As is customary, Mr. Market rallied from the morning schmeissing (at least halving the earlier declines):

* Breadth was negative 2-1.

* In percentage terms, the Russell Index declined 3x the Nasdaq and S&P.

* Banks were mixed -- but Wells Fargo (WFC) continues to lead the parade.

* Some leisure time stocks, like Disney (DIS) , fell today.

* Walmart (WMT) had one of the largest declines (in percentage terms) that I can remember. 

* Cryptocurrency-related equities got hit - led by Riot Blockchain  (RIOT) . So did some cannabis stocks, like Tilray  (TLRY) .

* Some of my other speculative shorts -- like Plug Power (PLUG) -- also suffered.

One comment on the Congressional testimony today.

The financial media and our regulatory authorities are incompetent in their coverage and regulations. They only converge in debate and testimony after the fact and not in anticipation of a problem.

Our financial media, politicians and regulators should use some common sense, appreciate history and listen to the anticipatory warnings and critics who uncover structural issues in the markets and concerns before problems like GameStop (GME) emerge.

There are too many pom poms being waved amid a chorus of "Everything's Coming Up Roses." (That comment also applies to the markets, imho. Speculation is cheered. Everyone thinks they will get out "in time" and the consequences of actions are dismissed).

It's a big waste of time -- a show.

As I mentioned, with the sale of my Walmart position I ended the day in a larger net short exposure than I started.

Dennis Gartman just responded (via email) to my opening missive: 

She went from $50 billion a week ago to $60 billion as of Friday!!!! This is utter madness as several tens of billions of new AARK owners now are suffering very real losses. A close tomorrow in the nearby NASDAQ futures below 15,550 would be an "outside reversal week" and those are rare indeed and almost always the harbingers of much, much lower prices.

Too, the rallies of late have been on lesser volumes in the futures... and demonstrably so... while the breaks, both intra and inter-day, have been on demonstrably higher volumes. This is manifestly bearish action.

With my long sale of Walmart (WMT) this morning, I have moved to an even larger net short exposure. 

Peter on sentiment and debt levels: 

Yesterday Investors Intelligence said Bull rose .5 pt w/o/w to 59.1 where I've said many times above 55 is stretched and 60+ is extreme. Bears, after rising last week, fell back by .2 pts to 18.1. The spread of 41 remains very elevated. Sentiment for the individual investor according to AAII got even more bullish as Bulls rose another 1.6 pts after jumping by 8.1 pts last week. At 47.1 that is the highest since December 10th. Bears fell by .9 pts and lower by 13 over the past three weeks to just 25.4, the lowest since Christmas Eve. As seen in the chart, the spread is back to the upper end. Seen last weekend, the Citi Panic/Euphoria model was at 1.66, still more than 4 times the Euphoria threshold.

Bottom line, sentiment remains giddy but giddy has been the right attitude over the past few months for sure. It always is until it's not. This rise in rates will certainly test the meddle and staying power of the bulls. If I had a dollar for every person that told me that low rates can substantiate higher multiples even though rates were low because earnings and the economy were depressed.

As for the pile of debt that a rise in rates would impact, yesterday the Institute of International Finance said global debt in 2020 went to $281 Trillion, up $24 Trillion to a fresh record high. That is 355% of global GDP. About half the debt increase was from government and the other half from the private sector (both business and households).

AAII Bull/Bear spread

Benefiting from the economic rebound in China and most of Asia along with an incredible containment of Covid and the rise in commodity prices, particularly in iron ore, Australia reported an increase of 29.1k jobs in January, in line with expectations. Also, the unemployment rate fell two tenths to 6.4%. The Aussie $ is getting back what it lost over the past two days vs the dollar in response. The 10 yr yield though after jumping by 8 bps yesterday is giving back 3.5 bps today at 1.37%. The RBA is all in via zero rates and QE (which was just recently expanded). The ASX was little changed.

The upside trend in inflation is not just a US thing. Sweden said CPI in January rose 1.6% y/o/y from .5% in December. The core rate was higher by 1.8% y/o/y from 1.2% in the month prior. You can be sure though that the Riksbank will call it 'transitory' too.

Sweden core CPI

Kraft Heinz (KHC) = world's fair!

Up another $1 1/2.

* Investing and artificial intelligence. 

* Payment for order flow. 

* The Covid housing boom is bigly.

(2/17/21 Morning Comments appear at the bottom) 
__________

Equity markets did not spend Ash Wednesday in a rather penitential mood. They did however clearly abstain from much of the recent euphoria they have shown during the morning's trading. So, it begins concern again was the nudging up of interest rates, some rising commodities prices and the coincident fear that the inflation may begin to accelerate or take off. That was mitigated somewhat a little bit later in the day.

The bulls managed to regroup at mid-day, actually began to do better after the publishing of the Fed minutes at 2pm. The Fed pointed out that they were clearly aware that things like the vaccine etc. night give the economy a bit of a boost, maybe even a minor spike, but they maintained that they were well in control of the possibility of inflation and remain with their eyes clearly on unemployment as the first concern.

Also of interest at least to me, was the fact that the minutes indicated that during their two-day meeting the Fed members discussed the speculative trading going on and the short squeeze around GameStop etc. and speculation may have had some retail involvement. The minutes didn't indicate exactly what the Fed members wanted to do and that was interesting because in his press conference after the meeting, Powell was specifically asked by 1 or 2 reporters about the speculative trading and he kind of shrugged it off and indicated they would let the SEC and other regulators handle that issue. So the trading in the afternoon as I say was somewhat aided by the idea that the Fed minutes indicated that the members felt they were in control and there was not going to be a case of inflation beginning to run away. That helped the Dow Jones finally close a new record. It allowed the S&P to eliminate the losses and close basically unchanged. NASDAQ however continued to drag a bit. Higher interest rates thought not too be a friendly environment for some members of the tech industry.

Certainly, every eye in Wall street will be on the hearings that will begin in Washington today on the Reddit/GameStop trading frenzy from a couple of weeks ago. I do believe as I have said from the beginning, that unfortunately too many in the financial media have been amazingly gullible and have portrayed this as a David and Goliath situation. They described it as almost a French Revolution in finance, a case of democratization in trading. In my veteran cynicism, as I said from almost the very beginning, I believe when the investigation is completed this will not have turned out to be a David and Goliath issue, but rather a spot with big players on both sides, some disguising themselves as retail to egg on the mob, to run up the prices for the benefit of one side verse the other.

The cold snap continues to dampen economic activity. The energy market continues to spike a bit, on reports of wild prices being paid as people desperately try to cover their responsibilities and liabilities in their contracts. Stories of gas prices trading at 50 or even 100 multiples above spot prices are making shorts nervous.

At any rate there was a lot of conversation built around yesterday's trading and we will see where we will go from here. As I say all eyes will be on today's investigation. As of this morning the futures look somewhat softer and slightly uncertain. The seasonal trading patterns again maybe trying to insert some influence, by my remembrance from Presidents day into early March the market at sometimes displays a minor roll-over pattern. But again, last week's seasonal pattern should have called for a bit more topping than we actually saw.

Again, there will be a lot of interest on the hearings this afternoon. I only hope that they dig down deep enough and discover as I assume that there were people disguising themselves as retail steaming on the crowd. It will be fascinating reading and hearing. The bulls still remaining in charge. The bears need to set up a couple of lower lows in order to gain the momentum. For now, it looks like we are leaning a bit more towards consolidation type day, but news can always change that.

Stay safe.

Arthur
__________ 

2/17/21 Morning Comments:

The market began Carnevale in a ripping roaring festive fashion. Late in the morning, some concerns and anxiety began to arise. NASDAQ went negative and the S&P went flat and, the Dow, which was mildly negative for a bit, managed to come back, as you will see from the midday update printed below.

We said that the bulls would have to regroup and circle the wagons a bit and, they did, at least in the Dow. But it looked like they had a hangover long before Carnevale was over and, we will wait to see how things go further.

As you will also note from the midday update, the basic concern was the steepening of the yield curve and the yield on the ten year which moved up through 1.25 to 1.3 and, as we said in that update, traders were concerned that the Fed, who is primarily watching the unemployment rate, may accidently let inflation slip by them, at least several prominent traders noted that on TV.

The early rally was aided and abetted, as we noted in the pre-opening Comments, by rising, almost, spiking oil prices as the hard freeze in Texas shut down the Permian Basin to some degree. And, even the alternate energy supplies, including the wind power, which saw the blades freeze up and unable to turn.

Over five million people went without power which will be the topic for probably weeks to come. The rising interest rates help the financials, providing the two main groups to lead the rally forward. Concerns about inflation was exacerbated to some degree by further upward pressure in everything from lumber to copper to, obviously, oil.

We will have to wait to see if there is a) any comment from the Fed and b) any particular change relative to commodity pricing.

Technicals were also less than glowing. At the bell, declines inched out advances even though the Dow managed to close at a new record. So, this is becoming, once again a head scratcher.

Technicals weakened much as last week when many traders were wondering if we were sputtering into a pause or, maybe even a temporary top and rollover. A little too early to make that call. We will see.

There are some geo-political challenges beginning to show up for the new Administration, including in Afghanistan and Iraq. Not major events yet but let us see if that develops into something the market begins to worry about and pay attention too.

Away from that, the futures this morning, on Ash Wednesday, don't seem too particularly concerned about the beginning of the Lenten season.

Asian markets were mixed and appeared to be mildly uncertain. Stocks in Europe are also uncertain to slightly lower. Obviously, folks will be paying attention to that yield curve again and, the yield on the ten year probably will be the bulk of the conversation.

A lot of people will be trying to assess Fed policy. How hot will they let inflation run and, will it matter to the market?

It looks like more storms of snow through much of America, with Texas getting hit again. That probably will slow down the economy and, slow down the vaccines.

The good Covid news is we seem to be moving back from the Thanksgiving/Christmas spike and, are now back to levels of contagion seen in October.

I sold my entire Walmart (WMT) position in premarket trading this morning and I have taken the stock off from my Best Ideas List based on the following: 

* A continued slowdown in E- commerce sales:

* Gross margins suffered and will likely get worse:

* Large capital spending boost - well ahead of last year and expectations. Estimated $14 billion in capital expenditures for "supply chain, automation, customer-facing initiatives and technologies" vs. $10.3 billion in the year just ended. 

* Forward guidance weak - reflecting disappointing comp sales, cost pressures and large cap ex, needed to expand supply chain capacity, improve customer experience and improve productivity:

* In poker parlance ARK's Cathie Wood has been dealt the "nut hand" repeatedly (and for some time)

* But ARK's favorable run of cards could change abruptly

* I remain Bearish on the U.S. stock market, Tesla and ARKK 

"(as Denethor runs by) So passes Denethor, son of Ecthelion"

- Gandalf, J. R. R. Tolkien 's novel The Lord of the Rings

"That reminds Doug Kass of Seabreeze Partners of the once-hot funds, such as the former Janus Twenty. "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," he writes in his blog. And that there is no price too high to pay for those concepts, in this case disruptive technologies, most notably Tesla (TSLA), ARKK's largest holding."

- Barron's, Up and Down Wall Street (Today's Stock Mania Differs From 1999's, but That Might Not Matter)

The last poker table is when the seats are all inhabited by the sharks. They soon start to devour each other. In the markets, we caught a glimpse of this in the GameStop (GME) circus - a likely foreshadowing of what might occur in other asset classes and stocks. 

"If you've been playing poker for half an hour and you still don't know who the patsy is, you are the patsy."

- Warren Buffett 

In life and in markets, history may not repeat itself but it rhymes. 

Throughout every stock market cycle there is a repetitive pattern in the world of money management. 

Sure, the names change - Gerry Tsai's Manhattan Fund, Kevin Landis' FirstHand Funds, Tom Marsico's Janus Funds, Ryan Jacob's Internet Fund, etc. 

But the outcome almost always has the same outcome. Too much marketing, an exponential rise in assets under management (AUM) - and then a spontaneous combustion. 

In last week's, "We All Live in Cathie Wood's World (But That Could Change Quickly" I wrote that in every 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 overexploited, valuations will go to extremes and a painful bust will follow. 

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

* In this market cycle, ARK Invest (ARKK) 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

Too Much Demand at Tesla? Not!

Which brings me to ARKK and Tesla TSLA.

Yesterday, as TSLA shares tested the 50 day moving average (not seen since November), Cathie Wood appeared on CNBC and waxed enthusiastically about the outlook for Tesla. 

Tesla's shares were down to $765/share (-$31/share) on Tuesday morning before Cathie Wood's CNBC appearance and closed +$2/share higher on the day.

On the above weakness Tuesday, ARKK added about 130k shares of Tesla into their portfolio. The Tesla position now represents approximately 10% of ARKK.

Meanwhile, Tesla's fundamentals are deteriorating as the company announced that it has reduced its Model 3 and Model Y prices. 

Bottom Line

ARK's investment strategy appears to literally drive 200 miles per hour as long and until the proverbial wall (of outflows) is hit.

Lost in the euphoria is that ARK's superior investment performance is, in a relative sense, newly minted, and the byproduct of only two exceptional years - in 2017 and 2020 and not by decades of strong relative and absolute result. 

To be sure, no one is paying ARK/Wood to be in cash - she is following an aggressive strategy of taking massive inflows and buying into momentum-driven story stocks. This is what she will keep doing until higher interest rates (or other adverse factors) shatter the valuation bubbles of her universe and redemptions come pouring in.

Of course my short of ARKK is anathema to the momentum types - who question the sanity of shorting ARK's momentum in a reflexive and Pavlovian backdrop. 

But the drool (and explosion of AUM at ARK) are self evident.

Perhaps the bell has not yet rung - as higher asset prices beget higher asset prices and ARK ETF inflows.

On the other hand, the bell may be close to ringing as the drool (of assets flowing into ARK) is evident as the ever higher asset prices for disruptive tech stocks beget ever higher asset prices as it attracts more buyers. Relatedly, check out Divine Ms M's observation about some potential "issues" with the Nasdaq this morning.

To me, history is my teacher - and I have seen the ARK phenomenon before.

Years from now we may be asking the question... "Remember ARK?" just as we do the same today with Gerry Tsai's Manhattan Fund, Tom Marsico's Janus, Ryan Jacob's Internet Fund, and Kevin Landis' The First Hand Funds. 

The names just change and it always ends badly.

Yesterday ARKK traded as high as $159/share and as low as $147/share - closing -$3 lower, for the first time since my Bar Mitzvah, at about $152/share.

In early premarket trading, ARKK is indicated down by another -$3 plus/share to under $149/share.

S&P futures are down by -18 handles (at 6:40 am and Tesla is also trading lower by -$21/share to approximately $778/share in the premarket.

Unlike the broad (and expanding) consensus, at today's prices, I remain Bearish on the U.S. stock market, Tesla and ARKK.

From me!

Danielle DiMartino Booth on a spring economic thaw:

• January's retail sales report saw a 5.3% month-over-month headline gain, nearly five times the Bloomberg consensus; per Opportunity Insights, consumer spending in low-income zip codes also saw a 13.6% gain versus January 2020, well above the -2.2% average since then
• Last month saw the fourth largest monthly retail sales gain all time, running 17.6% QoQ annualized vs. Q4 2020's 1.2% rise; all 14 spending categories saw increases from December, a 99th percentile event which has only happened five times in the 348 months on record
• The other non-COVID instances of gains across all 14 spending categories have seen retail sales pull back in the following two months; January's retail boom is unlikely to last, with the current winter storm across the South potentially setting up a volatile follow through

Anthropologic evidence suggests that ancient cultures practiced regular oral hygiene. Researchers have found recipes for teeth-cleaning and breath-freshening preparations that date to ancient Egyptian, Chinese, Greek and Roman cultures. Over the centuries, people have concocted some true oddities. Ingredients span the spectrum from normal - dried flowers, mint leaves and mixed berries - to the inexplicable - charcoal, vinegar and wine. The most cringeworthy descends from ancient Rome who bought bottles of Portuguese urine to use as a rinse. Importing the excreted liquid became so popular that Emperor Nero levied a tax on the trade. The ammonia (exclusive to the Portuguese?) in urine was thought to disinfect mouths and whiten teeth; it remained a popular mouthwash ingredient until the 18th century. It wasn't until the late 1800s that modern mouthwash was developed and mass-produced commercially. Thankfully, most early brands contained alcohol to stabilize the formula, an input still used today.

Good breath is something that accompanies good hygiene that starts with flossing, has brushing in the middle, and is finished off with that wash swishing around your mouths. Good breadth in economic speak creates a higher conviction for an emerging trend and/or suggests a reversal of a technical nature could be forthcoming. To add a little noise to the cacophony, both of these elements were present in yesterday's January U.S. retail sales report.

The 5.3% month-over-month (MoM) headline gain was nearly five times consensus, beating all 68 economists in the Bloomberg survey. A shout-out goes to QI amiga Michelle Meyer, Chief U.S. Economist at Bank of America (BofA), for being closest with a 4.1% call. Her accuracy reflects an appreciation of BofA's proprietary data on debit and credit card spending. As $600 stimulus checks hit bank accounts, these readings spiked among COVID-relief recipients. Support from the stimulus was more apparent for lower income households that have a higher propensity to spend, and the spending spurt lasted about ten days. For those earning under $50,000, in early January, spending gapped up into double-digit territory, running well north of those higher up the income stack.

In parallel fashion, Opportunity Insights' tracktherecovery.org concurred with the BofA data. Compared with the benchmark month of January 2020, consumer spending in low-income zip codes averaged a 13.6% increase; that compares to an average of -2.2% since January. Middle-income zip codes saw a gain of 4.1% vs. the post-January 2020 average of -6.4%. And high-income zip codes stayed in the red, at -4.5% versus an average of -10.6% since last January. An aside: Top earners are not battening down the hatches as much due to stocks near all-time highs.

What did U.S. households buy in January? You name it. Everything. With one month on the books, quarter-to-date retail sales were running 17.6% (quarter-over-quarter annualized) versus the fourth quarter's 1.2% rise. The gains were so broad-based that all 14 spending categories posted MoM advances over and above December. Every one of them also stands well ahead of their fourth-quarter paces. Standouts north of a 20% sequential rate included: furniture & home furnishings, gasoline, electronics & appliances, sporting goods/hobby/book/music, miscellaneous, building materials and nonstore/e-commerce (left table).

The reflex on virtual trading floors was to mark-up first-quarter expectations for consumer spending and gross domestic product (GDP). However, some blamed the January burst on seasonal adjustment factors that anticipated more seasonal weakness than realized. Because retail spending was lighter-than-normal during the typical holiday-shopping months of November (-1.3% MoM seasonally adjusted) and December (-1.0% MoM seasonally adjusted), the pullback in January was much more moderate than typically seen once the calendar turns, translating into a strong seasonally adjusted gain.

But that's just one factor. The fourth largest monthly retail sales gain on record stems from a confluence of factors including extra cash flow and timing of spending. Either way, the result was an extraordinary perfect breadth score that you can count on one hand. Fourteen out of fourteen has only been recorded five times in 348 months, a 99th percentile event.

This begs the simple question: What's next? The right table illustrates. In the non-COVID occurrences - March 1994, August 2014 and October 2018 - headline retail sales stalled and pulled back in the next month and two months forward. The COVID month - May 2020 - included a reopening impulse that extended through June and July.

What will February and March look like? The record chill across the middle of the country through the South could be setting up a volatile follow through. Be mindful that QI's home state of Texas is the second largest state by GDP in the nation accounting for nearly 8½ percent of total economic output. Insurance payouts for those who have lost everything and are fortunate enough to be covered will ripple through the data for months to come.

January's good retail breadth is unlikely to last, despite the super strong start to the first quarter. This should cause investors to breathe a sigh of relief that additional stimulus could still come down the pike after every major economic report on the U.S. economic calendar in yesterday's trading session beat market expectations.

The sell-off in the tech heavy Nasdaq and rally in Treasuries that bull-flattened the yield curve raised concern that the economy might not need another stimulus injection. Should the February data disappoint after the deep freeze, market participants will need more time to assess the underlying path of the economy as it heads toward the spring thaw.

PLEASE JOIN QUILL INTELLIGENCE IN CONTRIBUTING TO LOCAL RED CROSS CHAPTERS. I CAN NO LONGER COUNT ON ONE HAND THOSE I KNOW WHO HAVE LOST EVERYTHING. THEY ARE FORTUNATE ENOUGH TO BE INSURED. PLEASE BE AS CHARITABLE AS POSSIBLE TO HELP THOSE WHO HAVE SIMPLY LOST EVERYTHING, NO BACKSTOP.