Thanks for reading my Diary today.
The continued unrelenting rise in equities is amazing to behold.
Enjoy the evening.
Be safe.

Adding to Boeing (BA) and Citigroup (C) near the close.

I am taking off some more Alphabet (GOOGL) and Amazon (AMZN) at $2920.80 and $3389.30, respectively.

Markets move to new highs in a continuation of the ebullience over the last few weeks...

I have been watching Scott Minerd on Bloomberg TV who basically just said the equity markets will like rising interest rates. 

So, The Gospel According to Scott Minerd - and to many others - is that stocks thrive whether interest rates rise OR fall. 

That about sums it up!

From Peter: 

The Fed confirmed what they've well telegraphed that the $15b per month taper will begin "later this month...but is prepared to adjust the pace of purchases if warranted by changes in the economic outlook." They however are sticking to their forecast that inflation is temporary saying "Inflation is elevated, largely reflecting factors that are expected to be transitory." They however at least admitted that "Supply and demand imbalances related to the pandemic and the reopening of the economy have contributed to sizable price increases in some sectors."

And, they seem to be just fine with higher inflation as they said this with regards to its 2% target, "With inflation having run persistently below this longer run goal, the Committee will aim to achieve inflation moderately above 2% for some time so that inflation averages 2% over time and longer term inflation expectations remain well anchored at 2%. The Committee expects to maintain an accommodative stance of monetary policy until these outcomes are achieved."

The bar for rate hikes is this: "until labor market conditions have reached levels consistent with the Committee's assessments of maximum employment and inflation has risen to 2% and is on track to moderately exceed 2% for some time."

They also repeated their belief that "The path of the economy continues to depend on the course of the virus."

Bottom line, there remains quite a disconnect between the reality that I see and what I believe most Americans are experiencing, both households and businesses and what the Fed sees to the point that it seems like the September FOMC statement was not updated for today. They keep saying inflation is transitory? PCE inflation is well above 4% and the Fed is sticking to their symmetry goals to the detriment of businesses and consumers? To me, the bar for rate hikes clearly exists as the labor market is tight and inflation is on track to GREATLY exceed 2% for some time. Lastly, does the economy from here really still depend on the course of the virus? Not anymore.

The Fed was as dovish as can be with this taper announcement as the balance sheet is still going up by another $500b according to this plan, rates will still be at zero come summer and someone has got to put another $1 in Raphael Bostic's jar for saying "transitory" again. This is no way to deal with the aggressive inflation we are experiencing now. It just proves that the Fed is beholden to two of their masters, the markets and the US Treasury who still needs to sell a lot of debt. That said on the markets, stocks have ALWAYS run into some trouble during prior ends to QE and the tapering of QE3. Why should this be any different.

Thus, with this dovishness, the US Treasury will take the mantle on tightening from the Fed and it's doing so today with the rise in rates across the yield curve. The US dollar is slightly weaker.

My (ARKK) position has been much reduced after covering much of the position at lower levels ($112-$113):

Covering Half of ARKK Short

DOUG KASSSep 28, 2021 12:04 PM EDT

I have covered half of my short at $112.30.

I am back shorting ARKK at $122.35.

As we await the Fed, here is a chart of rate hike expectations:



Source: Zero Hedge

As we move into the Fed's decision, the general consensus appears to be a tapering, in scope to be in line with expectations, and a market rally that follows that decision. 

Stay tuned.

A record amount (4.3 million) of Americans quit their jobs in August: 

• Quit rates in America rose gradually after the 2008 financial crisis. Then the pandemic hit.
• Initially quit rates tumbled, but they soon began to spike. As with many other trends, the pandemic acted as an accelerant.

Market breadth at 12:30 pm.

I just added to Citigroup (C) at $68.89.

Disney (DIS) hasn't had an uptick since I was Bar Mitzvahed.

More from Peter: 

The October ISM services index jumped to 66.7 from 61.9 and that was well above expectations of 62 and the highest on record. Part of the reason for the headline jump though was for the negative reason of even more supply constraints as Supplier Deliveries rose by 6.9 pts to 75.7 and that is the 2nd highest on record dating back to 1997. ISM heard this from respondents, "lack of drivers and warehouse labor" and "capacity constraints, raw material shortages, labor shortages and transportation delays." Along with this, prices paid rose another 5.4 pts to 82.9, the highest since 2005 with all 18 industries seeing higher prices.

New orders too rose to a record at 69.7, up 6.2 pts m/o/m. Backlogs rose by 5.4 to 67.3, also a high since this survey began in 1997. Inventories got even leaner, falling by 3.9 pts to 42.2, the least since March 2020 and 2009 before that. ISM included these comments on inventories, "Trying to increase, but very difficult to do so to availability and transportation" and "Inflation is creating lower inventory levels due to costs." Both exports and imports were higher. Employment though did fall by 1.4 pts to 51.6 and that is the lowest since June.

All 18 industries surveyed reported growth.

Bottom line, demand for services continues to outstrip the supply. And as stated, the rise in the headline read also was lifted by the supply problems (the quirkiness of the calculation). ISM did cite the "ongoing challenges, including supply chain disruptions and shortages of labor and materials, are constraining capacity and impacting overall business conditions."

And this is what Markit said in their report that showed an increase to 58.7 from 54.9 about the outlook and I would regard as the caveat here, as seen above: "Finally, the level of optimism slipped to the lowest since February, as service providers reported ongoing concerns surrounding inflation and material shortages."

ISM SERVICES

NEW ORDERS

SUPPLIER DELIVERIES

INVENTORIES

I added to my small Tesla (TSLA) short at $1181.80.

I continue to get good feedback with regard to FibroGen.

The above is part of a publication on myelodysplastic syndrome. 

I would note that Acceleron (XLRN) is being acquired by Merck (MRK) for $11 billion. 

Acceleron has a drug on market which treats 15%-20% of the patient population. By contrast, FibroGen's Roxadustat treats all the population. 

This is similar to what's happening in Muscular Dystrophy, with FibroGen treating all the patients vs. everyone else addressing gene therapy deficiencies which Pfizer  (PFE) just stated may have class problems.

Adding to (DISCK) ($23.20) after what I thought was a good report and conference call.

In the last few days I have taken a meaningful long position in Citigroup (C) .

Masterhedge

If you look at Tesla stock ownership you may rethink the short. The short interest of available float may be understated. Add up Musk ownership, Index funds and semi -permanent holders like ARK.

dougie kass Masterhedge

I respectfully disagree with this.
There are approximately 1 billion shares of Tesla outstanding ($1.2 trillion market cap estimated).
1. Elon Musk owns about 220 million shares million shares (21% of outstanding shares) -worth about $265 billion)
2. ARKK, Cathie Wood's largest fund owns less than 3 million shares (less than one quarter of one percent) worth under $4 billion.
3. A total of 40% (400 million shares worth $500 billion) is owned by institutions - many of these as you noted are Index/passive funds. https://finance.yahoo.com/q...
So there is a "float" (defining it in very broad terms) of about 40% (or over $500 billion) To me that is plenty of stock to trade!
Dougie

Because of the intermingling of easy money, government financing and the high valuations of just about everything, it makes the Fed's job here really difficult in terms of doing what they should do in approaching the employment and inflation situation rather than what they will. While really beginning with Greenspan, with the advent of QE in 2008 the Fed now has three masters, the US Treasury, the bond and stock markets and their officially anointed one, inflation and the jobs market.

Thus, gradual will be their mantra in order to try to satisfy all as it always is when it comes time to tighten policy and they will unlikely deviate from what's expected, a taper of $15b per month until it's done. This of course is really no way of confronting inflation as it will still take its balance sheet to $9 Trillion from about $8.5 Trillion today and rates will still be zero when done. For perspective, QE1 and QE2 started out each at $600b. What they should do is end QE today and start discussing rate hikes but that would be too upsetting to two of the constituencies, the markets and the US Treasury and why it would unlikely not happen.

Since the last FOMC meeting on September 22nd, the CRB raw industrials index is up another 4.3% to just less than 1% from a record high. The broader CRB index is up 7.8% since then. The 5 yr inflation breakeven at 2.86% compares with 2.44% on September 22nd. The 10 yr is at 2.52% vs 2.28% then. One year inflation expectations in the UoM survey is now at 4.8% vs 4.7% seen in the week before that meeting. The 5-10 year guess is still at 2.9%. CPI printed up 5.3% for August in the week before that meeting vs 5.4% for the one seen last week. WTI crude oil is just under $82 today vs $71.89 in September. The average gallon of gasoline according to AAA is higher by 6.6%.

Because they had previously decided to end QE by year end, the Bank of England has a much easier discussion tomorrow. Either hike rates or don't. Either try to temper inflation via the demand side or don't.

Christine Lagarde of the ECB today is pushing back against the market bets for next year that short rates will get less negative. "In our forward guidance on interest rates, we have clearly articulated the three conditions that need to be satisfied before rates will start to rise. Despite the current inflation surge, the outlook for inflation over the medium term remains subdued, and thus these three conditions are very unlikely to be satisfied next year." In response European yields are down for a 2nd day but notwithstanding all the ECB QE, there is still some life left in the marketplace in European bonds and it will give its opinion still on what the ECB should do. This is in contrast to the Japanese bond market which the BoJ has effectively killed off.

Whether this works or not, the United Auto Workers rejection of the Deere employment deal is a new sign of growing frustration with the current level of wages and the leverage workers think they now have. The no vote was a pretty resounding 55% no to 45% yes. The deal included a 10% initial raise and 5% increases in year 3 and year 5. It also included cost of living adjustments and retirement bonuses among other things.

The average 30 yr mortgage rate fell back by 6 bps off the highest since April but both purchases and refi's fell. The purchase component declined by 1.6% w/o/w and 9.3% y/o/y. Refi's were down by 4.3% w/o/w and lower for the 6th straight week to the lowest since January 2020. Either everyone that wants to refi has already done so or it only takes a modest increase in interest rates to stop refi's dead in its tracks. They are down 33% y/o/y.

REFI's

Ahead of the US ISM services index today we saw some more PMI's from overseas. China's private sector Caixin services PMI for October rose to 53.8 from 53.4. Caixin said "Supply and demand both recovered as disruptions from local COVID outbreaks faded by the middle of October. The gauges for business activity and total new business both reached the highest level in three months. Overseas demand also rebounded as the measure for new export business moved into expansionary territory."

On inflation, "Prices in the services sector kept rising. Input costs increased for the 16th month in a row and rose at a faster pace than the previous month due to rising labor and raw material costs. Solid demand allowed businesses to pass part of this rise in costs downstream, leading the gauge for prices charged by service providers to reach the highest in three months." As for business expectations, they "remained relatively optimistic, though...fell to the lowest point in four months. Some surveyed firms were worried about rising costs and the stability of supply chains."

Singapore's October PMI fell to 52.3 from 53.8. Hong Kong's slipped to 50.8 from 51.7. India's on the other hand rose to 58.4 from 55.2 as they are gaining more success with their vaccine rollout.

The UK services PMI was revised to 59.1 from 58 initially and vs 55.4 in September. Markit said "Looser international travel restrictions and greater domestic mobility helped to lift the UK service sector recovery out of its recent malaise in October." New orders rose and "the impact of staff shortages was another rise in backlogs of work and greater willingness to pass on higher costs to new customers." With cost pressures, "Average prices charged increased at a survey record pace, reflecting across the board pressures on operating expenses...Record rates of input price and output charge inflation appear to have dampened business optimism, which eased to its lowest since January. Comments from survey respondents also cited worries about prolonged staff shortages and constraints on growth due to the supply chain crisis."

So yes, it is the inflation itself that is both slowing economic activity and negatively impacting visibility and business expectations. Stagflation doesn't have to be the economic scenario in the 1970's for it to be referred in a similar fashion now. To me, the word simply means moderating growth and high inflation.

On to the jobs data: 

ADP said 571k private sector jobs were added in October, well above the estimate of 400k and after a gain of 523k in September (revised down by 45k). The gain was dominated by large businesses, those defined as having more than 500 employees and in this case those with more than 1000, who added 342k of the jobs, 305k of which was with the 1000+ employee size.

The service sector hired a net 458k vs 431k last month with leisure/hospitality leading the way making up 185k of this vs 200k in the month before. Trade/transportation/utilities, where we know many are needed, added 78k, the most in 5 months. Healthcare/social assistance continued with its consistent hiring, by 47k in October vs 38k in September.

The goods side hired a net 113k with 53k coming from manufacturing and 54k from construction. That is the most since September 2020 with both categories also the most since then.

Bottom line, with more than 10mm job openings and the drop in both initial and continuing claims along with the daily labor shortage stories we keep hearing, we saw a nice job gain in October. After losing 19.5mm jobs last March and April, ADP said we've since added back 14.55mm. We know though that many people that make up the difference are not coming back, whether they've retired or there is some other reason so hoping for a pre COVID labor force repeat is completely unrealistic I believe. That said, we should continue to close the gap in the months and quarters ahead.

Adjusted for non recurrings, EPS in line and top line a bit better. 

dougie kass

Discovery (DISCK) conf call thus far:

1. better than expected streaming adds (+3 million)
   2. expectations that leverage will be far less than originally forecast upon consummation of the merger - a lot less net debt at closing of transaction (3x) long term target remains at 2.5x with warner
   3. adjusted for non recurrings, eps was $0.42 which was in line
   4. cash flow retention ahead of 50% guidance
   5. Kevin Mayer, who helped run Disney + is becoming a consultant to the Discovery initiative in streaming 
   6. Very strong upfront season

dougie

This price of home ownership, and the cost of renting houses, are the prime reasons why I expect the Fed to move more aggressively on raising interest rates next year.

* Today's circumstances - of massive liquidity and gross speculation - represent familiar warning signs

* Remember that history may not repeat itself but it sure as hell rhymes...

The market has grown increasingly speculative and while this might not be a broad indictment of equities - we should begin paying attention to the unprecedented speculation/gambling as well as the signposts of ebullience that are being ignored: 

* Tesla soars by 50% in a matter of months on little new news - to become one of the largest market caps extant.

* Meme stocks are flourishing - taking their turns almost on a daily basis. (Read: (CAR) , (BBBY) , et. al)

* And so are gewgaws (shiny objects of questionable value) - with charts moving from the lower left to the upper right - rotating in and out of traders' appetites.

* While value stocks languish in obscurity and underperformance.

* The combined impact of meme stocks rocketing, gewgaw gambling and the dormancy of value stocks is reminiscent of the final days of the dot.com boom in late 1999/early 2000.

* The shoe shine guy, bartenders and parking lot attendants have their heads down firmly in their iPhones - often trading fake and worthless digital currencies like the Squid Game crypto coin. 

* Negatives are ignored and even scorned by "talking heads."

* Supply chain disruptions intensifying, inflation ripping, central banks pivoting, the economic and political threat of China...Fuggedaboutit!
we are told by the bullish cabal.

* Shorting has never been more dangerous - with the tall risk to shorting longer and wider than ever seen (or at least since the dot.com boom in the late 1990s). 

* Equities move relentless higher without any dip whatsoever. 

No doubt my observations above will be dismissed by readers and traders who are profitably playing this game of "hot potato." After all, traders are taking their cue from a famous quote made in The Financial Times within weeks of an important market peak in 2007: 

"When the music stops, in terms of liquidity, things will get complicated. But as long as the music is playing, you've got to get up and dance. We're still dancing.

The depth of the pools of liquidity is so much larger than it used to be that a disruptive event now needs to be much more disruptive than it used to be.

At some point, the disruptive event will be so significant that instead of liquidity filling in, the liquidity will go the other way. I don't think we're at that point."

- Chuck Prince, Citigroup CEO, "Citigroup chief stays bullish on buy-outs," Financial Times, July 9, 2007

Sound familiar?

A good measure of complacency:

Danielle DiMartino Booth voices a negative view on the auto business - in marked contrast to the droves of those bullish on the sector:

Duck Test

• Lower, middle, and upper-income cohorts all had net pessimism regarding auto buying conditions, at -24%, -30%, and -35%, respectively, in October, per UMich; upper-income buyers have been the most pessimistic group in the last three months, not seen since 1981
• Since 1967, the correlation between CPI new vehicle inflation and new vehicle sales has been -0.47, with sales tending to rise when price rises moderated or fell; at roughly 9% YoY, current new vehicle inflation calls back to the 1970s, when sales ran at a 5-10 million SAAR
• Though October sales bounced back slightly to a 12.99 million SAAR, the downtrend since April's 18.3 million still has room to run; the stellar bounce back to 16.3 million SAAR in 2022 is predicated on supply chains normalizing & demand not having been pulled forward

"If it looks like a duck, swims like a duck and quacks like a duck, then it's probably a duck." Attribution for the phrase goes to the "Hoosier Poet" James Whitcomb Riley of Greenfield, Indiana. In 1849, he wrote: "When I see a bird that walks like a duck and swims like a duck and quacks like a duck, I call that bird a duck." Over the years, this declaration has morphed into the so-called "duck test," a form of abductive reasoning to determine the nature of an uncertain thing or situation, usually in the absence of, or in spite of, concrete evidence. The duck test's logical inference starts with an observation or set of observations and then seeks the simplest and most likely conclusion from the explanation.

Does the duck test apply to price shocks? Over the course of U.S. business cycle history, the most convincing price-shock duck test coincided with spikes in crude oil prices. The Arab oil embargoes that generated the energy crises (plural) of the 1970s have a place in the history books - and get a passing grade, for sure. The Iraq invasion of Kuwait which ushered in the Gulf War and the 1990-91 recession saw oil prices double from $20 per barrel to $40 and also meant there was a high probability that we had a small aquatic bird of the family Anatidae on our hands. In all cases, prices at the pump surged, and the most visible price in the U.S. economy, that of retail gasoline, created the pain point for purchasing power.

What about an auto price shock? Sure, consumers are now able to view prices more readily than in past economic cycles with the advent of the information age and price transparency by auto manufacturers and auto dealers. Who hasn't used cars.com or Kelley Blue Book or Edmunds?

But an auto price shock wouldn't and couldn't generate the buy-now mentality and urgency of an oil shock. Gasoline is a high frequency purchase measured in weeks. Auto-buying frequency is measured in years. Buyers observe prices and price movements more frequently with the former than the latter. That said, this statement is disproved in today's left chart.

The entire income distribution has coalesced around the vehicle price narrative. Prices have become such an impediment to buying conditions that lower-, middle- and upper-income households all indicate that it's a bad time to buy. For the past six months, there have been fewer respondents stating it was a good time to buy because of low prices relative to those who said it was a bad time to buy due to high prices. As recently as March, all three groups registered optimism with regard to prices: lower at 4%, middle at 9% and upper at 13%. In October, pessimism reigned: lower at -24%, middle at -30% and upper at -35%.

The most unique thing about the past three months was that upper income buying conditions related to prices were worse than both the middle and the lower tiers. This inversion from the top down in August, September and October was only equaled one other time in history: November 1981. For perspective, the biggest earners are the biggest spenders when it comes to new vehicle consumption. About 60% of cars and trucks are bought by the top-third, roughly 30% by the middle-third and around 10% by the bottom third, according to the Bureau of Labor Statistics' 2020 Consumer Expenditure Survey.

Since the late 1960s, new vehicle inflation has been inversely related to new vehicle sales. The correlation between the right chart's two series has been -.47 since 1967. This mirror image chart shows automakers consistently sold more product when price increases were moderate (between 0% and 5%) or declining. Current consumer price inflation for new vehicles around a 9% year-over-year rate harkens back to the 1970s, when sales trended between a 10 million to 15 million seasonally adjusted annual rate (SAAR). At the extreme, inflation above 9% led to a sub-10 million SAAR.

A cross check with the first chart's outlier - November 1981 - lead us to ask: "What if auto price shock turns to slump?" What followed the inversion in the income distribution back then was a capitulation at a lower SAAR. In the 12 months that followed November 1981, sales averaged 10.2 million. Even though we saw a slight bounce in October sales to an unrounded 12.99-million SAAR rate, if history repeats itself, the downturn that started from April's 18.3 million SAAR still has room to run.

To be sure, persistently high auto inflation would have to hold to generate a persistent sales slump. Whether we have all the details correctly placed in the current risk scenario is a moot point. What we do know is that the consensus anticipates a bounce back in the SAAR from 15.5 million in 2021 to 16.3 million in 2022 to 17.0 in 2023 before leveling off in the high 16s out to 2027. Underlying that medium-to-longer run outlook are two assumptions - shockingly high auto prices will fall back as the supply chain normalizes in the next two years and that unprecedented levels of stimulus-spending have not pulled forward an unparalleled level of demand.

A duck test for a slump in auto demand due to high prices only can be harvested over the next year. At least we know the consensus is pricing for the opposite to occur.