* Jeff wins the Trivia Contest

Jeff Hopwood • 33 minutes ago
Sir Larry Kudlow and Peter Boockvar!

Thanks for reading today.

Enjoy the evening.

Be safe.

Leverage ETF (JNUG) (junior gold miners) is up big (+$3.45) -- this may presage a broader move in GLD.

Adding.

* And a Wednesday afternoon Trivia Contest

Best Sellers Rank: #567,063 in Books (See Top 100 in Books)

#236 in Business Investments

#384 in Business Finance

#1,887 in Economics (Books)

• Publisher : Wiley; 1st edition (November 7, 2014)
• Language : English
• Hardcover : 544 pages
• ISBN-10 : 1118892984
• ISBN-13 : 978-1118892985
• Item Weight : 1.72 pounds
• Dimensions : 6 x 1.42 x 9 inches

• Afternoon Trivia Contest - the winner gets a signed book (above)!
• Both questions must be answered correctly:

Question #1: Which CNBC columnist do I call "my favorite host" (a reference to Ed Sullivan in "Bye Bye Birdie")?  

Question #2: Who wrote this endorsement of my book?

"Everyone is a genius in a bull market, but it's the ability to successfully maneuver thru all types of markets that separates the men from the boys. Doug Kass has done that in his long career, and this book provides amazing insight and invaluable stories that reflect his great ability to think outside the box in a business where many feel comfortable just following the herd. As Dougie would say, run don't walk, to read this book."

Please send your answers to our Comments Section!!

Daniel @InternRobinhood

Charles Munger on Celebrity SPACS: "The investment banking profession will sell shit as long as shit can be sold."

cenacapital @cenacapital

Munger coming in hot against #robinhood - a dirty way to make money from gamblers.

* And placing the shares on my Best Ideas List (short) at $65.12

I have followed Charles Schwab (SCHW) since it was listed on the Exchange. 

On the heels of a Bull Market in stocks and based on higher interest rates, allowing SCHW to earn a better rate on float, the shares of Schwab made a multi-year high today. 

While I believe that rates will likely move higher it is my view that the probabilities of a financial transaction tax on securities trading is higher than the consensus believes. 

This is the core of my short thesis. More to come next week.

This week Hong Kong unveiled its first tax hike on stock trades since 1993:

* Back shorting (IWM) (Russell Index) at $226.85 

First and foremost I am a business man!

From Monday, when I shorted IWM at $224.80, and Tuesday, when I covered IWM at $218.40:

Feb 23, 2021 ' 09:42 AM EST DOUG KASS

Well That Was Fast!

* Covered my IWM short at $218.40!

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!

* Homebuilder shares are mixed here on Wednesday after good EPS beats

* I have been adding to my shorts

New home sales in January totaled 923,000, above the estimate of 856,000 and up from 885,000 in December (revised up from 842,000). This figure peaked out at 979,000 last July but certainly is running at a good pace as the market desperately needs more new supply. Months' supply was little changed at 4.0 vs. 4.1 and the median home price was up 5.3% year over year (very volatile figure month to month because of the influence of mix). The average price went to a record high of $408,800 because of an increase in home sales priced above $500,000 relative to the gain in those priced below. 

We know the housing market has been red hot, and with 10% year-over-year price gains maybe it's too hot. Now that mortgage rates are rising, we'll likely see a rest. Since the January numbers the average mortgage rate has risen by 20 basis points to back above 3%. The thing that is stunning is the rapidity of this move higher in long rates as the long end has essentially tightened policy by 50 basis points in just seven weeks. Along with another jump here on Wednesday, the five-year inflation breakeven is up by 4.4 basis points to 2.44%, a level last seen in May 2011. 

Here is a 15-year chart on new home sales:

Here is a 10-year chart on the five-year inflation breakeven: 

"I am going to write a good Diary on Real Money Pro today... and I am going to help people. Because I am good enough, I am smart enough and doggone it, people like me."

-- Daily Affirmations With Dougie Kass

Today's Affirmations is about instability.

To me there are growing signs of mounting market disequilibrium and instability.

Volatility is heightened and players have concentrated holdings (e.g. ARK Invest).

From my perch this is the ingredient for a continuation of more violent price action with a bias lower, rather than higher.

I am not a licensed therapist, though.

"I deserve good things. I refuse to beat myself up. I am an attractive person. I am fun to be with."

From Charlie Bilello: 

The Road Back to Normal

Last month I outlined the data pointing to the beginning of the end of covid-19.

Since then, I'm happy to report that some incredible progress has been made...

• Covid-19 hospitalizationsin the US have declined 40 days in a row, down over 57% from their peak on January 6. At 56,159, hospitalizations are now back below the peaks from last April (59,924) and July (59,808).

• Covid-19 new casesper day have fallen 74% from their peak on January 11. At 64,301, they are now back below the high from last July and at the lowest levels since October 23.

• The percentage of positive covid-19tests has moved below 5% for the first time in 4 months.

• Covid-19 deaths are down 43% from their peak on January 13 and at their lowest level since early December.

While we haven't reached herd immunity just yet, we're getting closer every day, and with that closer to the pre-covid sense of normalcy we all seek.

Here's where we stand on that front...

Roughly 29 million Americans have tested positive for the virus to date. But based on antibody studies and estimated infection fatality rates from the CDC, the actual number of people who have contracted the virus is likely closer to 100 million, or at least 30% of the US population.

Additionally, over 13% of Americans have now received at least one dose of the Pfizer/Moderna vaccine, with older Americans being vaccinated at much higher rates.

The importance of this cannot be overstated, as this virus has been particularly fatal for older men and women. Americans age 75 and older represent only 6% of the population but 60% of all covid-19 deaths and over 80% of all covid-19 deaths have come from Americans over the age of 64.

Which is why I'm excited to write that 63% of Americans age 75 and older and nearly half of those above 64 have already been given at least 1 dose of the vaccine.

This wonderful trend should continue to push down hospitalizations and deaths in the coming weeks and months.

As for the vaccines, the limiting factor remains supply, but we'll soon see a significant increase as the FDA is set to meet this week to review the Johnson & Johnson vaccine application for emergency use. J&J said it will be able to produce 20 million doses by the end of March and 100 million by the end of June. And as the J&J vaccine only requires a single dose (vs. 2 doses for Pfizer/Moderna), this will mean an additional 100 million people than can be vaccinated within the next 4 months (J&J Phase 3 trials showed 85% effectiveness against severe disease and zero cases of hospitalization or death 28 days post-vaccination).

The road back to normal is finally within sight, paved by the combination of natural infections and highly effective vaccines. As more and more people are vaccinated in the coming months, I hope this will translate into a resumption of face-to-face interpersonal connections that have been put on hold for far too long.

Grandparents will be able to safely hug their grandkids again; weddings, birthdays and graduations will be celebrated again; and kids will be able to be kids again, returning to school and playing together.

Which is another way of saying that after a yearlong hiatus, humans can start being humans again. That's something we should all be celebrating, and I look forward to writing that post in the not too distant future.

iShares 20+ Year Treasury Bond ETF (TLT) traded over $170 in August 2020 and has made a new low here on Wednesday morning under $140 a share.

 I remain short bonds ... and long banks.

The rapid rise in interest rates now being experienced should be a boon for bank stocks.

I expect new highs are ahead for the sector.

* And that likely spells problems for equities

Interest rates are spiking here on Wednesday morning.

The 10-year U.S. note yield is 1.42% now and I remain short bonds, large in size: 

Time to revisit last week's column, "Will the Real TINA Stand Up?"

* Is the three hour tour over?

* Has Proud Mary stopped burning?

* I am not sure

* While the "TINA Ripper" I envisioned last April has taken place, I am sure the case for the TINA trade ("there is no alternative") is now vastly diminished

* The relationship between the 10 year US note yield and the S&P dividend yield has flip flopped in the last 11 months - presenting, in all likelihood, a quick death of the TINA argument - see the important chart below!

* So long TINA, it was good to know ya... and say hello to CITA ("cash is the alternative")

Is It Tina Louise - who played Ginger Grant on Gilligan's Island...?

"Just sit right back and you'll hear a tale,
A tale of a fateful trip
That started from this tropic port
Aboard this tiny ship.

The mate was a mighty sailing man,
The skipper brave and sure.
Five passengers set sail that day
For a three hour tour, a three hour tour."

- Gilligan's Island

Is it Tina Turner - who worries about the way that things might have been...?

"Left a good job in the city
Working for the man ev'ry night and day
Then I never lost a minute of sleep
When worrying 'bout the way that things might have been

Big wheels keep on turning
Proud Mary keeps on burning
Rolling, rolling, rolling on the river"

- Ike and Tina Turner,Proud Mary

Regardless of who is the real TINA to you, one of the core cases for the continuation of the Bull Market, the TINA ("there is no alternative") argument -- has, at best, been vastly diminished over the last year.

To me, the TINA argument is somewhere between dying to has died.

If you all remember back in March, 2020 I went all-in long stocks with the expectation of a "rip your face rally" and "mother of all short squeezes."

In my April, 2020 column (when fear, skepticism and doubt were plentiful), "Does the Continuation of a Rip Your Face Market Rally and the Mother of All Short Squeezes Lie Ahead?" made 17 persuasive arguments in favor of a roaring Bull Market:

It might seem ludicrous, and though the probability still remains low, here are some plausible reasons that we could face a continued rip your face rally and mother of all short squeezes over the near term:

* Innovation In The Scientific Community The most obvious catalyst would be a discovery in therapeutics (lots of smart people are conducting trials) or the introduction of a vaccination that successfully combats Covid-19. There is no one that expects a vaccine this year... but, what if? (Check! Scientists are actively seeking a therapeutic solution to Covid-19. It's a work in progress but there are some signposts of success already. Yesterday, Oxford Group's potential vaccine breakthrough likely has aided S&P futures overnight)
* The Curve Flattens More Quickly Social distancing ends up flattening the curve more quickly and virus cases/deaths collapse much faster than consensus expects. (Check! Approximately 10 days ago the national curve began to flatten as the "stay at home" edicts have been effective in curbing the spread of Covid-19)
* Businesses Are Allowed To Reopen Faster Than Expected An earlier than expected return produces a quicker normalization of business and economic activity. First in low population density areas and then spreading into urban communities. (Check! In the last few days the announcement of re-openings has quickened)
* The Consumer Is Pent Up The consumer, isolated for weeks, begins to spend (and is "pent up"). (No Check Yet! It's too early. We will have to wait 1-3 months to adequately analyze the trajectory of the consumer rebound)
* The Fed Buys High Yield Debt The Federal Reserve expands what it can buy - not necessarily stocks directly but begins gobbling up high yield debt. (Check! Though this did not surprise me, the magnitude of the Fed's willingness to fire its bazooka surprised market participants - favorably)
* Monetary and Fiscal Stimulation Kicks In Recognition that the unprecedented monetary and fiscal action will be productive in catalyzing global growth (on a lagged basis). (No Check Yet! It's too early but I remain confident of the impact)
* "Lower for Much Longer" Valuations could be reset higher based on interest rates "lower for longer." (Check! Valuations have ramped materially higher in the face of a still unclear and weak profit picture)
* A Growing Short Base Positioning has gotten very defensive. (Amateur) shorts are plentiful, hedge funds have materially derisked - contributing to a possible near term acceleration in the market's advance and a powerful short squeeze. (Check! As I mentioned in this morning's tweet, many market participants who were confident in the retest call, got short or were defensive. This helps to explain, perhaps, the last leg of the Bull since mid-April)
* As Stock Momentum Accelerates to the Upside, ETFs and Quant Strategies Kick In as Buyers Market structure (proliferation of ETFs and risk parity) could also accentuate an upward rise in stock prices - turning from sellers to buyers. Remember, "buyers live higher (and sellers live lower)" in an investment world dominated by products and strategies that worship at the altar of price momentum. (Check! I have always said that "buyers live higher and sellers live lower." We are likely seeing machines and algos, who worship at the altar of price momentum, in force recently)
* Oil Vey! An end to the oil fight between Russia and the Saudis. (No Check Yet!)
* Buy American - He Is! Warren Buffett announces a buying spree that includes not only a large expansion in his investment portfolio but also a very large acquisition of a Fortune 500 company. (No Check Yet! But here are some possible explanations)
* Play Ball! Major League Baseball announces the return of baseball in June (albeit without spectators at the ball field). (No Check Yet! But word is that MLB is considering a "soft opening")
*" I Am Going to Disney World!" Disney announces that Disney World will be reopened in June/July (with temperature testing). (No Check Yet!)
* Private Equity's Large Cash Hoard of over $1 Trillion (for leveraged buyouts). (No check yet! But last week's $20 billion+ junk bond offerings were well received and prices were calm post offerings):
* Merger Activity Explodes The abrupt hit to the economy causes a massive increase in merger and acquisition activity as weakened companies are gobbled up by those with human and financial capital and resources. Listed NYSE companies have fallen by more than 50% since 2007 - suppose listed companies continue to contract in 2020-21. A shortage of equities? (No check yet! But I do expect a renaissance in merger and takeover activity, a boon to investment banking)
* Take It to The Bank Banking industry profitability proves far more resilient than feared. (Check! 1Q2020 EPS, despite large loan loss provisions were reasonably good relative to expectations)

The Death of TINA?

However it is the last factor I highlighted in the list above - related to this morning's opening missive - that perhaps represented one of the more important observations in support of an explosive rally from the March, 2020 lows:

* A "TINA" Ripper Stock prices, facing a decade wide in the investment premia (the earnings yield less risk free rate of return) and the attractive gap between the high, absolute S&P dividend yield vs. short term interest rates. My one year bank CDs (which yielded 2.6% a year ago) have rolled over and now yield only twenty basis points! A "TINA (there is no alternative) Ripper" is possible. (Check Cubed! We have seen a "TINA" Ripper develop over the last two weeks)

The "TINA Ripper" took place, in spades.

But the problem today is that the relationship between the 10 year US note yield and the S&P dividend yield has reversed.

With risk free rates of return rising, the 10 year US note now does provide an alternative - especially with the S&P dividend yield plummeting:

Source: ZeroHedge

To repeat my case from yesterday:

Feb 16, 2021 ' 10:05 AM EST DOUG KASS

Is the Reflation Trade in Full Bloom? And Is the TINA Trade About to Die?

* The 10 year US note yield has risen by over 41 basis points in the last two months

* This is good for bank stocks

The market's opening indicates that the reflation trade is back in (full?) bloom.

The 10 year US note yield has blown through resistance - and is currently yielding 1.264% (up 6 1/2 basis points on the day).

The next major technical level is about 1.36% - which we hit in July, 2016 and in August, 2019.

Meanwhile, going out longer on the curve the 30 year bond is yielding +7 basis points to 2.073%. The December, 11 low was 1.66%!.

The 2/10s curve has continued to steepen - standing at around 115 basis points.

The most rate rise climb started late in the day on Friday when the Bundesbank, the Central Bank of Germany, mentioned TIGHTENING.

Then Treasury Secretary Yellen told the G-7 that now is "the time to go big."

Bottom Line

With short- and longer- term interest rates rising, and expected to climb further, and the S&P dividend yield declining (coincident with much higher stock prices) - TINA is now likely dying a not so slow death as bonds are providing an alternative.

Move over TINA ("there is no alternative") and say hello to my little friend, CITA ("cash is the alternative").

The jump in mortgage rates had an immediate impact on mortgage applications. With the average 30-year rate rising 10 basis points week over week to 3.08%, purchases fell 11.6% week over week and are down in four of the last five weeks to the lowest level since May. The year-over-year increase has slowed to 6.9%. Refi's declined by 11.3% week over week but are still up 50% year over year. Combining 10% home price increases with now-rising mortgage rates is a good combination for the market to take a breather. 

Here is a one-year chart on the average 30-year mortgage rate: 

Here is the one-year chart on purchases:

Here is a one-year chart on refi's:

My good buddy Peter Boockvar, chief investment officer with Bleakley Advisory Group, checks out bond yields here and abroad, among other things: 

Ahead of another round of Powell testimony this time in front of the House, yields continue higher again. The 30 yr bond yield is up by 4.5 bps to 2.22%, the highest since January 2020. The 10 yr is up by 2.3 bps to 1.37% and got as high as 1.38% after during Powell's testimony. To the question of what level of rates matters for stocks, we've seen the current level at least matter for the expensive, frothy parts of the market. Yields are moving up again in Asia and Europe. I've talked the last few days about yields in Australia and its 10 yr yield is up 40 bps in just two weeks. Bonds are getting oversold though in the short term and I wouldn't be surprised if the rise took a breather. The 14 day RSI in TLT is down to 22 and the 7 day is just 16.

Powell is not alone in believing that they are still far away from adjusting policy. The Reserve Bank of New Zealand overnight kept rates unchanged at .25% as expected and said "it would not change the stance of monetary policy until it had confidence that it is sustainably achieving the consumer price inflation and employment objectives" and they too will look past the rise in inflation in coming months in part due to base effects. But, what we've seen is market driven rates will go their own way if they see things differently.

30 yr Yield

Aussie 10 yr Yield

After the better than expected German business confidence index seen a few days ago, French business confidence in February fell a touch to 90 from 91. The estimate was 92. Manufacturing remained the bright spot, rising 1 pt m/o/m while services, retail and employment fell from January as Covid is still impacting business. The French 10 yr oat yield is up slightly to the highest since June. The euro is quietly back to a one yr high while the CAC is unchanged.

The British pound continues to trade great as they are both executing well with the vaccine rollout and coincident with that laying out plans for reopening again. UK stocks are cheap and where some value lies. The FTSE 100 trades at 15x 2021 earnings estimates with a 3.8% dividend yield. Compare that with the tech heavy S&P that the FTSE is not that trades at 23x 2021 earnings with a dividend yield of 1.5%.

POUND

The Hang Seng got pounded by 3% after Hong Kong announced that they are raising the stamp tax (a transaction tax) to .13% from .10%. That is the 1st time since 1993 that this tax was increased. This as we are debating that here. Hong Kong Exchanges and Clearing fell 9% in response.

From Arthur's morning notes:

Equity trading in US stocks was wild and woolly to say the least on Tuesday, in fact it started out in a rather bizarre fashion. The Bitcoin was getting crushed and very early on in the equity trading Tesla started to trade tick for tick down with Bitcoin. Then the high cap techs all followed right in after a rather disaster performance yesterday.

At one point Tesla was almost down 10% in a single day, and traders began to wonder if the wheels were going to come of the locomotive. Was this the beginning of a major sell-off, certainly the high-tech performance yesterday was disastrous and today it certainly didn't look much better.

The fall in high caps began to take everything else down with them. Soon the selling has spread all across the market. As I say it looked like we were going to flip into absolute free fall, at least until Fed chairman Jay Powell came to the rescue of the bull during the first part of his Humphrey-Hawken testimony. I think the key was when Powell said that the Fed would continue to do at least the current rate of buying bonds and mortgage-backed securities.

The markets had been worrying that the Fed might in fact think about tapering or limiting the amount of quantitative easing they were doing, but I think that the bell went off in several people's heads when he said that they would do at least whatever they were currently doing. "The least" insinuated that the Fed might be ready to increase the amount of bond buying they were doing. Therefore, they would be shoving even more money in the marketplace in the economy.

It seemed to be at that point that bargain hunters came in. As I say until that moment it looked like we were going to go into absolute free fall. But one by one the bidders showed up, the selling slowed and stopped and then reversed. At first it was tough sledding, but it was clear that the bulls were now on the counterattack. The selling, as I say, not only slowed, but the market began to pick up a wave of buying interest and it looked like after being on the verge of free fall, the bulls were almost ready to route the bears.

The market came back stunningly. At its worst, NASDAQ was down the equivalent of over a thousand points in the Dow Jones industrial average. As I say initially the selling was led by Tesla because of Elon Musk's noted embrace of Bitcoin. Even Apple began to be among the weak links in the techs.

By mid-day, the things had clearly turned, and Powell wrapped up his testimony and while it wasn't a major change in the yield on the 10year it was enough to allow that rebound rally that the bulls needed, and they pulled off rather effectively. The bull's counterattack was so successful that with about a half hour to go the Dow was now in plus territory by over a 100 points. The S&P looked like it was going to follow with a strong close and even the NASDAQ was being dragged grudgingly toward neutral territory. There was however selling in the final 15minutes and that cut the gain in the Dow to a very very moderate one. The S&P while showing a plus tick was virtually unchanged.

It looks like the grand debate is out there. We have looked at the technicals, and they do show some deterioration and we will wait to see if those negative seasonal pressures that we spoke of from the end of February going into March 1st begin to take hold. You know the theoretical Chinese curse "may you live in interesting times". Well, I guess we made it.

Overnight equity futures were relatively quiet, and as dawn hits Manhattan, we're looking at some slight gains, even in the techs and even more bizarrely in Bitcoin. A lot of back and forth about Powell comment the Fed might consider looking into developing its own cyber currency, and that has drawn attention since that would give the Fed a tremendous amount of flexibility in the money supply in which they can not only pump money in but make that money perishable, if you don't spend it by next month it begins to disappear, that could certainly accelerate monetary policy.

But for now, we are waiting to see whether the past few days are the end of the storm or simply the eye passing over. The technicals have deteriorated somewhat, but none are flashing red warning signals yet.

Keep your eye on the high techs and stay safe.

* Travelling at 200 miles per hour, Cathie Wood and Ark Invest are on a collision course with the proverbial wall of ETF outflows

* I expect a reversal of ARK's virtuous cycle of ETF inflows and a rising share price

* It is growing increasingly possible that with the emergence of a vicious cycle and a negative feedback loop that ARK's ETFs may exhibit even more volatility and less liquidity than its portfolio investments

* This would be disarming to ARK Invest's ETF holders

* In its extreme, a vicious cycle could be destabilizing for its largest portfolio positions (e.g. Tesla) and even for the market as a whole.

"Wastin' away again in Margaritaville
Searchin' for my lost shaker of salt
Some people claim that there's a woman to blame
Now I think, hell, it could be my fault"

- Jimmy Buffett, "Margaritaville" 

Travelling at 200 miles per hour, Cathie Wood and ARK Invest are on a collision course with the proverbial wall of ETF outflows and a possible "liquidity moment."

Rather than going full speed, ARK should be conserving gas (and its engine) and even taking a pit stop by employing a more conservative and more liquid strategy than it currently is.

Concentration in relatively illiquid investments and owning a large percentage of the floats, ARK is taking an all-too-familiar journey that has been repeated time and time again near the end of many speculative Bull Markets. (Think Tom Marsico, Fred Mates, Fred Alger, Kevin Landis and the many others that preceded Cathie Wood).

An asset gatherer par excellence, Wood has benefited from massive inflows, and like a souped-up GTO ARK buys and lifts liquid and illiquid holdings to inflated values as she is seemingly impervious to the sky-high price-to-earnings ratios of many of its large and small disruptive company holdings.

Over the last 12 months ARK Invest's assets under management have expanded from $10 billion to $60 billion. And ARK Invest now owns at least 15% of 11 different companies.

According to a recent Wall Street Journal article, the ARK Innovation ETF (ARKK) has almost  half ts assets in equities where it owns more than 10% of the shares outstanding.

The Bear Cave Market Newsletter highlighted the liquidity risks Tuesday night:

"Last night (Monday), ARK issued a correction to its "latest trades" email because the firm mistyped one of the ticker symbols. Worst of all, ARK seems indifferent to its illiquidity risks. For example, last week, ARK initiated a position in Vuzix (VUZI), a $900 million small tech company that is up around 1,000% over the last 12 months. Just yesterday, ARK's Genomic Fund (ARKG) bought another 122,000 shares of Surface Oncology (SURF), a $350 million cancer drug company. ARK now owns around 9% of the company. ARK should be treating the situation as a four-alarm fire. Instead, it is just business as usual."

Below is a list of ARK Invest's most concentrated holdings; in aggregate they fell by 7.5% on Monday and by 9.5% on Tuesday. 

The virtuous cycle continues until it doesn't.

On Tuesday, with nearly $475 million of ARKK outflows, we began to see signposts of a possible crash that may lie ahead: 

We have already witnessed the first blow across the bow in ARKK's share price, which dropped from the week-ago high of $159 a share to under $126 a share during the day on Tuesday (when I covered).

Despite that, Cathie Wood has continued to buy Tesla's (TSLA) falling knife, adding more than 250,000 shares in Tuesday's trading session alone. And Wood purchased nearly one million shares of an extended Twitter (TWTR) stock.

Going forward a combination of lack of liquidity in portfolio companies (see chart above) when coupled with ARK outflows could cause a death spiral for ARK ETFs and its constituent investments.

In the worst outcome, investors in ARK ETFs may shortly face something that is most worrisome and not expected -- namely, that ARK's ETFs could display more volatility and even less liquidity that its underlying portfolio investments. (This is something that has happened in history to ETFs and it is destabilizing to investors and their investments).

At that time, ARK's virtuous cycle of inflows and rising prices could quickly turn into a vicious cycle of outflows and lower stock prices for its ETFs and investments.

On Tuesday I highlighted some additional risks at ARK. The full post is below: 

Feb 23, 2021 ' 09:00 AM EST DOUG KASS

Is it About to Rain for Forty Days and Forty Nights? Will Cathie Wood Need Her Ark?

* 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.

On Tuesday I wrote an evergreen column for TheStreet on short selling that hopefully communicated some important principles and tenets and can be returned to when shorts are considered.

I wanted to re-post it here on Wednesday morning:

When Short Selling Is Done Right

* Short selling is risky

* Most individual investors would be better off to avoid short selling

* The academic evidence on the effects of short selling on our capital markets is overwhelmingly positive

* Short selling improves the efficiency of security prices, increases liquidity, and positively impacts corporate governance

"We don't like trading agony for money"

- Charlie Munger (in his response to my question when I was the "credential bear" at the 2013 Berkshire Annual Meeting)

Short selling is a risky investment strategy where the investor profits if the stock price drops.

Let's start with the reasons why most retail investors should not sell short as an offensive (and non arbitrage) strategy:

1. The gravitational pull of stocks is higher over time. On average, equities return about 6%x to 7% per year. So, bull markets are a far more frequent condition than bear markets.
2. The reward vs. risk in short sales is asymmetric. One can only make 100% on a short, but, in theory, the upside is infinite. (For example, GameStop (GME) rose from $20/share to $480/share. Compare that percentage rise to the percentage decline opportunity if GME had gone bankrupt!
3. If a long goes against you, as the shares decline in price, the position becomes a smaller portion of your portfolio. However, if a short goes against you, as the shares rise in price, the position becomes a larger portion of your portfolio.
4. Shorts are taxed adversely relative to longs. Longs sold after 12 months are eligible for long term capital gain tax rates. If you hold a short for five years and then cover for a profit - the gain is taxed as a short term gain.

Also consider that "everyone" is against a short -- current stock owners, managements, Wall Street sell-side research, investment banks (trying to sell stock to the public), commercial bankers (who are hoping investment banks succeed in raising capital, thereby reducing their lending risk) and, even, governments which prefer higher stock prices in order to receive higher tax revenues.

The media doesn't understand it. Even Congress doesn't get it. After the Game Stop hearings the only conclusions reached were that there should be more restrictions on short sellers even though the shorts were the victims. That's just crazy. Nobody in the hearings focused on how much the manipulative longs made and the pain THEY inflicted on the public. The financial media doesn't get it either. For every "short and distort" story, there are literally hundreds of fabricated touts lacking any real analytical basis.

The above factors help to explain why short selling is so difficult and why most should not sell short. It requires a great deal of "supervision" of positions and price discipline.

I have the investment scars on my back from my personal experiences in short selling when I was a "yute". As a result, I have developed some specific techniques to increase the odds of a profitable short. Let's briefly examine my core tenets in shorting:

* Avoid shorting valuation. It is my experience that even the stocks with the richest valuations tend to get even richer valuations.

* Instead, find stocks to short whose business landscape (and potential sales/profits) are deteriorating cyclically or secularly relative to consensus expectations.

* Do not short stocks with high short interest relative to the share float (total outstanding shares less insider holdings) or relative to daily average trading volume. In the main, I steer clear of shorts that represent over 7% or 8% of the float and when short interest represents more than seven or eight days of trading.

* Short sellers should have stops and risk parameters set before the trade goes on.

* In shorting, err on the side of conservatism.

* On average, short position sizes should be smaller than long position sizes.

* Short position sizes should be weighed against one's risk appetite and profile.

Market Benefits of Short Selling

Short selling confers a number of benefits both directly to the capital markets themselves and indirectly to the real economy. Theoretical, academic and empirical studies have shown that short selling improves overall market quality by contributing to price efficiency, improves liquidity, and has corporate governance benefits. Historical bans and restrictions on short selling have proved to negate many of these benefits, to the detriment of overall market quality.

Pricing Efficiency

Short selling contributes to the accuracy, efficiency and natural discovery of prices in securities markets, primarily by ensuring that both positive and negative public information about firms are promptly reflected in prices. The 2013 Boehmer and Wu study examined the speed with which public information is incorporated into stock prices, finding that more active short selling leads to faster incorporation of information into prices.

Improving Liquidity

Short selling also positively impacts overall market quality through improvements in market liquidity. A 2013 Beber and Pagano study examined the liquidity impacts of short selling bans across 30 countries, finding a decline in liquidity when shorting constraints are more severe.

Short selling helps the market to function more smoothly and efficiently. For example, short selling allows a market maker, hedge fund or liquidity provider to hedge options, swaps, futures, ETFs, etc. This generally results in improved liquidity, tighter spreads between bids and offers and (de facto) in lower effective trading costs.

Corporate Governance Benefits

Short selling also contributes positively to strong corporate governance by serving as an external disciplining mechanism on firm management. In theory, since short sellers are motivated to uncover wrongdoing by management, and then trade on that information through short sales, the probability and speed with which corporate misconduct is discovered increase. As a result, there is less incentive for management to engage in such misconduct, thus improving the corporate governance of the firm. A 2015 Massa and Zhang study examined the corporate governance impact of short selling - finding that the presence of short sellers does indeed improve the behavior of firm managers.

Some of the greatest examples of corporate malfeasance and frauds have been discovered by short sellers. Baldwin United, Enron, and Lernout & Hauspie are very good examples.

Shorting Strategies

There are many bonafide reasons to sell short away from an aggressive strategy to profit from lower stock prices.

For example, there are numerous hedge fund strategies that profitably incorporate short selling - arbitrage, long/short, etc.

However, most large investors now tend to avoid (non arbitrage) short selling because its hard to short in scale. Melvin Capital's experience with GameStop will likely further dampen the interest of large hedge funds from short selling.

Given the longer term trend that stocks climb over time, it should be clear that long buying generates wealth. By contrast, I consider short selling as a means of protecting wealth.

I use both Index ETFs and individual shorts in my approach to managing money - but almost always stick to my basic core short tenets (above).

Most individual investors, if they short at all, should probably stick to Index ETFs - which are liquid and diversified and not subject to short squeezes (as seen recently in Tilray (TLRY) , GameStop and AMC (AMC) ).

Until recently, longs and shorts have operated on an uneven playing field as the large majority of Wall Street sell-side research has been historically geared towards long buys, and not sales/shorts. As well, the financial media is geared towards buying not selling or shorting. However, with the broad expansion of social media outlets, this is changing and the field is growing more even.

Finally, it is my experience that when we compare fundamental long buyers to fundamental short sellers -- short sellers tend to be somewhat more informed and rigorous in their analysis. Given today's dominance of passive over active investing, market participants today are less educated about fundamentals than in the past and more educated in price (momentum). This has, in my view, created an unusual opportunity for short sellers who are willing to brave the formidable headwinds discussed above.

Danielle DiMartino Booth on the output gap:

• The "Outlook Gap II", or spread between CEO Own-Industry and Consumer Income Expectations per the Conference Board, is now at a record high; households are not nearly as optimistic as CEOs, with Income Expectations only modestly rising to a net 2.0% from January's 0.3%
• From 1989 to now, the Outlook Gap II has had a 0.76 correlation with the 3-month/10-year Treasury spread; it remains to be seen whether this quarter's Outlook Gap II, a record 3.70 z-score, pulls back or if the yield curve, in the manipulated Treasury market, rises to match it
• The latest S&P 500 operating EPS for Q4 2020 was 12.5% below Q4 2019, a step down from Q3's 4.8% drop; though the pandemic will muddy Q1 YoY comparisons, if CEO optimism is correct earnings could start the year strong, base effects and insider selling notwithstanding

There is dissension in QI's ranks. We know that 1974's The Godfather Part II is the best sequel ever. With flawless performances by Robert DeNiro and Al Pacino, it garnered even more Oscars for Francis Ford Coppola than his first epic and was the first sequel to win Best Picture at the Academy Awards. While that is the end of the story, Dr. Gates has proposed an alternative to be taken under advisement: 1986's Aliens. In the interest of politeness, James Cameron's genius does manipulate the tension beautifully - the build-up to carnage, to the unbearable waiting that climaxes in balls-to-the-wall action. The Marines who accompanied Ripley (Sigourney Weaver) are one-by-one fleshed out and brilliantly killed off. Yes, yes...there's some Hamlet there. And there are two exclamation points. Godfather II doesn't feature a single acid-veined xenomorph! And Hudson's (late, great Bill Paxton) quote, "Game over, man! Game over!" transcended 1980s pop culture!

As said, the nominee is under consideration only. We will always be true to our Italian roots. The first installment that preceded today's Feather was released in November 2019, when QI introduced the "Outlook Gap" which we're proud to report has since been emulated on the Street. Simply defined, it's the difference between CEO Expectations and Consumer Expectations via the Conference Board. Back then, as the economy crawled towards a recession nearly all today deny, we illustrated how the Outlook Gap had reached the widest on record in 2019's third quarter. Never had CEO's views on what the future held been as depressed as they were relative to their employees. Given the oscillation of the Outlook Gap tracks the labor cycle, we ventured that the reversal in the unemployment rate typically seen at the next cyclical inflection point would be that much more violent.

On to today's Sequel. One of the nuances of the Conference Board's CEO Confidence survey is that firms' leaders are asked not just about the six-month outlook for the economy but also that which pertains specifically to their own industry. The Outlook Gap included the former; the Outlook Gap II contains the latter, depicted in today's left chart (yellow line) and hit a record high in 2021's first quarter. With an eye inside their firms, Conference Board noted that CEOs across industries are planning for life after COVID-19. If downside risks are avoided, this optimism will likely translate into higher wages, employment, and capital spending over the next year. Think of it as vaccine velocity translating to escape velocity.

The same optimism is not emanating from the household sector. On slightly less optimism for the forward view on business conditions and employment, Consumer Expectations cooled in February. Meanwhile, income expectations only modestly improved, rising to a net 2.0% in February from January's 0.3%. The first quarter-to-date average of net 1.2% (green line) represents a mild setback from the fourth quarter's 2.0% print and is well below the roughly 13% long-run average. Not a serious vote of confidence for earnings prospects or the inflation outlook.

Main Street's labor cycle is to Wall Street's yield curve. The unemployment rate tracks both the Outlook Gap and Outlook Gap II. It follows that the yield curve trends with them over time as well. From 1989 to present, the yield curve has a cool .76 correlation to the Outlook Gap II.

The right chart zooms in to and plots together the last two business cycles. We normalized The Sequel with z-scores, deviation from the mean adjusted for volatility. The first-quarter reading was a record wide 3.70. The optimism illustrated in the purple line has not been met by the same cheerfulness of bond traders. The yield curve between the three-month bill and the ten-year note (red line) has risen in a much more measured fashion. It appears that the COVID shock had a greater impact on the spread between boss and underling expectations than it did on the manipulated Treasury market.

Does the Outlook Gap II converge to the yield curve or does the yield curve gap up? (The cliff hangs...)

The Sequel produces another parallel. The hope for better company performance from C-suite occupants can come from more positive outlooks for the top-line, bottom-line, or some combination thereof. Again, the linchpin is an efficacious vaccine rollout. And when payroll employment is still 10 million in the hole and 18 million are collecting some form of unemployment insurance - nine times pre-COVID levels - a rev up in revenues would generate a burst in profit growth.

Each week, Standard & Poor's compiles earnings per share (EPS) estimates for the current reporting season. The latest S&P 500 operating EPS for 2020's fourth quarter was 12.5% below the same quarter in 2019, a step down for the trend vis-à-vis the third quarter's 4.8% drop. Because the pandemic exploded onto the scene last March, comparisons between the first quarters of 2021 and 2020 will not be clean. That said, if CEOs are right, earnings could rip out of the gate to start this year, and not just because of base effects. (Our one caveat: Insider selling has not abated.)

CEOs are about to call game over on the recession. They noted that the outlook for employees' wages has improved, while the potential for layoffs has receded. Follow through would fatten paychecks and induce optimism across asset classes as jobless claims fell anew. The current yield curve is not pricing in such an outcome.