I am out of the office but I see there is a lot of confusion in the comments section as to my exposure.

I have made it very clear that I am large net short in exposure.

My conviction on the short side has grown as I observe the emerging fundamentals and rising prices. 

Enjoy the evening.

Be safe.

I have to admit to being stunned by the degree of optimism on Fin TV today. And I was elated!

I am leaving the office for a business meeting that might take two hours.

Radio silence for a while.

I am short Apple (AAPL) at $119.

Pressing more shorts and expanding net short exposure.

On a price to sales basis, stocks are at the highest level in history (at 2.71x). 

This is the 100th percentile of its historical distribution in over four decades of the stat being recorded. 

If you want to get bullish at these prices, like strategists Morgan Stanley's Mike Wilson, Credit Suisse's Jonathan Golub, and Goldman Sachs' David Kostin, I wish all the best of luck. 

I am now at a large short net exposure in equities. 

Price is what you pay, value is what you get.

* And with stocks inflated, the market may be vulnerable
* I am buying value stocks and shorting the markets

While S&P earnings estimates delivered by Wall Street strategists are moving up - perhaps in an attempt to rationalize high stock prices - the reality on Main Street is far different than that optimism. 

While two days does not a trend make, I have observed that interest rates in the last two days have declined - and bond prices have risen - indicating some market skepticism regarding domestic economic growth. 

With a disappointing domestic recovery growing in likelihood, the possibility of the Federal Reserve changing course next year coupled, arguably, with the likelihood of higher corporate tax rates - ambitious S&P consensus EPS estimates seemed destined to drift lower as 2021 goes by. 

Yesterday afternoon, Credit Suisse's Jonathan Golub commentary - he was neutral to cautious previously - is consistent with the above observation of emerging undue optimism. He writes:

S&P 500 to 4050 by Year-End 2021, 12.2% upside

We are initiating our 2021 S&P 500 price target of 4050, representing 12.2% upside from current levels (10.8% annualized). This is based on EPS of $168 in 2021 (previously $155), and $190 in 2022 (previously $170). These estimates imply EPS growth of 20% and 13% in 2021-22. Our target suggests multiples will contract from 21.9x today to 21.3x by year-end 2021, as earnings grow into currently elevated multiples.

Golub believes that the near term risks are real but are likely to fade: 

Near-Term Risks Real but Likely to Fade

While optimistic, we see a number near-term risks: (1) investor optimism is extremely extended, (2) production and distribution challenges could hamper the vaccine's rollout, (3) rising case counts could result in shutdowns, disrupting the holiday season, and (4) stimulus could remain politically unattainable. On a positive note, the successful vaccination of seniors and front-line workers could expedite the renormalization process well before herd immunity is achieved.

Morgan Stanley's Mike Wilson lives at $183/share and Goldman Sach's David Kostin holds to a $170/share 2021 S&P EPS estimate.

I am at below consensus, with a $150-$155/share projection.

My friends at Miller Tabak take a different view from Golub and the other bullish investment strategists, on the economic destruction caused by Covid-19 (something I discussed yesterday morning): 

Tuesday, November 17, 2020

Fall Covid-19 Surge Finally Doing Significant Economic Damage

We are seeing the first clear signs that the ongoing surge in covid-19 cases is having an adverse impact on the U.S. economy. Google's mobility data is one of the best high-frequency measures of real economic activity. Mobility has tracked GDP throughout the pandemic, plummeting in the spring, followed by an increasingly slow recovery. To identify the impact of the fall covid-19 wave, we compared recent changes in mobility by state to the number of new cases. For each additional 30 cases per 100,000 residents (which corresponds to 100,000 more new daily cases nationally), households have reduced their movement to retail and recreation locations, groceries, and pharmacies by about 3%. They are also reducing their movement to workplaces by about 1%.

Figure 1: 7-Day Average of U.S. Mobility (% change from Baseline) in 2020

These declines suggest that the fall wave will noticeably dent 4Q20 and 1Q21 growth. But the impact, so far, is much smaller than the declines from the spring when lockdowns caused nationwide mobility in some categories to fall by almost 50%. The unemployment rate falling below 7% despite cases being over three times higher than the spring makes clear that stay at home orders had at least as big of an economic impact as the public's own choices to restrict its economic activity in order to avoid the virus. Figure 1, above, shows that the virus continues to keep mobility well below its pre-pandemic levels. But the fall wave has only made things moderately worse.

A bigger downside risk is that the fall surge will lead to more stay at home orders. A few states, including Oregon and New Mexico, have re-imposed theirs and other states, including Michigan and California, have enacted significant new restrictions. The impact of these measures is not yet identifiable in the mobility data. We doubt, however, that stay at home orders will become as widespread or as long-lasting as in the spring, partly because public opinion surveys suggest that half of the public would not obey them. But if we are wrong, then the lack of fiscal support could make their economic impact even worse. As long as cases remain elevated, covid-19 will weigh on growth, possibly causing it to completely stagnate. But government closures of many businesses would risk a double-dip recession.

Bottom Line

Thanks to the wonderful vaccine news, seasonal strength in the equity markets and near resolution of the election -- with a kicker from price momentum-based products and strategies -- stocks have been levitating. 

With the risks to the downside in the economy and in corporate profits growing, the market's aggregate risk now overwhelms the upside reward. 

Sic transit gloria. 

I am buying value stocks and shorting the markets more aggressively.

After shorting more (SPY) and (QQQ) in pre-market trading (ramp), I have moved to large net short in exposure. 

Pray for me.

(Tuesday's comments and update appear at the end.)

We had suggested that the markets may have a consolidation day after several key indices moved to new record highs. Apparently, the market decided to oblige us and, the big caps rested, and the small caps continued to advance.

The market breadth improved slightly, which is an interesting sign of strength in a somewhat overbought market.

As dawn reached Manhattan on Wednesday, the futures were helped by reports that Boeing could receive recertification on their Max plane and by further reports of the apparent efficacy of the Pfizer vaccine and further reports they would be moving swiftly to get approval and, vaccinations could being early. They have all apparently pleasantly helped the market.

If, as the futures seem to indicate, the bulls decide to return to rally mode, obviously, we will look to see what happens when they test the recent highs. That would be roughly Dow 29900, S&P 3630 and Nasdaq 11960.

They will be the levels traders will look at. Do we touch and get repelled - showing a new line of resistance or do we simple march through?

Nevertheless, the bulls have the ball and, it is up to them. Obviously, we will keep an eye on the news ticker as always.

Stay safe.

Arthur

__________

The bulls followed-up on the vaccine celebration with a little bit of a spike into the close but it was not enough apparently to panic the shorts and, we ended with a mild technical overbought. That may be part of the reason for the pullback that we are seeing overnight.

No new news and the political picture remains murky as they talk of assumed outgoing President Trump going to make some key moves before leaving, if he leaves office.

Part of the minor overnight pullback may also be the result of some speculation that we may be in a race between vaccine availability and the Covid surge cresting.

Some speculate that if the Covid surge grows too large, it can put us behind a kind of eight ball that will limit the initial efficacy of the vaccine on the economy. In essence, will the GDP fall in the first quarter and by how much? Will that postpone the "reopening celebration" that traders had initially hoped the vaccine would bring?

The difficulty is that the balance between vaccine availability and further Covid outbreaks is not clearly measurable and, unfortunately, we may only learn of its economic impact when the numbers begin to come out. It is a concern but, as I say not measurable and, therefore, not easy to fit into your trading pattern.

Barring any new news on either vaccines or the political front, today looks somewhat like a consolidation day. As we noted, we are mildly overbought and, we will be looking at the further testimony from the social tech stocks and, Powell will be making comments, although not a major address later in the day. Some look to see if he will talk about increasing the size or frequency of their purchases.

So, overall, we will look for a little pushmi-pullyu and, a somewhat heightened sensitivity to the news ticker.

Stay safe.

Arthur

__________

Update - 1:50 p.m.

In this morning's comments we said this felt like it might be a consolidation day and, after the Dow and several other indices closed at record highs, the action certainly looks like they are consolidating those gains, in particular, trying to work off some of the overbought condition that resulted.

We think, barring any new surprises, we will chalk it up as a general consolidation.

Stay safe.

Arthur

* Knowledge@Wharton What is ahead for the US economy?

* Health experts warn that after big Thanksgiving celebrations expect small Christmas funerals.

* Why value investing works. 

Peter on mortgage activity and bitcoin: 

After declines in 6 of the past 7 weeks, the MBA said purchase applications rose 3.5% w/o/w, getting back some of what it lost over the prior two weeks. They are still up by 26% y/o/y. We've seen a plateau in the pace of applications to buy a home since May with much of that likely due to the dearth of inventory but I believe recently some of that is the affordability issue that is rising, particularly for the 1st time buyer. Refi's fell by 1.8% w/o/w but are still up 98% y/o/y with record low mortgage rates.

PURCHASE APPS

The UK saw headline CPI in October higher by .7% y/o/y and the core rate up by 1.5%, both up 2 tenths from September and both 2 tenths more than expected. PPI also was up more than estimated. These numbers are certainly subdued but a core rate of 1.5% in the middle of a pandemic is still not far from the BoE target of 2%. I continue to assume that 2021 will see higher levels as the economy rebounds further on the mass vaccine rollout, mostly in the 2nd half of 2021.

On the higher than expected print, along with Brexit deal expectations that are seemingly close, has the pound higher again, now approaching $1.33 vs the US dollar. The dollar is also broadly weaker across the board. Gilt yields are up slightly. On the persistent dollar weakness, it's only been bitcoin recently that has gotten going to the upside while gold and silver continue to consolidate its gains this year. After that consolidation is done though and I wish I knew when, I'm sure they join bitcoin to the upside.

BITCOIN

The lack of inflation in the Eurozone in October was confirmed with the final read that was the same as the initial. Headline CPI fell .3% y/o/y and rose .2% at the core. Lower energy prices kept a lid on the headline while little change in services and non energy industrial goods limited the price gain at the core. If there was to be higher inflation in this region, it will certainly be a 2021 story but whether Europe will be mimicking Japan or not with its inflation trends is still very possible notwithstanding all the actions of the ECB. The ECB plans on 'recalibrating' their policy at the December meeting but at this point, what is the point with the vaccine clearly being rolled out in the coming months.

The October Japanese trade data was mixed as exports, while down by .2% y/o/y, was better than the estimate of down 4.5% while import dropped by 13.3%, more than the forecast of an 8.8% decline. Exports to China grew by 10.2% y/o/y and rose by 2.5% to the US while falling by 2.6% to the EU. Bottom line, the export number continues to get less negative but your guess is as good as mine as to what global trade looks like in the coming months as we get thru the tough winter.

In the market with no memory from hour to hour:

So true:

zerohedge

@zerohedge

Learning from mistakes: 2018: Buying bitcoin at all time high... selling months later for 70% loss 2020" Buying NASDAQ at all time high with call spreads...

Danielle DiMartino Booth on a lopsided Chinese economy:

• Optimism for Chinese industrials surged to start Q4, with QI's Demand-Supply Indicator hitting 6.3, its highest level since January 2011's 6.6 print; industrial production in October also matched December 2019's 6.9% YoY pre-pandemic rate, portending further expansion
• From its May 27 low of around 7.2, the yuan has appreciated by more than 8% in recent weeks to near 6.6 per USD; imports of factory inputs will increase on the back of a stronger Chinese currency, translating to rising exports and strengthening global growth prospects
• Chinese retail sales rose 4.3% YoY in October, but remain down over the first 10 months and will subtract from 2020 GDP; until vaccine distribution is underway, China's supply-side virus response ensures global industrials will keep outperforming consumer services

Work from home has brought with it the temptation of the kitchen pantry. Sinful snacks are in such proximity, our will power is sorely tested. One retro tagline - today's title - will hopefully sway you to reach for a healthier alternative. In 1947, inspired by the V8 engine, the most powerful at the time, Chicago's Frank Constable devised a formula that launched V8 Vegetable Cocktail Juice. One year later, Constable was bought out by the Campbell Soup Company that's maintained continuous production of the beverage since. Though mostly water and tomato concentrate, V8 is defined by reconstitutes of eight vegetables - beets, celery, carrots, lettuce, parsley, watercress, spinach, and tomato. Next time a craving hits, grab a V8 instead and put some balance back in your diet.

But, if you're reaching beyond the pantry for that balance, remember there's precious little to be found in recessions with their propensity to provide great test cases for imbalances. Those of the garden variety are brought on by demand shocks that morph into supply shocks until demand sustainably rebounds and supply recovers in train. The COVID recession was unique in that both a demand and supply shock hit at the outset triggering China's shutdown, which slashed global demand and supply. The rest of the world followed as so many dominoes generating massive economic dislocations in the second quarter that have reversed course in 2020's second half.

We track short-run demand-supply imbalances with PMIs' New Orders-to-Inventories spreads, reliable guides for the near-term path of industrial output. Because there's more than one inventory metric in PMIs, notably IHS Markit's, we also can tap stocks of purchases, or inputs, and that of finished goods, or output not yet shipped. The two biggest economies - the U.S. and China - also provide alternative lenses into their factory sectors - respectively, the renowned ISM and China's Federation of Logistics & Purchasing (CFLP).

In the spirit of QI innovation, we've derived a proprietary Chinese Manufacturing PMI Demand-Supply Indicator (blue line), a fusion of four rudimentary elements via Markit and the CFLP - two New Orders-to-Stocks of Purchases/Inputs spreads, and two New Orders-to-Stocks of Finished Goods spreads. Markit covers private industries and the CFLP is weighted toward state-owned enterprises. Including all four spreads into one composite dispenses with bias favoring any one indicator.

The start of the fourth quarter saw a surge in optimism for China industrials. At 6.3, the Demand-Supply Indicator broke to the highest since January 2011's 6.6 reading. Hard data confirm. October China industrial production advanced at a 6.9% year-over-year rate (yellow line), maintaining September's pace, which matched December's pre-pandemic print. The excess demand signal from our Demand-Supply Indicator portends further improvement of China's industrial expansion.

An appreciating yuan supports the bullish narrative; in recent weeks, it's strengthened by more than 8% from the May 27 recent low of around 7.2 to near 6.6 to the U.S. dollar. A stronger Chinese currency means the Middle Kingdom can import more factory inputs which in turn rebalances supply with demand. More imports into China translate into rising Chinese exports to its key trading partners. The appreciating yuan should continue to reflect strengthening global growth prospects.

It follows that the greenback weakens. The annual trend in the U.S. Dollar Index (ticker DXY, green line) has an inverse relationship with QI's Demand-Supply Indicator. DXY is heavily weighted toward the euro and yen but excludes the yuan. Due to the interconnectedness of China's industrial trade with Japan and with the Euro Area, especially that of Germany, their currencies are viewed as proxies. For corroboration, and with a hat tip to QI friend Peter Boockvar, Bloomberg JP Morgan's Asia Dollar Index has hit the highest level since June 2018.

Because China better controlled the virus, the openness of the industrial supply chain won't be impeded, fresh demand shocks in other areas of the global economy, notwithstanding. Until vaccine distribution is underway, global industrials should continue to outperform their consumer services counterparts. In the meantime, China's excess demand will benefit nations that feed its appetite for exports, a continued trend that portends poorly for the dollar and favorably for commodities.

The trouble with airtight narratives is that they're too neat. That prompted us to play devil's advocate, with an assist from QI amigo Leland Miller, founder of the China Beige Book (CBB). According to his latest check, the respective demand for, and rejection of, loans from Commodities and Manufacturing players soared and crashed in the third quarter, mirror images of the second quarter. After the full thrust of Chinese stimulus aimed at infrastructure was apparent, lenders relaxed and opened their coffers, emboldened by officials' direct backstop.

Conversely, of the remaining five sectors, including Real Estate and Construction, Retail and Services saw the highest loan rejection rates. The lenders, who know their surveyed responses to the CBB are anonymous, recognize that China's growth miracle is predicated on official spending. To that end, October's retail sales were 4.3% higher than the year prior, but much less robust vis-à-vis industrial production's 6.9% rate.

As China expert Michael Pettis points out, "October contributed to a worsening of the domestic consumption, not an improvement." With retail sales down over 2020's first 10 months, he expects consumption's contribution to 2020 full year GDP to decline by roughly two percentage points. "We should recognize how lopsided and partial China's recovery has been," he wrote, "and how this was largely the consequence of Beijing's supply-side policy response to what was mostly a demand-side problem, unlike the responses in other countries." Maybe China should have had a V8.