"Just one more thing."

-- Lt-Columbo

Occasionally one finds kernels of wisdom on Twitter:

Thanks for reading my Diary today and all week.

Have a great weekend.

Be safe.

(I will try to be as well!)

* I do love pizza

* But the dual concerns of pulling forward sales and some evidence of disappointing sales, relative to high expectations, has reduced my upside price target for Papa John's (PZZA) .

In keeping with my paring down of some long term investing positions that have reduced upside vs. downside ratios ( (GM) , (MS) , (PNC) , (GS) , (WMT) , (DIS) , (GOOGL) , (VBR) , (VTV) , etc.), I have reduced to small-sized my position in Papa John's. 

While I don't view PZZA shares as particularly expensive, I am increasingly concerned, with the 2021 introduction of several Covid-19 vaccines, that the markets will begin to refocus on the pulling forward of future sales at Papa John's into the recent and current quarters. Moreover, we are beginning to see some weakness relative to high expectations in certain regional markets. (Note: Our channel checks have not been exhaustive as we have been focused on only a few regions in our research.) 

I don't think there is a lot of downside to the shares but sales comps will be increasingly difficult next year - so the upside reward is lower than I previously anticipated.
__________ 

Long PZZA (small), GM (small), MS (small), GS (small), WMT (small), DIS (small), GOOGL, VBR (small), VTV (small).

Given my earlier view expressed about the market's oversold and overvalued condition in my opening missive - I am reducing my overall net exposure through some additional individual shorts (Tesla (TSLA) and Apple (AAPL) ) and now via a reduction in my Alphabet (GOOGL) long investment. 

As posted in my Diary, I have been a consistent buyer on Google on all dips over the last few months. 

Given the price rise and the diminished upside vs. downside, I am taking the position today from large-sized to medium-sized at $1790. 

The shares traded at $1400 two months ago! 

Google was added to my Best Ideas List on December 26, 2018 at $1001. 

I have added to my Tesla (TSLA) short at $594, and my Apple (AAPL) short at $117.

First, my dachshund puppy got sick, and then on the way out for some coffee the car in front of me abruptly stops and my BMW is totaled.

I am not sure what will happen next but my strong advice is not to listen to any of my investment ideas today!

*The "Biden Bump" has taken stocks higher in the fourth quarter

* Many stocks have moved from undervalued to fairly or overvalued

* Market participants are now again complacent, greed has replaced fear and markets are now vulnerable to a bitcoin-like drop at any moment

* I remain medium-sized net long in exposure

"Price has a way of changing sentiment."
- Divine Ms M (pinned tweet!)

The market is overbought and statistically overvalued after experiencing the third best month (in November), in percentage terms, in history. 

Speculation is now running amok (EV, SPACs, etc.) and sentiment is at an extreme - whether seen by the CNN Fear and Greed Index sentiment studies, or, as I have noted, high gross and net hedge fund exposure as well as other data. This is in marked contrast to September/October when many were fearful of the election and its consequence on equities. 

Stocks are now about 20% above my calculus of "fair market value" - that discrepancy has been a good tell for me of market vulnerability in the past. 

Bit Coin Redux?

Consider the abrupt $3,000 decline in the price of bitcoin that abruptly took place in the last 36 hours - it could come anytime to equities. 

The Biden Bump

In early October, I wrote about the positive near term market impact of aBiden Bump- a non consensus view that many, especially Republicans(!), disagreed with. 

At its core was my forecast of an expectedly clear Biden victory (my Surprise List's electoral college forecast almost exactly predicted Biden's electoral college votes) which would result in a non litigated election. I based this on the betting shops and polls - which some dismissed because of the predictive errors of 2016. 

I also, at the time, underscored that I was confident in the health and scientific communities' ability to discover therapeutics and vaccines to squash Covid-10. 

In addition, while many thought the market's health would be conditioned on a 2020 stimulus bill I never thought a bill was in the offing - but, rather a Democratic led stimulus package was likely in early February. Again, I though this as a positive as I believed the markets would "see through" the failure of a package this year. 

Seasonality and poor (defensive) market positioning were also conditions I mentioned contributing to a fourth quarter Biden Bump.

I noted, at the time, that value stocks were cheap relative to growth - stretched to an unprecedented differential. I posited that a "ketchup" trade in value stocks could also abet a market advance. 

As the market's advance gained speed in the last two months, many of the positive conditions that I highlighted a while ago have reversed. Positioning is no longer defensive, the election outcome is now certain and, in recent weeks, the market advance has accelerated coincident with a Biden victory. Several vaccines, with fantastic results, have been announced and will enter the market in early 2021. 

A weak market and investors' uncertainty/fear have been replaced with all-time Index highs and investor ebullience, and even greed. 

Here is a reposte of that important article: 

Oct 05, 2020 ' 09:25 AM EDT DOUG KASS

The 'Biden Bump' Could Levitate Stocks Over the Near Term

* Unlike the consensus, I would not view what appears to be an increasingly likely Democratic victory as a reason to sell stocks over the near term.

* I would own and be long stocks at this time.

* Most importantly, a Biden win and Democratic sweep of the Congress would hasten the imperative and passage of a massive fiscal stimulus program -- that is now being "discussed" between the two parties -- probably as soon as February, 2021.

* Consider this contrary, and second level thinking... that a possible Biden Bump (higher) in equities lies ahead, coupled with a group of other positive factors - like cautious market positioning, changing market structure, seasonal strength, an unlitigated election, and that we are far closer to therapeutic and vaccine solutions, etc.

* Friday's buys (on weakness) took me from medium-sized to between medium and large-sized in net long exposure.

"The upshot is simple: to achieve superior investment results, you have to hold non-consensus, contrarian views regarding value, and they have to be right. That's not easy... The good news is that the prevalence of first level thinkers increases the returns available to second level thinkers. To consistently achieve superior investment returns, you must be one of them."

- Howard Marks. The Most Important Thing: Uncommon Sense For The Thoughtful Investor

As I pointed out on Thursday morning, the market's rally from the September lows has coincided with the rising popularity, in the polls and betting parlors, of Vice President Joe Biden. The trend of a narrowing path to a second four year term for President Trump has been steady and the gap between the two was widening up well before the early Friday morning's announcement that President Trump has Covid-19. The uncertainty of the President's health caused a Pavlovian reaction and a not unexpected hit to the markets on Friday... which has been almost recovered already this morning.

The consensus is that a second term for President Trump is market and business friendly and that the Biden's tax plans are hostile to the markets.

"I recognize my view is a contrary one. Most think, as my friend Peter Boockvar wrote to me (in an email exchange between us this morning) 'that people will shoot first and ask questions later on tax policy. Everyone will want to pay the 2020 cap gains tax rate and worry about hike in corporate taxes. If 2021 doesn't bring that, stocks will rebound but we know the money management industry is very sensitive and emotional to anything happening in November and December. ' Peter might be correct in a normal year but perhaps not in a year in which unemployment is so elevated and in which a large number of small businesses have been gutted and are in desperate need of a financial lifeline. Moreover, if you look closely and analyze Vice President Biden's tax plan - it appears quite thoughtful." (As to my last point on Biden's tax plan - I do not think it is bad for the markets looking out the next few years. His tax plan is sensible and necessary).

- Kass Diary: Will We See a 'Biden Bump" Which May Levitate Stocks Throughout the Balance of the Year?" (September 30, 2020)

I respect all thoughtful and rigorous investment views - like those expressed by fellow contributor, Bret Jensen, who wrote on Friday in support of that consensus:

"In Thursday's Daily Diary, Doug Kass postulated that the markets are possibly getting a "Biden Bump" as chances seem to be increasing of a Democratic clean sweep come November. I have the complete opposite point of view, which is basically what markets largely consist of -- contradictory opinions leading to different positions. I just don't see how the prospect of higher taxes, more regulation, adding congressional input into corporate decisions and a more pro-union tilt at the National Labor Relations Board (NLRB) and in the court system will be good for business confidence, investment, profits, the economy or the markets. If these policies were a recipe for success, the accelerating exodus out of states such as California, New York and Illinois would not be occurring. In addition, futures plunged overnight on word that President Trump has tested positive for Covid-19, which most likely hurts his re-election chances even further. This undermines the case that a Biden Bump is the reason for the rally we've seen this week in equities."

- Bret Jensen, I Am Not Sold on a 'Biden Bump' In the Markets

But, I respectfully disagree with Bret (and my view, detailed Thursday and this morning, has nothing to do with politics!) as stated in "Will We See a "Biden Bump" Which May Levitate Stocks Throughout the Balance of the Year?"

* From my perch a more convincing Biden win (and possible Congressional sweep) is now my baseline expectation. This, to me, is market friendly and let me explain.

* The worst outcome for the markets would have been a close and litigated election in which the outcome would be uncertain for days, weeks or even months. In this case there could be civil unrest and the markets would not only suffer but the market would likely also grow more volatile. Much needed fiscal relief would be placed on the back burner.

* A middle of the road outcome for equities would have been a Biden win and the Republicans regaining control of the Senate. A large fiscal package would likely be somewhat diluted in this scenario.

- Kass Diary: Will We See a 'Biden Bump" Which May Levitate Stocks Throughout the Balance of the Year?" (September 30, 2020)

Most notably, in that column, prior to the rise in Biden's political stead, there was a bonafide fear of a litigated Presidential election that would make it unclear who was the victor. Days, weeks or even months of that litigation would create economic, business and market uncertainty. This outcome would have been disastrous for the markets.

The popular betting site, Predicit, now places high odds of a Biden win and Nate Silver's 538 indicates an 81% chance of a Democratic Presidential victory.

A clearer path to a Biden Presidential win has salutary investment implications. It is my view that if the November election odds/probabilities were much closer there would be certainly be no stimulus bill this year as the parties would have been locked in an even more partisan clash over stimulus. Even with Trump's reduced election odds a stimulus bill is probably not in the offing in the next two months. By contrast, an uncomplicated and explicit Biden election victory could deliver an easy passage of a large and meaningful stimulus - in excess of $2 trillion - likely to be introduced post haste following the Inauguration. A clean Democratic sweep of Congress would probably further solidify a large passage.

I have pointed out that in addition to a clearer path of a Biden Presidential win, there are other factors that would aid our markets - including current cautious/defensive positioning, seasonal market strength in the fourth quarter, an evolved market structure that would likely seize on this potential market strength and take stocks even higher and continued cooperative world central bankers who are providing excess liquidity (see chart below).

Source: Zero Hedge

As my pal, independent thinker and The Credit Strategist author Mike Lewitt relayed to me in an email this morning:

"I also think they Fed is much more important for stocks. A Biden victory is pretty clear and the market doesn't seem upset by that prospect. I also think people expect higher taxes even if Trump wins after all the money we spent. Biden will be more pro-regulation but again not sure how investors think about that or anything fundamental anymore. And think that stability and certainly and less chaos is something markets may like."

Finally and perhaps most importantly we now appear to be closer to significant vaccine and therapeutic inroads by the scientific and medical communities - than we were only a month ago.

I am not so naïve as to reject the notion that, in the fullness of time, a Biden victory could be accompanied by more extreme market unfriendly fiscal and tax policy. A lot depends on its structure - and based on some of Biden's comments in the first Presidential debate he might not be moving as far left in policy as some have suggested. But I do not invest based on fear. I believe this is an issue, in my view, that should be addressed as we move into the first quarter of 2021 and not, currently, in the fourth quarter of 2020 - when we know the facts and tax proposals better:

"While I have expressed and continue to be concerned with intermediate-term issues that could serve as market headwinds in 2021 (a disappointing economic and profit outlook relative to consensus, the rapid accumulation of private and public debt, the specter of rising inflation, the lack of global cooperation and coordination - and its impact on world trade, elevated valuations, the likely diminished impact of monetary policy - the Fed is "pushing on a string", the need for higher corporate tax rates to help fund the exponential growth in national debt, etc. - much needed (large) fiscal stimulus pushed by Democratic Party initiatives, likely vaccine and therapeutic advancements and seasonal strength in equities (within the context of unprecedented easy money) are the ingredients of a possible "Biden Bump" in the months ahead."

- Kass Diary: Will We See a 'Biden Bump" Which May Levitate Stocks Throughout the Balance of the Year?" (September 30, 2020)

Bottom Line

In business and life in general, ultimate success often lies in combining unconventional behavior and favorable outcomes; the need to think and act like a contrarian. After all, logic dictates that if you follow the crowd then you can't beat the crowd.

As Howard Marks says: "You must learn things others don't, see the things differently or do a better job of analyzing them - ideally all three."

As I have noted, the 2016 Presidential election provided the contrary - a Trump win and an advancing stock market.

The 2020 Presidential election may provide another contrary - a Biden win and an advancing market over the near term.

As is often the case we might consider today employing second level thinking - not consensus or first level thinking.

I remain bullish short term and bearish intermediate term.

I raised my net long exposure on Friday.

On Friday I started out my commentary with this more cautionary post:

Nov 25, 2020 ' 07:40 AM EST DOUG KASS

Minding Mr. Market

* Tesla's shares have risen more than twice the market value of General Motors in less than two weeks

* The recent market rise may not be the end of the beginning of the Bull Market

* It might be the beginning of the end of the Bull Market

I start the day with a medium-sized net long exposure.

That said, I want to start today with a warning that the recent strength in the market may not be the end of the beginning of the Bull Market. Rather, it could be a blowoff representing the beginning of the end of the Bull Market.

No better example are the shares of Tesla (TSLA) (a new short) which has risen more than twice the market value of General Motors (GM) in less than two weeks - primarily based on its inclusion into the S&P Index.

Tesla exemplifies the current degree of speculation (manifested in an extreme greed reading in the CNN Fear and Greed Index). In the case of Tesla, it has likely been fueled by option strategies (see Softbank (SFTBF) !) that have been seen before where there is massive buying of short term out of the money options forcing dealers to buy stock to hedge their options they sold.

What has been the news during this period? As mentioned yesterday, more product recalls and Consumer Reports no longer recommending their cars because they came out second to worst in product reliability. Plus a host of new and bonafide competitors.

Despite the stronger economic rebound there isn't a peep out of the central bank saying it's policy of endlessly keeping rates low may be data dependent. It is fostering a casino with a host of unprofitable IPOs and SPACs with an EV cherry on top of the sundae.

Most of the country is suffering terribly and the financial markets are partying. When this finally ends Main Street may come after Wall Street with pitchforks and investors' current smiles could be erased and replaced with tears.

I recently made the point that the price-to-sales ratio of the S&P 500 is at an all-time high of 2.71x, while other measures such as the Shiller's Cyclically Adjusted PE Ratio, Tobin's Q Ratio, and the Market Capitalization-to-GDP Ratio are also at or near all-time highs.

High valuations can obviously persist for long periods of time but that doesn't render them attractive entry or hold points.

Current Tactics

Despite my near term concerns I am medium term net long in exposure and I have no Index shorts, though at any point in time in the near term that can change! 

I am respectful of the force of the advance but I am looking over my shoulder to see whether the Cossacks are coming! 

I am positioned with about 10-12 large long term investment holdings -- mostly "forever" holdings concentrated in financials, Google/Amazon, packaged foods and special situations -- 5-7 small/tag end holdings (in stocks that have recently reached my price targets and no longer have compelling reward vs. risk characteristics - like (GM) , (DIS) , (GS) , (MS) , (WMT) ) and about five individual short positions ( (TSLA) , (AAPL) , etc.). I am also long -- for a very short term trade -- in volatility (VXX) which will likely be soon taken off for a loss. I have a small/medium-sized position in (GLD) and I am short the bond market. 

Low stock prices - available months ago - were the ally of the rational buyer. 

Today's high stock prices are the enemy of the rational buyer.

One of Warren Buffett's most important quotes involved the price we pay for a stock: 

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

As I noted above: 

"I recently made the point that the price-to-sales ratio of the S&P 500 is at an all-time high of 2.71x, while other measures such as the Shiller's Cyclically Adjusted PE Ratio, Tobin's Q Ratio, and the Market Capitalization-to-GDP Ratio are also at or near all-time highs.

High valuations can obviously persist for long periods of time but that doesn't render them attractive entry or hold points." My next move will be to reestablish a net short exposure - though my timing is uncertain. 

At the core of my intermediate concerns is my expectation of weaker economic and profit growth relative to consensus expectations - the outgrowth of a Fed that "is pushing on a string" and the growing mountain of global debt which serves as a governor to growth. 

Given the reversal of conditions cited above and the rise in share prices over the last few months -- a market decline could occur as abruptly as the bitcoin price drop of the last 24-36 hours.
__________ 

Long VXX (large), GLD, XLF (large), GM (small), DIS (small), GS (small), MS (small), WMT (small), KHC (large), SJM (large), THS (large).

Short TSLA, AAPL (large).

My posts here on Friday morning will be less frequent and shorter than usual as we had a medical emergency with one of our dachshunds yesterday.

Thanks for understanding...

Danielle DiMartino Booth on an expected cold bath of economic statistics ahead:

• Total U.S. unemployment claims rose from 20.3 to 20.5 million the week of November 7, the latest week available and the first increase since August; recent initial claims data suggest all-in claims will rise again next week, coinciding with November's nonfarm payroll survey
• Google searches for "file unemployment" have risen from early November's pandemic low back to mid-August levels; the nine states whose jobless claims have risen from double-digit to triple-digit YoY increases have also seen the worst spikes in hospitalizations per capita
• Per Womply, 21% of small businesses were not open at the start of November, up from June's 16% closure rate; consumer spending at local businesses is also down 27% YoY, notably higher than October's -20% print and reflecting the collapse in federal stimulus

When asked by a foreigner why he bathed once a day, a Roman emperor is said to have replied "Because I do not have the time to bathe twice a day!" But it was not the Romans who put baths on the map. The oldest archaeological findings were in Europe dating back to the Bronze Age circa 2,400-800 BC. And then there were the Alabaster bathtubs excavated in Akrotiri on Santorini Island, testaments to how Minoan civilization maintained their personal hygiene. Odysseus famously took one last bath before his departure from the Isle of Calypso. But was it hot or cold? Homeric epos purported that Greeks used cold water first, then hot, which suits us just fine. Why the Romans decided to reverse the order - starting with hot and then moving into cold water (Brrr!) is a mystery.

Maybe that Roman emperor was the lucky one for only having to take the one bath given the experience ended on a nice warm note. Investors must be feeling like a Roman whose taken that second bath after Wednesday's data onslaught. There was good news in the durables and new home sales data - sectors that have benefitted from the supply chain restoration and easy money pumping record home price appreciation. But in the consumption-driven U.S. economy, labor market trumps all. As such, it's noteworthy that the entirety of data on the jobs front threw cold water on the notion that the third wave of the coronavirus would exact little lasting damage before the vaccine's healing power took hold.

The best news is the jobs data are flashing yellow, not red. The first inkling we had was via real time Google Trends for those searching for "file unemployment" (green line). In the first week of November, search readings hit 7, the lowest since pre-pandemic mid-March. The deterioration back up to 13 in the three weeks since brings search activity back up to mid-August reads. And critically, the latest data point coincides with the week to come for jobless claims and points to a third straight week of rising seasonally adjusted initial state jobless claims (orange line).

The breadth of states experiencing acute rises in jobless claims also speaks to how widespread the virus is as opposed to the first instance centered on the coasts and the summer's second wave in the Sunbelt. Back in January, we gauged the breadth on the basis of states with double-digit year-over-year (YoY) increases in jobless claims (blue line). "Moot" best describes that gauge now that it characterizes the whole of the nation. The new measure is triple-digit YoY growth (red line), which had improved to a post-pandemic low of 35 in early November but has since reversed course.

Mapping the states that have seen double-digit increases elevate to triple-digit is telling. The nine states that fit this bill - Arizona, Connecticut, Iowa, Kentucky, Minnesota, Montana, North Dakota, Utah and Vermont - are among some of the hardest hit in the most recent spike in coronavirus hospitalizations per capita. And no, we don't find any coincidence here.

As for the latest out of the University of Michigan (UMich) on consumer sentiment, we know vagaries from prices at the pump to bumps in the stock market can swing the twice-monthly reads from hot to cold. Less volatile are households' perceptions of the job market. As bad as things have been since the pandemic struck the U.S., the 47% in the back half of November we backed out from QI's holiest of data grails - higher unemployment expectations - were the worst since April and within five percentage points of the post-pandemic high of 52%. For context, we rank any print north of 33% as 'yellow' and 50% and higher as 'red.'

Moreover, consumers' perceptions of their current finances gave back the last two months' gains and fell to the post-pandemic lows registered seven months ago. Reflecting the collapse in transfer payments which was evident in October's personal income report, the largest net declines were reported by lower income households (-6 points) and those aged 65 or older (-9 points). UMich's Richard Curtin, who has shepherded the survey for nearly a half century warned that, "A delay in federal aid until next year would allow great harm and permanent damage to occur to many firms, local governments, and households."

To that end, we also heard Wednesday from Womply that 21% of small businesses were not open at the start of this month, up from June's 16% rate. Consumer spending at local businesses is also off by 27% appreciably lower than October's 20% YoY drop in October.

Add it all up and the yellow-shaded area, the all-in "bathtub" aggregate, which includes all U.S. unemployment claimants, ticked up for the first time since August to 20.5 million in the latest week available, November 7th, from the prior week's 20.3 million. More importantly, we know from timelier data on initial claims that the all-in sum is poised to rise again next week. We care because that total coincides with the nonfarm payroll data survey week ended November 14th.

Wednesday afternoon was peppered with headlines of sell-side firms taking down their forecasts for November payrolls. No doubt, we'll know more a week from now. The preponderance of data in hand today suggest Wall Street should brace for a cold bath.