This has been another exciting and volatile week in the markets. 

Thanks for reading my Diary. 

I hope it was helpful to your trading and investing process by delivering my - often contrarian - analysis. 

Enjoy the long weekend - we all need it. 

Be safe.

In response to my ARK Innovation  (ARKK) post this morning, one of the largest portfolio managers in the world just emailed me this: 

I couldn't agree more.

I was taught in business school during the 1980s that "innovation" and "disruption" were the cornerstones of capitalism.

Now it's something new and unique. I love marketing...

Enough said.

There is a gamma pin of Tesla (TSLA)  - because of outstanding weekly call/putt open interest - at $800. 

If we get a "down day" in the markets on Tuesday, I would not be surprised of an outsized move to the downside early next week.

Five Chart Friday from Charlie Bilello is always a great read! 

I highly recommend Professor Galloway's No Mercy No Malice.

This week... The Algebra of Wealth.

Bonds continue to break down in price as yields rise.
Good for the banks. 
Citigroup (C) , my Trade of the Week, did fine over the last few trading sessions.

Pretty much range bound today.

A good use of my time this afternoon will be for some research.

No trades (yet) today.

* In this market cycle, ARK Invest is at the forefront of investing in disruptive technology

* But I hear the echoes of the "Nifty Fifty Era" and The Dot.com Boom in today's current market conditions

* ARK is not the first to shoot lights out in the market and to gain massive assets under management

* We should look at the bank trust departments in the late 1960s/early 1970s and the Janus Funds (especially the Twenty Fund) during the dot.com era to remind ourselves of boom/busts in money management

* ARK may be an intriguing short for those that believe stocks (and technology in particular) are currently overpriced

In every stock market cycle there is a dominant investor who captures the market's zeitgeist by incorporating and reflecting the ideas and beliefs of the times. 

But there is an inevitability of every market cycle that the optimistic expectations will be over exploited, valuations will go to extremes and a painful bust will follow. 

Today's market cycle seems no different than others in the past. 

Cathie Wood's ARK Innovation (ARKK) may be this cycle's bank trust department (think late 1960s, early 1970s) or the Janus 20 (of the dot.com bubble period):

"We Invest Solely In Disruptive Innovation"

As their investment catchphrase goes (see above) Ark Invest only invests in disruptive technology.  

But, in every market cycle the dominant investor's (e.g., ARK) moat is considered impenetrable - that their assets under management will never go out of style, or they can never pay too much for the constituent investments of the strategy and that their style, like investment trees, will grow and soar to the sky. 

As night follows day, the dominant investor's (e.g., ARK) hubris spreads like the wildfire of the valuation of their investments. From ARK's website:

Invest In The Future Today

ARK identifies more innovation evolving today than ever before. We believe it is changing lives and businesses across the globe dramatically, creating opportunities to own the next big thing by investing in the future today.
Take Advantage Of Market Inefficiencies...Make The World A Better Place

Bank trust departments 50 years ago couldn't pay enough for the Nifty Fifty: 

"In the United States, the term Nifty Fifty was an informal designation for fifty popular large-cap stocks on the New York Stock Exchange in the 1960s and 1970s that were widely regarded as solid buy and hold growth stocks, or "Blue-chip" stocks. These fifty stocks are credited by historians with propelling the bull market of the early 1970s, while their subsequent crash and underperformance through the early 1980s are an example of what may occur following a period during which many investors, influenced by a positive market sentiment, ignore fundamental stock valuation metrics."

The Janus Funds (and Janus Twenty in particular) got hit by the turmoil as the dot.com bubble burst in the early 2000s. Its concentration in technology stocks led to a rapid rise and steeper fall when the boom turned to bust. Janus' assets peaked at $325 billion in the first quarter of 2000, before shrinking by over -60% over the next three years. (Here is some more background information on Janus' fall from grace, see here and here.) 

No worries, though, as ARK's CEO is certain, in an interview yesterday, that there is no bubble in equities nor in here portfolio:

Here is another Wood interview in which she dismisses bubble talk and Tesla (TSLA) skeptics. 

One of the key features of the bank trust departments who suggested that there was no multiple for Polaroid or Eastman Kodak that they would not pay for or Janus' same conviction in Cisco (CSCO) - were their outlandish predictions. And ARK's Cathie Wood is loaded with them: 

* Wood interview which predicts and explains how the price of bitcoin will trade at $400,000. 

* Wood is highly confident that Tesla (ARK's largest investment) will hit $7,000/share by 2024 and eventually hit $15,000/share. 

Here is what I recently wrote about my ARKK short: 

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.

Bottom Line

Stock market cycles almost always go to the extreme. 

Currently the popularity of ARK Invest and their constituent investments are benefiting from a virtuous cycle. 

But, virtuous cycles are such - they turn into less virtuous cycles and, sometimes, even vicious cycles. 

As in the Byrds "Turn, Turn, Turn": 

"To everything turn, turn, turn
There is a season turn, turn, turn
And a time to every purpose under heaven

A time to be born, a time to die
A time to plant, a time to reap
A time to kill, a time to heal
A time to laugh, a time to weep..."

But, in the extreme when looking at the future, Barry McGuire's "Eve of Destruction" might be a reasonable foreshadowing of events to come facing ARK Invest: 

"But you tell me over and over and over again my friend
Ah, you don't believe we're on the eve of destruction."

To this observer, ARKK is an excellent proxy for the exaggerated speculation in large cap disruptive technology. 

It is one of my largest shorts.

I will be out at a business meeting from 10 am -12 pm this morning. 

So posts will be less frequent and shorter.

If there is one characteristic on its surface as counter intuitive of this bull run has been the elevated level of the VIX but one thing we've learned is that a big factor is the massive amount of call buying where historically most people are buying index puts as a hedge. Here is an updated chart of US call option contract buying. The visual says it all. The dice is rolling, the wheel is spinning, the slots are ringing, and the cards are being laid out. Also of note, according to BoA and EPFR Global equity fund inflows totaled $58 billion through the week ended February 10th, a record amount.

It's old news and reflecting the teeth of another round of shutdowns but the UK economy contracted by 7.8% y/o/y in Q4, but a touch better than the estimate of down 8.1%. It actually improved by 1.2% m/o/m in December from November. With the UK having vaccinated more than 10% of its population, well more than the Eurozone, it will be the quickest to recover in the region. The freedom from the bureaucracy of the EU is coming in handy right now.

You think U.S. money supply is surging?

That's just a blip.

China increased theirs by $5.4 trillion since March.

Their money supply is now 81% larger than the U.S.!

The only chart you need in order to understand what will happen in finance and with domestic economic growth over the next few decades:

Important and highly recommended:

Danielle DiMartino Booth discusses the topical semi chip shortage:

• The semiconductor shortage could shave at least $60 billion off the auto industry topline and crush 10% of global demand across the supply chain; there is little domestic supply to fall back on, with America's share of global production falling from 27% in 1990 to 12% today
• The top 10 manufacturing intensity states are seeing initial jobless claims mount faster than the rest of the U.S., the first big trend reversal since April; Ohio, the 4th largest durable goods manufacturing state, has been hit especially hard after faring better than the nation last year
• Despite lifted lockdowns, France, Italy, and Germany all saw their Industrial Production underperform in December; should the semi shortage hamper U.S. industry, if Ohio's broad based manufacturing slowdown is any indicator, a reversal in U.S. IP and Durable Goods Manufacturing Aggregate Hours Worked is likely at risk

Sometimes it's best that the cart come before the horse. It started with disaster in the ice cream embellishment department. Missing was a critical ingredient in Butter Drop Do cookies that topped the ice cream so enjoyed at the Toll House Inn. And so, Ruth Wakefield improvised, grabbing a knife and the chocolate bar Andrew Nestle had given her as a gift. As things turned out of the oven, semi-sweet chocolate did not melt like baker's chocolate; the chopped pieces softened but maintained their shape. The burst of flavor was distinct and irresistible. An instantaneous hit, the recipe made cooking's answer to Billboard circa 1938 - Betty Crocker's radio show. Wakefield went on to strike a deal with Nestle: The company featured her cookie recipe on the back of every bar of semi-sweet chocolate it sold; in exchange she received a lifetime supply of chocolate. And then came the horse...Nestle introduced the Toll House semi-sweet morsel in 1941. The cookie came before the chip.

Right about now, manufacturers worldwide are wishing they could reach in the inventory cupboard for a chip substitute. Per CNBC, the semiconductor shortage will shave more than $60 billion off the top line in the global automobile industry alone. In all, some 10% of global demand could be crushed from the beginning of the auto supply chain to the end. The genesis was the presumption of a demand decline for vehicles that never manifested thanks to the magnitude of U.S. stimulus spending even as COVID caused rolling closures of auto production. Chip suppliers pivoted, selling into other sectors benefitting from stay-at-home orders such as consumer electronics and laptop makers.

Because of the 26-week minimum lead time to build the chip to automakers' specifications, a massive logjam has formed. Per Deloitte, a separate amplifier as design sophistication soars is the increase in chip input per vehicle, which is expected to cross $600 next year, double 2013's $300. And it's not just cars. Companies from Apple and Qualcomm to IBM Microsoft are all running low. That helps explain why QI was a dismal failure as Santa in 2020 and is still waiting for the damn new Xbox to get back in stock.

The recent backstory started with the trade war prompting some chip makers to shift manufacturing from China-based Semiconductor Manufacturing International to Taiwan Semi, which takes time. Looking further back, as is the case with so many U.S. industries, there's precious little domestic supply to fall back on. According to the Semiconductor Industry Association, America's share of global semiconductor manufacturing has steadily declined from 37% in 1990 to 12% today. The Association issued an open appeal for "substantial funding for incentives for semiconductor manufacturing, in the form of grants and/or tax credits." While President Biden has committed to signing an executive order within weeks, it's unclear what can be done near term to address the shortage.

While we can't be sure of the causal link, we can report a few canary sightings. Despite lifted lockdowns, France and Italy both missed their December Industrial Production (IP) forecasts. The same can be said for Germany which saw its first IP contraction in eight months. While the Economy Ministry flagged "bottlenecks in the semiconductor industry," it also stated that it had seen, "weaker orders and damped sentiment among businesses." This development should not be surprising given the more advanced spread of coronavirus mutations. That said, the backslide in expectations in Industry & Trade and Transports & Logistics via IFO do portray an industrial sector that's seen persistent weakening since late summer (righthand chart).

Closer to home, as gauged by initial state jobless claims through the first week of February, the Top 10 manufacturing intensity states (yellow bars) are clearly seeing fresh layoffs mount at a faster pace than the balance of the nation (green bars), the first significant trend reversal since April.

In the U.S., the canary is the Buckeye State (blue bars), where jobless claims had run below that of high-intensity manufacturing states and the balance of the nation since April. This relative outperformance began to reverse in December, intensified in January and flew off the scale at February's outset.

Some digging revealed that with a population of 11.8 million, Ohio is the 7th largest state but the country's 4th largest Durable Goods Manufacturing producing state behind California, Texas and Michigan. It makes sense that the chip shortage has disproportionately caused harm there...except none of the layoff announcements we found cited the chip shortage.

Ford is laying off workers at its Sheffield plant due to faltering demand for some of its workhorse F650 and F750 trucks. Also in job cut mode: L Brands and the parent company of retailer Justice, both of which are headquartered in Ohio. And Premier Health, Dayton's largest medical network, has made sizeable headcount reductions.

Beyond that, we could only find a large smattering of smaller manufacturers closing shop. If the canaries in Europe and Ohio have died by inhaling lethal gases we can't yet detect, we can expect to see the beginning of a reversal in U.S. IP (purple line, depicted inversely) and Durable Goods Manufacturing Aggregate Hours Worked (red line, also depicted inversely). If the industrial sector's woes are more than just a chip shortage, investors could find they've put the semi suppliers ahead of the semi buyers. Putting the cart before the horse doesn't always end in a warm chocolate chip cookie.