Thanks for reading my diary today.
Monday was margaritas day, but for me, tonight is margaritas night.
Enjoy the evening.
Be safe.

No trades since noon.

From The Bear Cave Report:

Could ARK Invest Blow Up?

ARK Invest, the hot active management ETF firm founded by Cathie Wood, has seen assets grow from around $10 billion to $60 billion over the last 12 months. ETFs, unlike hedge funds, do not have long-term capital and can rapidly gain or lose assets based on the sentiments of its retail investors. These changing flows can act as a self-fulfilling prophecy for ARK, which invests in relatively illiquid companies.

For example, on January 31, ARK's Innovation ETF owned 6.04 million shares of Invitae Corp (NYSE: NVTA - $9.63 billion), or about 3% of the company. As of February 12, ARK's Innovation ETF owned 17.3 million shares of Invitae, or about 9%. By buying such a large stake in a short period of time ARK Invest may be artificially enhancing its returns with its buying pressure. This could also happen in reverse.

If Ark Invest faced outflows it would need to sell some of its holdings, which could cause them to fall. If hedge funds start front-running the forced selling, Ark Invest's performance could deteriorate further, which would lead to more outflows, then more selling, and then worse performance, and then more outflows, etc... A recent Bloomberg article found that ARK Invest owns at least 15% of 11 companies it is invested in. The Wall Street Journal raised similar concerns and highlighted that 43% of ARK's assets are in companies where it owns at least 10% of the company. These large stakes are difficult to exit quickly.

One way to counteract illiquid stakes could be to have extra funds invested in liquid placeholder stocks. For example, ARK's Genomic Revolution ETF, which focuses on companies "enhancing the quality of human life," recently invested $185 million in Google.

That might not be enough. In 2019, the Woodford Equity Fund in the U.K, collapsed after persistent outflows left the fund with only illiquid holdings. What makes ARK Invest especially problematic is its daily transparency about its trading as well as the potential to front-run forced selling. For example, one hedge fund manager wrote,

buyhighsellhigher @ebitdaddy90

WSJ article says Arkk has almost 50% of the fund in stocks where they own 10% or more of the company. @CathieDWood I look forward to feasting on your carcass when flows turn negative. Gonna be easy to get some predatory shorts going in all your small caps. - February 7th 2021

If enough people have the same philosophy, ARK may sink.

I have a series of business meetings and I will be on radio silence for a few hours.

I am exhausted and it is not even noon yet. What a day.

A lot of activity today.

A real lot.

If you can't follow (which is understandable!) I am left with the following: 

Longs: Verizon VZ, Bank of America (VZ) , Citigroup (C) , JPMorgan (JPM) , Wells Fargo (WFC) , (GLD) , (SLV)

Shorts: Bonds, Homebuilders, Hilton (HLT) , Hyatt (H) , Twitter (TWTR) , Disney (DIS)

As stated, I am out of all my Index shorts and out of my speculative bitcoin package of gewgaws. 

In gross and net terms I am now very light. 

That said, I remain with a negative outlook for both stocks and bonds.
__________ 

Long VZ (large), BAC (large), C (large), JPM (large), WFC (large), GLD (large), SLV large

Shorts: TLT, Large Homebuilders Package (large), HLT (small), H (small), TWTR (large), DIS (large)

Because it is unlikely we'll get many insightful questions today from Senate members, we'll have to rely more on Jay Powell's prepared testimony in order to get a good sense of his thoughts, particularly on inflation, vaccines and the shift higher in long rates. Like I asked yesterday, will Powell embrace the steeper yield curve because while it partly reflects higher inflation expectations it is also pricing in the highly effective vaccines we have, the collapse in the Covid count and the increase in economic activity that follows. Or will he worry about the rapidity of the rise in long rates and try to temper the move. While the Fed has full on asymmetric policy in that we still have zero rates and massive QE because of Covid, the long end of the curve acknowledged that in 2020 but is saying we have vaccines now therefore it's time to pivot. The Fed has shown NO interest in pivoting. Their policy in 2021 is still playing the 2020 playbook.

In Europe, we saw the Lagarde bond bounce yesterday after she said they are 'monitoring' the rise in long rates. That rally lasted all of one day because sovereign yields are rising again. The German 10 yr bund yield fell 3.4 bps yesterday and are up 4.2 bps today to a hair below -.30%. They are also up 4-5 bps across the region. The revision to January CPI in the Eurozone was left unchanged with the initial print a few weeks ago of up .9% y/o/y headline and 1.4% core.

GERMAN 10 yr Bund Yield

Also living in 2020 and not acknowledging that 2021 will see the end of Covid as we know it (will still linger but in a much more contained way) is the Deputy Governor Anna Breman of the Riksbank. She said today "We must be prepared, be able to act decisively and have the courage to use new and untested tools if price stability is under threat. I do not think that any of the tools I have discussed today should be ruled out, as long as their use is lawful." What tools did she talk about? Helicopter money, NIRP again, dual interest rates, and YCC. No humility here.

Old news considering how effective they've been in rolling out the vaccine, the UK change in employment for the three months ended December fell by 114k, more than the estimate of down 30k. The unemployment rate rose one tenth to 5.1% as expected. Wage growth was good, in part due to mix, with a 4.1% y/o/y gain in weekly earnings from 3.6% in the month prior. Positively too, the January jobless claims count fell by 20k after a 20.4k decline in December. With PM Johnson yesterday announcing plans for more reopenings in coming months and more mass inoculation, all these numbers will get much better in coming quarters. The pound is rallying, gilt yields are rising and the FTSE 100 is down with all other equity markets.

While a February number, it should also be considered old news, that being the CBI retail sales report. It rose 5 pts but a still deeply negative -45 and the estimate was for a 10 pt rise. CBI said "With lockdown measures still in place, trading conditions remain extremely difficult for retailers. Record growth in internet shopping suggests that retailers' investments in on-line platforms and click and collect services maybe paying off, but the re-opening of the sector can't come soon enough to protect jobs and breathe life back into the sector."

I guess not surprisingly Jay Powell remained very dovish. After giving an overview of his views on growth and inflation he repeated what was in the January FOMC statement that rates will stay at their current levels "until labor market conditions have reached levels consistent with the Committee's assessments of maximum employment and inflation has risen to 2% and is on track to moderately exceed 2% for some time. In addition, we will continue to increase our holdings of Treasury securities and agency MBS at least at their current pace until substantial progress has been made toward our goals." In other words, full speed ahead notwithstanding the changing conditions.

With respect to inflation, instead of citing the rise in commodity prices and goods prices, he broadly said "Following large declines in the spring, consumer prices partially rebounded  over the rest of last year. Fact Check: They FULLY rebounded and them some as the inflation stats are above where they were in February 2020. Instead of specifically citing the rise in goods and commodity prices he instead said "for some of the sectors that have been most adversely affected by the pandemic, prices remain particularly soft." And, "Overall, on a 12 month basis, inflation remains below our 2% longer run objective." Thus, giving no credence to the dramatic change in inflation expectations in the TIPS market. We'll see if a Senator asks him about inflation today. My guess is only that Pennsylvania Senator Pat Toomey hopefully will as he seems to get it, along with everything else the Fed is doing based on what I heard with his interview on CNBC this morning.

Bottom line, the Fed is focused on employment and seems very willing to absorb higher inflation and excesses in financial market that brings financial instability in hopes of getting there. But, as seen in the long end of the yield curve, the markets have a say here too and they are speaking loudly. Hopefully at some point Fed officials will listen.

S&P CoreLogic said that its US home price index in December rose 10.4% y/o/y while its 20 city index was higher by 10.1%. As home prices are not included in CPI and PCE, the Fed still is worried about inflation that is too low and are still aggressively buying mortgage backed securities. Like I've said before, it is like a child who covers their eyes and thinks they are invisible. Just because home price gains are not included in the consumer inflation stats doesn't mean they don't exist.

At the city level, the gains were led by Phoenix, Seattle, San Diego, Cleveland and Boston. Lagging but with price gains still at 7-9% y/o/y were Chicago, Vegas, Dallas, San Fran and Atlanta.

Bottom line, strong home prices gains are certainly good for current homeowners who now have higher equity in their homes that they can tap if they choose. While it is also good for sellers, unless they are downsizing, they are paying up for whatever they move into. For the 1st time buyer that is saving up for a down payment, sorry because lower mortgage rates are no longer an offset.

US HPI y/o/y

The February Conference Board's Consumer Confidence index rose to 91.3 from 88.9 and that was slightly above the estimate of 90. The components though were mixed as the Present Situation jumped 6.5 pts while Expectations fell by a touch. One year inflation expectations continued higher, up by 3 tenths to 6.3%, the highest since the supermarket driven spike last June. The average over the last ten years is 5.2%.

The answers to the labor market conditions improved with jobs Plentiful up and those Hard to Get down. Expectations though for higher employment weakened as did for income.

Spending intentions weakened across the board with vehicles, homes and major appliances. As for homes specifically, it is at the lowest level since last May. My guess as for the reason is those 10% home price increases.

CONSUMER CONFIDENCE

One yr INFLATION EXPECTATIONS

Lastly, the Richmond manufacturing index for February was unchanged at 14 as expected. Prices paid and received were up sharply.

I have covered the following shorts in today's whoosh lower: (AAPL) , (ARKK) , (MARA) , (CAN) , (PLUG) and (PTON) .

* Covered my Index shorts and Tesla this morning

As you all know I have distributed the investable funds from my managed accounts recently as I am starting a new hedge fund, Seabreeze Partners LP. 

Over the last month or so I have been basically trading/investing in my own account in preparation for the changeover. 

As I will be making a large investment in my new Partnership - and need the funds available shortly - and in light of the magnitude of the market's decline I am taking a lot of profits on my short positions this morning. 

So, you will see more short covers ahead - I just covered, on the whoosh lower my (SPY) and (QQQ) hedges as well as covering all my Tesla (TSLA) short - which are in response to this business changeover and less a reflection of my market views. 

Here is what I recently wrote: 

Dec 24, 2020 ' 09:20 AM EST DOUG KASS

Why Now, Doug?

"Ch-ch-changes
Ooh, look out, you rock 'n' rollers
Ch-ch-ch-ch-changes
Turn and face the strange
Ch-ch-changes
Pretty soon now you're gonna get older
Time may change me
But I can't trace time
I said that time may change me
But I can't trace time"

- David Bowie,Changes

As some are aware, in early 2021 I am planning to launch Seabreeze Partners LP, a new hedge fund/investment partnership.

In the next few days I will be returning the money invested in my separately managed funds accounts back to investors. I will be liquidating some of these accounts in their entirety. Others will have most if not all of their equity positions transferred directly back to them. I expect that most of the managed accounts will be making an investment in Seabreeze Partners, LP.

As I will shortly no longer have investment control of these "returned" managed accounts, the only stocks that will appear in my disclosures will be equities that I personally are long or short. Currently, the only long investment positions I am holding personally are Wells Fargo (WFC) , Bank of America (BAC) , JP Morgan (JPM) , Citigroup (C) , Goldman Sachs (GS) , Morgan Stanley (MS) , and the Financial Select Sector SPDR Fund (XLF) . In addition, I also have a short position in Tesla (TSLA) , I am personally short the bond market -- iShares 20+ Year Treasury Bond ETF (TLT) , and I am short the Nasdaq and S&P Indices.

The below message, "Why Now, Doug" appears on the welcome page of our Seabreeze Partners Management website which is live this morning:

Why Now, Doug?

I will try to make my answer to this question relatively brief.

After managing several hedge funds over many years I closed my principal Investment Partnership in 2013 after having complications following surgery for prostate cancer. At that time I came to the conclusion that I could not "give it my all" and continuing Seabreeze Partners would be unfair to my Limited Partners.

Since then I have fully recovered.

Beginning in 2015 I have acquired several managed accounts. Since then I have invested my own money, I have continued to write for Real Money Pro (TheStreet) where I have been for 23 years, I have lectured at a number of graduate business school programs (most recently an Advanced Economics course at The Yale School of Management - MBA Program - during the Spring Semester, 2019), I have written a best-selling book (Doug Kass on the Market: A Life on The Street) and I have served as a Board of Directors member for three public companies, two of which we have sold.

It is time for me to get back onto the investment field.

Since closing Seabreeze Partners seven years ago we have all witnessed a substantial change in market structure that will likely create many new market opportunities for our new Partnership. Specifically, the transition from active ("stock pickers") to passive investing which knows everything about price but nothing about value has provided a broad opportunity set for the disciplined and unemotional trader and for the research-based investor.

Quantitative programs and exchange traded funds now dominate daily trading activity - they are both crowd followers.

The elimination of commissions for retail traders and investors have bolstered the "gambling" element of trading equities and have reduced time horizons to a matter of minutes. Some even tout their lack of knowledge about fundamentals over the game of bidding up the "shiny objects du jour" like SPACs, blind pools and other new investing vehicles. From this setting, a new asset class buyer, exemplified by the powerful impact of the Robinhood trading site - in which the traders pay no commissions at all - has emerged. They, too, are predominantly crowd followers of a trading nature.

Reflecting the dominance of passive investing and trading, it can be argued that today's traders and investors are the least intelligent and most uninformed in history.

With so many worshipping at the altar of price and momentum, market moves are becoming dramatic and routine - exacerbated by the aforementioned changing market structure in which "buyers live higher and sellers live lower." As a consequence, we are likely in an extended regime of heightened volatility. Consider that in the span of only seven months this year, we have moved from an all-time high in the S&P Index in February to a one third decline in March, to another all-time high in September which was almost +50% higher than the March lows.

Given these conditions, adopting a long-only approach to investing makes less sense today relative to the past: Rather, an opportunistic long/short approach appears preferable. Having been a successful short-biased investor for several decades I fully understand the price disciplines required in short selling. Specifically, I recognize the fundamental asymmetry of shorts relative to longs. Risks associated with shorting are theoretically infinite, but rewards are "only" 100% if a stock goes to zero. Moreover, a losing short position increases in portfolio size as the stock rises while longs that decline in price have a reduced portfolio size. As such, most shorts should be viewed as hedges or trades and as protectors of wealth while investments with longer term timeframes should be viewed as generators of wealth.

The Bull Market over the last decade has benefited from the markedly reduced supply in the number of listed securities - from about 7,800 (in 1999) to under 4,000 issues today. And with a complicit Federal Reserve who, under the cover of Covid-19 and political influence, has moved to near zero interest rates "as far as the eyes can see." Meanwhile uncontrolled and undisciplined fiscal policies have abandoned any concerns over deficits and have had little regard to our rising national debt load.

The plethora of crowd-following strategies and products have, at times, produced markets that are ever more frequently disconnected from the real economy - sometimes by large amounts. This has placed a premium on hard-hitting primary analysis coupled with the implementation of a trading and investing strategy that is disciplined and free of emotion.

It is important to recognize that higher prices are the enemy of the rational buyer and lower prices are the ally of the rational buyer. Opportunities unfold when programs, products, strategies and emotion take stocks below intrinsic value and vice versa. For example, in March 2020 sell programs and other factors pushed stocks to well under their fair market value. Buy programs and speculators took us to well above intrinsic value only a few months later - at a point reminiscent of the time when Citigroup's Chuck Prince famously said about his bank's continued commitment to leveraged buy-out deals despite fears of reduced liquidity because of the occurring sub-prime meltdown: "As long as the music is playing, you've got to get up and dance."

Whether to the downside or to the upside these influences have been quick and consequential. As stated previously, the heightened volatility and the distortions in price have actually improved the opportunities to produce superior investment returns for the dispassionate trader and investor who is willing to capitalize on the short term "artificiality" and the frequent and sometimes conspicuous absence of price discovery that these factors have produced.

We view time horizons as a weapon of outperformance against those with no attention span and patience.

It is our intention to capitalize on these long and short opportunities in our new Investment Partnership.

Our investment team will be a combination of experience and youth - but it's common thread will be strong, hard-hitting analytical capabilities draped in logic, common sense and a strong work ethic.

To summarize, I believe my unique and broad experience managing long and short money as well as managing young professionals, my strong academic (Wharton) and analytical background, my extensive writing about and analyzing the markets over the last two decades, my teaching experiences at the graduate level, my participation at the corporate Board of Directors level at a number of companies coupled with my many business contacts I have established over the last four decades - are important influences that will hopefully inure to the benefit of our Limited Partners and to our Investment Partnership.

This is the answer to the question, Why Now, Doug?

We are excited about this opportunity.

I have covered a lot of my (SPY) ($381.50) and (QQQ) ($312.50) shorts.

* Momentum is often a vicious temptress

In early February I wrote that the prospects for short selling were as attractive as I could remember - I got a lot of pushback here and there on this view: 

Feb 09, 2021 ' 12:20 PM EST DOUG KASS

Contrary to the Conventional View, the Case for Short Selling Has Improved

* The unfolding of recent events has created an abundance of short selling opportunities

"It's easy to grin

When your ship comes in

And you've got the stock market beat.

But the man worthwhile,

Is the man who can smile,

When his shorts are too tight in the seat."

- Judge Smails, Caddyshack

Bull Markets emerge from adversity and bad news, while bear markets are borne out of prosperity and good news.

So it is with investing methodologies and styles.

To wit, I can't remember when short selling was such a target as today.

And I can't remember - given the market's structural profile and economic/profit uncertainties - when the opportunities to short have been so attractive.

It is my view to be greedy when others are fearful (of the short side) especially with the apparent distortion between current share price levels and my calculation of "fair market value."

Frankly, when hedge hoggers duck for cover, and terminate their short research, for fear of their own safety - the green light to go red is shining as brilliantly as I can recall.

With a great deal of objection from the "peanut gallery", I went all in long in March, 2020 and I have gone all in short in February, 2021, with an equal amount of Bronx cheers today.

At least for Monday the short opportunity proved out as many of my shorts were schmeissed: 

* PLUG -$7 (-13%)

* MARA -$6 (-14%)

* GBTC -$3 (-5%)

* CAN -$4 (-16%)

* MSTR -$87

* TSLA -$66

* RIOT -$6.5 (-9%)

* CVNA -$27

* ARKK -$8.50 (-6%)

* PTON -$14 (-10%) 

We were "told" my bulls on these speculative gewgaws that there would be plenty of time to ride them out on the long side - that we would all "know" when to exit.

Not many have exited.

I just covered my Riot Blockchain (RIOT) short. 

The shares are down another -$17 today.

* For a large gain.

Housekeeping item. 

MSTR is down by another -$180/share. 

I have covered my MSTR short at $680.

As I wrote recently: 

Feb 16, 2021 ' 02:10 PM EST DOUG KASS

MicroStrategy's Gimmickry

* If you want to own bitcoin, buy bitcoin and not MicroStrategy!

As mentioned previously in our Comments Section, I am short MicroStrategy (MSTR) :

dougie kassSteve9 hours ago

I have expanded my speculative package of shorts to include some of yours Steve - including MSTR, TLRY (on the opening) etc.

This move to sell bonds to acquire additional bitcoins could be among the dumbest capital allocation moves I have seen in a long time.

Without rendering a verdict on bitcoin, my point simply is that if an investor likes bitcoin, just buy bitcoin.

There is no reason to buy MSTR to own bitcoin.

In fact, any bitcoin they own should be valued at a discount to its current price, because you have no control over it. Yet MSTR's stock price has ripped and it means people are valuing the bitcoin at substantially more than what MSTR paid for it.

This is a good gimmick for them for the time being, but if I were an insider there I would be selling stock hand over fist and I suspect they might be...

* Covered my IWM short

I selected a short of (IWM) as my Trade of the Week: 

Feb 22, 2021 ' 10:35 AM EST DOUG KASS

Trade of the Week - Shorting IWM (Russell Index) at $224.80

Here is all we have to know (from the Divine Ms M):

I just covered this short term rental at $218.40!

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

* But Cathie Wood might now be, like Gene Kelly, 'singing in the rain'

* ARKK traded down by -$9 yesterday and is down another -$7 today

* Tesla traded down by -$66 yesterday and is down another -$45 today

* Bitcoin is -$7000 this morning

* I am short ARKK, TSLA, peripheral bitcoin "plays" (like MSTR, CAN and RIOT) as well as some constituent investments in ARKK's portfolio

* An ARKK unwind represents a bonafide market risk now



"For seven days from now I will send rain on the earth for forty days and forty nights, and I will wipe from the face of the earth every living thing I have made."

- Genesis 7:4 

Over the last two weeks I have cautioned about the risks that Ark Invest's (ARKK) virtuous cycle - perpetuated by massive inflows - runs the risk of being a vicious cycle should outflows commence as Cathie Wood runs her portfolio at 200 miles per hour:

"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."

- Kass Diary, The Last Poker Table?

Here is a compilation of my recent critiques of ARKK: 

* The Last Poker Table? 

* Latest Cathie Wood Trades

* We All Live In Cathie Wood's World (But That Can Change Quickly)

* An Old Man Writing About "Games Traders Play" - Blinded By A Sense of History

Is ARKK Buying A Falling Knife (Tesla)?

"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)

"Let the stormy clouds chase.
Everyone from the place,
Come on with the rain
I have a smile on my face."

- Gene Kelly, Singing in The Rain

Cathie Wood, like Gene Kelly, may now be "Singing in the Rain".

On weakness (again), ARKK added 185k shares of Tesla (TSLA) yesterday. (Talk about running a portfolio 200 miles per hour!) 

I have shorted ARKK, ARK's largest investment Tesla, and a number of constituent portfolio companies that have been taken to grossly inflated valuations, in part, by virtue of Wood's purchases. 

I also have predicted a likely poor outcome and that Cathie Wood is inevitably doomed to a similar and dire ending experienced by Tom Marsico's Janus Funds and Kevin Landis' Firsthand Funds in the last speculative stock market cycle. 

History rhymes. 

And developing a contrarian investment thesis (as I have done with ARKK, TSLA, etc.) through logic of argument, hard hitting analysis - whether long or short - usually pays off.

I have written a piece on short selling for TheStreet: "When Short Selling Is Done Right."
Check it out here! 

From Q:

I have covered some of my Tesla (TSLA) and ARK Innovation (ARKK) shorts in premarket trading. 

I typically trade around core positions (long and short) - and that is what I did this morning.

I have covered my Facebook FB trading short rental in premarket trading for a profit.

Danielle DiMartino Booth on commercial real estate woes:

• Per the Equipment Leasing and Financing Association, new originations volume fell 7.2% YoY in Q4 2020 after drops of 13.3% and 14.4% in Q3 and Q2; F.W. Dodge's Construction Contract Volume Index likewise collapsed 26.3% in Q4, 30.7% in Q3, and 28.2% in Q2 2020
• In Q1 2021, a net 25.4% of senior loan officers reported tightening CRE loan standards, the tightest among all lending categories, per the Fed; though this is well off the net 52.2% seen in Q4 of last year, it remains seven times tighter than the long-run average from 2010 to 2019
• Barclays' U.S. CMBS IG Index has posted just a 2.5% YoY return thus far in February, its weakest in three years; with it and the 10-year Treasury's -0.9 correlation since mid-2013, the inverse movement between the two could move especially as the Office sector is stress-tested

That pesky groundhog was right! Six more weeks of chill has us dreaming of longer days when we can exercise in the great outdoors. Show of hands, anyone else "grow" an extra winter layer this year? To shed said spare tire, we need to pump up our CRE, or Cardio Respiratory Enduranc e, the capacity for the heart and lungs to work in concert to provide working muscles with oxygenated blood for prolonged periods of time. Want to improve your CRE in the comfort (prison) of your own home? The following build muscle and burn calories: jumping jacks, burpees, mountain climbers, push-ups and side-shuffle touches. Not a fan despite their low (no) cost? Try swimming, jumping rope or high-intensity indoor sports at your local YMCA, such as basketball and hot yoga when it's cold outside.

Getting in better shape is something which the other CRE - Commercial Real Estate - could stand to do, especially as we don't yet see a recovery in sight as the hard data play hard to get. The rule is that CRE returns to expansion after the economy is well into its recovery. The rub in the current cycle is CRE also wasted no time in becoming distressed.

No doubt, confidence abounds that CRE will regain its mojo. To that end, the Equipment Leasing & Finance Foundation's (ELFF) Monthly Confidence index rose in February to 64.4 (on a 50 breakeven scale), the highest since September 2018. Via executive input, the index provides an assessment of prevailing business conditions and expectations for the $900 billion sector that funds CRE projects, large and small. A number in the qualitative survey acknowledged 2021's Paycheck Protection Program will suppress capital needs. Pent-up demand is nonetheless expected to induce a rebound in leasing activity.

Channel checks aren't as rosy. In today's left chart, you see new business origination volume from equipment finance companies contracted through yearend 2020. The 7.2% year-over-year (YoY) fourth-quarter decline followed a 13.3% drop in the third quarter and a 14.4% pullback in the second. These data from the Equipment Leasing and Finance Association (ELFA) represent member equipment finance companies across small-ticket, middle-market, big-ticket, bank, captive and independent leasing and finance companies. Based on hard survey data, the responses mirror economic activity in the broader equipment finance sector.

Add to the hard-data mix construction contract volume from industry king F.W. Dodge. This metric mirrored the ELFA series but with greater negative amplitude, falling -28.2%, -30.7% and -26.3% in the 2020's second, third and fourth quarters, respectively. The Dodge series measures the amount of floor space, in both square feet and meters, specified in new contracts for imminent work on commercial and manufacturing buildings.

One reason for the persistent weakness is stingy bankers. CRE faces the tightest lending standards among major buckets including commercial and industrial loans, residential mortgages, credit cards, auto loans and other consumer loans. One mines these data in the Fed's Senior Loan Officer Opinion Survey. In 2021's first quarter, a net 25.4% of senior loan officers reported tightening lending standards (yellow bars). Granted, this is down from 74.2% and 52.2% in 2020's third and fourth quarters, respectively. However, it remains seven times greater - tighter - than the average from 2010 to 2019.

It should come as no surprise that CRE pricing remains under pressure. Green Street's Commercial Property Price Index captures where commercial real estate transactions are currently being negotiated and contracted. It's both paralleled the weakness in new business originations of equipment finance companies and construction contract volume and its "recovery" is closer to being L-shaped vis-à-vis the other metrics. The four-quarter progression from 2020's second quarter to 2021's first quarter to date is -9.3%, -9.4%, -8.5% and -7.1% YoY (green line).

As seen on the righthand chart, fundamentals haven't reached the end of the tunnel. The total return for Barclays' U.S. Commercial Mortgage Backed Securities (CMBS) investment grade index (orange line) is strained against a rising 10-year Treasury yield (purple line). Since the middle of 2013, the correlation between the Barclays index's annual performance and the YoY path of the 10-year yield was -.90. Thus far in February, the index has posted a 2.5% twelve-month return, its weakest showing in three years.

CRE is already on the Fed's financial stability radar. The just-released Monetary Policy Report noted CRE, "prices remain at historically high levels despite high vacancy rates and appear susceptible to sharp declines, particularly if the pace of distressed transactions picks up or, in the longer term, the pandemic leads to permanent changes in demand."

In a February 11 report, S&P Global stress-tested Office REITs exposed to "dense gateway markets that face prolonged pressure from accelerated remote working and office downsizing trends" with the following assumptions:

• Only 50% of leases are renewed at expiration;
• Lease renewals at rates that are 25% lower effective rent (including higher lease concessions and tenant improvement);
• Very few new leases due to slower-than-expected recovery from the pandemic-induced recession;
• Cumulative occupancy declines of about 10% to the mid- to low-80% area (95% currently);
• 10% decline in same-property NOI in 2021, moderating to 5% decline annually from 2022-2024.

S&P's bottom line: "We anticipate credit metrics to significantly worsen, with adjusted debt to EBITDA deteriorating by one to two turns by 2022 and further...by 2024." Factoring in the inevitable ripple effects, we see no room for a hawkish Powell in today's and tomorrow's congressional testimonies.