"She asks me why
I'm just a hairy guy
I'm hairy noon and night
Hell that's a fright
I'm hairy high and low
Don't ask me why
Don't know
It's not for lack of bread
Like the Grateful Dead"

- Hair

I am leaving early today for a haircut - as I haven't gotten one in about four months! 

Thanks for reading my Diary today. 

Enjoy the evening. 

Be safe. 

Oh, and my favorite line... "They will be ga ga at the go go when they see me in my toga!"

* Bending but not breaking

While breadth has only deteriorated slightly, the Nasdaq is starting to give way after leading the S&P this morning. But let's not lose sight that the Nasdaq is +4% in the last three trading days! 

(QQQ) s just went negative - now at $327.63 after peaking at $330.20 late this am. 

As posted, I increased my already large net exposure today.

* I remain short bonds in size (and long banks as a beneficiary)!

Elevated valuations will matter at some point as the 30 year bond yield is breaking out and could put pressure on price earnings ratios:

European core CPI was an upside shocker this morning - albeit still with a 1-handle. 

GAAP trailing 12 month PEs are nearly 40x on both the S&P and Nasdaq. So, the valuations may not be able to stomach an inflation spike to a number starting with a "3" - where we seem destined to go later in the year. 

Meanwhile the euro inflation 5 year 5 year swap jumped six basis points to the highest level since May, 2019:

The bearish Steve:

• Steve • 2 hours ago

  Classic signs of distribution JMHO
  Massive round trip In a mere few days the "SPY" dropped from the highs of 381.90 (on 1/28/2021) we dropped to 368.30 (01-29-2021) a drop of approximately 13.60-points now today we sit at 383.20 up 14.90 higher just a few days later a rollercoaster ride of over 28.50 SPY points in a mere 4-days
  Volume on down day, 01-27-2021 123.35 million shares
  Volume on down day, 01-29-2021 126.65 million shares
  Volume on up day, 02-01-2021 75.81 million shares
  Volume on up day, 02-02-2021 63.86 million sharesMassive round trip In a mere few days the "QQQ" dropped from the highs of 326.40 (on 1/28/2021) we dropped to 312.75 (01-29-2021) a drop of approximately 13.65-points now today we sit at 327.50 up 14.75 higher just a few days later a rollercoaster ride of over 28.35 QQQ points in a mere 4-days
  Volume on down day, 01-27-2021 55.26 million shares
  Volume on down day, 01-29-2021 55.16 million shares
  Volume on up day, 02-01-2021 35.60 million shares
  Volume on up day, 02-02-2021 33.75 million shares

* Be prepared for wide price changes in this high beta ETF

In my view (high octane), ARK Innovation ETF  (ARKK) stands in the epicenter of today's speculation in large cap tech names. 

I have been consistently adding to my ARKK short since Monday. 

At the core of my short thesis on ARKK is that most of the ETF's 10 largest holdings are ridiculously overpriced. 

Near 3% position, Spotify (SPOT) , is -10% (or $33/share) today. 

I expect more implosions in price in ARKK's portfolio. 

Here is my short thesis which was presented on Monday: 

Feb 01, 2021 ' 07:21 AM EST DOUG KASS

Trade of the Week - Short ARKK ($140)

* I am shorting ARKK in the pre- market above $140/share

* Will Cathie Woods and holders of ARKK need an ark if my concerns regarding speculation are realized?

* Sic transit gloria

For those that are looking for a relatively conservative and diversified way to short a basket of what I believe are some of the most overpriced gewgaws extant - the ETF (ARKK) (ARK Innovation ETF) might be appealing to you.

Led by a near 11% holding in Tesla (TSLA) , here are ARKK's Top 10 Holdings.

Besides an 11% holding in Tesla, some of ARKK's portfolio of top 10 names includes a 7% holding in Roku (ROKU) (27x sales), Square (SQ) (320x PE), Twilio (TWLO) (40x sales and Shopify (SHOP) (700x PE), etc.

ARKK is probably the largest actively traded ETF and is managed by superstar Cathie Woods - who recently predicted that TSLA would trade at $7,000 by 2024 and ultimately hit $15,000/share. In other words, Ms. Woods believes Tesla is worth between $7-$15 trillion.

I probably could stop here but I won't!

From Mike Lewitt's The Credit Strategist on Woods' view and comments on Tesla:

"In normal times this would be crazy talk. Actually, in any age this should be considered the utterings of a shaman. But today it just blends into all the other crazy talk and people just nod their heads like a bunch of bobble heads and let it pass."

Money has poured into this ETF - causing more and more of the underlying stocks to be purchased by ARKK. In fact, ARKK doubled in size in 3Q2020 to nearly $9 billion.

As I discuss in my opening missive (coming up) I believe we are now experiencing "Peak Speculation" and shorting ARKK (a proxy for speculation) is a call that the sizeable inflows of the last few years will become outflows in the year ahead.

I am shorting ARKK - the hippest ETF extant - in the pre-market above $140/share.

Sic transit gloria.

Fame is a fleeting thing.

Back from my vaccination for Covid - done seamlessly (took less than 30 minutes) in Palm Beach!

* Downside risk now dwarfs upside reward (measurably) - at least according to my calculus.

* I am often wrong and always in doubt, though!

Back over my skis, short - as the S&P Index is trading at its largest differential to "fair market value" in years.

Bidding for the following longs this morning: Walmart (WMT) , Verizon (VZ) , (SLV) and (GLD) .

Offering the following shorts this morning: Disney (DIS) , Tesla (TSLA) , Carvana (CVNA) , Peloton (PTON) , Plug Power (PLUG) , (ARKK) , (SPY) and (QQQ) .
__________ 

Long WMT (large), SLV (large), GLD (large), VZ (large).

Short TSLA (large), CVNA, PTON, SPY (large), QQQ (large), ARKK (large), PLUG, DIS.

My pal Peter on Draghi, non U.S. PMIs, and other stuff: 

Europe is getting some higher inflation that the ECB wants. Headline CPI for January rose .9% y/o/y, above the estimate of up .6% and the core rate jumped by 1.4% y/o/y, well more than the forecast of up .9%. The market reaction was sharp in the 5 yr 5 yr euro inflation swap which is higher by 6 bps to 1.38%. That is the highest since May 2019. Sovereign bond yields though are little changed outside of Italy. Some of the CPI gain is being blamed on one time things like the expiration of a German tax cut but that should have been included in the estimates. Higher energy prices also helped the headline gain by falling by a lesser amount. There was also a change in the weights of some categories. Base effects will further lift inflation in the months to come and then we can see what the natural rate is. I'd argue that it will be higher as the vaccine gets further rolled out and supply constraints are not quickly alleviated. The German 10 yr inflation breakeven is up 1 bp to 1.13%, the highest since November 2018.

GERMAN 10 yr INFLATION BREAKEVEN

5 yr 5 yr Euro Inflation Swap

The Italian BTP yield is falling 9 bps to .56%, a 4 week low on the possibility that Mario Draghi becomes PM. The same Draghi that bailed out the finances of European governments, killed the entire Eurozone banking system via reduced profits from crushed loan margins. The same Draghi that killed the savers, pension funds and insurance companies and the same Draghi that created the biggest bubble in the history of financial markets in the regions bond markets. The MIB stock index is higher by 2.6%.

Ahead of the ISM services index, China said its January Caixin services PMI fell to 52 from 56.3 and that was 3.5 pts below expectations. This is a 9 month low and taken with the state sector PMI and the Caixin manufacturing index all show a moderation in growth in January. At least on the services side some of this is definitely ahead of the Lunar New Year where government officials are encouraging people to stay put and not travel back home in order to not spread Covid. This impacts travel plans and spending. Looking ahead, "Although business confidence regarding the 12 month outlook for activity remained strong in January, the degree of positive sentiment weakened since December. Notably, the level of optimism was the lowest recorded since last September. Firms widely expect customer demand to recover and activity levels to expand once the Covid-19 pandemic comes to an end. However, uncertainty over the trajectory of the virus weighed on overall confidence." I view the slowdown in China in January as only temporary.

Japan's services PMI was revised to 46.1 from 45.7 but that is still down from 47.7 in December. Again, Covid is limiting the recovery in this sector of the economy. Australia's services PMI was 55.6 from the initial print of 55.8 and while down from 57 in December is still well above 50 as Covid almost doesn't exist in Australia. Evidence is that at the upcoming Australian Open they will allow 30,000 people each day for the tournament, although that is 50% less than usual.

India's services PMI rose .5 pt m/o/m to 52.8. Hong Kong's was 47.8 vs 43.5 and Singapore's improved to 52.9 from 50.5. With Singapore, a growing bellwether in the region particularly as it benefits from those leaving Hong Kong, Markit said "After enduring difficult business conditions throughout 2020, January data brought some positivity as domestic led demand supported the strongest rise in output since April 2019. Policymakers will welcome the expansion, which followed the movement into phase 3 restrictions (resumption of domestic flights)."

The January final read of the Eurozone services PMI was 45.4 vs 45 initially and down from 46.4 in December. The last time we saw a print above 50 was back in August. The selective shutdowns can be blamed of course. Though, "Looking ahead to the coming 12 months, confidence about the future dipped since December but remained comfortably in positive territory. Optimism was highest in Italy, followed by Spain." The sluggishness has the euro down for a 3rd day to just above $1.20, the lowest since early December.

The MBA said purchase applications were flat w/o/w but still up 16% y/o/y. All of the gain in mortgage apps on the week was in refi's which jumped by 11.4% w/o/w and higher by 60% y/o/y. The average 30 yr mortgage rate gave back the 3 bps it gained last week. The key for 2021 is whether the red hot housing market in 2020 can sustain itself with ever rising home prices approaching 10%. We'll see how much of the 2020 strength was the pandemic driven desire for more space in the burbs, along with low mortgage rates and whether that has been satiated or not. Either way, Millennials are now the key demographic driving housing and as they create families, they will want to buy a home.

ADP said a net 174k private sector jobs were created in January, about 100k more than expected, with about half offset by a downward revision of 45k to December to 78k. After shedding jobs last month, small businesses resumed hiring. Medium-sized businesses (50-499 employees) again added jobs. After losing jobs in December, large businesses added some back. 

Manufacturing added 1k after shedding 14k last month. Construction hired a net 18k vs. 9k last month. There was no change in hiring for the second month in natural resources/mining. The services sector hired a net 156k after losing 73k last month. Leisure and hospitality was a main swing factor here as the sector lost 79k jobs in December and added back 35k in January. Trade/Transport/Utilities added back 16k of the 29k lost in the month prior. Healthcare hiring keeps jugging along with another 48k. 

ADP's summation was this: "The labor market continues its slow recovery amid Covid-19 headwinds. Although job losses were previously concentrated among small and midsized businesses, we are now seeing signs of the prolonged impact of the pandemic on large companies as well."

Smoothing out the last half year has the six month average job gain at 340k and the three month average at 132k with the last three months certainly reflecting new rounds of shutdowns and Covid spread. The recovery thus continues in fits and starts and it won't be until late spring/early summer before the U.S. economy gets almost fully its legs back but it will. The question though then for the biggest component of the economy, the consumer is to what extent they shift spending back to services from the splurge on goods over the past 12 months. After losing 19.7 million jobs in March and April, we've since added back almost 10.1 million according to ADP. 

Thus, a ways to go to recapture fully what was lost.

The Reddit inspired short squeeze, which had electrified the market last week almost completely disassembled in Tuesday's trading. As the divergence by some to focus some of their attention on the silver market, left them without enough firing power on any of the fronts. So, silver was down and again, GameStop was weak as it had been the day before but now it was joined by almost all the others in the group.

The selling in GameStop was rather ferocious and, the stock plunged again and, at one point, looked it might go into freefall. As you can see from the update from yesterday, some traders were even wondering if it could get down below $70 a share and, would that just break it wide open. So, the lack of the fear that the general market would be hurt by liquidation as people scrambled to raise capital virtually disappeared.

Another anomaly in the afternoon was that while, the market appeared to be a very strong and broad rally, some of the technical underpinnings were showing great divergence. The TRIN or Arms Index shot up sharply. We will have to investigate that a bit further.

The bulls not only took charge but threw a bit of a party and celebrated.

The Dow was up over 600 points during the day and, the bears failed to mount much of a counterattack. They did, however, lose some of the strength rather late in the session. That may have been when GameStop began to circle the wagons when it fell below a $100 a share but did not go into freefall.

The other factor was that Senator Schumer came out and looked like they were going to force through the budget reconciliation. As I had noted, having a basically tied Senate with the Democrats only gaining control by the tiebreaking vote of the Vice President presents a bit of a problem, particularly during a pandemic. If any Democratic Senate is sick, they will be one vote short and can't get a tie and, therefore, the Vice President will be neutralized. So, you can see this is going to be a game of great strategy now to see where we go from here.

But, at any rate, we have regained virtually all of what we lost last week and, earnings season continues to go well. After the close, the big surprise was that Jeff Bezos will be reducing his role in the Amazon management and, while the man he named as his successor is deemed by very many to be exceptionally talented, the market seemed in post-close trading, a little nervous of about losing the unique talents, at least in many minds, of Jeff Bezos.

Alphabet, however, did well on the earnings category. It will be interesting to see how this morning, as we move closer to the opening, once again how terrific earnings are interrupted. Both stocks ran up into the earnings. In the past week or so, whenever that has happened, it has not been a successful follow-through and, this morning will determine a great deal.

As dawn hits a snow-covered Manhattan this morning, markets are relatively quiet. Both Alphabet and Amazon are showing some mild strength after some terrific earnings. The frenzied selloff of the last two days in the Reddit short squeeze candidates appears to be somewhat tempered, with most of those stocks trying to circle the wagons. That apparently shifts over to the general market where we see small changes.

The Dow was firmer in the morning and, then as short squeeze candidates began to look relatively stable, the bulls decided to sit out a bit of the next few hours or so. We will see, I think, what happens with GameStop which will certainly influence the broad market as it has for the past several days.

We will try to dig into some of the technical anomalies we noted but so far, they don't appear to be flashing any emergency signals.

Stay safe.

Arthur

Source: Ivan the K

* I remain bearish
* I still smell varmint poontang

"And I say, "Hey, Lama, hey, how about a little something, you know, for the effort, you know." And he says, "Oh, uh, there won't be any money, but when you die, on your deathbed, you will receive total consciousness." So I got that goin' for me, which is nice."

- Carl Spackler, Caddyshack

Gunga La Gunga (sometimes pronounced Gunga Laguna) was originally a Tibetan expression of peaceful dismay used after making an errant golf shot. 

The dirty water of liquidity continues to slosh around the markets - powering stocks to near all time highs this week. 

Speculation has been briefly squashed in certain quarters ( (AMC) , (GME) , etc.) - but the speculators remain most active as measured by the continued strength in SPACs and a number of other gewgaws that are characterized by healthy stock charts and challenging operational and financial disclosure - which makes company analysis problematic. 

Overnight results are league-leading Alphabet (GOOGL) and Amazon (AMZN)  - both on my Best Ideas List but not currently owned by me - were somewhere between positive and breath taking. More on that later.

Meanwhile, optimism - reflected in elevated valuations - grow more elevated in an atmosphere on optimism and, by my measure, complacency. 

For now, late last week's breakdown appears to have been a near term fakeout as stocks have marched higher Monday and Tuesday. This morning both S&P and Nasdaq futures were higher. 

Nevertheless, this pro Jock is using the macro (Index) and micro strength to add selectively to my old and some new shorts - as I still smell varmint poontang. 

Today I have my second Covid-19 vaccination on tap in the morning - so I got that goin' for me which is nice.

From Knowledge@Wharton - "What Wall Street's 'Short Squeeze' Means for Investors and Regulators"

Here is the Reddit/WallStreetBets post from last year that described the possibility of a squeeze in GameStop (GME) . 

Danielle DiMartino Booth on maximum optimism:

• The NACM's Credit Managers' Index was very optimistic in January, with Manufacturing Sales hitting a record high 76.7 on a 50-breakeven scale; Service Sales registered a 75.1 print, the second highest reading since 2005, further buffering positive credit manager outlook
• The upturn in business sales, which NBER tracks when dating recessions, began in Q3 and continued through Q4; moreover, Bloomberg's consensus recession probability has fallen from 100% in Q2 2020 to 20%, and may drop further given the rosy credit manager picture
• Per FactSet, 76% of S&P 500 companies have reported Q4 revenues above estimates, besting the five-year average of 62%; credit community confidence has also bled over to traditional banks, with half as many, on net, reporting tightened C&I loan standards in Q4 vs Q3 2020

I can see clearly now, the rain is gone,
I can see all obstacles in my way
Gone are the dark clouds that had me blind
It's gonna be a bright (bright), bright (bright)
Sun-Shiny day...

In June 1972, Houston native Johnny Nash released the single "I Can See Clearly Now." In late October of that year, the RIAA-certified gold single took a mere two weeks to vault from #20 to #5 to #1 on the Billboard Hot 100 on November 4, 1972, holding that spot for four straight weeks. It was the first reggae song to hit #1 trailblazing a path for Eric Clapton's cover of Bob Marley's "I Shot the Sheriff" in 1974 and Blondie's "The Tide Is High" in 1981. The tune had its share of Hollywood cameos in the opening sequence of Gross Pointe Blank and in the movie Thelma and Louise. And it was an obvious choice of jingle for Windex, who used the song in the late '80s. Sadly, we lost Johnny Nash on October 6, 2020 at the age of 80.

Credit managers don't tend to sing about bright, sunny days. The Bureau of Labor Statistics describes them as overseers of an organization's credit business. That's fitting as they set credit-rating standards, determine credit limits and monitor the collections of past-due accounts. Credit managers are forward-looking by nature, always peering three, six or twelve months over the horizon. Highly effective credit managers watch for warning signs and are strict with deadlines.

All things considered we were struck by the rosy top-line guidance in the January National Association of Credit Management (NACM) Credit Managers' Index (CMI). Manufacturing Sales hit a record high 76.7 (on a 50 breakeven scale, red line), prompting NACM to describe it as nothing short of astonishing. Service Sales clocked in at an eye-watering 75.1 (green line), the second highest reading since survey inception in 2005.

No company controls revenues. When the diligent, meticulous lot of credit managers are this rosy, one thing comes to mind: higher conviction for recovery. NACM is clearly picking up the first factor in these excerpts from the report:

"Credit managers do not dwell long on the past and tend to look toward the future. The expectations for the U.S. economy as a whole have been improving with the vaccine roll out and the assumption that many of the restrictive protocols may start to lift in spring and summer."

Translating credit managers' sales optimism to the business cycle can be done by tracking real business (manufacturing/wholesale/retail) sales. This lagging gauge - only available through November - is one of the four horsemen of the cycle-pocalypse and feeds the Coincident Index used by the National Bureau of Economic Research to date recessions.

The upturn in business sales (purple line) started in the third quarter and advanced further into the fourth quarter. In parallel fashion, consensus recession probability (yellow bars) fell from 100% in 2020's second quarter to 20% in 2021's first quarter - and could compress further based on credit managers' cheery sales readings.

Top-line performance in the S&P 500 also should follow the improving sales picture. Revenue per share growth in the S&P 500 composite index (light blue line) has a high correlation over time with business sales growth in the production and distribution chain. How's .80 grab you since 2005?

The latest weekly installment of FactSet's Earnings Insights indicated that 76% of S&P 500 companies have reported actual revenues above estimates in the fourth quarter of 2020, which is above the 5-year average of 62%. If 76% is the final percentage for the quarter, it will mark the fourth-highest percentage of S&P 500 companies reporting a positive revenue surprise since FactSet began tracking this metric in 2008.

As of the week ended January 29, the S&P 500 is reporting year-over-year (YoY) revenue growth of 1.7%, compared to the prior week's 0.8% and that of 0.1% at the end of the fourth quarter. If 1.7% is realized, it will mark the first time the index has reported YoY revenue growth since 2020's first quarter.

Rising confidence in the credit community will naturally spread to conventional banks. Indeed, bank loan officers have begun to lean in the same direction. Monday's release of the Federal Reserve's first-quarter Senior Loan Officer Opinion Survey revealed that, on net, half as many banks reported tightening standards on commercial and industrial (C&I) loans for firms of all sizes in the fourth quarter vis-à-vis the three months ended October 2020. For large and midsize businesses, the share of banks that eased standards for C&I loans quadrupled.

In the meantime, roughly seven in ten banks did not shift their standards for construction and land development loans and loans secured by nonfarm nonresidential loans while almost no banks reported they had eased standards for commercial real estate loans.

The late Johnny Nash sang, "Look all around, there's nothing but blue skies. Look straight ahead, there's nothing but blue skies." Credit managers have never seen such blue skies. And despite economic scarring and financial markets rife with overvaluation, bankers have clearly started hearing the same tune, which begs the question, "Have we reached maximum optimism?"