"Just one more thing.'

- lt. Columbo

MicroStrategy (MSTR) files for a possible stock shelf offering.

Stocks have levitated somewhat in the last 30 minutes.

Calling it a day early

Thanks for reading my Diary.

Enjoy the evening.

Be safe.

The averages are unchanged from about an hour ago as market breadth slides further lower.

I can now say unequivocally, based on my company management contacts over the last two weeks, that the semiconductor shortage is a far greater issue than what we read about.

Slip slidin' away
Slip slidin' away
You know the nearer your destination
The more you're slip slidin' away

-- Simon and Garfunkel,Slip Slidin' Away 

I am laser focused on market breadth.

Breadth has been slip sliding away over the last two hours.

Was flattish earlier and is now 13-18 negative.

Delta Air Lines (DAL) has begun to roll over again (on the charts).
DAL is on my Best Ideas List (short).

* This leading market sector (late 2020/first half 2021) is now vulnerable to an earnings disappointment

* Both trading volume and net interest margins and income will likely miss previously forecasted levels

Comments this morning by JPMorgan's (JPM) Jamie Dimon on slumping trading volume (-38% year over year and worse than expectations) is contributing to the decline in bank stocks. 

Moreover, net interest margin forecasts that JPM and other large money center banks have previously made will also likely prove to be too optimistic owing to the recent and unexpected interest rate drop. Indeed, Dimon just reduced the bank's forecasted net interest income projection (down from $55 billion) to $52.5 billion.

dougie kass

Sent to Scott Wapner just now:

judge
belski is among the most arrogant and obnoxious talking heads extant
he always has the answers and people that disagree with him (i.e, Paul Tudor Jones) are just fools.
fools with billions of dollars.
dougie

Repeating for emphasis: I would no longer be long the banks.

I am now short (MS) and (GS) .

To repeat again what Federal Reserve Vice Chair Randy Quarles said back in May, "Ultimately what drives inflation is peoples' expectations about what they're going to need in the way of wages. Those are imperfectly measured, obviously, but better measured by surveys rather than market based measures."

The Fed might not alter their verbal stance on Wednesday (because there obviously won't be any action) but inflation is now a Main Street issue and not just a Wall Street debate and thus their credibility is now more broadly on the line. 

The NY Fed just said in its monthly Survey of Consumer Expectations that "Median one year ahead inflation expectations increased by .6 percentage points in May to 4.0%, the 7th consecutive monthly increase and a new series high. Median inflation expectations at the 3 yr horizon increased from 3.1% to 3.6%, the 2nd highest level in this series, behind only the reading from August 2013. The increase at both horizons is particularly pronounced among respondents age 60 and over and among those with a high school degree or less." This is pretty similar to what the UoM said on Friday about who was most impacted by higher inflation expectations. This survey dates back to 2013. 

So we debate whether inflation of 2% or more is temporary or not and in this survey consumers are uncertain too as "Median inflation uncertainty - or the uncertainty expressed regarding future inflation outcomes - increased sharply at the short and median term horizons."

As for specific prices: "Median year-ahead home price change expectations increased by 0.7 percentage point to 6.2%, substantially above the 2020 average of 2.3% and marking a third consecutive month with a new series high. The May increase was driven mostly by respondents who live in the "West" and "South" Census regions."

And: "Expectations about year-ahead price changes increased for all commodities in May. The median one-year-ahead expected change in the price of food and rent increased by 2.2 and 0.3 percentage points, respectively, to new series highs of 8.0% and 9.7%. The median one-year-ahead expected change in the price of gas and in the cost of medical care rebounded by 0.6 and 0.3 percentage point, respectively, to 9.8% and 9.4%. Finally, the median one-year-ahead expected change in the cost of a college education increased by 0.2 percentage point to 6.1%."

As for the offset to expectations of one year inflation of 4%, expected wage growth one year ahead rose .4 percentage point to 2.5% where "The increase was driven mostly by respondents with low educational attainment (no more than a high school degree)."

If you're making more than $100k, you're feeling pretty good because higher inflation has less of an impact on your lifestyle. Income expectations rose to the highest since January 2020 to 2.8% (but still below expected inflation expectations). "The increase was driven mostly by respondents with high household income (above $100k)." This cohort also helped to drive spending growth expectations of 5%, a series high, up from 4.6% in April. We'll soon see how much is inflation generated and what's real on the spending side in terms of percent increases.

Bitcoin and its peripheral equity plays are taking the oxygen out of the speculative room this morning.

Market breadth at the get go flattish with Nasdaq +30 handles and S&P -9 handles.

This is a bit different (mixed movement on the Indices) than a lot of the previous trading sessions when the Indices were flattish and with both the Nasdaq and S&P Indices gapping higher.

May be a cautionary signpost.

Peter, ahead of the FOMC:

Ahead of the FOMC meeting this week I'll have more to say on Wednesday but I wanted to print here what the WSJ editorial page said on Friday if you didn't see it. I only take a few sentences from the 1st paragraph and a few from the last. Yes, we saw a 5% y/o/y May CPI increase, the largest since August 2008, "But don't worry, Americans. The Federal Reserve says inflation is 'transitory' and that it has the tools to control prices if they start to spiral out of control. Let us pray...What's undeniable is that Washington is conducting one of the most radical fiscal and monetary experiments in peacetime history. Even if the current inflation is transitory, Americans are paying more for it now." And as we saw in Friday's UoM consumer confidence index, these higher prices are having a direct impact on the consumer desire to spend, in particular on homes and cars, and those over the age of 65 and lower wage earners highlighted the negative effect on their standards of living.

I do want to set something straight here. US inflation is NEVER transitory. It is always rising pretty much in a straight line from the lower left of the chart to the upper right. The ONLY question is the rate of change and as said here before, it is really only the goods side that is the determining factor as to by how much because services inflation is pretty consistent. So, for this debate, transitory is an inflation rate of change that slips back to 2% or less and not temporary would be an extended period of time above.

The actions of the Hungarian central bank and the one in the Czech Republic are irrelevant to global markets but they still face growth and inflation situations that dictate policy. On the inflation side, each country is also experiencing similar pressures that the developed world is so I thought it interesting to hear what central bankers from each said today. Tomas Holub, a central bank in the Czech Republic said that there is "a growing risk of a spill over into inflation expectations" from the current rise inflation pressures. "That's precisely the moment when we must say no, monetary policy won't allow a prolonged period of elevated inflation, and we're beginning to normalize. And if I conclude that that moment is now, then why postpone until August?"

A Monetary Council Member at the Hungarian central bank said they will be hiking rates next week most likely and they plan on spreading out additional ones quarterly. "If we move too slowly, that can have serious negative market consequences, but if we move too fast then we can undermine economic growth, which is still fragile. We need to strike a balance." I agree it should be a balance but they are getting started.

I include these comments just to contrast the search for a balance from a growing number of emerging market central banks who have experience with inflation and the all or none full speed ahead approach of the Fed, ECB and BoJ.

There were no market moving data points overseas. The better than expected Eurozone industrial production figure was for April.

* Linear TV network demand is surprisingly strong

* Scatter pricing is at all time highs

Contrary to general expectations, the post pandemic upfront TV market is robust with double digit ad growth.  

This is unexpected and could result in an improving environment for both the profits and share prices of Fox (FOX) , ViacomCBS (VIAC) , and Discovery (DISCA) .

More on the current "silly season":

In What Is Going On With Interest Rates?I concluded: 

* The recent 25 basis basis point fall in the 10- year U.S. note yield has surprised many

* There is likely a limited window for any further declines in interest rates

* I expect the Fed to upgrade its expectation of inflation risks in the next few months

I am now entirely convinced that the Fed's view that inflation is transitory is wrong-footed. 

I write this based on extensive conversations I have had with over 10 managements in the last week. 

From my perch, those conversations - about goods and labor inflation - were undeniable. 

The nascent inflation we have seen over the last few months is here to stay. 

And, with it, will be margin pressures as disappointing operating leverage from above trend line economic growth. 

Bottom Line

The Federal Reserve and market participants have their collective heads in the sand. 

The inflation I see will likely be longer in duration and more acute than the Federal Reserve sees. 

I would now be short (TLT) bonds (again) and consider shorting equities - on any signs of a price momentum break - as surprisingly sustained inflation could be the market's Achilles Heel.

More on this subject in the days ahead.

This is what Grandma Koufax would call "silly season":

Reflation: Damaged but Not Undone

Summary: Declining longer dated inflation expectations are contributing to lower yields, but can't explain the -12bp decline in the U.S. 10yr yields last week or the -25bp plunge over the past month. Inflation expectations moved higher on the CPI number and are still above post-GFC levels, and commodity prices, despite China's interventions to push prices lower, have moved modestly higher. Market based indicators show few signs of a declining growth outlook.

Odds of a destabilizing demand boom that causes aggressive Fed reaction or sustained high inflation have come down as supply constraints ease and payroll growth missed expectations. Less demand push inflation risk, China signaling a desire for lower commodity prices and the Fed indicating inflation expectations are increasingly a focus have reduced inflation risk, helping explain some of the UST yield decline.

Yields posted a -2.5 standard deviation decline (1962-now) and tend to rebound over a 1, 3, and 6mo basis following such aggressive declines. Assuming economic momentum continues over the coming months, a likely outcome given strong labor market demand (there is about one job opening per unemployed worker), positive capex trends and less China drag going forward. Cyclicals may struggle though even as UST yields stabilize. The past few weeks have damaged the reflation narrative and that will take time to reverse. A few weeks of UST yields grinding higher, positive employment readings, declining claims, and a stronger than expected payroll report would all help change the trend in yields. Positive fiscal package news is a swing factor for yields, but sentiment toward passage of another round of fiscal support is weak.

A strong consumer, firming labor markets, the Fed's new inflation overshoot framework, and a strong housing backdrop form the basis for our high, but not too high, inflation call. The positive flow of savings is also is why a fiscal cliff is unlikely and Cyclicals earnings remain significantly more attractive than Defensives. How household savings are spent, or not, and what that means for the economic outlook is an intense debate, which is why narratives can change rapidly.

Bitcoin has risen over the weekend seemingly on the basis of another Elon Musk tweet. 

The digital currency market is absurd.

A trifecta!:

Another one from Liz Ann:

I guess there are a lot of fully invested bears:

Danielle DiMartino Booth on the general unattractiveness of municipal bonds and the risks associated with housing affordability pressures, something I have been warning about!:

• Per MarketWatch, the ratio of 10-year municipal bond yields to comparable Treasuries is roughly 60%, appreciably richer than the historical 80%; demand from wealthy Americans has spiked in recent months amidst fears that taxes will be increased in new legislation
• Treasury payments in April and May totaled $177 billion, well above the $87 billion average in the nine years before the pandemic; while the top third of earners has filed taxes and is buying up munis, stimulus and deadline extensions have inflated outflows to lower earners
• 64% of those in the top third of income earners cited high home prices as impeding demand in UMich's latest consumer survey, up from April's record 52%; unfavorable perceptions on home, vehicle, and durables prices reached their worst level since November 1974's record

This high repute, with bounteous Nature's aid,
Won confidence, now ruthlessly betrayed
At will, your power the measure of your troth!-
All who revere the memory of Penn
Grieve for the land on whose wild woods his name

- William Wordsworth, To the Pennsylvanians, 1842

Renaissance Italy breathed oxygen back into the Arts...and Finance. Wealthy families, most notably the Medici of Florence, grew their power bases via financial assistance from city-states. The practice spread throughout Europe and to the New World. In 1812, the City of New York sold the first U.S. municipal bond to construct canals from the Hudson River to Lake Erie and Lake Champlain. Once completed, these canals greatly enhanced access to and from New York City and have been credited with securing the city's status as the financial center of the universe. Access to this new funding swept the country. In the 40 years through 1880, U.S. municipal debt quintupled to $1 billion. Speculation tainted the reputation of the securities as states and municipalities inevitably took advantage of borrowers' good will. The five-year downturn that followed 1837's bank panic left eight states, including Pennsylvania, effectively bankrupt inspiring William Wordsworth to pen the above-quoted poem.

Demand has so overwhelmed supply that funds in today's $4 trillion municipal bond market are closing to new issuers. Per MarketWatch, the ratio of 10-year municipal bond yields to that of comparable maturity Treasuries is roughly 60%, appreciably richer than the historical 80%. Wealthy Americans are paying up as never before, panic-buying amidst fears taxes are set to rise via legislation passed using reconciliation which only requires 50 votes in the equally split Senate.

An emerging recognition that not all is well with the U.S. economy, even and especially in light of Bloomberg headlines regaling conspicuous consumption, is amplifying anxieties among buyers of municipal bonds seeking shelter for their wealth. Friday's "'Revenge Spending': Lamborghinis Sold Out This Year as Covid Gloom Lifts" is surreally commonplace.

The absence of a household credit cycle in developed economies underlies the growing uncertainty. The well-informed may not have the precise numbers that feed today's left chart in hand. But they're nonetheless aware of the reality depicted, mainly because the same cohort buying munis is one in the same with Americans who've just written big checks to pay their taxes...with a one-month delay.

The pandemic-induced calendric disruptions continue to influence cash flows in and out of the Treasury Department. As we detailed months ago, the first quarter's payments (orange bars) were Biblical in magnitude. The $643 billion paid out in combined stimulus payments and tax refunds was 3.3-times the average of the prior decade's $197 billion.

Tax Day was delayed this year to May 17th, which delayed the pain for millions. The vestiges of stimulus check payments and legislated tax forgiveness for those who've been receiving unemployment benefits since last March also inflated Treasury payments in April and May vis-à-vis the pre-pandemic norm. In the nine years preceding the pandemic, Treasury outflows averaged $87 billion in the second quarter's first two months (purple bars). Last year's CARES Act blowout ballooned this total to $319 billion, the only thing making 2021's $177 billion appear to be a step down. We would add that the ice storms bought Texans an additional one-month reprieve; taxes in the Lone Star State are due this Tuesday.

The "and then what" helps explain the righthand chart. Stimulus and tax refund follow-through are not coming. The consumers with the greatest sway are wising up to this.

We know that home price inflation has been rampant. Note though that we reference this for the first time in the past tense. The top appears to be put in, sooner than anticipated. Anecdata convey price cuts between 10-15%, especially at the high end. And QI amiga Ivy Zelman has turned cautious on homebuilders. Her proprietary survey of players in the space revealed a fourth straight month of weaker-than-seasonal order activity in May. What's changed in the last month is demand from buyers curtailing activity as opposed to builders self-imposing limits due to runaway costs. To that end, Zelman adds, "While some referenced normal seasonality as the culprit for the order pullback in May, others highlighted sticker shock and affordability constraints as a headwind to homebuyer confidence."

The top third of income earners account for half of U.S. home sales. At 53% and 56%, this group commands an even greater share of car and household durables, respectively (top tri-colored bars). That fact punctuates the University of Michigan's Richard Curtin's warning: "Spontaneous references to market prices for homes, vehicles, and household durables fell to their worst level since the all-time record in November 1974. These unfavorable perceptions of market prices reduced overall buying attitudes for vehicles and homes to their lowest point since 1982. These declines were especially sharp among those with incomes in the top third."

At 64%, survey respondents mentioning high home prices impeding demand took out April's prior record 52%. Those citing nosebleed car and household durables prices also rose to 35% from 26% and to 25% from 23%, respectively; these are both at 1981 highs. The kicker is the pushback: "These reports of rising prices were not accompanied by increases in buy-in-advance rationales, even for homes: just 7% said it was better to buy a home before prices went even higher, down from 9% last month." The avarice-disdaining Wordsworth would be inspired anew.