DAILY DIARY
Until Later...
Thanks for reading my Diary today.
I hope it was value added.
Enjoy the evening.
Be safe.
I'm Jetting Over to Boeing
I have steadily been buying Boeing (BA) -- almost daily.
The stock finally caught a bid today.
Speculation Is Running Amok in Some Digital Currency Gewgaws
"The Squid Game token rocketed in price from around 1 cent on Tuesday to trade around $38 late Sunday, according to CoinMarketCap data. It then stepped up to around $90 early Monday, then spiked to just above $2,861 before falling to $0.003467 at 10 a.m. ET."
Scams and frauds like this is a sign of the times...
Caveat emptor.
Subscriber Comment of the Day (and My Response!)
I would like to respond to one aspect of your, a SICK stock market post. I feel Keynes is getting misrepresented by society. I don't mean this as a criticism of you Doug. I feel you used Keynesian as society has been taught to think of it. It gets characterized by politicians and media that government deficit spending is fine because that is what Keynes taught us. However, his thesis really was that the governments should play a counter cyclical roll that mute both extremes of the business cycle.
The problem is when the economy is strong like '05 and '06 no one remembers or talks about Keynes. That's because in that phase of the cycle he would advocate tax hikes and rate hikes for two purposes. One is to raise revenue specifically to pay down debt, he was very clear about this. This frees up dry powder for the government to borrow and spend in the next recession. The second is to lessen the bubble extremes at the tops of cycles so that the fall into eventual recession is less extreme. Instead, we NEVER pay down debt and if we get close to closing the deficit, we pass increased entitlement spending. Which is effectively debt as it's a future liability that will need funding.
Then we have a recession while up to our eyeballs in debt. Everyone suddenly remembers Keynes! They say hey we know governments should borrow and deficit spend to get out of recessions. That is true but he believed the government would have little to no debt going into the recession because they had been aggressively paying it down the previous years. By only being Keynesian when it comes to deficit spending and never when it comes to debt reduction you are assuming Keynes believed debt didn't matter. I think this is false because he very specifically said debt should be paid down at the top of the cycle so that it could be used again at the bottom
fair and valid observations Jim.
Dougie
Tesla Short Basis
Tesla (TSLA) short basis now (scaled up on strength) about $1,170.
Taking Off More Tilray
I have taken off more of my Tilray (TLRY) buy/write program.
Down to tagends.
Covering Some HOOD
I covered some of my Robinhood (HOOD) short just now under $34.60.
The recent share price drop has reduced the reward vs. risk.
I plan to re-short on strength.
Tweet of the Day (Part Five)
Not transitory:
Tesla's 7 Day RSI is 97
For a lengthy period of time I have elected not to short Tesla (TSLA) - though I have been of the view that it has been substantially overvalued.
Today, the seven day RSI is 97 and I have taken a trading short rental at $1160.
I would not try this at home!
I am just being transparent in my trading.
Boockvar on the Data
From Peter:
The October ISM manufacturing index was 60.8, down slightly from the 61.1 print seen in September but a bit better than the estimate of 60.5. The internals were mixed though as new orders fell to 59.8 from 66.7 and that's the lowest since June 2020 and backlogs were down too to 63.6 from 64.8. Interestingly, inventories with manufacturers rose to the highest level since 1984 but remained anemic with customers at 31.7. ISM said with respect to this rise in inventories for manufacturers that expanded "due to panelists' companies stocking more raw materials in hopes of avoiding production shortages, as well as growth in work-in-process and finished goods inventories." Employment rose 1.8 pts to 52 and that's a 3 month high. Export orders were up to 54.6, higher by 1.2 pts but imports fell below 50. Delivery times went to a 5 month high, up 2.2 pts to 75.6 and in turn prices paid rose 4.5 pts to 85.7. For perspective on prices paid, over the past 40 years it has averaged 57.8.
Of the 18 industries asked, 16 saw growth with wood products and nonmetallic mineral products seeing a contraction, likely due to supply problems.
ISM laid out all the issues that we've become fully aware of where demand is still far outpacing supply for goods. "Business Survey Committee panelists reported that their companies and suppliers continue to deal with an unprecedented number of hurdles to meet increasing demand. All segments of the manufacturing economy are impacted by record-long raw materials lead times, continued shortages of critical materials, rising commodities prices and difficulties in transporting products. Global pandemic-related issues - worker absenteeism, short-term shutdowns due to parts shortages, difficulties in filling open positions and overseas supply chain problems - continue to limit manufacturing growth potential. However, panel sentiment remains strongly optimistic, with four positive growth comments for every cautious comment. Panelists are fully focused on supply chain issues in order to respond to the ongoing high levels of demand."
All of this is firmly embedded but the question of course is to how long it lasts in 2022. I'm still of the belief that while some parts of the chain of supply will smooth out in the back half of 2022, it won't be until 2023-2024 before we see more normalization. I'll also repeat my belief that because the practice of 'just in time' inventory management is gone forever, we're going to see a higher level of inventory kept at both manufacturers and customers. In turn this means lower inventory turns, higher working capital needs, less free cash flow and likely higher prices than seen during the 'just in time' regime. Of course flowing thru all of this is how both the markets and the economy react to a global central bank trend in 2022 towards monetary tightening, however slow, however glacial that process will be.
I do want to finish with these notable comments from Markit's manufacturing press release today, "1 in 4 (companies) reported that demand had fallen, often as a result of customers either lacking other inputs or pushing back on higher prices." That said, "demand growth...remains well above trend despite easing in October, hence producers saw another steep rise in backlogs of uncompleted work. This shortfall of production relative to demand was the principal driving force behind a survey record rise in manufacturers' selling prices, suggesting that inflationary pressures continue to build and look unlikely to abate to any significant degree any time soon."
ISM MFR'G
NEW ORDERS
MFR'G INVENTORIES
CUSTOMER INVENTORIES
Breadth
Market breadth at 11:05 am.
From The Street of Dreams (Part Trois)
Bernstein has upgraded Discovery (DISCK) to Market Perform, lowering its price target to $26 from $28.
The analyst continues to see a long list of very serious concerns, but the market seems to also share those concerns, and has driven the stock price down to a level where he can no longer argue the risk/reward for investors skews significantly negative from here.
He believes the market is already pricing the stock for the company to miss its streaming revenue guide, EBITDA guide, or both.
A SICK Stock Market
The S&P Index has advanced by nearly 300 handles since the September lows despite the forceful headwinds of S-I-C-K:
* Supply chain disruptions are intensifying
* Inflationary pressures are accumulating
* China's economic challenges are mounting
* Keynesian policy is failing
Supply Chain Dislocations Will Be With Us for Some Time to Come
The impact of COVID coupled with a multi-decade shift to globalization, and other policy actions, have led to a disruption in global supply chains.
The Federal Reserve and central bankers are powerless to do anything to improve supply chains. Indeed, with the interruption of supplies of nearly everything product under the sun, aggressive central bankers have only caused inflation and inflationary expectations to rise.
Inflationary Pressures Will Persist
The inflation genie is out of the bottle and, once liberated, her presence will continue to be felt over the next several years.
PCE inflation moved up to 4.4% in September, the higher year over year increase in three decades:
Market based inflation expectations hit a new high last week:
Over the near term, core PCE inflation is likely to remain well over three percent and core CPI inflation above four percent - as the lagged impact of shelter inflation hits the data, see the three charts that follow:
China Is a Threat to Global Economic Growth and Geopolitical Harmony
"No economy has been able to ignore a property bubble and even less so offset it and continue to grow replacing the bust of the real estate sector with other parts of the economy. Heavily regulated economies from Iceland to Spain have failed to contain the negative impact of a real estate sector collapse. It will not be different in China."
- Danielle Lacalle
As the engine of global economic growth - responsible for nearly one third of incremental world GDP - China, under the pressure of a levered economic system and an outsized dependency on local real estate/property markets, is stumbling and will be slow to recover.
Given the size and excessive leverage of China's property market - valued at $55 trillion - it is twice the size of its U.S. real estate equivalent and four times larger than China's GDP - when combined with the large amount of developer debt in the hands of the average Chinese household and retailer investors, the vulnerability is clear.
From Danielle DiMartino Booth this morning:
- China's manufacturing PMI was 49.2 in October, just below September's 49.6 print as energy remains constricted; crude stockpiles hit 919 million barrels by October 24, 59% of capacity and the lowest since November 2018, and 13% of coal capacity remains offline
- At 31.7, ISM Mfg Customers' Inventories are at their highest levels since February, despite lingering supply chain woes; as is the case with China, the globe's marginal driver of demand, New Orders in the U.S., appear set to decline as inventories are replenished
- China's services and construction PMI had a headline of 52.4 in October, shy of the 53.0 consensus forecast and well below September's 53.2; economic activity in the world's second largest economy is at the cusp of contracting, bringing with it a sizable deflationary impulse
The economic - property bubble-driven growth almost always leads to a debt-driven stagnation - and political ramifications are unfriendly to growth and represent a potential geopolitical threat.
Keynesian Economics Will Prove to Be a Failure
At the core of Keynesian theory is that the coordinated monetary and fiscal policies can stabilize economic output, inflation and unemployment over the business cycle. As noted above, there are exogenous forces at work in this cycle which render policy ineffective.
I expect expectations for tightening to be pulled forward - as Goldman Sachs has done over the weekend.
The Book of Boockvar
This week's central bank news will not just come from the Fed as the BoE and RBA both meet too. The BoE will actually debate how to manage the demand side of the economy via a potential rate hike while the Fed's idea of countering inflation is to take their balance sheet up by another $500 billion to $9 Trillion thru June 2022. The RBA will discuss how the short end of the yield curve literally ran them over last week when they didn't defend yield curve control. Their bond market essentially tightened policy by 60 bps in the 2 yr but which is down 7 bps in yield today.
The German periodical Bild took off the gloves when it comes to inflation calling Christine Lagarde, "Madam Inflation." They said by allowing inflation to run hot, "Christine Lagarde is melting pensions, wages and savings." She did respond in an interview to another German paper Der Spiegel and said "I do my own shopping and pay attention to how prices develop. I see that some everyday items like yoghurt, bread or butter are becoming more expensive." We all see it but the question is how the ECB will confront it.
Bottom line, the widespread global inflation currently being experienced brings a whole new world to the halls of modern day central banking where they have gone to all ends of the earth to generate the higher inflation we're now seeing but now are being pressured to temper its increases. The problem though is the world's level of debt and market valuations are predicated on very low inflation and extremely easy policy. This will be quite the balancing act to say the least.
I do want to say this about the flattening of yield curves in many different countries. I do believe it is a direct bet on central bank tightening and the assumed presumption of the slowing growth that comes from that more so than right now betting directly on an economic moderation even though the inflation and supply problems is having that impact too.
I'm going to include the chart of the 2 yr Australian yield again to highlight how extraordinary it is to see a yield go from .03% to .84% bps in one month for a developed country and go to .84% from .13% in four trading days. It reflects the dangers of yield curve control when it eventually ends and the analogy of a central bank sitting on a ball (interest rates) in the pool that once it gets loose, it shoots higher.
AUSSIE 2 yr YIELD
This is what was said in Friday's final October UoM consumer confidence report on inflation, "Consumers' recognition of high and rising prices is near universal, so too is their desire to reestablish spending for a more traditional holiday season. People understand that the origin of inflation has been in the upheavals in supply lines and labor markets. The acceptance of higher prices was caused by swollen savings due to the record pandemic cash incentives as well as by Biden's new social support programs. The declining resistance to price hikes among buyers will be joined by less resistance among sellers to hiking prices that will be justified by higher materials and labor costs. These reactions promote an accelerating inflation rate until a tipping point is reached when consumers' incomes can no longer keep pace with escalating inflation."
As the world leaders debate how to promote clean energy and stifle investments in fossil fuels at the same time they call out for more oil and gas production to counter higher prices, Raymond James estimates that the business pressure on fossil fuel companies will result in 50 of the largest oil companies to increase their annual budgets by just 1% this year, according to the WSJ. Thus, the needed supply will only come from OPEC+.
It was great to see an end to the steel and aluminum tariffs between the US and EU. Now we just need to get rid of the terrible tariffs on China that US companies are paying for in the midst of the worst supply story in a few generations.
China's state sector weighted October manufacturing index fell further below 50 at 49.2 from 49.6 in September. Notably was the 8.6 pt increase in input prices and the 4.7 pt rise in output prices. Also, Business Activity Expectations fell to 53.6 from 56.4 and that is the weakest since February 2020. The non manufacturing PMI which also includes construction moderated to 52.4 from 53.2. Prices pressures were seen here too not surprisingly while business expectations softened a touch.
Caixin, the private sector focused manufacturing index which covers more small and median sized businesses saw a slight uptick to 50.6 from 50. Caixin said "Chinese manufacturers noted an improvement in demand during October, but power shortages and rising costs weighed on production...Limited power supply and material shortages also dampened supplier performance, with lead times increasing at the fastest rate since March 2020. As a result, inflationary pressures intensified, with average input prices rising at the sharpest rate since December 2016, while the pace of output charge inflation also accelerated notably since September." Business expectations eased a bit.
There are certainly a lot of economic balls being juggled in China with a sharp residential real estate slowdown, selective power shutdowns which seem to be easing, product shortages and a still no tolerance approach to Covid, at least until the Olympics and party gatherings in 2022 which will anoint Xi leader again for another term. While most markets in Asia were green, the Shanghai comp and the H share index in Hong Kong were red. The 10 yr yield was lower by 3 bps.
Here are the other PMI's seen today and it reflects COVID reopenings and/or lessened restrictions: Japan 53.2 vs 51.5, Australia 58.2 vs 56.8, Taiwan 55.2 vs 54.7, Vietnam 52.1 vs 40.2 (as factories reopened), Indonesia 57.2 vs 52.2, Thailand 50.9 vs 48.9, Malaysia 52.2 vs 48.1, and India 55.9 vs 53.7. South Korea's was the other one in Asia and it slipped to 50.2 from 52.4.
The only thing of note in Europe was the surprising decline in September retail sales which fell by 2.5% m/o/m rather than rise by .4% as forecasted. Higher inflation can be blamed as also likely, less car inventory available. The 10 yr German bund yield is creeping ever closer to zero, up 2.3 bps to -.083%.
From The Street of Dreams (Part Deux)
Cantor lowers Tilray (TLRY) to neutral.
I have a small position in this name, having reduced recently.
Chart of the Day (Part Deux)
The bull arguments I heard late last week is that the consumer is pent up and not spent up - leading to a likely vigorous acceleration in the rate of domestic economic growth.
I am more doubtful, as the personal savings rate is now down to pre COVID levels.
Chart of the Day
The relationship between shorter and longer term interest rates has broken down:
Tweet of the Day (Part Four)
Tweet of the Day (Part Trois)
Programming Note
I will be out between 9-10 am as I am getting a Moderna (MRNA) booster.
Tweet of the Day (Part Deux)
Tweet of the Day
I remember tweeting after the Epstein probe intensified that Leon Black and other corporate types were going to be in hot water based on my knowledge of the situation.
I was interviewed by New York Magazine on the subject and ultimately decided to give my information to several journalists, at The Wall Street Journal, Vanity Fair and CNN, who have since written on the story.
The plot is thickening now and there will be more announcements like this impacting the C suite that are to be revealed:
From The Street of Dreams
On cannabis - being greedy when others are fearful:
