Positives

1) Initial jobless claims fell to 730k from 841k last week (revised down by 20k) and that is down from 825k last week. This brings the 4 week average to 808k from 828k. Those getting PUA fell to 451k from 513k last week and vs. 342k in the week prior. Continuing claims, delayed by a week, totaled 4.42mm from 4.52mm in the week prior. That was 40k less than expected. Delayed by two weeks, continuing PUA fell another 167k to 7.52mm. Those still receiving Pandemic Emergency Assistance in contrast rose by 1mm to 5.06mm, the highest since the pandemic began. 

2) When combining the upward revision in December to the January core durable goods number, the net result was a better than expected figure. The internals were mixed though as while all the core categories were higher y/o/y, vehicle/parts, computers/electronics and machinery orders all fell m/o/m. Metals and electrical equipment orders were higher m/o/m. Shipments of core goods exceeded expectations which means we'll see an upward revision to Q1 GDP as a result. Inventories got leaner as the inventory to shipments ratio fell to 1.63 from 1.67, the lowest since February 2019. 

3) The final read of the February UoM consumer confidence index was 76.8 from 76.2 initially and slightly above the estimate of 76.5. This though compares with 79 in January and 80.7 in December and is the lowest since August. Most of the m/o/m decline was in the Expectations component. The UoM said, "All of February's loss was due to households with incomes below $75,000, with the declines mainly concentrated in future economic prospects." One year inflation expectations was 3.3%, the same as the preliminary print but up from 3% in January and 2.5% in December. That matches the highest level since August 2012 and helped by an increase in expectations for gas prices. There is a clear divide in confidence between Democrats and Republicans and "among those households who retained their jobs and those that lost jobs and incomes", according to the UoM. 

4) 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 10 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. 

5) Thanks to government transfers, personal income in January jumped 10%, about as expected and that drove a spending increase of 2.4%, also about as forecasted. The combination saw the personal savings rate jump to 20.5%, the highest since May 2020 when the CARES Act was kicking in. Looking just at private sector wages and salaries saw an .8% m/o/m increase vs. .6% in the prior two months and 1% in the two months before that. Y/o/y it grew by 1.8% vs 2.2% and 1.9% in the months prior. Spending was mostly driven by an increase in the purchases of goods. 

6) New home sales in January totaled 923k, above the estimate of 856k and up from 885k in December (revised up from 842k). Months' supply was little changed at 4.0 vs 4.1 and the median home price was up 5.3% y/o/y (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. 

7) The Richmond manufacturing index for February was unchanged at 14 as expected. Prices paid and received were up sharply. 

8) The February Dallas manufacturing index rose to 17.2 from 7 and well above the estimate of 5.0. This is pre-freeze. 

9) The KC manufacturing index covering February rose 7 pts to 24. The estimate was 15. Prices received rose to match the highest level since 2008. Prices paid are at a 10 yr high. 

10) The consumer price index in Tokyo in February rose .2% y/o/y ex food and energy as expected and unchanged from January. 

11) Spanish CPI in February missed what was forecasted with a .6% m/o/m drop, 4 tenths more than the consensus. The Spanish statistical office explained this by saying it was mostly due to a drop in electricity prices after a jump in January. Also weighing was the drop in prices for restaurants and hotels not surprisingly. 

12) 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%. 

13) Reflecting solid semi exports, South Korea said in the 1st 20 days of February their exports rose 16.7% y/o/y. Average daily exports jumped by 29%. Semi exports were higher by 27.5% while autos were up by 46%. 

14) 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. 

15) The February German IFO business confidence index rose to 92.4 from 90.3 and that was above the estimate of 90.5 with both components higher. The IFO said simply, "The German economy is proving robust despite the lockdown, especially thanks to strength in industry." 

16) German consumer confidence rose m/o/m. 

17) Within the December UK labor report, 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. Positive too, the January jobless claims count fell by 20k after a 20.4k decline in December. 

18) Pitchers and catchers have reported to camp.

Negatives

1) The world's bond markets revolted. The U.S. had its worst 7 yr auction since it was initiated in 2009. As heard this week, some central bankers acknowledge it, some want to fight it and others whistle by. 

2) The Fed's balance sheet rose another $33b to a fresh record high of $7.59t. Considering the growing size of U.S. debts and deficits, with another $1.9 trillion about to spent, you ain't seen nothin' yet. 

3) The jump in mortgage rates had an immediate impact on mortgage applications. With the average 30 yr rate rising 10 bps w/o/w to 3.08%, purchases fell 11.6% w/o/w and are down in 4 of the last 5 weeks to the lowest level since May. The y/o/y increase has slowed to 6.9%. Refi's declined by 11.3% w/o/w but are still up 50% y/o/y. 

4) The January PCE rose .3% m/o/m both headline and core. The headline rate was as expected but the core rate was above the estimate of an increase of one tenth. The y/o/y increase for both is 1.5%. Goods prices rose .5% y/o/y and positive for the 1st time since February 2020 and driven by a rise in durable goods. Services inflation held at 1.9% and has been pretty steady between 1.8%-2% over the last six months. Core services prices rose 1.5% and also has been steady between 1.3%-1.5% over the last half year. Food prices jumped 3.6% y/o/y while energy prices fell by 4.5%. 

5) REVISED COMMENTS: The Chicago February manufacturing index fell to 59.5 from 63.8 and that was a bit below the estimate of 61. The six month average is 60.2. New orders FELL to the lowest since August 2020. Backlogs though rose to the most since October 2017. Inventories fell but are still above 50. Supplier deliveries, reflecting supply issues, rose to the highest since May. Employment ROSE to a 16 month high. Prices paid were little changed but at the highest since September 2018. "Companies again noted price increases for raw materials, especially tin." 

6) The trade deficit of goods widened to $83.7b in January, above the estimate of $83b and not far from the record low of $86.1b seen in November. That compares with $83.2b in December. Exports were up by 1.4% m/o/m while imports grew by 1.1%. 

7) Pending home sales fell 2.8% m/o/m 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% m/o/m 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. 

8) S&P CoreLogic said that its U.S. home price index in December rose 10.4% y/o/y while its 20 city index was higher by 10.1%. These are unsustainable gains and price out some first-time families. 

9) 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. 

10) French consumer confidence fell m/o/m. 

11) French CPI in February was flat m/o/m, 3 tenths more than expected after a .3% rise in January. Versus last year prices rose .7%, two tenths more than expected. 

12) 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. 

13) The UK CBI retail sales survey rose 5 pts but to 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." 

14) Hong Kong announced a hike in their stamp tax.

During crazy times like these, it's more important than ever to listen to legends like him who've seen it all. And, as Doug noted, we're in luck, as Munger just hosted his Daily Journal annual meeting on Wednesday! I highly recommend that you listen to the entire two hours (posted on YouTube here - I suggest 2x speed), during which he fielded dozens of questions. It's amazing that he's so mentally sharp at the age of 97!

Here are some highlights:

• "Robinhood trades are not free. When you pay for order flow, you're probably charging your customers more and pretending to be free. It's a very dishonorable, low-grade way to talk. And nobody should believe that Robinhood's trades are free."
• Munger was asked whether he still identified "wretched excess" in the financial system - as he had warned of in February 2020 - and where he saw the excesses as most egregious in the current market. He replied: "It's most egregious in the momentum trading by novice investors lured in by new types of brokerage operations like Robinhood. And I think all of this activity is regrettable. I think civilization would do better without it."
• When asked why Warren Buffett dumped Wells Fargo's (WFC) stock from Berkshire Hathaway's (BRK-B) portfolio, but Munger didn't from the Daily Journal's, he replied: "There's no question that Wells Fargo has disappointed long-term investors like Berkshire. You can understand why Buffett got disenchanted with Wells Fargo. I think I'm a little more lenient. I expect less out of bankers than he does."
• On special purpose acquisition companies ("SPACs"): "The world would be better off without them. This kind of crazy speculation, in enterprises not even found or picked out yet, is a sign of an irritating bubble. The investment-banking profession will sell shit as long as shit can be sold."

As mentioned yesterday afternoon, I have a family situation to address so I will be calling it quits for the day.

I have left our editors with some columns that are set to go this afternoon.

Enjoy the weekend.

Be safe.

Gold is the most oversold since March 2020 according to the 14 day RSI.

The February Chicago manufacturing index fell to 59.5 from 63.8 and that was a bit below the estimate of 61. The six month average is 60.2. New orders and backlogs were higher month over month while inventories fell. Supplier deliveries remained elevated and rose further. Employment dropped while prices paid rose again. Again, manufacturing has led the recovery and we'll see to what extent it can maintain the momentum when consumers shift spending to services in the coming quarters. 

Here is a five year chart on the Chicago Manufacturers Index:

The final read of the February UoM consumer confidence index was 76.8 from 76.2 initially and slightly above the estimate of 76.5. This compares with 79 in January and 80.7 in December, and is the lowest since August. Most of the m/o/m decline was in the Expectations component. The UoM said, "All of February's loss was due to households with incomes below $75,000, with the declines mainly concentrated in future economic prospects." One year inflation expectations was 3.3%, the same as the preliminary print but up from 3% in January and 2.5% in December. That matches the highest level since August 2012 and helped by an increase in expectations for gas prices as that is a price most see everyday. 

Employment expectations were little changed but did rise for income.

Spending intentions fell across the board, slightly for homes and major appliances, and more so for auto's. 

There is a clear divide in confidence between Democrats and Republicans and "among those households who retained their jobs and those that lost jobs and incomes", according to the UoM for obvious reasons. I'm hoping this changes this summer when mass inoculation his here but UoM also said, "The worst of the pandemic may be nearing its end, but few consumers anticipate persistent and robust economic growth in the years ahead or that employment conditions will be soon restored to the very positive pre-pandemic levels." This is certainly reflected in the level of confidence that is not far from the Covid lows seen below. 

Here is a five year chart on the U of M Index:

Here is a 10 year chart on one year inflation expectations:

I have covered my shorts in Disney (DIS) , Hilton (HLT) and Hyatt (H) this morning.

I have reduced to medium-sized.

* I am slowing liquidating most of my personal investment positions in order to get liquid for my investment in my new hedge fund, Seabreeze Partners. 

"You say
The price of my love's not a price that you're willing to pay
You cry
In your tea which you hurl in the sea when you see me go by
Why so sad?
Remember we made an arrangement when you went away
Now you're making me mad
Remember, despite our estrangement, I'm your man

You'll be back, soon you'll see
You'll remember you belong to me
You'll be back, time will tell
You'll remember that I served you well
Oceans rise, empires fall
We have seen each other through it all
And when push comes to shove
I will send a fully armed battalion to remind you of my love!"

- Hamilton You'll Be Back

Twenty three years ago I made a contract with TheStreet that I would write a hard hitting and often contrarian column devoted to explaining the reasons why, when, and what I am transacting both trades and investments in stocks and bonds. 

I promised full transparency and I hope I have achieved it for all of you. 

And I promise to do it "for ever and ever."

But for the next few weeks, and until my April 1 Seabreeze Partners startup, I won't be trading/investing as I need funds to invest in my new venture. I will, as I wrote, be liquidating. 

I hope you understand. 

Nevertheless, I will write about what I would be doing if I was trading and investing until then. With full analysis, as always. 

So: 

I will be back like before... 

"I will fight the fight and win the war
For your love, for your praise
And I'll love you till my dying days
When you're gone, I'll go mad
So don't throw away this thing we had
'Cause when push comes to shove
I will kill your friends and family to remind you of my love."

I continue to liquidate my personal portfolio in preparation for the start of my new hedge fund, Seabreeze Partners.  

I have covered Carvana  (CVNA) and my homebuilder shorts.

Something I have been expecting and why I believe (ARKK) is a short. 

On Thursday ARKK experienced $200 million of outflows. All of ARK Invest had $443 million of outflows yesterday.

The January PCE rose +0.3% month over month both headline and core. The headline rate was as expected but the core rate was above the estimate of an increase of one tenth. The year over year increase for both is +1.5%. Goods prices rose +0.5% year over year and positive for the first time since February 2020 and driven by a rise in durable goods. Services inflation held at 1.9% and has been pretty steady between 1.8%-2% over the last six months. Core services prices rose +1.5% and also has been steady between 1.3%-1.5% over the last half year. Food prices jumped +3.6% year over year while energy prices fell by -4.5%. We know the latter will soon reverse and the former continues higher. 

The core PCE rate up at a +1.5% year over year pace matches the highest since March 2020 and in the months to come the comps of course get much easier but I believe stay persistently higher even after that. Again, PCE runs persistently below CPI mostly because of the differential of how each weights housing and healthcare, and within healthcare PCE is measuring Medicare and Medicaid reimbursement rates and CPI is measuring out of pocket expenses. Both DO NOT include home prices but imputed and actual rents instead. 

Here is a six year core PCE:

Thanks to government transfers, personal income in January jumped +10%, about as expected and that drove a spending increase of +2.4%, also about as forecasted. The combination saw the personal savings rate jump to 20.5%, the highest since May 2020 when the CARES Act was kicking in. Imagine where it goes when the Democrats pass their spending package. Looking just at private sector wages and salaries saw an +0.8% month over month increase vs. +0.6% in the prior two months and +1% in the two months before that. Year over year it grew by +1.8% vs. +2.2% and +1.9% in the months prior. Spending was mostly driven by an increase in the purchases of goods, as we know what's taken place over the past year. The shift back to services though is now upon us in coming quarters and much of the spending on goods won't be repeated such as laptops, new kitchens, and backyards that people splurged on in 2020. 

The trade deficit of goods widened to $83.7 billion in January, above the estimate of $83 billion and not far from the record low of $86.1 billion seen in November. That compares with $83.2 billion in December. Exports were up by +1.4% month over month while imports grew by +1.1%. We know that the goods side of the global economy has been much more vibrant than services but also where supply chains have been clogged up and price pressures have accelerated. It is also these wide deficits that secularly pressure the dollar. 

Here is a 20 year chart on the goods trade deficit:

Note Peter's comments on the bond oversold this morning: 

I remain bearish on bonds but fully acknowledge how oversold we are right now. At yesterday's close TLT had a 14 day RSI of just 18 and a 7 day of 10. Anything under 30 starts to get oversold. Now this is only one metric but one that has gotten very stretched. While we saw another ugly night in Asian bonds, European bonds are bouncing a touch ex UK (see below) which in turn is helping US Treasuries. The Aussie 10 yr that I keep talking about saw yields blow out again overnight with an 18 bps jump to 1.92%. That is now an increase of 49 bps just this week and by 70 bps over the past two. This even as the RBA yesterday stepped up to buy 3 yr bonds. The 10 yr JGB yield is up to 16 bps where 20 bps is the upper end of YCC. The 40 yr JGB yield, the least impacted by BoJ manipulation, is at .82%, the highest in more than 2 yrs which has me bullish on Japanese bank stocks that are down 90% since 1989 in nominal terms.

I mentioned yesterday that the Fed has two choices here, either 1)fight the bond market or 2)acknowledge it by sounding less dovish. There is however a 3rd option which is the path they'll choose and that is do nothing right now and keep saying they are focused solely on the unemployment rate. What will get them to either pivot to door # 1 or #2 is when something breaks, either stocks, credit spreads or the economy.

ECB Executive Board member Isabel Schnabel has chosen door #1 as she said today (repeating what she said yesterday) that "A rise in real long term rates at the early stages of the recovery, even if reflecting improved growth prospects, may withdraw vital policy support too early and too abruptly given the still fragile state of the economy. Policy will then have to step up its level of support." Again, then why root for higher inflation if you don't like it when it comes. Eurozone bonds are up slightly in response.

The chief economist of the BoE Andy Haldane is choosing door #2 as he said last night "there is a tangible risk inflation proves more difficult to tame, requiring monetary policymakers to act more assertively than is currently priced into financial markets...People are right to caution about the risks of central banks acting too conservatively by tightening policy prematurely. But, for me, the greater risk at present is of central bank complacency allowing the inflationary cat out of the bag." It is these comments that has led to further selling in gilt's.

Haruhiko Kuroda, the BoJ Governor, who still wants higher inflation but no change in yields is not surprisingly choosing door #1 as they bought more ETF's and said "It's important now to keep the entire yield curve stably low as the economy suffers the damage from Covid-19...The BoJ has no intention of pushing up 10 yr bond yields above its target of around 0%." That said on yields, the BoJ actually wants some steepness to their yield curve and has not stepped up JGB purchases. They finally realized that they've done enough damage to their banks via no yield curve.

Aussie 10 yr Yield

JGB 40 yr Yield

The US dollar index is again holding this 90 level and after breaking below yesterday is now closer to 91 and back above the 50 day MA. We can only call this a flight to dollars with the global equity selloff because many overseas participants don't want to see another dollar shortage issue that we saw last March that led to the massive liquidation of Treasuries by foreigners in order to procure dollars. That led to the Fed stepping in to 'support market functioning.'

DXY, 50 day in purple

The consumer price index in Tokyo in February rose .2% y/o/y ex food and energy as expected and unchanged from January. The headline rate is still negative but with the comps much easier in the months to come that will change with the rise in food and petro.

French CPI in February was flat m/o/m, 3 tenths more than expected after a .3% rise in January. Versus last year prices rose .7%, two tenths more than expected. Spanish CPI though missed what was forecasted with a .6% m/o/m drop, 4 tenths more than the consensus. The Spanish statistical office explained this by saying it was mostly due to a drop in electricity prices after a jump in January. Also weighing was the drop in prices for restaurants and hotels not surprisingly. This will of course recover in the months to come. The French 10 yr is back to zero after getting above it this week for the 1st time since June. The Spanish 10 yr yield is down 3 bps after the 14 bps increase over the prior three days.

I have sold out of all my trading longs right after the opening.

If the gain in stock futures hold, I will likely sell at least half of my trading long rentals made yesterday after the close.

(2/25/21 Morning comments below)

Morning Notes: 2/26/21

So much for the bulls taking the momentum. Before they can get into the limo and drive away, they got run over by a truck. Thursday was the worst equity performance by the markets in the month of February, and a pretty poor performance by almost any standard.

The main motivation on the downside was a continuing up-swing in yields on the 10year, which began to accelerate again. Two problems with the yields were nearly dreadful auction at 1pm, which spooked some of the bond players and also did some technical damage to the short term 7year, 2year bonds etc. Suddenly we don't have much faith in the short end nor in the longer end. That has led some people including my friend Peter Boockvar to worry that the Fed may have lost control of the market and certainly after the bell rang all I heard were fears that the Fed didn't actually know what was going on.

**Due to technical difficulties the rest of these comments will be somewhat abbreviated.***

Another concern on the yield front were comments from a couple of Fed regional presidents. They seem to shrug off inflationary pressure, they seemed to shrug off where other prices had been going, it seemed to therefore underscore the idea that the Fed maybe out of it and that spooked traders.

There was some satisfaction that the NASADQ held above its low of last Tuesday trading. Which was 13003 or 13004 will have to watch that today. As we guessed the Senate parliamentarian objected to the minimum wage sector. That may in fact make the rest of the bill more easily passed in the Senate. So, we will wait and see. Market technicals such as sharply negative breadth and the spike in the VIX were consistent with washout trading. Let see if they can circle the wagons.

One last note, it would appear that the Reddit/GameStop people maybe using out of the money options to chat up small buying panics in certain stocks. Just as out of the money puts were used in the air raid on Lehman and Bear Stearns. I would love to see the positions.

Sorry for the abbreviated format.

Stay safe.

Arthur
__________

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

Okay, this is really getting stupid:

As I tweeted our very early this morning, I would not be surprised to see a dead cat bounce in the markets. 

Late yesterday and in the evening I bought some small trading long rentals that I plan to sell out today if, indeed, the markets rally. 

I start the day slightly net long in exposure. 

P.S.: My Trade of the Week (shorting (IWM) ) turned out very well and produced fine profits... twice - for accumulated gains of about $8/share!. 

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 was not surprised that there was criticism in some quarters to my recommendations in yesterday's opener, "Stop the Speculative and Manipulative Madness by Introducing a Financial Transaction Tax and by Eliminating Weekly Stock Options"

I write these sort of columns in order to express my view and encourage respectful debate. 

There were some reasonable and thoughtful responses like these: 

Rolf Thrane

Dougie - I for one appreciate your writeup on needed changes in trading rules. I am writing that because that kind of stuff is a big reason why I subscribe. Without some serious thinking it is hard for me at least to have a contemplative response. I have worked a lot with strategy for market makers in my past career and enough to know this is very complicated. So if I think I can contribute for real to this discussion I will post after having given it some thought. I really do not think this is a Liberal versus Republican thing at all - as some subs are might be suggesting. . I think this is a discussion about restoring sanity to the market - as you write.

J Leafly

I agree with Doug wholeheartedly about the need for better regulation of markets. I remember a time when folks were absolutely fearful of the SEC.
Unfortunately, technology has advanced with remarkable speed, and the SEC has not been able to keep up at all. Enforcement has fallen by the wayside.
Many of the problems began with the elimination of the uptick rule. Levered, inverse ETFs and a host of other shiny new financial products could not exist with the uptick rule in place. This isn't usually a problem, but it sure becomes a very big issue in times of financial stress!
I'm not entirely sure a transactions tax would work to root out all the evils. In fact, like every other tax, it would likely grow over time as the cash-strapped government looks for more ways to raise revenue.
That said, a small transactions tax would essentially eliminate high-frequency trading and the scalping the general public takes at the hands of the scoundrels who collude with the exchanges to co-locate their equipment near the exchanges.
The SEC is truly asleep at the switch. This game has changed dramatically over the past couple of decades. It's time that the SEC is given the mandate and the funding to actually accomplish their mission statement: The mission of the SEC is to protect investors; maintain fair, orderly, and efficient markets; and facilitate capital formation.

AlanHHI

I may be the only one on the site, Dougie, but I'm with you. We need a transaction tax to keep the market honest. There should be a way to protect the little guy by exempting the first $50,000 of trades or something from the tax. I'm sure there will be plenty of little guys who bought GME this morning at $140 who will be crying next week when it returns to $40. 

But many didn't even bother to read my complete column - which is neither respectful nor reasonable. And, too frequently this sort of response was echoed: 

"I didn't read the post above about instituting a financial transaction tax because frankly that's what liberals always want...as Reagan said the most dangerous words in the language are "I'm from the government and I'm here to help". Tax things so govt can piss the money away in useless, never ending programs that only serve as political graft. Some things never change."

Or these: 

"Liberals support the biggest dumb ideas. That's what they do."

"Count me as "non-stunned"...stupidity knows no bounds............"

"I'm stunned that people think that situations like $GME are a basis for governmental regulation. Trying to rid the market of crazy short term volatility is ridiculous."

And, straw man arguments, like in this tweet, were plentiful: 

"You know all those 'experts' that have been worried about the 'little guy losing money trading 'junk' stocks? Did they have any good advice today for the 'pros' that lost their ass?"

Unfortunately, the dogma and DNA of the "keep the government out of our business" crowd seemed to only read the headline of my column and dwelling on my suggestion that a financial transaction tax could quell speculation and reduce the gamification of the stock market. Ignored was the body of the column which emphasized the need for more robust enforcement recommendations that could result in a market played on a more level field (uptick rule, transparency of short disclosures, enforcement of borrow and locate rules, real time clearance, the elimination of weekly options - which to me is basically gambling, etc.) 

With the proliferation of Robinhood and other commission free trading platforms combined with the distribution of government money made in order to ease the Covid-19 distress - the trading business has already been Democratized. 

Unfortunately, the rapid changes in trading technology coupled with the rising role of social media have run quickly past the rules and the enforcement regulators (SEC, et. al). 

Speculative areas of the market today are being manipulated by a few and ignored by our regulators whose regulations are outdated and whose enforcement is not apparent. 

This has nothing to do with politics - though many retreat to politics rather than analysis. 

I strongly suggest reading Jim "El Capitan" Cramer's opening missive this morning, "This GameStop Nonsense Has Gotten Out of Hand - It has become the market equivalent of the storming of the Capitol, and the viciousness must stop.

" Democracy has crossed over to nihilism and anarchy. No, I am not talking about the storming of the Capitol, I am talking about the vicious nature of way too many of the champions of GameStop (GME) , the ones who truly believe in a paranoid style of investing: smash the tyranny of the hedge funds, or even mimic them, and you will win at this game...

So, here's what I think can happen. If these brigands can come up with anothercompany besides GameStop, one that's simply a good company with good prospects -- and can we exclude Palantir (PLTR) -- and show how it can go upwithout the useful idiot hedge funds, then I am all ears. But right now the fight has descended into a nihilistic attempt to steal from the hedge funds to those who deserve it more and the battleground is some video game store that's not the playground of the hedge funds anymore. They are gone. It's the Capitol and the barricades simply don't hold up against the onslaught. But if they take the Capitol, they win in GameStop, is that the beginning? Or is that the end?""

The bottom line is that I believe more sensible regulations should be considered and enforcement is needed to adapt to gains in technology. 

If not, the speculative manipulation runs the risk of mounting the same sort of distrust that occurred during the dot.com boom that lead to millions of traders and investors leaving our markets for years.

* I covered my TLT short in Thursday's bond market schmeissing

* Look for bank stocks to now pause after the remarkable rally in the space

Nearly every trade and investment I make is based on an assessment of reward vs. risk. 

The upside opportunity is always weighed against the downside prospect. 

This is the core of how I manage money and, especially as it relates to my investments, it is based on the fundamental analysis of a company and/or the calculus of intrinsic value. 

It provides me with a sense of "margin of safety" -- essential, in my mind, in finding comfort in trades and investments. 

So it was Thursday that I covered my longstanding and high-conviction bond short. 

The magnitude of the decline and speed of that decline, with the iShares 20+ Year Treasury Bond ETF (TLT) moving down from $170 a share to under $138 a share since August 2020, have measurably changed the upside/downside prospects to the trade, particularly as sentiment has changed from bullish to bearish as speculators have aggressively added to fixed-income shorts and as the financial media has just woken up to the material change in yields. 

Math and anticipation are my investment watchwords, not charts and reaction. 

As to the ramifications of a possible reversal lower in the recent rise in bond yields, I suspect rate-sensitive market sectors such as banks could pause, back and fill now. 

That said, I have no plan to disturb my large bank investment holdings.

GroupStink at work:

Danielle DiMartino Booth on the divergence in consumer confidence between California and Texas:

• The Insurance Council of Texas projects last week's winter storm will be the costliest in state history, with $20 billion in claims as a starting point; raw materials input costs required for repairs were at pre-storms 12-year highs
• Per the Conference Board, Texan household confidence was at a post-pandemic low before the storm, while Californians were at their most optimistic since March; the spread between the states' confidence and expectations were also their widest on record in data back to 2007
• Correlation between Texan and Californian expectations has been .89 since 2007, making February's 49-point divergence all the more significant; by comparison, in December 2015 when oil price woes plagued Texas, Californian expectations were running 17.4 points hotter

Before there was schadenfreude, there was epikhairekakia (¿p¿¿a¿¿e¿a¿¿a in Greek), the middle ground in Aristotle's Nicomachean Ethics which outlines a triad on a moral spectrum. At the virtuous extreme was nemesis (¿¿µes¿¿), a painful response to another's undeserved good fortune. In the center was phthonos (f¿¿¿¿¿), a painful response to any good fortune of another, deserved or not. And then there is the vilest, epikhairekakos, taking pleasure in another's ill fortune. As much as the great Greek philosopher may merit credit, the term in the English vernacular is schadenfreude, a German term defined by the Oxford English Dictionary as "the malicious enjoyment of the misfortunes of others." Though the term dates to the mid-1800s in English texts, its usage was virtually nonexistent until the 21st century per a 2009 semantical exploration by New York Times Associate Managing Editor Philip Corbett. The word "schadenfreude" was not used once in 1980. By 2000, it had risen to 28 and then "surged" to 62 in 2008.

Correlation is not causation. Still, we posit two non-coincidences as to why schadenfreude has since become part of our everyday vernacular. The Federal Reserve's reaction to the Great Financial Crisis fomented the worst of the inequality widening...until its reaction to the pandemic, that is. Resentment was just half the formula. The other key to schadenfreude's success was the ability to share the spite. At 2007's South by Southwest Interactive conference in Austin, @jack shrewdly placed two 60-inch plasma screens in the conference hallways. During the event, tweets per day tripled to 60,000 from 20,000.

Last week, many Austinites avoided their Twitter accounts. The spectacle of schadenfreude was too much to bear in the face of true human suffering. To provide but one example, (leaving out the name of the author, who is now blocked), consider this lovely gift to humanity: "Texas crossed the line supporting attacks on elections, on the north. Texas, along with other southern states, basically declared war on the north. The hell with Texas. You want to not be a team player, then go it alone."

And then there were the occupants of the world's 5th largest economy who had apparently been waiting for a huge tragedy to happen upon the world's 9th largest economy. Those tweets were less political and more personal. Suffice it to say, Californians are a bit sore about the exodus to Texas. Many were excited to have the opportunity to maliciously enjoy the misfortune of others.

The role of politics will loom large over the Texas debacle we've learned was avoidable. Consider this excerpt from the NPR, time-stamped January 6, 2014:

"'We lost about 3,700 megawatts of generation,' said Dan Woodfin, ERCOT's Director of System Operations. Woodfin said about 1,800 megawatts of lost power came from two large plants that were forced offline after some of their monitoring equipment froze. 'Probably if we had lost another unit it would have put us into an Energy Emergency Alert Three,' Woodfin said, referring to the level that would have prompted rolling blackouts.'"

The feature then goes on to fill in the background that in 2011, Texas experienced rolling blackouts due to extreme cold that caused power plants to fail. In the three years that followed, ERCOT had "encouraged" more plant weatherization. Clearly, the "encouragement" was insufficient. The price exacted is a huge TBD. The Insurance Council of Texas anticipates this will be the costliest storm in state history. A first stab at claims is $20 billion. And those are the lucky ones. The U.S. has become a rentership nation; the majority of those who don't own also are not insured.

Separately, we won't know for some time how long the rebuild will place upward pressure on inflation. Hurricane Harvey walloped Texas' coast in 2017, not all 254 counties. What we do know is that the copper, steel and lumber needed to repair the damage was already in high demand and short supply, pushing input costs to a 12-year high.

It will be interesting to get a read on Texans' consumer confidence the next time the Conference Board publishes its monthly survey. Before the winter storms hit, Lone Star households' confidence was at a post-pandemic low (blue line). Californians' spirits were headed in the opposite direction, to the highest since last March (yellow line).

The spread between the states' confidence and expectations (not shown) were the also the widest on record by such a wide margin we double checked the data. Back in December 2015, when the decline in oil prices was biting Texas, Californians' headline confidence and expectations were 10.6 and 17.4 points higher, respectively, than those of Texans. In February, the Golden State's happiness surplus rang in at 22.0 points for confidence while that of expectations exploded to 49.0.

QI's Dr. Gates was perplexed: "Big states usually run together. Over the last 14 years, that was the case with consumer confidence in California and Texas. From 2007 to 2020, the correlation between confidence in the top two states was a hefty .89. That makes February's all-time divergence that much more significant."

We get that Texas reopened its economy months ago. The release of California's pent-up optimism should have opened a divide. But a 49-point divergence on what the future holds? We can only cross fingers that the schadenfreude dissipates and that the country's biggest two economies' outlooks realign as the vaccination campaign unleashes pent-up demand nationwide.