* But it had a real good beat

"Dougie Kass, 14 years old. Yeah, I am from Long Island."

- American Bandstand 

Increasingly, over the last few months, the daily action has become increasingly random and hard to predict - in a market that has little memory from week to week.

Today was another example of this phenomenon.

As the contestants used to say on American Bandstand, "I like the melody of the song, but it is hard to dance to; I liked the 'B' side better."

In the absence of predictability, it is usually a good time to keep larger than normal cash reserves.

Which is exactly what I am doing.

More on this theme early tomorrow morning.

Thanks for reading my Diary and enjoy the evening.

I have a 4:15 research call, so I am heading out early.

Market breadth and heat map at 3:05 pm.

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A good management announcement was delivered by Verano Holdings (VRNOF) today:

I am working on two research projects this afternoon, so my posts will be less frequent and shorter than usual. 

A heads up.

For those that are keeping count, my cost basis on my (SPY) short is $473 and on my (QQQ) short it is $399.

The 10 year US note yield has risen by +13 bps today (to 1.63%).

I am in general agreement with Dan Niles' comments:

Mark B

Dan Niles on VIAC:

UPDATE ON VIACOM ($VIAC)
1/2/20220 Comments

At the end of every year, I try to look back at some of the biggest mistakes to learn from them. Viacom ($VIAC) is certainly one of those. I have also received many requests on social media for an update on my thoughts and at times 280 characters can be a bit too restricting.

RECAP OF $VIAC

Back in 2020, I talked about VIAC being a more value centric way to participate in the excitement around streaming. VIAC's stock surged and reached $100 on 3/22/2021 from $37 to start the year. In hindsight, much of the move in this name was driven by relentless buying by Archegos Capital Management, a ~$20B hedge fund. VIAC's stock quickly retraced those moves as an extremely well-timed capital raise by VIAC and the high-profile liquidation of Archegos drove VIAC's stock down to an intraday low of $40 on 3/26.

To us, this move lower created a very interesting buying opportunity which we talked about subsequently on air. But today the stock is even lower at $31. So, what happened?

Fundamentally, VIAC rev expectations have been drifting up through 2021 driven by streaming revs that have also been going higher. Given the losses in Viacom's streaming business, this has driven EBITDA and EPS expectations lower which is natural as they gain scale in streaming. As discussed later, streaming leader Netflix (NFLX) lost money for eight years before 2020 and will be cash flow breakeven this year. Obviously NFLX's stock has done well over this time driven by subscriber growth, the most watched metric. But obviously subscriber growth did not help VIAC's stock price this year. So what happened?

In our minds, there were two main driving forces after the Archegos meltdown that drove VIAC's stock price even lower: 1) the leaders in the streaming space started missing their subscriber expectations and 2) treasury yields started to rise this year creating a greater focus on profits versus just growth.

DRIVING FORCE 1:

SUBSCRIBER MISSES BY STREAMING LEADERS

In 2021, NFLX missed both Q1 and Q2, Disney (DIS) missed Q3, and Roku (ROKU) missed Q3. Traditional media company Discovery (DISCA), which is also pushing hard into streaming by merging with AT&T's Time Warner division, missed their Q3 as well. When the leaders in a particular space miss, investors typically assume that the smaller players will suffer even more. If you believe that growth is slowing at the leaders like NFLX, DIS, or ROKU why wouldn't growth at a smaller player like VIAC eventually slow as well especially when even their peer DISCA missed? Furthermore, there is less career risk as a portfolio manager for owning an industry leader like DIS or NFLX than VIAC if all of their stock prices decline. As a result, sentiment for VIAC soured as well as for the other players in the streaming space.

DRIVING FORCE 2:

RISING TREASURY YIELDS & FOCUS ON PROFITS

As interest rates started to rise from 0.9% on the 10-year treasury to roughly 1.5% today, investors started to focus more on the profitability of companies in addition to their growth in all spaces. While streaming is a fast-growing business, it burns a lot of cash. For example, the free cash flow (FCF) of streaming leader NFLX was negative $3.3B in 2019. In fact, FCF was positive for the first time in nine years at $1.9B in 2020. But even that profit was due to an unsustainable decline in content production and a surge in subscribers both driven by Covid. In 2022, despite 214M subscribers as of Q3 and expected revs of $29.7B for the year, NFLX's FCF is expected to be neutral as production expenses ramp back up and subscriber additions slow down. On a positive note, FCF is expected to be positive every year thereafter.

For VIAC, they have had upside to their subscriber expectations for the past nine months, but they have not disclosed their: 1) FCF losses from streaming; or 2) the timeline for these losses to peak or turn positive. Given streaming leader NFLX is just at FCF breakeven with 214M subs, investors are understandably nervous about VIAC which has 47M streaming subscribers with an additional 54M advertising supported streaming subscribers from Pluto TV. Additionally, EBITDA expectations have drifted lower in 2021 as VIAC has made the prudent business decision to invest more in streaming given the growth they are seeing in subscribers.

PREDICTIONS LOOKING FORWARD

Q4 results for VIAC should breakout 1) their three separate divisions (Direct to Consumer, Studios, and Networks) and 2) their operating profits/losses for the first time. We believe the company will increase their subscriber forecasts for the long-term given the positive momentum in this business. We see VIAC both adding more streaming subscribers in Q4 than Q3 and in 2022 than in 2021. But we forecast that the losses in their streaming business will increase through 2022 as they invest to launch in Europe in the second half of 2022 with losses peaking at some point in 2023/24. We expect EBITDA/EPS expectations to be reduced as a result. Given the strength in their streaming business in contrast to others which disappointed such as NFLX, DIS, ROKU or DISCA, we believe this is a good investment for the long-term. Unfortunately, if the current sentiment persists, there is risk the stock may go lower in the short-term much like it did on Q3 results despite strong subscriber growth of 62% y/y.

CONCLUSION

I am an investor that likes stocks with growth at a reasonable price. VIAC trades at 8x CY22 PE despite their streaming revenues up 62% y/y. This is incredibly cheap compared to streaming leaders NFLX (46x PE; revs up 16% y/y in CQ3), DIS (~34x PE; streaming revs up 38% y/y in CQ3), and ROKU (~121x PE; revs up 51% y/y in CQ3.) These streaming leaders are all growing their streaming revenues slower than VIAC yet fetch much higher multiples. In addition to VIAC's asymmetric growth vs. valuation profile, VIAC's $1.1B in streaming revs in their September quarter grew to 16% of overall company revenues. NFLX is trading at 10x trailing sales. VIAC should do close to $5B in streaming revs this year, so it does not seem unreasonable to assume $50B is a reasonable valuation for this business alone. However, all of VIAC has a market cap of only $21B with ~$10B of net debt assuming current announced deals close.

From a subscriber perspective, NFLX had 214M subscribers at the end of Q3:2022 with a market cap of $267B. A valuation of ~$1,250 per subscriber. VIAC now has 47M streaming subscribers with 54M ad supported streaming subscribers from Pluto TV with a market cap of $21B.

While we have admitted our mistake and cut our position in VIAC to take a tax loss for 2021, upcoming Q4 results and the outlook for streaming losses hopefully sets a bottom for the stock and sets the name up for a good rest of 2022. Investors may want to go to the sidelines until guidance is given on Q4 results or sentiment reverses for the company.

Today VIAC is viewed as a melting media ice cube and streaming loser. We believe VIAC will slowly become recognized as a contender along with NFLX and DIS in the streaming wars. VIAC has one of the broadest offerings of all the streaming services with sports, movies, news, unscripted, adult, and kid content. This should lead to a higher multiple much like we saw with DIS when their streaming business really took off. Time will tell.

Best wishes for your investments in the New Year.

I am trying to figure out the best way to buy the VIX Index - as I am of the strong view that volatility this year could be unprecedented. 

Stay tuned.

I have a heck of a lot of cash now.

My interview starts at the 28 minutes and 35 seconds mark.

I have sold out my (BA) at about $210 this morning (+$9). 

Again, I am trying to reduce my gross long exposure and plan to buy back BA on weakness.

More positive FGEN news.

AT&T (T) is +$3/share above its recent lows and I am expanding my portfolio's net short exposure. 

I have sold my T common and reduced my short T puts position. 

I plan to reengage on weakness.

Here is the breadth and heat map as of 10:20 am.

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The yield on the two year US note has risen to 0.81%. That's the highest level since February, 2020.

I have aggressively shorted this morning's ramp and I have moved from market neutral to net short.

I suspect the little bout of profit taking from the sharper rise in futures reflects the hit the bond market is taking now.

My belief that the economy, markets and monetary policy are conjoined fraternal triplets will be tested in at least the first two quarters of 2022 as not just the Fed tightens, but many other central banks do as well.

As all three pieces are firmly connected, you cannot separate them out in terms of how a change in one influences the others. It means there is no such thing as tightening monetary policy without an eventual tightening of financial conditions. It will just depend on how much will the Fed tolerate.

It means that any drop of substance in markets in reaction to monetary tightening will have a direct impact on consumer spending. With respect to markets and the economy, I heard Steve Sadove last week say that when he was CEO of Saks, his trend sales had a 90% correlation with the stock market.

Also, as the cost of money is so influential on housing and autos, where funding rates go will obviously impact these two sectors greatly with prices of each at record highs, by a lot.

It didn't have to be this way, but it is what it now is, a very financialized macro economic and market intermingling. What is different this time relative to the gradual shift in this direction over the past 30+ years is we now have notable inflation which will in turn impact the Fed's flexibility in responding to any disruptions they cause. We are certainly very accustomed to the Fed quickly reversing themselves.

Now there are certainly moments in time when one triplet looks its own way for a period of time. For those that have been around markets for a while, we've heard this lot, "but rates are rising for good reason because the economy is good." In 2017, the Fed was raising rates but markets went straight up all year with low volatility but we can attribute the disconnect to the hopes and inevitable passage of the large corporate income tax cut. Once we entered 2018 though, attention shifted immediately back to the rate hikes.

So my bottom line question is this, is there a free lunch from the epic monetary largesse the world's central banks showered on us over the past two years? The next two quarters will be a good test.

Ahead of the final December US manufacturing PMI today we saw some from overseas. South Korea's manufacturing PMI rose 1 pt m/o/m to 51.9, Taiwan's was up by .6 pts to 55.5, Malaysia's was higher by .5 pt to 52.8 and the Philippines increased by a slight .1 pt to 51.8. On the downside was the Indonesia PMI by .4 pts to 53.5 and India's to 55.5 from 57.6.

Specifically with South Korea, Markit had some issues under the hood. They said "If we take demand, reports from our survey members suggest that new orders are primarily being driven by domestic clients, and even then, growth is minimal. Survey data showed new export orders falling for the 1st time since September 2020, which firms attributed to rising Covid cases globally, congestion at ports and a lack of available shipping containers. Indeed, these factors, alongside supply shortages at vendors, were also to blame for further delays in supplier delivery times, which lengthened to the greatest extent since April 2020. Given South Korea's prominence in the automotive and electronics industries, substantial improvements in global supply chains will be required before we see a meaningful acceleration in manufacturing growth."

The December Eurozone manufacturing PMI was left unrevised at 58 vs 58.4 in November, the lowest since February. There were some supply pressures bright spots though as Markit saw some "further easing of the supply chain crisis as average lead times lengthened to the softest extent since February. Firms took advantage of this relative gain and added purchases to their inventories at the fastest rate ever recorded by the survey, outpacing the previous record set in November by a notable margin...Meanwhile, rates of input cost and output price inflation eased, but remained among the fastest ever seen by the survey." With respect to the labor market, "the rate of jobs growth was strong and above its historical average by a notable margin. Business confidence also strengthened slightly to a 3 month high." The euro is down slightly while bond yields are mixed with all stock markets in the green that are open.

Putting the rate cuts in Turkey to 14% over the past few months into perspective, Turkey reported that its December CPI rose 36% y/o/y. The estimate was 27%. Wholesale prices almost doubled, up by 80% y/o/y vs the forecast of up 68%. Hyperinflation here they come? Let's hope not. The lira is actually up today after falling for 5 straight days last week as while these are shocking inflation stats, it's not a complete surprise.

As we enter 2022 it is worthy of a special note and consequence. 

2022 contains three twos. And the number two is so special: 

To begin with, two is a unique even prime number because all even numbers are divisible by 2. But any number apart from 2 that is divisible by 2 is not a prime number. 

In biology, the structures of many living organisms, especially in mammals, various vital features occur in pairs: eyes, ears, hands, legs, nostrils, jaws, forelegs, hind legs, lungs, kidneys, nostrils, jaws, forelegs (or arms), hind legs, lungs, kidneys, and on and on.

Sexual reproduction in almost all living organisms requires the mating of two organisms, male and female, or the uniting of materials provided by male and female organisms.

In molecular biology each molecule of DNA usually consists of two polynucleotide strands that form a double helix.

In physics there are two opposite and complementary electrical charges: positive and negative. Both are needed and work together in the formation of atoms and molecules, the founding blocks of everything. There are two opposite and complementary magnetic poles: north and south. Both play a part in setting up a magnetic field. In the electronic configuration of an atom, a maximum of two electrons may occupy a given orbital at any instant.

In Eastern philosophy, a well-known dualism is that of Yang and Yin of China and the Yang and Eum in Korea. They stand for pairs of characteristics such as masculinity and femininity, or positivity and negativity.

In Judaism: The Book of Genesis notes that the first humans were a couple, Adam and Eve. One may recognize this as being necessary for reproduction and multiplication of the human race. In the story about Noah, the animals boarded Noah's Ark two by two. One may infer that they were male and female pairs, to allow those species to survive through sexual reproduction; the Ten Commandments were given in the form of two tablets; two candles are traditionally kindled to usher in the Shabbat; two challahs are placed on the table for each Shabbat to commemorate the double portion of manna that fell in the desert every Friday; in Jewish law, the testimonies of two witnesses are required to verify and validate events, such as marriage, divorce, and a crime that warrants capital punishment; Rosh Hashana, the first day of the Jewish year, is a 2-day holiday.

The Numerology number 2 is known to numerologists as a supremely feminine force, one that represents both grace and power. It is cooperative, always aiming to bring peace and balance back to a relationship or situation. This Numerology number is also very sensitive -- of all the numbers, it has the strongest intuition. It is able to sense currents and feelings instinctively, then use these clues to connect with others empathically.

At its very core the 2 in numerology represents partnerships -- the coming together or balancing of two individual people, concepts, or things. While it holds great power over any situation, it wields it with such diplomacy and tact that the result is not control and authority, but harmony and teamwork. It is a mediator, able to see two sides of a situation in an unbiased way and guide others down the middle road.

I am far from providing all the examples that make the number 2 so special. 

But I have made my point. It is in this spirit that I offer my best wishes to all of you for a healthy, happy, and prosperous 2022.

Tesla's (TSLA) report of better than expected fourth quarter deliveries - published over the weekend - is buoying the shares. 

From Bernstein's Tony Sacconaghi: 

Tesla reported better-than-expected Q4 deliveries of 309,000, up 71% year-over-year and 16% higher than consensus expectations and higher than prevailing whisper numbers. Full year 2021 deliveries were 936,000, up 87% year-over-year, well ahead of Tesla's target of "greater than 50%." 

The analyst acknowledges that the delivery number is "impressive," reflecting improving capacity in existing facilities and high-capacity utilization, despite industry wide component and supply chain challenges. Demand indicators remain strong for Tesla, particularly in the U.S., Sacconaghi points out, arguing that given volume leverage and price increases, he suspects the quarter will deliver strong profitability and sees several structural forces that should help gross margin in 2022.

Nonetheless, while he acknowledges Tesla's success and sees continued near-term stock appreciation as likely, Sacconaghi continues to struggle to justify the company's valuation. The analyst has an Underperform rating and a price target of $300 on the shares.

I suspect Citigroup (C) had been pressured by significant tax selling over the last few weeks of 2021. 

For this reason and for the reasons mentioned in these two posts from last week (here and here), I expect Citigroup's shares to rally this month. 

I like the shares of Citigroup now - both as a trade and as an investment.

I will be on Bloomberg radio at about 9:30 am this morning.

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