Thanks for reading my Diary today.

It was another weird day in the markets, with the S&P 500 index up 20 handles, while the average stock was lower.

I covered a bunch of shorts (winners and losers) and moved to a medium-sized position in Citigroup (C) on the broad weakness in the banking group (as the 10 year U.S. note dropped by about 5-6 bps).

I didn't understand the weakness in Viacom (VIAC) (after the in line quarter) but will be working hard to figure it out tonight. Making a lot of calls...

Enjoy the evening.

Be safe.

Peloton (PTON) misses badly.

I covered one third of my Netflix (NFLX) short for a loss.

The pronounced rotation is epitomized by Goldman Sachs' fall of -$14 (or 3.25%) today - on no news- compared to a rise of +0.25% in the averages.

This was just received in my in box from the single best entertainment analyst I have ever met - regarding today share price drop in ViacomCBS (VIAC) : 

"There is no rational expectation for the weakness. I am buying more..."

I wrote this earlier this morning and I just wanted to emphasize the point:

I have rarely seen such a violent rotation out of value and into growth. 

I suppose it is a reaction to Powell's narrative yesterday which suggested to many that expectations of multiple rate hikes next year may be overdone. 

I disagree but the market does not. The yield on the 10 year US note is only down by 5 basis points at 1.53%. 

I am listening to Rosie on CNBC who believes that rates are likely to move lower in the fullness of time.

I added to (GRBK) and (IVZ) longs just now.

I just covered half of my remaining (DAL) and (UAL) shorts. 

I can't explain the weakness in ViacomCBS (VIAC) and I have further increased this already large long position.

I have covered some more (LSPD) and (W)  , and a portion of my (DNUT) short at $13.65.

I don't know if this is true, but high above the Alps my Gnome is hearing chatter of a Tesla (TSLA) convert offering.

I don't think I have ever seen such a bifurcated market - huge strength in growth and huge potholes in value.

The rotation out of value into growth is accelerating this morning.

The S&P Index is now higher in 15 out of 17 days. 

The 14 day RSI is the highest highest since September, 2020.



I have reduced my (SPY) short exposure by taking on a SPY long against the short call position.

I have covered my (MS) and (GS) shorts at $100.54 and $410.52, respectively.

And over there.... BofE blinks but not for long, claims down, productivity weak, unit labor costs up and inflation breakevens higher.
From Peter:

While the BoE did not raise interest rates today as many thought they would, they are essentially telling us it's coming in December at the same time QE is ending by saying "The Committee judges that, provided the incoming data, particularly on the labor market, are broadly in line with central projections in the November Monetary Policy Report, it will be necessary over coming months to increase Bank Rate in order to return CPI inflation sustainably to the 2% target." They are forecasting a 1% bank rate by the end of 2022. They said this for not hiking today, "near term uncertainties remain, especially around the outlook for the labor market, and the extent to which domestic cost and price pressures persist into the medium term."

As positioning was set up for a move today instead of another bout of dilly dallying in the face of the 5 yr UK inflation breakeven at 4.15%, we're seeing position unwinding with the pound down and gilt yields lower.

Initial jobless claims fell to 269k, 6k less than expected and down 14k w/o/w. Not far from the near 200k we stood at pre COVID. Also positively, continuing claims fell by another 134k to 2.1mm, another post COVID low and hopefully many of these are filling the large number of jobs available, especially since the pay on these jobs continues to grow. This stat stood at around 1.7mm pre COVID.

Bottom line, the pace of firing's continues to moderate which makes perfect sense considering the high demand for labor where employers are holding tight to their existing labor force and searching for more.

INITIAL CLAIMS

CONTINUING CLAIMS

Maybe Kimberly Clark was revealing when I highlighted a few weeks ago what they said in their earnings conference call where it is taking 40 people now to do the job previously of 30. Also, it's costing more to get these people. Amazon talked too about shrinking productivity. Well today the BLS said productivity in Q3 fell by 5% q/o/q annualized, worse than the estimate of down 3.1%. As a result, unit labor costs jumped by 8.3% vs the forecast of up 7%. Smoothing out the quarterly noise, productivity y/o/y fell by .5% and that is the first negative print since 2016 and matches the worst productivity quarter since Q4 1993. Unit labor costs y/o/y rose 4.8%, the 3rd largest increase going back to 2012.

This data point lends more evidence that companies are not going to be able to offset their higher labor costs via increased productivity and lends more evidence that profit margins will get hit and business will try to recoup that via higher prices to the rest of us.

PRODUCTIVITY y/o/y

UNIT LABOR COSTS y/o/y

Lastly, here is a 2 day intraday chart of the 5 yr inflation breakeven. It jumped right after the FOMC statement and is doing so again this morning. If the Fed is not going to control inflation, the market will do it for them, as I've said before this year.

INTRADAY 5 YR INFLATOIN BREAKEVEN

From Goldman:
ViacomCBS Inc. (VIAC) : 3Q21 First LookViacomCBS (Buy) reported solid 3Q21 results that came in slightly ahead of our estimates for revenue ($6.61bn vs GSe $6.56bn) and Adjusted OIBDA ($1.02bn vs. GSe $999mn). The upside was primarily driven by upside to Content Licensing revenue as Advertising, Affiliate and Streaming revenues were approximately in-line. Streaming growth remained strong, with revenues growing 62% y/y and streaming net adds of 4.3mn (GSe 4.1mn), led by Paramount+ (per the release).VIAC also announced a distribution agreement with T-Mobile, which is offering all new and existing T-Mobile and Sprint customers on every postpaid consumer and home internet plan one full year of Paramount+ Essential for free. We estimate that this represents 27 million potential subscribers for Paramount+, as this equates to the number of postpaid accounts that TMUS reported as of 3Q21. Any existing TMUS accounts that already subscribe to Paramount+ Essential are eligible to receive a $4.99 monthly credit from ViacomCBS during the 12-month promo period. Based on our estimate that VIAC has 14-15 million domestic Paramount+ subs, the overlap with TMUS accounts is likely low as the carrier has less than a 1/3 share of the postpaid market. This implies to use that this new distribution agreement could drive material upside to VIAC's streaming subscriber base over the next 12 months. We will be looking for more color on this agreement and management's outlook for more distribution partnerships on the call.Bottom Line: We expect a positive reaction in the stock, which has recently underperformed, based on VIAC's solid 3Q21 results and potential upside to streaming trends as a result of the new distribution agreement with T-Mobile.

Wayfair (W) , another short, missed top line.

Shares weakening.

Lightspeed (LSPD) , a short, is down by -$17/share, or 18%, on weak guidance. 

More later.

The reason why the Fed is not considering rate hikes until after QE is over is because they don't want a market hissy fit repeat of 2018 when they were double tightening, allowing their balance sheet to contract while also hiking rates. So, while they've clearly met their dual objectives, and with inflation far exceeding it, they are trying to appease the stock and bond markets. With respect to their maximum employment goal, whatever that means at this point, here is an anecdote from a friend yesterday:

"My wife went to Cheesecake Factory today for lunch with her mom. Tons of empty tables yet they had a 25-30 minute wait. Short staffed. Then they left and saw Starbucks was closing its gate in the mall at 1:00pm. Wife asked the woman are you closing for a break. She said no, we have no staff to cover rest of the day."

With no real attempt to quell inflation by the Fed by tempering the demand side and instead have fingers crossed that the supply problems resolve itself, I'm sticking with my longs in energy stocks, ag stocks, uranium stocks, precious metals and UK bank stocks, among other positions. We'll hear from the Bank of England at 8am est and because they already decided to end QE at year end, they have a lot of flexibility to attack inflation via rate moves. The Fed in contrast is so offsides and badly positioned because they aren't close with ending QE and of course eventually hiking rates. And thus, if inflation doesn't moderate in the US, I don't expect the Treasury market to just sit there and absorb it at current rate levels.

Shifting to market sentiment, Investors Intelligence yesterday said Bulls jumped to 54 from 48.9 and all of those came from the Correction side which is down to just 21.9. Bears actually rose a touch to 24.1 from 23.8. Today AAII said Bulls rose 1.7 pts to 41.5, the 2nd highest read since early September. Bears dropped by 3.4 pts to 26 and that is the least since July 29th. The CNN Fear/Greed index is up to 82 vs 63 one week ago and 25 one month ago. Bottom line, as sentiment follows price, the mood has certainly gotten optimistic again.

The ECB has its own challenges now with inflation considering how extreme their policy is. September PPI for the Eurozone today printed up 2.7% m/o/m, 4 tenths more than expected and are up 16% y/o/y. That's just a bit over 2% and of course transitory I hear.

The October Eurozone services PMI was slightly revised to 54.6 from the 1st print of 54.7. That is down from 56.4 in September and it's the lowest since April. Markit said "New business growth slowed fractionally in October, although increased tourism and greater flexibility towards international travel reportedly boosted overseas demand." Employment rose to the best since October 2007 and "Inflationary pressures continued to build as service providers registered the strongest increase in both costs and selling prices for just over 21 years."

The decision by JP Morgan not to custody, and introduce other restrictions, on U.S. cannabis stocks will likely result in a near term improvement for non U.S. based companies like Tilray (TLRY) and favor (MJ)  over (MSOS) . 

Yesterday, when the announcement was delivered, the non U.S. cannabis ETF MJ rose, and so did its constituent holdings like Tilray, while the US cannabis ETF MSOS, and its constituent holdings, fell. 

I suspect that relative performance advantage will be short lived as JP Morgan doesn't have a heavy presence in the space - and the real value in cannabis lies in the U.S. based companies. 

Tactically I plan to take advantage of the likely relative price action and shift out of non U.S. cannabis exposure (MJ and TLRY) into U.S. cannabis exposure, through MSOS and the multi-state operators, because the longer term advantages and opportunities lie in the later area.

My first look at Viacom's (VIAC)  results are a slight top-line beat and in line bottom-line (adjusted for non recurrings).
More after the conference call.
I am adding in premarket trading.

* The market thinks so...

There was nothing surprising in the Fed's message yesterday afternoon.

Yesterday I suggested the "in line with consensus" comments by the Fed would lead to another market ramp (though it was far more rigorous than I expected), which has continued overnight in the futures market.

Market participants seem to want to hear what they want to hear.

What I heard was that tapering no longer holds any economic benefits and that Fed has clearly turned away from its (incorrect) notion of transitory inflation and will likely be more aggressive in its interest-rate hikes next year.

The skeptic in me thinks that bolder and more hawkish rate language will come after the president makes the likely decision of having Jay Powell continue as Chairman of the Fed (as I suspect the Virginia gubernatorial results could cut the rug under Senator Warren's pleas for him to be replaced).

To me, 2-3 rate hikes are in the cards for 2022.

Here is more on the decision from my friends at Miller Tabak:

Wednesday, November 3, 2021

The Fed Starts to Lay the Groundwork for Rate Hikes

The FOMC has now successfully managed to announce the start of its tapering of asset purchases without causing a significant disruption to financial markets. The pace, reducing purchases by $15 billion per month starting this month, and ending in June 2020, was only slightly faster than expected and will not cause any economic harm. Both the FOMC statement and Chairman Powell's press conference were mostly dovish, especially in continuing to describe inflation as transitory. This was to be expected and isn't very informative: Powell remains one of the bigger doves on the FOMC, the Fed did not have to issue a new dot-plot, and the FOMC wanted to avoid connecting the tapering announcement to any hawkish language on inflation or interest rate hikes.

The November meeting does, however, signal the start of a much trickier process of prepping the public for rate hikes in 2022. CME Fed futures suggest that the first-rate hike is possible (17%) by March 2022 and likely (62%) by June 2022. Futures also now suggest that the most likely outcome through 2022 is two rate hikes. We mostly agree with this assessment (the June 2022 figure may be closer to even-money) and expect at least two rate hikes in 2022 with a longer-term Federal Funds rate closer to the 325-350 bps band then the Fed's current 250 bps forecast. Notably, Powell did not push back very hard against market expectations of lift-off in mid-2022.

Rate hikes pose a far greater risk to both the real economy and financial markets than tapering asset purchases. QE has already exhausted most of its benefits. And while tapering has a clear end (no more asset purchases by mid-2022), there is no obvious limit to how high the Fed may have to go on interest rates. Expect the Fed to gradually work up to a new message that it is prepared to curb inflation by raising interest rates moderately faster than suggested by the September dot-plot. Chairman Powell took baby steps in this direction on Wednesday, acknowledging the upside risks to inflation and stating multiple times that the Fed "will not hesitate" to raise rates if the inflation outlook worsens (it has, as we discuss below). The December meeting is likely to show a modest movement towards faster rate hikes, expect a clear majority of members to predict lift-off in 2022, but no upward movement from its 2.5% long-term prediction for the Fed Funds rate yet. Bigger adjustments are very likely to follow at subsequent meetings.

From Danielle DiMartino Booth:

• The Cash to Supply spread, comparing cash equivalents to ISM inventories, has been above a +2 z-score for 18 months and was +5 in October; the series leads durable goods inflation, which snapped its 25-year deflationary trend last year and registered a +6 z-score this month
• Per ISM, backlogs are increasing in 29 out of 36 industries across manufacturing and services, a record high; as a result of the bottlenecks, the U.S. labor market is seeing earnings growth in the right-tail, with both paycheck and wage inflation above the 5% YoY threshold
• Yield curves steepened after yesterday's tapering announcement by the Fed, though Powell held firm on decoupling tapering from rate hikes; however, the potential for further flattening long-term remains strong as evidence continues to defy the transitory narrative

Remember China?