"Just one more thing."

- Lt Columbo 

I just covered my large (IWM) short at $218.35.

I also covered the balance of my (TLT) short at $137.35.

I have a family issue to address and won't be returning today.

See you all tomorrow.

I have several meetings with prospective investors for my new hedge fund, Seabreeze Partners LP, this afternoon.

Radio silence from 1-3 pm.

* Bond market is facing Yellen

* I remain short Homebuilders... here's why

While many of us having been watching the rapid rise in long rates, what is very notable today is the jump in the 5 year yield. Yesterday, Janet Yellen & Co auctioned off 5 year paper at a yield of 0.62%. The bid to cover was very light and that yield was above the when issued, both pointing to a weak auction. Today, the 5 year yield is at 0.72%, a double from the 0.36% yield we saw at the December 31st close. This is so relevant because the Fed via the zero fed funds rate and massive QE, which is targeted towards maturities up to 5 years, have been doing their best to suppress the short end. Again, the market is saying 'In Your Face.'

Here is a one year chart of the 5 year yield:

Separately, pending home sales fell -2.8% month over month in January, worse than the estimate of no change, partly offset by an 8 tenths upward revision to December. The biggest declines were seen in the Northeast, down by -7.4% month over month, and the West, down by -7.8%. The index level is at the lowest level since July. The lack of supply is certainly the main factor in why transactions are slowing but I'd argue that 10% annual price increases are having an impact too. If everything you buy at a store saw 10% price increases, you'd naturally buy less. Now for those who will live in a home for 20-30 years, prices right now don't matter but sticker shock can still impact behavior in the short term. 

A very interesting stat my friends at Danielle's Quill Intelligence highlighted today is worth noting for homebuilders which need to build more homes. They wrote today, "see the narrowing gap between the median sales prices of single family existing homes and single family new homes. To smooth out some of the noise, we applied a 12 month moving average. In January, the gap shrunk to around $33,000 from around $75,000 three years ago."

Here is a five year chart on the pending home sales index: 

I am very bearish on the outlook for equities at these levels.

(TLT) has dropped from over $170 (last summer) to under $140 today.

Given the pace and duration of the recent rise in bond yields and the bearish "positioning" of speculators I am reducing my bond short for the first time in this cycle from large-sized to medium- sized.

Halving short now and covering some TLT short at $139.10.

Here is the chart:

I am hopeful that (IWM) "ketchups" on the downside to the senior averages, which it is well ahead of over the short term.

(2/24/21 Morning comments below)

Morning notes: 2/25/21

US equity markets continue to display more personality traits than all of characters in all of the Steven King novels. The counterattack by the bulls which was so successful late Tuesday afternoon, seemed to faulter a bit on Wednesday morning but as soon as the Fed chairman began answering questions in his house panel testimony, the bulls regrouped and came on with a vengeance.

The Dow was outstanding due in no small part to Boeing and the financials. Even the energy group aided the rally. The overall rally was quite broad and of the eleven S&P sectors, ten of them closed higher. The outstanding performance however went to the Russell index. That seemed to be as the markets relied very strongly on the assumption that between the vaccine and apparent collapse in new cases, that players were buying into the fact that the Covid crisis might be over, and the American economy may be reopening sooner rather than later as they had thought.

Some traders have attributed the recent upward move in yields, not so much to the threat of inflation or even the possibility of the Fed tightening. Rather they see it based on the simple collapse or the presumed collapse of the Covid threat. Remember when the pandemic broke out, the yield on bonds absolutely plunged, and if we are going to be reopening quickly again the presumption seems to be that yields will have to move back up to some degree.

Many people continue to watch for the 1.5% to 1.75% area of the yield on the 10year. As I say the rally on stocks was extremely good. The bulls were absolutely in charge. A little icing on the cake was late in the day they would rush back into some of the Reddit rebellion crowd. GameStop was bought with both hands and a shovel and it, along with AMC spiked very smartly in the final hour or so. Some of that hit a bump in the road near the very end. The Redditt system actually blew out somewhat on the close, and strangely so did the Fed payment system. We will have to find out if the Reddit and Bitcoin crazy traders were in any way responsible for the Fed payment difficulties.

Clearly any concern about risk peered to be tossed aside. You'll find yourself thinking of all of the old slogans about too much money, chasing too rapidly after too small a target. There was no question but that there was an aura of "cash is trash" about what was going on. The fear of missing out was suddenly back in vogue all the old axioms about trains leaving stations, whatever, made it look almost like a short squeeze in general. Everybody push each other aside to try and get into whatever stock they were chasing.

The spike in GameStop does not bode very well for the underpinnings of the market, but it is only a small sector and it will bear watching. So, with the Fed at your back and with yields actually moving down late in the day a tick or two. The bulls ended in an almost celebratory manner, and they are clearly back in charge and had the momentum.

The Dow closed at a record high. So much for that seasonal topping patterns we were looking for, I guess. Instead, we got a series of seasonal spike tops showing up in recent days. May you live in interesting times.

Vote maybe due on the Covid relief package. The key vote may come from the Senate Parliamentarian, who will decide whether the minimum wage sector can correctly be placed in a reconciliation bill. If not, that sector will have to be pulled out or they will need 60 votes instead of 50. So, the key vote will be whether minimum wage sector remains in the bill or not.

So, the form chart suggests the traders need to keep an eye on comments from Senate Parliamentarian. Any change on the yield on the 10year and any further spikes in the Reddit group like GameStop and AMC and whether we are getting a new drastic leg of speculation.

For now, be wary, stay safe.

Arthur
__________

Morning notes: 2/24/21

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.

Arthur

Despite lower S&P and Nasdaq futures, the Russell Index is indicated higher in premarket trading.

I have added to my Russell short in premarket trading.

I covered my Twitter (TWTR) short for a loss in premarket trading.

* Speculation is an almost constant condition - it has been going on thru the history of time

* But manipulative practices ruin our markets

* The introduction of a financial transaction tax and the elimination of near term (weekly) call options would help to eradicate the manipulation in our markets

* A financial transaction tax would also squash high frequency trading and front running (of order flow)

* Speculation, through market manipulation, sucks the oxygen out of our markets and builds a level of distrust that could, once again, as it did in prior speculative cycles, lead traders and investors to abandon our markets

* The SEC has the power and should move before it is too late

"In order to get a stock to move you need to get people who are making orderly markets, the options markets, to be caught off guard. They have to be able to lay off their risk at the time of buying so they don't get caught short without a hedge.

So what happens if all day Tuesday and Wednesday you and your friends quietly came in and bought the March 95, 100 and 105 way out of the money calls. You bought them small enough that the market makers didn't take it seriously and didn't think to lay off as much risk.

Then in the last two hours of trading you come flying in and started buying the March 60s and 70s as well as the April 60s and 70s AT THE SAME TIME as you blitzed the common through multiple brokers. Again, keep in mind that an aggressive prosecutor could find that you fomented activity but nobody in the government seems to be paying much attention.

What would the market makers do? They are short these way out of the money calls that are now deep in the money. They are still being hit with out of the money call buys from even higher strikes. They have no choice. They can't risk being this exposed.

So they sweep. They take every share imaginable to be sure they aren't put out of business by some sort of initiative that takes GameStop to its rightful place of wherever these zealots think it can go.

Remember, the buyers spout that Ryan Cohen has a plan and it takes the stock much higher than $350. So why not buy these calls early and often,

The sellers of the calls can't hedge with other calls as they are being blocked by buyers who want everything they can get. And you get a blitz of a squeeze like we had. They can't protect themselves.

Here we go again."

- Jim Cramer, "How Do You Pull Off What GameStop Buyers Did?"

The gewgaws of speculation - GameStop (GME) and Koss (KOSS) - barreled higher in Wednesday's after hours and continue to rise this morning - in some measure because of the manipulation of our (options) markets by a small cabal of traders. 

As explained (above) by Jim "El Capitan" Cramer, near term (weekly) call options activity is the tail that is wagging GME's dog and share price. I saw this sort of behavior, and wrote about it, regarding the manipulation of Tesla's (TSLA) common shares via weekly call buying over the last few months: 

* Where is the SEC on Tesla?

* Are Tesla's Shares Being "Manipulated" Or Is The Stock Simply the Object of Insane Speculation?"

The Gewgaws Are Ripping This Morning

Speculation has been in our markets from the dawn of time. Nothing new there. 

But manipulative practices ruin our markets - and the options markets have become the straw that stirs the drink of today's speculative activity. 

GameStop

Koss

Finding A Solution

My solution to all of this is the implementation of a small financial transaction tax and for the elimination of near term (weekly) options. 

As to those that believe in "caveat emptor" and laissez faire I say the role of our capital markets is not to look the other way when markets are being manipulated. 

Manipulation builds distrust and alienates market participants. 

Rather, the role of our capital markets is to raise and build capital - which helps provide industry with the money to hire and build, not to treacherously speculate - by a small group of manipulators. 

A financial transaction tax would serve to not only dent the manipulation and speculative activity in stocks like in GameStop, Koss, and the other shiny objects du jour but it would also produce a more fair and orderly market. 

Importantly, this would improve the confidence of a fair and level playing field to most investors and traders. It would keep them in the game and not out of the game. 

I suspect, as I mentioned in my presentation of Schwab (SCHW) , as a new short idea yesterday that the probabilities of a modest financial transaction tax is higher than the consensus expects. 

In addition to the above recommendations, of a financial transaction tax and the elimination of weekly options, several other changes should be made: 

* We need instant clearing of trades to avoid more brokerage capital shortfalls and other problems.

* Brokers and regulators should more strenuously enforce borrow and locate rules before a short position is put on.

* The reporting of short disclosures should be the same, and as transparent, as reporting long disclosures. 

To paraphrase Charlie Munger's comments yesterday at The Daily Journal Annual Meeting, the world would be better off without today's manipulation and speculation. 

To directly quote Charlie at that Annual Meeting: 

"Novice investors are getting lured into a bubble in a "dirty way" by Robinhood (et al)"

Peter writes, "in your face QE": 

Well, when the bond market wants to run, it's going to run much faster than any central banker and that again is on full display today. Also, be careful what you wish for. Don't spend all your waking hours to artificially suppress interest rates and then root for higher inflation because when the market thinks that inflation will come, it will run you over. I again will highlight what is going on with yields in Australia. After hiking rates by 40 bps in the two weeks ended yesterday, the 10 yr Aussie yield is up by another 12 bps today to 1.73%. In your face QE. This yield was .97% on December 31st. The New Zealand 10 yr is spiking by 18 bps TODAY to 1.87%. It was .99% at year end.

European yields are jumping by 6-8 bps across the board. The German 10 yr bund yield in particular is higher by 6 bps to -.25%, the UK 10 yr gilt yield by almost 8 bps to .81%, the highest since January 2020. The ECB, the central bank that did whatever it took but then went much further with NIRP and more and more QE in order to generate higher inflation, is now fighting the market's belief on higher inflation. Following what Lagarde said earlier this week, ECB chief economist Philip Lane today said they are "closely monitoring the evolution of longer term nominal yields. We will purchase flexibly according to market conditions and with a view to preventing a tightening of financing conditions that is inconsistent with countering the downward impact of the pandemic on the projected path of inflation." Hello Mr. Lane, the market has a different market view than you do and if you don't like it, don't make the desire for higher inflation the crux of your policy.

Now we know the Europeans have a big problem here because their governments have been feasting on the trough of no cost to funding their excessive debt loads, particularly the Italians. The Italian 10 yr is up 9 bps today.

The Bank of Korea overnight also said they are ready to fight the market if they feel it's needed. BoK Governor Lee said "Now isn't the time to discuss full normalization like a rate hike, because uncertainty surrounding the trajectory of the economy is very high." There is one thing though that Lee acknowledged, "Higher yields may put pressure on stocks and property."

Aussie 10 yr Yield

UK 10 yr Yield

German 10 yr Yield

This is all spilling back over to the US shores with the 10 yr US yield up to 1.46% and the 30 yr at 2.32%. Coming with this is a break in the US dollar index below the 90 level. As I said a few days ago, higher rates and a weaker currency is what 3rd world government finances are made of.

DXY

The rebound in China and manufacturing strength globally helped Hong Kong's exports jump by 44% y/o/y in January but it is also being flattered by easy comps as China shut down last January. The estimate was up 31%. Also helping the number was a rush of exports ahead of China's holiday and a 73% increase to Taiwan. Imports were higher by 38%, well above the forecast of up 29%. I continue to believe the Asian region will see the best economic growth in the coming decade and exposure must be a key part of one's portfolio. The Hang Seng got back some of the stamp tax loss from yesterday, higher by 1.2% after the 3% plunge yesterday.

Europe's February economic confidence index rose to 93.4 from 91.5 and again led by manufacturing. Services confidence, that of the consumer and construction rose slightly m/o/m and fell at retail. On the headline beat, along with broad dollar weakness, the euro is back above $1.22, higher for the 5th day in the past 6.

German and French consumer confidence indices were mixed with the former higher and the latter lower m/o/m. Likely this summer as the vaccine penetration gains steam in Europe, consumers will be much more confident across the board.

My pals at Miller Tabak think rates are rising for the wrong reason:Bond Yields Are Rising for the Wrong Reasons

The rise in bond yields, with the 10-year Treasury rate up to 1.38%, has gotten ahead of the pace of the economic recovery. Fed Chair Powell was right on Tuesday when he attributed the increase to optimism about upcoming growth. But it is crucial to look at where the rise is coming from. Figure 1 decomposes the 10-year yield into its term premium (using the New York Fed's estimates), reflecting investors' willingness to assume long-term risk, and the part of yields that depends on expectations of future short-term rates. The entire increase is due to higher term premiums. The part that depends on future short-term rates continues to decline. In other words, concerns about future rate hikes are not at all to blame.

There are two important implications from these data. First, it is clear that higher inflation risk is driving much of the increase in longer-term rates. But just as fears of serious inflation in 2021 are overblown, many investors are also overestimating long-term inflation risk. This creates significant downside risk for bond yields if, as we expect, inflation data disappoint later this year. Second, with term-premiums well off of their previous range around -50 bps, yields have also become more sensitive to upcoming changes to the Fed's asset purchase programs.

In his Congressional testimony this week, Powell reiterated that the Fed will not revisit QE until "substantial further progress" has been made on inflation and employment, and that progress has stalled in recent months. His subsequent comments were also somewhat dovish, stating on Wednesday that it will be "some time" before such progress is made. We expect the FOMC to start discussing tapering by around the fall, with it actually starting in the first half of 2022. Once begun, however, expect the Fed to quickly take asset purchases down to zero.

Danielle DiMartino Booth is bullish on homebuilding:

• Per the Mortgage Bankers' Association, average home loan purchase size hit $418,000 this week for a 20.2% YoY gain; with Treasuries lifting 30-year mortgage rates to five-month highs as well, MBA's home purchase application index is 23.9% off its recent high
• Recently at a 7 million SAAR, single family home sales have seen 5 straight months of 20% YoY gains, the best since 1983; supply in the resale market hit a record low of 1.8 months in January while months for sale since completion for new builds saw a near-record low of 2.9
• New home supply not started saw a massive 17.4% jump last month amidst a land grab by builders; homebuilders should continue to prosper, with the gap between median existing and new home prices shrinking to a $33,000 12-MMA vs. $75,000 three years ago

March 12, 1964 was an auspicious day for those with gambling ways. The New Hampshire Sweepstakes was the first of its kind U.S. lottery. Now called New Hampshire Lottery, the original winners were sourced from horse race results. Fifty-one years later, almost to the day, the HGTV series My Lottery Dream Home premiered on March 7, 2015. If you're into such things, it lives up to its name. Ace designer, real-estate advisor, TV personality, snappy dresser, bon vivant and purveyor of positive vibes, host David Bromstad takes recent lottery winners on over-the-top house hunts for their castle in the sky on earth. Whether they win hundreds of thousands or hundreds of millions, lottery winners jump headfirst into the real estate market. Will they splurge on an extravagant mansion or settle for a humble, yet sound, investment?

In today's U.S. housing market, prospective homebuyers feel like they have to win the lottery just to afford that Cape Cod with a white picket fence on a postage-stamp lot on a quiet street. The Mortgage Bankers' Association (MBA) latest weekly installment revealed the housing price proxy - average home purchase loan size - rose to a record high $418,000. But that's not the number that'll make your eyes water. The 20.2% year-over-year increase was the fourth highest on record in 1,573 weeks of history dating to January 1991, a 99.75th percentile event, thank you Jay Powell.

It's evident that home prices are richening quickly due to an acute imbalance between demand and supply. It's not just the urban outmigration. Many who were close to retirement and looking to downsize pre-pandemic held their homes off the market due to the virus only to have their adult children move in with them. Formerly empty nests are full and then some.

A dearth of supply alone, however, cannot fully explain how challenged housing affordability is. As low as the base was, the march higher in Treasury yields pushed thirty-year fixed mortgage rates to a five-month high in the week ended February 19th.

QI friend Peter Boockvar observed that the uptick had an immediate impact on mortgage applications. The MBA home purchase application index fell 11.6% week-over-week and has fallen in four of the last five weeks for a cumulative drop of 23.9%. One caveat: the Texas freeze may have overstated the weakness in the latest week. Regardless, the preliminary February University of Michigan consumer survey rang the sellers' market bell - home buying conditions inverted with home selling conditions for the first time since March 2020.

Single-family home sales - existing plus new - have been running at a blistering pace just shy of a 7 million seasonally adjusted annual rate. The five-month string of 20%-plus year-over-year gains through January was last seen in 1983, the first full year of recovery following the double-dip recessions of 1980 and 1981-82. You would think that a hot housing market would be music to home builders' ears. That's certainly the case if there's enough inventory to sell. But that hasn't been the case of late.

Demand in the one-family resale market has been so strong it pushed months' supply to a record low 1.8 months in December and January. Spillover to the builder market pushed the median number of months for sale since completion to 2.9 months, two tenths off a record low over 46 years of history since 1975. That type of demand push is depicted in the left chart.

The new home sales report breaks down new home supply for sale by the three stages of production - not started, under construction and completed. To normalize comparisons, we used our favorite z-score (deviation from the mean adjusted for volatility). Inventory of completed single-family homes fell to a near record low in recent months (light blue line); from October to January, this metric came in south of a -1 z-score. Recall, these are speculative homes that are getting scooped up as the builder owns both the house and the lot.

With so few completed homes to sell, let the land grab commence! That would be the parabolic move in the red line. New home supply not started rose a record 12,000 units in absolute terms and a heady 17.4% monthly advance (seasonally adjusted), the fourth largest on record.

Like most production channels, the normal course of events goes something like this: what happens upstream flows downstream. At the moment, home builders' first-stage process implies a backlog of new domiciles are in the pipeline and, barring cancellations, should go under construction in short order. That should eventually turn around the collapse in the last stage of production supply - completions. Despite mortgage rates climbing back over 3% and generating affordability fears, homebuilders are likely seeing dollar signs - and profits - for months to come. Otherwise, why the land grab?

For yet another angle to support home builder performance, see the narrowing gap between the median sales prices of single-family existing homes and single-family new homes. To smooth out some of the noise, we applied a 12-month moving average. In January, the gap shrunk to ~$33,000 from ~$75,000 three years ago (orange line).

Homebuilders probably think they've won the lottery. The more the existing home market ramps and prices close the gap, the better conditions are for homebuilders to sell. Call it a homebuilders' sellers' market. Though that day will come, challenges have yet to impede the upward momentum in the homebuilding sector (green line). Stay overweight.