well as spending on discretionary goods, appears to be stalling; with confidence for those with six-figure incomes also wavering, the risk of a double-dip recession grows with each passing day

It started with the end of the Studebaker. In December 1963, the failed U.S. carmaker closed its South Bend, Indiana plant, an event that heralded the implosion of its pension plan. Defaulting on its obligations left its former employees' retirement safety nets in tatters. Incited, United Auto Workers' president Walther Reuther led a movement to backstop pension assets that culminated in the Employee Retirement Income Security Act of 1974. Employers could now be sued for restitution if they failed to meet their fiduciary responsibilities. The reform crusade didn't end there, though. In 1978, Congress passed the Revenue Act which included a provision, section 401(k), that allowed employees to defer taxes from bonuses and stock options. Three years later, the IRS ruled favorably on this new plan. With employers enticing workers with a match, adoption of the plans was rapid and widespread.

The 401(k) was never designed as a replacement to traditional defined benefit (DB) plans but rather a supplement. Try telling that to employers. Since the 1981 IRS ruling, the percentage of employees covered by DB plans has crashed from 60% to 12%. And, according to the Pew Charitable Trust, 53% now take part in a 401(k) while 35% are not covered by a plan of any kind. The Pension Protection Act of 2006 turbocharged employee participation by allowing 401(k) plans to adopt a default opt-in provision. The catch was the requirement to provide a "Qualified Default Investment Alternative" in order to use the opt-in default.

An overwhelming majority of employees chose "target date" funds, designed to automatically rebalance portfolio holdings as an employee approaches his or her retirement age. As per Cerulli Associates, nearly 60% of 401(k) plans are directed to target-date funds. QI's colleagues at Evergreen Gavekal recently highlighted a report by Vincent Deluard, Director of Global Macro Strategy at INTL FC Stone titled, "Swimming with the Target-Date Whale; Short for Halloween, Long for Christmas?" Appealing to our lack of conviction in coincidence, Deluard notes that, "the four most recent corrections ended in the last week of the quarter, and three of them ended on the same day - the 23rd." March 23rd, the day Jerome Powell fired his bazooka, corresponded with the $2.3 trillion in target-date funds rebalancing out of bonds and into stocks to keep demographic balances in check.

As for investors with holdings in IRAs and traditional brokerage accounts, with a hat tip to QI friend Jim Bianco, the U.S. has more than 12,000 investment adviser firms who employ more than 400,000 Registered Investment Advisors (RIAs). More than 35 million investors use these services. As for the investments, 88% of RIAs recommend ETFs for their clients. Incredibly, Bianco observes, "No other investment vehicle has a higher usage, not even cash at 83%!"

The bottom line is that the vast majority of U.S. retail investors are invested in the same manner. Call it the world's biggest crowded trade.

The year 1981 not only opened the 401(k) floodgates, it was also the last time there was a single-digit price-to-earnings multiple on the Standard & Poor's 500 stock index, the world's benchmark. As interest rates have fallen in lockstep, and despite major bumps along the way, there has never been a better time to be invested in the U.S. stock market. The Federal Reserve has made sure of it and given investors deep comfort in automated, passive strategies.

The trick now will be sustaining the confidence game. That's easier said than done against a backdrop of falling bond and stock prices and waning faith in the Fed's power to shepherd the real economy.

Despite the flood of liquidity and trillions in target-date and passive funds pumping up stocks since the March lows, upper-income buying conditions have yet to recover for anything but homes (left-hand chart). As we've covered comprehensively, it would have been difficult for housing to not rebound given the combined firing power of the FHA, Fannie Mae, Freddie Mac and the Fed feeding rampant speculation that's driven up home prices to record levels of appreciation.

Regardless of the election outcome, the risk of a rapid double-dip recession is growing with every day that passes. The income uncertainty as it applies to the purchase of large durable goods, autos and homes across the income spectrum (green line) has stalled and is flirting with turning into a "W." The same can be said for confidence among workers who make $100,000 or more (purple line). And finally, spending on discretionary goods - what we want as opposed to necessities - looks as if it could be rolling over (orange line).

It's worth adding that the U.S. economy does not exist in a vacuum. As evidenced in the price of crude oil, the renewed global slowdown will act as a drag. And to state the obvious, the virus will slow spending. Despite reporting blowout top-line growth, the mighty Amazon warned that spending on big ticket items was most at risk. After revenue growth of 37% in the third quarter, it forecast its top line could grow by as little as 17% in this year's final three months, a.k.a., the critical holiday shopping season.

Because of the way investing has been blindly automated, the 401(k) and other passive strategies will likely be put to the test after a remarkable 40-year run. It's with good reason that cash, cash equivalents and the ability to hedge are trading at a premium.