Ns over Ss. 

Breadth 17-15 most of the day - not too swift considering absolute gains in the Nasdaq and S&P Index. 

Ten year yield down another four basis points to yield 1.45% - confounding a lot of bright observers. The downturn in rates - despite a hot inflation print - helped the pivot of growth ( (AMZN) and (GOOGL) ++) over value... banks down. 

I continue to view banks as sales after the big run over the last 16 months and the weakening fixed income yields. I favor a (GS) short. 

Oil up a quarter, gold +$6.20/oz. 

Cryptocurrencies flattish after the recent runup last evening. 

Gewgaws give it up bigly led by (GME) (-30%) and (AMC) (-13%). 

Thanks for reading my Diary today. 

Enjoy the evening. 

Be safe.

* And eliminate the negative

* I feel a sermon coming on me

Two days ago FIN TV and their kind were all over the GameStop (GME) trade. 

Today GME shares are -$90/share, a loss of nearly 30% in market capitalization. 

Watch how fast the GameStop playas (bulls) quiet down and quickly forget their enthusiasm as they deemphasize the negatives (and emphasize the positives). 

Brother and sisters be seated as I feel a sermon coming on me! 

Remember the unanimity a month or two ago on the upbeat prospects for Micron's (MU) shares?

Now look at the MU chart.

Nary a comment, regret or admission from the self confident bulls, especially of an unusual call activity-kind.

And no guilt.

* The 30-year auction was mixed

* Real weekly earnings are plummeting after being artificially goosed in 2020

From Peter Boockvar:

After a solid 10 yr note auction, today's 30 year bond auction was mixed. The yield of 2.172% was about 1 bp above the when issued and the bid to cover of 2.29 was a touch below the one year average of 2.33. On the other hand, direct and indirect bidders took 82% of the auction, a bit above the 12 month average of 79%. 

To the question over why are yields falling today in the face of another hot inflation print, I do believe some of it is directly related to the very dovish tone that Christine Lagarde took today. She was nonchalant with inflation, believing it's temporary (even though they purposely want higher inflation), the ECB said they would continue to front load the PEPP and also said that most didn't want to start the taper talks of this program. She directly said they need to be "patient" with what is called an EMERGENCY program. So in response, the 10 year German bund yield fell 1.2 bps to the most negative since late April. Our Treasury market is very much correlated to the direction of theirs. 

Another thing I wanted to mention as we discuss the inflation stats today, there is one thing to frame it for what it means for markets, rates and Fed policy, but understand what this means for the U.S. wage earner. A chart of REAL weekly earnings in May, down -2.2% year over year and is a picture is worth a thousand words. If inflation is NOT temporary, the economic implications IF wages don't further accelerate to offset this will be profound.

* I love it

Here you go!

Here we go again - divergences aplenty.

Nearly flat and uninspiring market breadth with the Indices strongly higher.

Apropos to my opening missive, the two largest meme stocks, (GME) and  (AMC)  , are down by -$60/share (-19%) and -$6/share (-13%), respectively.

Of course everybody has gotten out before today's plunge and has moved into the next meme play. Not! 

The whole meme trading thing is a farce and pump and dump scheme under the umbrella of a legit theme, embraced and perpetrated by the very small cadre who profit from it.

So far, the action has been understandable if not exactly predicted. They punched through the higher highs and then retraced. The key here will be what happens in the afternoon.

Do the bulls regroup and take us up to even higher highs and, hopefully stay above them or, does the market pull back and, possibly reverse? The worst for the bulls would be if they close down.

So, let's watch the action. The intraday high so far is Dow 34740; S&P 4250 and Nasdaq 14035. That would be their upside target and, hopefully a breakout and, again on the downside the intraday lows but more importantly if they managed to turn negative.

The action in the ten-year yield remains anomalous or perhaps part of the new evolving trading pattern.

Cross your fingers and stay safe.

Good Luck!

Arthur

Thomas C

"Coinbase: Why Raymond James' Bearish Rating Doesn't Matter"

Summary

COIN recently received an underperform rating from Raymond James.

While we agree with their assessment that the exchange business has no moat, we believe they are missing the forest for the trees.

We explain where COIN's true value lies.

Raymond James analyst Patrick O'Shaughnessy recently initiated coverage of Coinbase (COIN) at Underperform as he expects the cryptocurrency exchange to suffer from pricing degradation over time.

While we agree with their assessment that the exchange business has no moat, we believe they are missing the forest for the trees.

As we detailed in our full investment thesis Forget Bitcoin - 5 Reasons To Buy Coinbase Instead, COIN is a leading cryptocurrency infrastructure company that is investing aggressively in cryptocurrency innovation in order to reduce dependency on its no-moat crypto trading fee business. As a result, assessing its future prospects strictly based on its exchange business is to completely miss the bigger picture on the company.

The Exchange Business

COIN's exchange business benefits from several factors, including the fact that it has the early-mover advantage that has enabled it to achieve size and scale that dwarf most of its competitors'. That said - as Raymond James pointed out - it has no structural barrier to entry against competitors and, as a result, the market is increasingly getting saturated with new competitors in the space, many of which offer cheaper trades and a more user-friendly experience than COIN.

We essentially said the same thing in our recent piece How Much Is Coinbase Worth:

While it is true that its cryptocurrency trading platform benefits from a large network effect and early-mover status, there is no lasting moat here given that competition is plentiful and growing and the retail investing crowd typically cares more about fees than anything else, making it a highly commoditized service.

As a result, we expect COIN's exchange business profit margins to shrink fairly rapidly over the next several years. At the same time, there is likely going to be sufficient growth in cryptocurrencies to keep COIN's volume at a meaningfully high level. Additionally, COIN has the scale and brainpower to compete with anyone in the space, making us confident that they will remain large players in the exchange business.

The True Value Of COIN

According to COIN's CFO, they are moving aggressively to generate ancillary sources of income.

These include:

a cryptocurrency rewards credit card through a partnership with Visa (V)

the recently launched Coinbase Prime (a prime brokerage product for custody, advanced trading, data
analytics, and prime services targeting institutional and corporate investors)

cybersecurity services tailored to blockchain and cryptocurrency

loans and deposit accounts.

In fact, management is so bullish on these initiatives that they expect greater than 50% of their revenue to come from these ancillary businesses within 5 years.

This leads us to our main point: COIN is not just a cryptocurrency exchange business. In fact, we would argue that its exchange business is only a very small part of what it will become. For now, its exchange business is simply the means by which it is able to build up a massive customer network, gather immense sums of consumer data, attract leading talent in the crypto space, and print cash for reinvestment into its far more important long-term business initiatives.

We expect COIN to leverage its industry-best brain trust and customer network and data along with its large cash pile and strong free cash flow generation to differentiate and competitively position itself. This includes continuing investing in crypto and blockchain startups, its institutional cyber security and storage service businesses, and other methods to improve the secure storage, exchange, and use of cryptocurrencies.

As a result, in the future COIN could very well be a combination of a leading exchange business, credit card company, wealth storage service, cyber security technology company, and cutting edge cryptocurrency and blockchain technology company. Ultimately, the sky is the limit with them and - as long as management allocated capital intelligently and cryptocurrencies maintain their long-term growth momentum - COIN's intrinsic value is many multiples of what it is today and has been labeled by some investors as the Microsoft (MSFT) of the 2020s.

Furthermore, their CEO - Brian Armstrong - has a track record of innovation and success, moving from Airbnb (ABNB) to COIN. He is a visionary who was an early major mover in the cryptocurrency space and - with the help of his strong technical team - is a front-runner to continue to lead future growth and innovation in the cryptocurrency space.

Investor Takeaway

COIN is clearly a highly speculative investment as the vast majority of the existing business does indeed lack a meaningful moat. As a result, many investors and analysts may conclude that it is wildly overvalued.

That said, we believe such characteristics are short-sided. First of all, COIN has not seen any fee compression thus far and believes that growth in the space as a whole will offset the increase in competition for the short-to-medium term and enable COIN to keep its exchange profits in place for now.

Second, COIN owns an industry-leading set of consumer data due to its industry-leading network. Data is the new oil and COIN is working hard to monetize their data treasure chest through ancillary crypto infrastructure businesses.

Third, it also has a growing set of relationships with institutions that it plans to leverage to drive significant profitability in the years to come as institutions increasingly accept, save, and spend cryptocurrencies.

Fourth, they are led by a visionary CEO who has a track record of innovative success. As blockchain technology and cryptocurrencies evolve and grow exponentially, COIN is an odds-on favorite to emerge as one of the leaders and capitalize on future growth opportunities that are not even conceived of yet.

To reiterate, COIN is clearly a highly speculative investment as there is a wide range of potential outcomes at play here. However, if you are bullish on the future of cryptocurrency, COIN is as good of a bet as any. As a result, we reject Raymond James' recent rating as short-sided and instead encourage investors to assess COIN based on its intangible strengths which we believe are potentially far more valuable than its exchange business. We rate COIN a speculative buy with a risk-adjusted fair value estimate of $300.

Disclosure: I am/we are long COIN.

- SeekingAlpha.com

Thomas C

Bitcoin in backwardation points to a bear market - J.P. Morgan

Bitcoin (BTC-USD) moving into backwardation, where the current price is higher than the futures price, is a reason to stay bearish on the crypto, J.P. Morgan says.

It's a sign of weak institutional demand at present, strategists led by Nikolaos Panigirtzoglou write in a note today.

In times of normal demand, Bitcoin trades in contango and the "typically high (above 10% annualized) futures to spot spread is likely a function of the high 'risk free' rate of opportunity cost implicit in crypto markets," they say.

"But when demand is particularly weak and price expectations turn bearish, the futures curve shifts into backwardation," which was the case for most of 2018, Panigirtzoglou adds.

"We believe that the return of backwardation in recent weeks has been a negative signal pointing to a bear market," they say, adding they "are reluctant to abandon (their) negative outlook" until the spread over spot moves back to positive territory.

Another bearish sign is the still-low share of Bitcoin in the crypto markets, J.P. Morgan says.

"We believe the share of Bitcoin in the total crypto market would have to normalize and perhaps rise above 50% (as in 2018) to be more comfortable in arguing that the current bear market is behind us."

Elsewhere in the crypto space, El Salvador President Nayib Bukele, whose country just became the first to make Bitcoin legal tender, tweets the state-owned geothermal electric company will put up a plan for Bitcoin mining "with very cheap, 100% clean, 100% renewable, 0 emissions energy from our volcanos."

"This is going to evolve fast!" he says.

- J.P. Morgan

I continue to view Tesla (TSLA) as an investment short:

"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 complacency..

The level of complacency in the face of these inflation prints is truly amazing. 

Many are whistling past the graveyard as they have little clue as it is the biggest piece of kryptonite for just about everything in markets and the economy.

"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."

* Global investable assets reach $250 trillion. 

* Investing in meme stocks. 

* Is day trading a good idea? 

Again, the market put in a kind of strange performance. The yield on ten-year went down and not insignificantly. Yet, stocks couldn't get the bulls moving and, it was only the slide rule that gave itself some credibility.

As you may recall, the slide rule said the support in the Dow would be 34430 and, the intraday low in the Dow turned out to be 34439. The slide rule said support in the S&P would be 4205 and, the intraday low was 4208. It was only the Nasdaq where the slide rules and the action didn't quite cooperate. They were looking at support in the Nasdaq 13790 and, the low was actually 13906. So, of all the averages, that one was the furthest away.

As we began by saying, the separation of the yield on the ten-year and, the market direction continued yesterday. We don't have nightly meetings of the Friends of Fermentation anymore (hope to start that soon) but some friends called in with a couple of theories as to the separation of the yield on the ten-year and the direction of the stock market. Several noted, in similar form, that I wasn't truly listening to the market. That what had changed was not the market paying attention to the yield on the ten-year but that the message of the ten-year had changed in what it was saying.

Those folks said, you were thinking that when the ten-year yield went down, it meant that it was a sign that the Fed was getting a little extra room to avoid tightening and, therefore, that prompted the bulls in the stock market and, that was good for a rally. But now the drop in the yield in the ten-year might be sending a somewhat different message and, here some of the Friends of Fermentation split. Some said that it was simply that this temporary "transitory" inflation was proving to be just that, transitory.

In their opinion, the recent quick and sharp reversals in some of those inflationary signals meant that the economy might be actually sinking and, despite the Fed being maybe not at full tilt but pretty strong at knowing where they are, that the economy was, in fact, slipping back and that's why lower yields were hinting the economy, despite the Fed, was slipping backward and, that was now negative for stocks.

There was a small subset group that had very interesting but, so far, unprovable condition and, that was, they thought some early signs of deflation, believe it or not. That yields were coming down because there might be a hint of global deflation beginning to appear.

They point to some very arcane data out of China, which seems to indicate their banking reserves may be shrinking, possibly on purpose (which is hard to believe). Nevertheless, the problem here is that this rather arcane measurement has a pretty long lag time, up to 16 weeks. Now we are talking about something that is not going to show up until nearly four months from now.

Now, add on to that if they are tightening banking, why would they be doing that in the face of new Covid outbreaks and, lockdowns that are resulting in back-ups and shortages?

So, there are questions about all these explanations, but it was incontestable that once again, the yields moved lower and, stocks move followed suit. Once again, the global economy is a bit puzzling.

There was yet another theory and, certainly not one of my favorites, and that had to do with the fact that yields might be dropping because of what looks to be the stalemate on several of the Biden proposals, whether it is infrastructure or some of the other things and, that they look either not to go through at all or be significantly reduced as they move for passage, and the theory being that means there will be less necessity to float new bonds and, therefore, there will be less demand for money and, therefore yields could go down.

It is neat. It seems to fit the current circumstance but, as I say, I am not quite buying into that.

Overnight, global equity markets are mixed with small changes. Markets in Asia have a slight edge to the upside, while markets in Europe are lower, perhaps showing some anxiety about today's ECB meeting, particularly as traders try to figure out these new swings in yields and interest rates and, what are their significance.

The US calendar is a bit busier than it has been. We are going to get, importantly, early this morning, the CPI data, initial claims, some services reports, more inventory data on natural gas, the 30-year auction at 1:00 p.m. and, of course, anything that comes out of G7. So, at least, the newsticker will hold some attention to the market players.

For this morning, the slide rule suggest resistance at Dow 34674; S&P 4240 and Nasdaq 14080. Support at Dow 34303; S&P 4197 and Nasdaq 13897.

It is assumed the key feature will be this morning's CPI. Does it show inflation? If so, how does the ten-year react? More importantly, is there a reaction in global yields? The mystery hopefully will be solved in a matter of days.

In the meantime, be wary and stay safe.

Arthur

Headline CPI in May rose by +0.6% headline and +0.7% core vs. the estimate for up +0.5% for both. These follow +0.8% and +0.9% increases, respectively, in April. Versus last year, headline CPI is now up +5% and the core rate by +3.8%. To rid ourselves of the easy comp/base effect discussion, May headline CPI was up +5.1% vs. May 2019. In other words, about +2.5% per year. The core rate is up by the same amount vs. May 2019 so I hope we can now rid ourselves of the base effect excuse. 

In breaking down the inflation analysis here between services inflation (VERY persistent) and goods inflation (VERY cyclical that averages around zero), services inflation ex energy rose +0.4% month over month  after a +0.5% rise in April and a +0.4% increase in March. They are up +2.9% year over year. Core goods prices spiked by +1.8% month over month after a +2% increase in April. They are now up +6.5% year over year. 

Within services, Rent of Primary Residence rose +0.2% month over month for a fourth straight month while Owners' Equivalent Rent was up by +0.3% month over month. With the wide gap between home price increases (+13%) and rental growth, expect rents to play catch up, thus accelerating services inflation. Positively, medical care costs were subdued, falling by -0.1% month over month and up by +0.9% year over year with healthcare services little changed and drops in prescription drugs. On the other hand, as the pace of driving picks up steam, auto insurance prices jumped by +0 .7% month over month  after a +2.5% jump in April and +3.3% increase in March. Airline prices jumped but are still below the 2019 levels. If you have a pet, pay up. Pet services prices rose +0.6% month over month and +5% year over year  and vet service prices jumped by +1.2% month over month and by +5.4% year over year. Not surprisingly, 'food away from home' prices rose +0.6% month over month and +4% year over year.  

On the goods side, used car prices rose +7.3% month over month after a +10% jump in April. They are now up +30% year over year. We certainly know what's going on here and new vehicle prices, if you can get one, rose +1.6% month over month after a +0.5% gain in the month before. Apparel prices, as we start buying clothes again, was up by +1.2% on the month and up by +5.6% year over year . Furniture prices were up sharply across the board by +13% in the month. Major appliance prices rose +12% year over year and for laundry equipment by +27%. 

Energy prices were flat month over month but up +29% year over year. Food prices grew by +0.4% month over month and +2.2% year over year.  

I believe we can now throw out the base effect/easy comps argument as prices are now rising solidly to where they were in 2019. As stated here many times, the whole transitory or not debate is only on the goods side as services inflation is ALWAYS sticky (outside of pandemics) and persistent and we are in the midst of the most widespread scenario of goods price pressures since the 1970's. 

In response, the 10 year inflation breakeven is rebounding by +4 bps to 2.37% and the 3 year by +6 bps to 2.62% and the 5 year also by +6.5 bps to 2.50%. The 10 year nominal yield is up by 2.5 bps and I remain of the belief that we'll be above 1.75% by the end of the summer after we see more months of high inflation reads. Thus, 1.50% will likely be the lower end of this range and the recent Treasury rally is over I believe. 

Here is a 45 year chart on core good prices (month over month):  

ECB president Lagarde gave her thoughts on inflation in today's press conference and she is VERY sanguine. While raising its inflation stats, she said 'long term inflation expectations remain subdued' and that while 'underlying price pressures will increase somewhat', 'slack and a higher euro will damp pressures.' I think she and her colleagues will be mugged by the reality of sticky inflation in the coming months. I've heard Lagarde say 'temporary' a lot so far in her press conference. 

Initial jobless claims fell to 376k from 385k, just above the estimate of 370k. The four week average fell to 403k from 428k. PUA fell by 2k week over week to 71k. Also positively, continuing claims fell by 258k after rising by 146k as hopefully some of those job openings are getting filled. Delayed by two weeks, those still receiving emergency claims fell by 70k and continuing PUA was down by 13k. 

The pace of firing's continue to moderate and it was good to see the drop in continuing claims but both remain about double the level pre COVID.

* When I was a 'yute' we called this a "pump and dump" scheme

* I feel like I am watching stupidity in real time as communities of traders gamble on what stock will be the next AMC, GameStop, Wendy's or Clover

* Whittling down analysis as to what is a company's short interest is not an effective or profitable trading strategy over any reasonable period of time

* Most of the current objects of many traders' affection are headed towards the ash heap of speculation

* Gamblers almost always lose their money - whether gambling on horses or on stocks

* History rhymes

As I prepare for the soon to be launch of Seabreeze Capital Partners LP, I have little interest in identifying what will be the latest target of the Reddit/WallStreetBets community. I would hide your children and your portfolios from those irrational pursuers of almost unattainable, illusory and almost certainly sustainable profits in meme stocks. 

Nor do I watch the financial media continue to highlight and embrace as business news the awesome daily games of overpriced gewgaws. 

And I don't pay attention to the Redditt and other boards, Twitter, Comments Sections or the "(stock) service commentators/providers" -- we used to call them tout sheets in horse racing -- that are in search or are promoting their own worthless shiny objects in the hope that the stocks will be embraced for a trade that produces untold but short lived percentage gains and fortunes for their promoters who are no different that the "pump and dump" schemers that existed and perished in prior market cycles. 

The setting which has allowed for today's 'pump and dump' schemes is no secret. This expanded setting is importantly the byproduct of the geometric expansion in the quantity of forums/communities in a world that is increasingly flat, interconnected and networked. 

Unfortunately, and I can write this with authority, most of the objects of affection of these communities are headed towards the ash heap of speculation - just as most of the shorting stars, known collectively at SPACs did in the early months of 2021 and as many/most of the dot.com names did in the late 1990s. 

What Turns Me(me) On?

Whittling down stock analysis to what is a company's short interest is not an effective or profitable trading strategy over any reasonable period of time. 

As I prepare to launch Seabreeze Capital Partners LP, I am looking to buy equities -- whose fundamental outlook exceeds consensus expectations -- that sell at a reasonably large discount to intrinsic value,  providing my Limited Partners with a reasonable "margin of safety" and an attractive upside reward vs. downside risk. 

And as I prepare to launch Seabreeze I am looking to short equities, whose secular business models and operating landscape are deteriorating relative to consensus expectations, that sell at a reasonably large premium to intrinsic value - providing my Limited Partners with an attractive downside vs. upside proposition. 

I will continue to do my share of speculating but, within reason, and not on worthless gewgaws. 

For over two decades my Diary has affirmed the notion that there are many ways to deliver superior trading and investing returns. While my approach is fundamentally based, I admire and respect those that are technically-oriented and can make sizeable trading profits by observing charts. 

But, the recent meme nonsense is gambling, has a low win ratio and will likely result, as it has over history, in legions of traders leaving the game. 

So, read my Diary if you are a bonafide investor and a thoughtful short term speculator who believes in analysis (and the calculation of intrinsic value), the probabilities associated with economic/market/sector/company outcomes, and for those that view macroeconomic commentary as value-added to the investing process.

As Peter expresses in this morning's commentary, bullish investor sentiment has moved higher with rising stock prices: 

Yesterday Investors Intelligence said the Bull/Bear spread is getting closer to 40 again as Bulls rose 1 pt to 54.5 and Bears are down to 16.2, the lowest since last August. Today, AAII said Bears rose just under a point to 20.7 and that is a bit off the lowest level since the 1st week in January 2018 seen last week which was right after the major tax bill was passed and right before the vol blow up. Bulls fell 3.9 pts to 40.2 but after rising by 7.7 pts last week. Bottom line, sentiment is certainly positive though not extreme, but Bears have certainly gone missing in both of these surveys.

China released its May loan data where aggregate financing was similar to that seen in April. Total loans rose 1.92T yuan vs 1.85T in April of which 1.5T were bank loans. The estimate was 2T. Money supply growth as measured by M2 rose 8.3% y/o/y, up two tenths from the prior month and two tenths more than expected and compares with the 5 yr average of 9.3% and off the slowest pace since July 2019. The PBOC has tried to have this metric rise in line with nominal GDP. Bottom line, the Chinese have quite the juggling act here as they are purposely trying to tamp down on excessive credit growth and rising home prices at the same time allow bankruptcies to take place while the PBOC modestly backs away from easy money but all still wanting to grow within their GDP target.

Speaking of modestly backing away, the Bank of Korea is setting up the markets for some rate hikes. A BoK member said today "If there's a hike or two over consideration of situations in the economy, financial stability and inflation, I don't think that has to be seen as tightening, as the level of the current rate is low." This is in light of the just released quarterly monetary policy report where risks of higher inflation and financial imbalances were cited. In response the Won is higher and the 10 yr bond yield rose 3 bps to 2.14%, the highest since mid March and just a few bps from the highest in 3 years. The Kospi though shrugged it off with a .25% increase.

Ahead of the ECB meeting today, there was nothing of note in Europe as we just saw more April industrial production figures where the French one missed expectations and in Italy it beat. The influence though of supply problems and stop and start restrictions also played a factor but that is now going away. European yields are slightly higher while the euro is a touch lower with stocks mixed ahead of Lagarde who has a really difficult needle to thread as things get better.

Oh, my goodness (watch this closely!) ... actually, to me, and in reality, fiat money has become mostly and generally virtual.
MicroStrategy (MSTR) has a doomed strategy of accumulating bitcoin in a leveraged fashion, imho:

Well, I suppose we already knew the Federal Reserve was out of their mind: