Enjoy the evening.

Be safe.

See you early Friday morning.

Midday Market Intelligence: grain of salt
US stocks are trading marginally lower Thursday and yields on 10- and 30-year US Treasuries are sharply lower as investors may be interpreting the Fed's hawkish tilt Wednesday as a sign that an extended US post-pandemic economic expansion may be a bit harder to achieve in a potentially emerging environment of less accommodative monetary policy.
Is that what they wanted?
The big move down in 10-year Treasury yields is remarkable today. Yields have fallen 7bp to 1.48% and are now at the same level seen just prior to the FOMC's surprisingly hawkish tilt on Wednesday afternoon.Why buy long-dated US risk-free bonds if the US central bank just indicated that it may want to raise its benchmark Fed funds rate earlier than previously expected? The answer may lie more in duration than anything else. Shorter-term US Treasuries are little changed today. But the longer-term view for US growth seems to be taking on a bit more of a cautious complexion with the bid for long-dated yield. Given the post-Great Financial Crisis history of anemic US growth, investors may be saying today that they are uncomfortable with how strong the US economy can grow without monetary accommodation once we have reached out beyond this current post-pandemic reopening bounce period.
Interestingly, however, David Mericle and team are not totally certain that the Fed will raise rates sooner than 2024 -- even after Wednesday's revelation that 13 of the 18 Fed members now anticipate a rate hike by 2023 (see "Pulling Forward Liftoff to 2023 on Hawkish News About Fed's Interpretation of Average Inflation Targeting"). Our new baseline forecast anticipates a Fed funds rate hike in 3Q23. But importantly, we see the odds of a hike by the end of 2023 as only modestly better than 50% because liftoff could easily be derailed by lower-than-expected inflation or a sharper deceleration in growth as fiscal support fades -- both reasonable expectations to maintain given the experience of 2008 through 2019
Adding to the potential longer-term growth trepidation today, is further signs that the post-pandemic recovery may be already peaking. The Philly Fed Index pulled back modestly to 30.7 from 31.5 a month ago with new orders sentiment (see "USA: Philly Fed Manufacturing Index Edges Down; Jobless Claims Increase Against Expectations"). Interestingly, however, the 6-month view of growth from those surveyed improved and is now at its highest level in 30 years.
The weekly jobs update also disappointed today with a rise in weekly jobless claims to 412k from 375k last week. The monthly Payrolls report has disappointed for two months in a row and may further suggest that the initial boost from people finally getting outside again may already be starting to fade -- just as the Fed turns a bit more hawkish.
At the sector level, pro-cyclical sectors are under particular pressure today in the wake of peak growth concerns. Energy, Materials, Financials and Industrials are all down 1.5%-3.0% on the day as investors rotate back into the new defensives -- Tech -- including stocks that should benefit from lower long-term rates (Utilities).

My view is that the market is responding as expected to an initial possibility of a taper.  

Selling cyclicals, flattening the curve, buying the dollar and selling financials, and buying tech on the belief they will grow in a slower growth economy brought on by tightening.

...and see here.

From Peter Boockvar: 

I've argued this year that either the Fed gets control of the inflation narrative or the market will do it for them. The market certainly did up until yesterday and while Jay Powell & Co. was only slightly less dovish, it clearly was enough, for now. I emphasize 'for now' as we see how the temporary or not scenario plays out the rest of the year and into 2022 and how slow the Fed will go in cutting asset purchases because they will go slow. Honestly, it's not even worth a discussion yet on what they might do with the fed funds rate even though we are seeing a dramatic flattening of the curve today. That said, QE has been mostly focused on the shorter end of the curve and maybe that is what the 5 yr yield is mostly responding to.

In just the past two days, the 5s/30s curve has narrowed by 22 bps to 118 bps, the lowest since late November with the 5 yr yield up by 10 bps in two days and the 30 yr yield down by 13 bps. 

As for the commodity trade, as seen in the BoA survey of investment managers this week, it became the most overcrowded trade along with crypto so this is certainly a real shaking of the tree. I remain bullish though, particularly energy, ag, precious metals and copper.

Thanks to my friend Ronnie Stoeferle at Incrementum AG, here is a good chart on commodities relative to stocks:

If you are bullish on digital currencies, check this out!

Bidding for more ViacomCBS  (VIAC) and Discovery  (DISCA) now.

Goldman Sachs (GS) is down big for the third day in a row. 

Today another -$11.35 to $359.65. 

With the Seabreeze launch in under two weeks, I just took in the trading short rental. 

Same goes for Morgan Stanley (MS) (-$3.51 to $87.50).

I could not disagree more with my old friend, Mike Mayo (over the near term) with regard to his bullish view of financial stocks. 

See my comments today in my Diary.

With interest rates moving lower - growth is now outperforming value in a material way. 

Sell banks, short (MS) and (GS) .

Here is my "connect the dots" of the August, September, December and March 2021 lows on gold to get to the $1530-$1560 price target. 

If I was actively trading I would be adding to Goldman Sachs (GS) and Morgan Stanley (MS) shorts.

A connect the dots of the trading lows since last August's peak suggests a gold price target of $1530-$1560.

Gold is -$75/oz this morning. 

I have no particularly intelligent view, nor position, on gold but it is now the most oversold, as measured by the seven day RSI, since August 2018 when it was trading at around $1175.

* Meme stocks aren't new, but their advocates are. 

* Everyone is a star when debt is cheap. 

* The commodities boom has lured crooks.

Dennis Gartman chimes in: 

I continue to hold to the thesis that one must needs hedge against inflation and gold remains my first choice given its centuries of history. Cryptos are not in any way to be considered as inflation hedges and the theory that they are is massively ill-founded. However, I shall grant that there is some logic to the notion that Bitcoin may have some sort of quasi-intrinsic value given that there shall be a limited supply of "mined" coins, but that cannot be said of Dogecoin and the myriad other crypto currencies that have sprouted up over the course of the past several years and shall continue to sprout up in the months and years ahead.

That having been said, I have not in recent weeks recommended taking up a new position in gold, nor have I recommended adding to gold already owned. Indeed, for the past several weeks I've suggested here that one is to be patient for lower prices shall come sooner than we think. And that has indeed happened, with nearby gold having traded down to $1800. This move to $1795-1810 has rather materially piqued my renewed buying interest. Patience has been rewarded. As for Bitcoin et al, I have missed one of the great bull markets of any "asset" in history; but as I have said, had I been around then I would have missed the Tulip Bulb Mania in Holland as well as the South Sea Affair and other such "Bubbles."

However, I would have also missed the crashes that followed each as night follows day and as bear markets follow bulls. I shall refrain from trading in the cryptos, but I wish those who've done so nothing but continued fair winds and sunny investment skies; however, ill winds, hail and blinding rain are inevitable. As for equities, if they must be owned, I still suggest steel, ball bearings, railroads and tire manufacturers for again these are, have been and shall continue to be the basic requirements of sturdy, economic growth. Even if electric cars are the future, they will need steel, ball bearings and tires. But be careful! Be very, very careful!

Note: Gold is literally collapsing this morning - down by -$64/oz.

I am generally in agreement with Pete (boldface is my emphasis): 

So the taper has begun, not in practice yet of course but in terms of the market's adjustment to the growing reality. This also alters the debate on whether inflation is 'transitory' or not because a cut in asset purchases is happening anyway, an interest rate hike or two next year is happening anyway (we have big economic problems if it doesn't). The question of 'transitory' or not will instead dictate the timing and pace of this. I'm just guessing that if the Fed has its way, and inflation pressures do cool they would talk further about tapering at the July meeting, we'll get details in August in Jackson and actual implementation in September or the early November meeting. However, a few more high inflation prints and some more good jobs number maybe means that September is a done deal.

Bottom line, when looking back over the past ten plus years of extraordinary monetary activism (no central bank humility), their license to do as they chose was predicted on low inflation. Higher inflation for longer takes away that license, becomes kryptonite to them and they become more beholden to the markets moving ahead of them. As you know my stance that inflation will remain more persistent for longer, the Fed will be forced to act faster than they hope and anticipate as we look out to the next 12+ months I believe. Persistent inflation is by far the biggest threat to markets and the economy and thus keeping it tame is crucial.

Bonds around the world are selling off in response to the very slightly less dovish Powell and Co. The most notable moves were in Australia where its 10 yr yield jumped 10 bps (see jobs data below) and in New Zealand that saw a 13 bps rise in its 10 yr. In Europe, the 10 yr gilt yield is up by almost 7 bps as we know the BoE is ending QE by year end. German and French 10 yr yields are up by 3-4 bps. We know the ECB will take its time but will follow to an extent what the Fed does.

The US dollar is up strongly for a 2nd day not surprisingly, but I do question the sustainability because I'm confident that this Fed policy shift will be glacial and if not, inflation will still run faster than them. Also, I don't see any slowdown in the pace of US debts and twin deficits.

The Reserve Bank of Australia is going to have real difficulty in sticking to its uber dovishness and this likely spells the end of YCC next month. In May, Australia added 115.2k jobs, well more than the estimate of up 30k and the unemployment rate fell to 5.1% from 5.5%. Australia has more people employed than pre COVID and how can RBA Lowe still say they won't hike until 2024? If he waits, he'll just further stoke more of a housing bubble and other extremes.

The central bank of Norway, Norges Bank, left rates unchanged at zero as expected but said the rate hike cycle will start in September "most likely." The plan is to hike 25 bps per quarter.

I'm guessing in response to more selective COVID restrictions and for sure supply problems was why Singapore non oil exports rose 8.8% y/o/y, about half the forecast of up 16%. Shipments of electronic products and telecom equipment led the way. As we are now looking at potentially a changed monetary global landscape, I remain most bullish on Asian stock markets with pockets of opportunity in Europe, particularly in the UK.

Capturing the modest market response yesterday to Powell, AAII did say they saw a few more Bears but no drop in Bulls as the Neutral category fell. Bulls rose .9 pts to 41.1 and is up almost 5 pts this month. Bears rose 5.5 pts to 26.2 and are back to flat on the month. For perspective, the Bull/Bear spread average over the past 5 years is 3.5. There wasn't much change in yesterday's II data where Bulls slipped .4 pts to 54.1 while Bears were up .1 to 16.3. An almost 40 pt spread remains wide but not extreme. This survey is as of last Friday. I think overall, there remains a level of complacency and positivity for sure but not alarming so right now.

* Tops are processes (bottoms are events)

* Investors are remarkably complacent - with no one, save Perma Bears, looking for a meaningful market decline

* The market silliness is now deafening as the (motley) fools rush in at the end of a speculative cycle

* I see a pivot in monetary policy and disappointing, relative to consensus, 2022 S&P EPS

* There is a possibility for a broad valuation reset lower for stocks in the months ahead

* I also expect Peak Portnoy, Peak Redditt/WallStreetBets and Peak Silliness in Speculation in the near term

* Interest rates will likely rise and valuations will likely decline in the year ahead

* Few stocks meet my criteria for selection today

* History always rhymes...

My non consensus market view, expressed during the second week of June, 2021, remains unchanged following the Fed's decision. 

Sell in June for the anticipated market swoon: 

Jun 09, 2021 ' 09:00 AM EDT DOUG KASS

- Forbes Magazine cover (1998) - h/t Peter Boockvar

"During the first six months of the year, speculation returned post haste.

Meme stocks and other gewgaws were embraced by gamblers and speculators, in part because of the Fed-induced liquidity and stimulation checks. But the adoption of the YOLO Trade ("You Only Live Once") - reflected in a record amount of new account openings in late 2020/early 2021 - probably runs deeper than just liquidity provided by global central bankers. Indeed, the deepening gambling element has been reflected in unprecedented call options activity - likely inexperienced traders being inexperienced.

As a further confirmation of the times, CNBC, now has an AMC bug under their stock futures mention (at the bottom right of the TV screen).

I would say with some authority, and given the precedent of history, that clutching this sort of gambling/betting attitude is a late Bull Market cycle phenomenon.

Though company buybacks have moderated, negative real interest rates - and nominal short term rates of a few basis points - have produced large inflows into stock funds, a further stimulant for equities at a time in which the spread of COVID-19 has moderated dramatically.

My view advanced recently is that a near doubling in the Indices from March, 2020 combined with rising individual and corporate taxes and the specter of margin pressure from elevated input costs and higher federal statutory tax rates, could be formidable obstacles to further market advances, placing significant pressures on stocks despite the recent and impressive price momentum:

I am unequivocal - as written last Tuesday I remain manifestly bearish on both stocks (value, growth and meme), bonds, Bitcoin and NFTs."

- Kass Diary, One Bite, "Everyone Knows The Rules"

In Monday's"One Bite, Everyone Knows the Rules!"I outlined my view that when (motley) fools rush in most investors' are destined to have an adverse outcome.

This morning I wanted to first look back and then look forward (and expand upon Monday's views) - in light of the calendar and the near culmination of the first six months of the year, and the launch of my new hedge fund, Seabreeze Capital Partners LP later this month.

The First Half of 2021 In Review

* Stocks moved steadily higher throughout the first 5 1/2 months of the year

* A bull market in speculation and in (motley) fools also characterized the first half of 2021

Most equities steadily rose higher during the first 5 1/2 months of the year - importantly abetted by the excess liquidity and stimulation provided by fiscal and monetary policies aimed at countering an unprecedented global pandemic.

Retail inflows into funds were conspicuous and robust.

The impact on an unprecedented level of speculation have been profound. As an example:

Traders spent **$11.6 billion** on options premium for AMC last week--more than on SPY, QQQ and Tesla COMBINED "These traditional relationships between volatility and stocks have been turned on their heads" - Wall Street Journal

That excess liquidity found itself in both well known large capitalization equities and the speculative gewgaws (SPACs, meme names (GME) , (AMC) , etc.) The later category was aided by the closure of many businesses (many trader/investors were forced to stay at home), the proliferation of commission-free trading, the rising popularity of trading forums (Redditt/WallStreetBets), and the availability of credit/loans/margins to trade speculatively. Both SPACs and meme stocks experienced popularity and markedly higher prices early in the year. The rise in meme stocks ended abruptly a few months ago and many of the popular speculative issues fell dramatically soon thereafter. In recent weeks, meme stocks have reclaimed their leadership position and popularity. Though meme stocks have regained their popularity in May/June, SPACs and other gewgaws ( (CAN) , (MARA) , (PLUG) , (PTON) , (MSTR) , etc.) remain firmly in the dumps.

Unprecedented liquidity also found its way into other asset classes - particularly cryptocurrencies - an asset class that erupted in price in early 2021 only to fall by nearly 50% in recent months. Though meme stocks have rallied bigly, cryptocurrency prices have failed to recover from that consolidation/schmeissing.

Looking Forward

Key bullish macroeconomic features of the next 12-18 months are likely to be:

1. An impressive year over year gain in 2021 S&P EPS.
2. Elevated and above secular historic economic growth.

Key bearish macroeconomic features of the next 12-18 months are likely to be:

1. A likely pivot from excessive monetary stimulation to less stimulation.
2. A continuation of signs of rising inflation and inflationary expectations.
3. A moderation in the rate of expansion in global and domestic economic and profit growth beginning in the second half of 2021 and intensifying next year.
4. The failure of our political system (both sides of the pew) to overcome a sickening and intensified level of partisanship - this has policy implications.

Key Issues

There will be numerous other factors that will influence stock prices in the 1-2 years ahead.

Some more questions I ask myself include:

* Will the absurd speculation (in meme stocks), NFTs and other gewgaws cool off?

* Will the absurd leverage provided to traders and gamblers (and even with some large hedge funds) in a number of asset classes result in comeuppance to those assets and a significant drag on the broader markets?

* Will the emergence of safety issues and the further increase of the supply of new digital currencies produce a further crash in cryptocurrencies?

* Will a cryptocurrency crash feed into other markets and asset classes?

* Will the strong support of retail investors cool off or fade away if any of the above occur?

* Will retail traders/investors - as they did in the early 2000s (following the dot.com bubble) and in 2007 (at the beginning of The Great Decesssion) - flee the markets?

* Will interest rates finally rise on a sustained basis?

* Will inflation get out of control?

* Will the higher costs of materials, labor, transportation and regulations adversely impact U.S. corporate profits and profit margins?

* Will high valuations grow ever higher or finally readjust to historic or even lower levels?

* Will the pressures to raise corporate and individual taxes intensify - pulling down economic and EPS growth?

* Will geopolitical issues resurface with a new Administration in Washington, DC?

* Will additional, new and/or variant viruses surface?

There is not enough time and space to deal with all of the issues above - but I will briefly deal with some of the major subjects introduced, and naturally follow up with the others over the next few weeks.

Some Answers

Here are some of my core expectations and brief responses to the above. They form the basis for my negative market(s) outlook.

In late 2021 I expect monetary policy to begin to pivot from its aggressive stance in recent years. The trajectory of economic growth is now sufficiently so far above trend-line that "panic policy" is no longer appropriate. Moreover, as noted in my previous post, low interest rates are now losing their effectiveness. As well, there is a belief that excessive ease has widened the wealth and income gap and is contributing to rising inflation and inflationary expectations, which also hits the have nots relative to the haves.

Stocks discount the future and will not necessarily prosper even though economic growth is positive and well above trend line - as so many seem to insist on Fin TV. As I have written bear markets/consolidations are borne out of good news (early 2000, late summer 2007) and bull markets are borne out of bad news (March 2009, December 2018 and March 2021). So, a revaluation lower in price earnings multiples, though counter-intuitive to some, has a basis in investment history, especially with rising interest rates, higher inflation and expanding inflationary expectations. In other words, buy the rumor, sell the news.

In terms of inflation, it is a bonafide threat - and, not in my judgement, a transitory event as, once out of the bottle it can not easily be put back in. Labor shortages and daily product price increase announcements are now routine. Yesterday Sherwin-Williams (SHW) announced the implementation of a +7% August 1 price increase in its Americas Group, and Chipotle (CMG) has just raised menu prices by almost 4%.

We start the second half of the year with substantially elevated valuations - particularly in light of some of the risks discussed in this opening missive.

As noted, the forward 12-month P/E ratio for the S&P Index is over 21x, above the five year average of 18x and the ten year average of 16x:

U.S. company profits and profit margins are now exposed to higher costs. Though economic growth over the near term is a tail wind, the positive operating leverage expected by my pal Thomas Lee and others may disappoint. Optimistic and heightened consensus 2022 S&P EPS estimates may be many integers too high.

As to a continuation of stock market speculation (in meme names), as noted by the 1998 Forbes cover above, the dominance of thoughtless retail gambling is nothing new and, if history rhymes, and is our guide, it always ends badly. The uniqueness of today's silliness is that some relatively sober minded corporate executives and investment "talking heads" are pandering to them! It will likely end badly for them as well.

I see Peak Portnoy, Peak Redditt/WallStreetBets and Peak Silliness in Speculation.

In terms of speculation in other asset classes, notably cryptocurrencies, this too, I am afraid - and have written volumes on - could end badly. It is already bad as privacy, taxation and (near infinite) supply issues have recently surfaced - producing a halving in price of some digital currencies. As to NFTs, which are neither an artform nor a platform, the outlook is even worse than for Bitcoin, IMHO.

Bottom Line

"I will be calm. I will be mistress of myself."

- Jane Austen,Sense and Sensibility

As I have written, the market's structural change from active to passive investing has produced the least educated investor and trading base in history.

Frankly, I see so much foolishness and poor judgment being displayed these day - by market participants and by "talking heads" - in their continued and spirited search for superior trading and investing returns.

Indeed, the speculative silliness, to this observer, is now deafening.

Many of the generally accepted and upbeat consensus macroeconomic views seem to be threatened or might have a reduced probability of being achieved given the threats discussed in this morning's column.

As to equities, upside rewards are likely dwarfed by downside risks and few stocks meet my criteria or standard for selection these days.

The premium between S&P cash (4230) and my calculation of the "fair market value" (about 3300) is in excess of over 20% and at the widest overvaluation in years.

Given my concerns, I am a non-consensus bear on most asset classes.

My investment conclusion and strategy is to sell in June for the anticipated market swoon.

From the @WSJ and illustrating the evolution of the interest rate expectations of @FederalReserve officials over the last six months.

Here is a global central bank update.

* Brazil hikes rates for the third time this year -- 75 bps increase to 4.25%.

The narrowing of the yield curve is another headwind for banks:

I addressed Citigroup's (C) short-term challenges yesterday.

From Miller Tabak:

The Fed's Outlook Is More Hawkish Than It Seems

At first glance, June's FOMC statement and projections are about as dovish as possible. Three more members predict a 2022 rate hike, a majority now predict lift-off by 2023, and five members now predict at least 75 bps of increases by the end of 2023. This is close to the smallest possible credible shift given recent inflation data. Furthermore, by not explicitly mentioning tapering asset purchases and continuing to describe inflation as "largely reflecting transitory factors," the Fed is doubling down on its position that inflation will pass. There remains a good chance that the Fed is right.

The most interesting feature of the FOMC meeting is its new 3.0% y/y forecast for core-PCE inflation at the end of 2021. May core-PCE inflation will very likely come in slightly below the core-CPI rate of 8.8% (m/m, annualized). The Fed's 3.0% forecast would then only require a 2.2% annualized rate between June and December. In other words, a single additional month of inflation readings like those of April and May would blow up the Fed's new forecast and de-stabilize its latest projections for the Federal Funds Rate. It is almost a given that the Fed will use more hawkish language during the summer as the time for tapering asset purchases approaches. The Fed's position is increasingly fragile, and it would not take much for the coming shift in tone to far exceed expectations.

When asked about its forecast for tame inflation between June and December, Chairman Powell cited the dramatic increases in categories such as lumber, vehicles, etc. For the Fed's forecast to be right, there will almost certainly have to be significant price decreases in these categories in coming months. This could happen but, even if it does, the 3.0% prediction is still very optimistic. Trimmed-mean inflation measures, which exclude the biggest changes, were around 4.5% in April and May. New PPI inflation data (more on this later) also suggests that upcoming inflation will be broad enough to quickly doom the Fed's hopes.

Core-inflation coming in above 3% would not necessarily imply that the Fed is wrong about inflation being transitory. But today's meeting would have been much more dovish if it had been accompanied by a more realistic inflation forecast around 3.5%. Instead, there is likely to be revision towards earlier interest rate hikes that is not yet reflected in the Summary of Economic Projections.