Thanks for reading my Diary today.

Enjoy the evening.

Be safe.

I don't have a dog in the hunt (having covered my Disney (DIS) short for a profit recently) but Disney missed on the bottom line (as I expected).

Here you go:

Oct 12, 2021 ' 08:30 AM EDT DOUG KASS

Why I Shorted the Mouse Last Week

* The ever popular and heavily institutionally owned Disney is seen by many as the perfect reopening trade

* We are less certain

* Following strong 3Q results (in August), most analysts raised their EPS forecasts and price targets - that may have been premature

* Since then, Disney reported weakness in Disney + (analysts rationalized the disappointment)

* Going forward, the company faces unusual execution challenges in streaming, legacy television, movies , cruises and in theme parks - in an unsteady and uncertain macroeconomic backdrop

* Consequently, sell side consensus expectations - for Disney's EPS to rise from $2.10 this year to over $6/share in 2023 - may be too ambitious

* Disney's high valuation incorporates successful execution in a challenging backdrop - we see reaching that base, and optimistic, case with a diminishing probability

I have owned Disney (DIS) on and off for over five years.

There is probably no more loved company - and popular stock - than Disney.

In March, 2020, and for the second time in six years, I placed DIS on my Best Ideas List at $93.

Several weeks ago I sold out of my long standing long position. I was long stock and short puts.

Last week I shorted DIS at about $176/share:

Oct 05, 2021 ' 02:30 PM EDT DOUG KASS

I Am Fading the Disney Rally

Shorting Disney (DIS) at $175.91 now.

Yesterday I took the stock off of my Best Ideas List:

ct 11, 2021 ' 03:20 PM EDT DOUG KASS

Off Disney

I am taking Disney (DIS) off of my Best Ideas List (it was put on at $93/share in March, 2020).

Hopefully if I get up early enough I can deliver my analysis and map out my thesis why I recently shorted the shares.

Recent Developments

In August, Disney reported a good quarter as streaming subs adds for Disney+ comfortably beat expectations. The shares rallied briskly, and we sold our long positions.

From Goldman Sachs, following the third quarter rosy release:

"DIS reported beats to consolidated revenue ($17.0bn vs. Visible Alpha Consensus Data $16.8bn), AOI ($2.2bn vs. consensus $1.9bn) and adjusted EPS ($0.80 vs. consensus $0.53). The headline beat was total Disney+ subs of 116mn, above consensus of 112mn and GSe of 111mn, and ahead of media reports that implied the sub base was just above 110mn late in the quarter. Another encouraging data point, in our view, was a return to profitability in the domestic Park business, with the overall Parks and Experiences segment driving most of the top and bottom line beats as attendance continued to ramp and more parks returned to operation."

One month later the shares took a dive after CEO Bob Chapek stated at Goldman Sach's Communacopia Conference that Disney+ subscription growth would not meet expectations because of a slow ramp in sub growth at Star+ in Latin America.

The shares have since recovered to about $174/share.

The Bear Case

* We believe the pace of anticipated EPS recovery - by the sell side - for Disney over the next several years is too optimistic.

* Analysts expect about $2.10/share in 2021, a near doubling in 2022 (to $4.00/share) and another +50% gain in 2023. (to over $6.00/share).

* According to our spread sheets, 2023 E consensus may be as much as $1/share too high.

* Revenue growth forecasts are projected to be +26% in 2022 over 2021, and +12% in 2023 over 2022. EBITDA growth is anticipated (in same years) of +50% and +40% - these, too, seem, ambitious.

* We view the business lines of parks, streaming, cruises and linear networks as vulnerable to disappointments relative to the consensus expectations.

* The company's valuation is excessive given the execution challenges below. Looking at 2021 and 2023 estimates, the shares trade at 85x and 30x EPS estimates, 40x and 19x estimated cash flow, and are at a free cash flow yield of under three percent on 2023 estimates. Following a number of high profile acquisitions and costly content spends, net debt/equity is a high 45%. So, EBITDA better move rapidly higher - as consensus expects - over the next 2-3 years!

* Disney does not pay a dividend so there is no yield support for the shares

* An underappreciated risk is that Disney's balance sheet is less pristine than in the past. Total long term debt exceeds $50 billion and total liabilities are over $83 billion. Capital spending is a high $4 billion/year.

*Disney's ROE - off the ambitious 2023 analyst estimates will still be well under 12% - high against the aforementioned and elevated valuation metrics. And high compared to other growth companies.

* We expect the following challenges to that favorable sales, profits and cash flow progression:

1. Our contacts suggest Disney+ streaming sub adds will disappoint over the current and next quarter and that the company may guide down expectations for next year.
2. We view the consumer as less healthy than consensus (more in keeping with Goldman Sachs and Danielle DiMartino's negative views) - consumers are likely to begin tapping into savings following the recently ended benefit programs related to COVID. The inflation in admission prices of theme parks could produce an unexpected demand elasticity in 2021-22.
3. In a tightening labor market Disney may face challenges in maintaining a stable work force in its theme parks.
4. The macroeconomic backdrop could turn less favorable and uneven in the year ahead.
5. Consumers may remain unsettled about returning to the company's theme parks and cruises.
6. An anticipated margin recovery at theme parks may not be achieved in the face of higher labor and other costs.
7. Cord cutting in the legacy linear network division remains problematic.

The Bull Case

* The bullish argument (expressed by my pal Jim Cramer and others) is that the weakness in Disney + is is a one-off.

* Bulls argue that the recovery in Disney's theme park, cruise line, and movie theater business also makes this stock a great reopening play.

*Some are confident in a margin expansion story within the parks. Disney management implemented several changes during the pandemic to better manage expenses. The bulls see guests are spending more in the parks in the future, thanks to new reservation systems, membership programs, experiences, and technologies.

Bottom Line

Disney faces a future of macroeconomic uncertainty.

A fundamental shortfall in sales/profit/EBITDA growth - relative to consensus expectations - over the next 1-2 years seem increasingly likely.

Given the company's business mix, especially the segments skewed towards travel, incorporates numerous risks to profitable growth, a growing likelihood that sub adds at Disney + will disappoint over the near term, ongoing challenges to executing a complicated streaming strategy in a competitive backdrop coupled with an elevated valuation and no dividend support -- Disney's shares seem overpriced.

I am adding to (GRBK) under $25.25.

I took in some of my (CVNA) short at $286.

I covered some (ARKK) under $117 this afternoon.

I am back picking (MSOS) at $28.50.

Market breadth at 3 pm.

Adding more aggressively to Boeing (BA) at $218.55.

I just took in my (COIN) short at $328 for a good profit (of $15/share) - offsetting some of yesterday's loss.

I have added to shorts in (TROW) , (BX) and (KKR) .

I am short (RIVN) at $108.77.

Sized small.

Though not a soul in the business media is focusing on today's interest rate rise - I am. 

The yield on the 10 year note is +12 basis points (to yield 1.57%). The yield on the long bond is up by even more (+13 bps). 

The inflation data was hot and the 30 year bond auction was awful - with the yield five basis points above the when issued price. The bid to cover was well under the one year average and direct and indirect bidders took 75% of the auction. 

Five year inflation breakevens are at a new high of 3.08% (+10 bps), while the 10 year inflation breakevens are +6 bps and the 30 year inflation breakevens are +3 bps to the highest level in seven years. 

Expanding my equity shorts.

I further increased my short exposure all morning. 

See yesterday's opening missive.  

And see the response to the Rivian (RIVN) IPO ($113.50). 

IMHO 

The speculation, valuations and the developing fundamentals, relative to expectations, are all epic. 

Though my glasses have been foggy - and I, as always, remain full of doubt - I am now playing it the way I see it.

So far stocks basically shrug off another apparent spike in inflation. However, the yield on the ten-year does creep back above 1.50%. It may get stock traders attention if it moves above 1.56%. Otherwise, stocks are trying for a consolidation day after a few bumpy turns.

Stay safe.

Arthur

Market breadth at 12:15 pm:

(DISCA) chart:

* Adding to Boeing (BA) .

* Streaming stocks go from loser to hero ( (VIAC) and (DISCK) )

* Banks catch a bid o the rate rise ( (TLT) -$1.50) - steadily adding to (C) .

* Scaled up on my (COIN) short - cost basis now $344.10.

AT&T (T) has been a dog with fleas. 

LightShed Partners is hosting a meeting with the CEO of AT&T Communications tomorrow. 

This is something that might help the shares move higher:

LightShed hosts Jeff McElfresh, CEO of AT&T Communications, in a Zoom meeting on Thursday November 11th at 11:30 am ET. AT&T Investor Relations will also be joining. In this meeting we plan to discuss:

• Competitive wireless landscape
• New revenue growth opportunities
• Can fixed wireless compete with broadband
• Pace of spectrum deployments
• The fiber opportunity

Going back to the beginning of the introduction of the Treasury inflation protected security (TIPS) in 1997, the 10 year REAL yield today is falling to a new low at -1.24% with the 10 year inflation breakeven jumping by 8 bps to 2.72%. 

Here is a 25 year chart on the 10 year real yield:

This week I warned about the (GE) spin - and I will continue to warn and avoid the shares as I see limited upside.

I still really like and am engaged in the pairs trade of Long (IVZ) /Short (TROW) .

Phillip Brantley

Has everyone seen this posted on adweek.com?:

A new multiyear global agreement between ViacomCBS and Twitter will bring premium digital content from hit shows, iconic franchises and live events from the media giant's entertainment, news and sports brands to the social network.

The pact covers all markets worldwide where both companies operate, and financial terms were not disclosed. Subscription streaming service Paramount+ is also teaming up with Twitter to host three watch parties on the social network, coinciding with select highly-anticipated original series.

Those tentpole programs will be eligible for marketing support and brand sponsorship sales rights via premium pre-roll video option Twitter Amplify, combining premium video from ViacomCBS with paid reach and targeting from Twitter.

ViacomCBS will also tap other Twitter marketing offerings, including live video, real-time highlights and Twitter Moments.

Twitter and ViacomCBS recently teamed up to livestream the red carpet show from the 2021 BET Awards in June on the social network, along with the preshow for the 2021 MTV Video Music Awards in September. The latter also included #VMAStanMail, which enabled artists to experience "stan tweets" in any language.

Twitter head of global content partnerships Jennifer Prince said in a statement, "We're excited to take our strong partnership to a new level, offering premium content across entertainment, news and sports and giving brands the opportunity to align with ViacomCBS' entire portfolio on a global scale. Through highlights, Twitter Moments, innovative formats and Paramount+ watch parties, Twitter will put users at the center of the biggest moments happening around the world."

ViacomCBS senior vice president of distribution and business development-streaming Andrea Wolinetz added, "We're thrilled to extend our long-standing relationship with Twitter in this expansive global deal that brings together the full ViacomCBS portfolio and magnifies the scale and scope of our valued partnership. Twitter is the digital water cooler for trending topics and fandom worldwide, and we're excited to provide front-row access to innovative digital content experiences and culture-defining moments across the best of entertainment, news and sports for Twitter users everywhere."

I reshorted (COIN) (small) at $341.43.

* Tesla (TSLA) below par.

* Gold (GLD) gets jiggy.

I added to my short position in (SPY) at $467.02.

I bought more (T) and (VIAC) in the premarket. 

That is all I have done thus far today.

Jim "Still El Capitan" Cramer on the COIN miss: 

• Coinbase... the arrogance of these guys-half dozen references to what a great quarter it was when it was a huge miss... they must think we all just fell off of a turnip truck... they will be bailed out by the rise of Ethereum and Bitcoin, but their arrogance is shocking and, frankly, ill-advised

I covered my short at $309 in the after hours.

I plan to reshort the stock on any further strength.

I mentioned yesterday that with OER (owners equivalent rent) starting to pick up in the data, inflationary conditions are firming/worsening:

Contrary to what you hear in the public press, since October most of the market returns has been valuation - and not EPS - based:

A good one, Holiday Holdup: Can We Solve Our Supply Chain Problems?

It's free to subscribe to Knowledge@Wharton - I have found it to be a good resource.

So on the day that the 5s/30s yield curve spread closed at the lowest since August 2020 yesterday, the 5 yr inflation breakeven closed at the highest on record dating back to 2002 at 2.99% when the 5 yr TIPS was introduced. What's the message? I can only think of a stagflationary one but I'm open to other thoughts.

5 yr INFLATION BREAKEVEN

While up the past 2 days, the Baltic Dry Index has fallen by half off its decade high in early October. I'm attributing this to the drop in iron ore prices because of the sharp decline in Chinese steel production. That is in part because of the fall off in residential property construction along with the emissions limits in China. Yesterday the China Iron & Steel Association said that daily crude steel output fell for a 6th straight month and is at a 44 month low. In response the price of iron ore is at the lowest since September 2020 and you can see in this chart the relationship between the price of iron ore and the Baltic Dry Index. Also likely weighing on this index is that China seems to have filled up its coal inventories again.

IRON ORE in white, BALTIC DRY INDEX in orange

Because iron ore is not the only commodity to watch, the CRB raw industrials index yesterday closed at a fresh record high in the 40 yr history of it. Also, on the shipping front, it's not just dry bulk. The Shanghai to North America Air Cargo Index closed Monday (I don't have yesterday's print) at a fresh high. It's up 400% since February 2020.

CRB RAW INDUSTRIALS INDEX

SHANGHAI to NORTH AMERICA AIR CARGO INDEX

With regards to inflation, China said its PPI in October rose 13.5% y/o/y, above the estimate of up 12.3% and after a 10.7% y/o/y gain in September. Spiking energy prices were certainly a main culprit along with higher commodity prices elsewhere. There is still a wide spread though between consumer and producer prices as CPI was up just 1.5% y/o/y. As a benign CPI print offset the hot PPI in terms of the market, the 10 yr Chinese yield was up just 1 bp to 2.91%. The yuan is unchanged while Chinese stocks were mixed.

Also out of China was its October loan data where aggregate financing totaled 1.59T yuan, about 100b less than expected but the bank loan component was slightly above. We know Chinese authorities have told Chinese banks to ease standards to those households that want to buy an apartment in order to eat up some of the excess inventories and provide cash for the cash strapped developers. Money supply growth accelerated to an 8.7% y/o/y increase from 8.3%.

If you haven't seen, the high yield market in China has literally imploded with the OAS spread blowing out to 2400 bps from 750 before Evergrande started its epic fall from grace. Obviously major strains with real estate developers is the main reason but it's dragging other companies in other industries with it, aka contagion.

CHINA high yield OAS

Back in the US, the 8 bps drop in mortgage rates and 14 bps over the past 2 weeks helped to lift mortgage applications. Purchases rose 2.7% w/o/w but remain down by 4.1% y/o/y on tough comps and a moderating pace of transactions. Refi's rose 7.4% w/o/w after 6 straight weeks of declines. They remain down by 29% y/o/y, certainly on tough comps and if you haven't refinanced yet your mortgage, what exactly are you waiting for?

I posted this last evening and I wanted to make sure everyone read it: 

Nov 09, 2021 ' 05:34 PM EST DOUG KASS

Invesco Reported Excellent October Flows and AUM

"Just one more thing."

- Lt. Columbo

Good news for Invesco (IVZ) investors.

IVZ reported October month-end assets under management of $1.593 billion, an increase of 4.3% from September's month end.

Total net inflows were $18.8 billion.

On Monday Citigroup (C) released its 10Q - and I studied it. 

Nothing earth shattering. 

The document included a strategic refresh, a discussion of asset sales, and consent order remediation, and balance sheet and capital management as well as a new approach to reporting business lines which will provide investors with a better understanding in assessing operating performance and growth prospects. 

* Citigroup has submitted its remediation plans to the Fed/OCC.

* The sale of the company's Australian consumer banking operations will close in the first half of 2022. (2021 year to date pretax profits total $235 million - in line with expectations)

* As of the end of 3Q, deferred tax assets declined by $200 million to $9.2 billion.

* Citi's adoption of SA-CCR will have a slightly adverse impact on regulatory capital ratios

* Citi's asset sensitivity has declined as the bank focused on funding cost management.

* Surplus capital remains sizeable.

* Portfolio credit quality continues to improve. 

I recently reestablished a long position in Citigroup. 

I expect, in a flat market, for the shares to rise above $80/share by the end of 2022.

Plunging Chinese iron ore prices speak volumes on the decay of their domestic economy:

Global copper inventories hit the lowest level in 13 years:

* A new column is planned

I am planning to introduce a new column early next week called "What's Going To Make This Stock Move?"

By nature I am a (long) buyer of value (with a catalyst) although I will buy growth at a reasonable price (GARP). Alphabet (GOOGL)  and Amazon (AMZN) are two examples of the later approach.  

Going forward, my new column will highlight the factor(s) that could result in near term upside of longer term investment ideas.

Inflation is becoming ingrained in the mindset of the businesses and the consumer: 

* PPI inflation for intermediate goods has exceeded the same metric for finished goods by a double-digit margin for the last six months; only the seven-month stretch from July 1974 to January 1975 compares historically, as pipeline pressures risk bleeding into consumer prices

* ISM Manufacturing New Orders, though still above the 50-breakeven, has fallen below 60 after a 15-month streak north of that threshold; further declines could continue to push down. Small Business Expectations, already at near record pessimism due to elevated uncertainty

* In the NFIB October survey, a record 51% of small business owners said they plan to raise prices in order to combat higher material, transport, and labor costs; with core PCE printing at 4.4% vs. the 2% target, the latest CFO Survey also validates the rising input cost dilemma

* The company is being run conservatively and will continue to resemble the economy/S&P Index going forward

I have always thought, suggested and even said to Warren Buffett and Charlie Munger when I appeared on the dais of Berkshire Hathaway's 2014 Annual Meeting - that the company was being run conservatively (and expanded) for the purpose of diversifying and not necessarily managing external growth. 

No longer was Berkshire (BRK.A) (BRK.B) (perhaps hurt by its size) trying to find the potential "gazelles" to acquire that would provide large returns relative to investment - GEICO, American Express come to mind. Save its fortuitous investment in Apple (AAPL) years ago, Berkshire has been paying top dollar (for a railroad or for industrial companies) and relatively high valuations for mature businesses that further diversified the company. 

Acting more as a conservator than a grower, it has been my thesis that Buffett was assuring that Berkshire Hathaway had a growing "buffer" of cash and a business mix that would result in better performance in a downturn vs. building up Berkshire as an above average performer in an upturn. 

Here is some further evidence to that assertion:

Not transitory: