"Just one more thing."

- Lt. Columbo

dougie kass • a minute ago

This is a one way market dominated by passive products that follow price momentum.
Case in point banks, oils and autos today on the upside and Tech on the downside.
Who pays 8% and 11% for (GM) and (F) - on news (production increases in EV) that were announced a month ago?
The machines.
I want to trade opportunistically against them because they know everything about price and nothing about value.
It doesnt mean that F and GM will immediately trade down, but...
Dougie

"The best lack all conviction, while the worst are full of passionate intensity."
- William Butler Yates

I started the day writing about my lack of conviction:

Jan 04, 2022 ' 08:48 AM EST DOUG KASS

My Conviction Level Today Is Low

* I try hard to be a truth teller in my Diary - even when it makes me sound foolish, uncertain and indecisive

* A consistently confident narrative tells you more about the narrator than the commentary/view

* While I am negative in my market and economic views I am currently not confident today that the market will cooperate with my views - this could change tomorrow

* However, in rare times, one should go for the jugular but not on a steady diet!

That said, there are some things I have a conviction in:

* There has rarely been such a wide array of possible economic and market outcomes than exist today (many of them adverse).

* Confidence is an abundant quality of Wall Street. At this stage in the market, cull out the people that you use as resources. Remember, opinions are like butts, everyone has one!

* We are likely in a maturing bull market in which it is easier to lose money than make money.

* I would avoid illiquid and speculative gewgaws like the plague. Stick with quality.

* Consider favoring value over growth. (Today was a conspicuous example of the bifurcation that continue for months).

* Also considering erring on the side of conservatism in a bull market that seems advanced.

* The market has likely entered a new regime of heightened volatility. (Recognize that when I woke up the S&P futures were up 27 handles and the Nasdaq futures were up 130 handles -- look at the lows in the indexes and the close, amazing).

* Inflation will not be transitory.

* Nor will the supply chain dislocations and logistical problems likely be remedied anytime soon.

* We have probably entered a difficult investing backdrop but a good setting for opportunistic traders. (I am going to do a lot more pairs trades).

* Rates are likely to rise further- so there is an alternative to equities.

Thanks for reading my Diary.

I hope it was value-added.

Enjoy the evening.

Be safe.

I shorted (mean regression trade) (F) and (GM) at the close.

I will be covering tomorrow - win, lose or draw.

Adding further to (SPY) short at $477.88.

I am adding to my (SPY) short at $477.36.

"Leave the gun, take the cannoli."

- The Godfather

For emphasis!

I just added to (C) at $63.70 and shorted (JPM) against it at $168.05.

Yesterday commentators and the analyst community waxed enthusiastically about Tesla's delivery beat in the quarter ended December 31, 2021. 

Tesla sold about 30k more cars than expected. At $50k/unit and assuming the company made 10% net after tax this would result in about $150 million in "extra" after tax profits in the fourth quarter. 

For a rough perspective on how absurd the $150 billion rise in Tesla's market cap was yesterday - it represented 1000x the gain of $150 million of "extra" profits relative to consensus.

When I referenced being back in a (SPY) short in the previous post - I didn't chronicle the wide spread damage under the market's hood.

Besides the large-cap tech carnage consider the weakness in illiquid/speculative gewgaws, crypto-related equities, large-cap biotechs, and Chinese stocks. ARK (ARKK) crap and such popular names as (NVDA) , (PYPL) , (PENN) / (DKNG) , and (TWTR) .

Against that we have a bidding up in cyclicals (oil/autos) which is also extreme on the other end!

To me this is all a sign of a maturing Bull Market.

The reason I am back in my (SPY) short, and not in (QQQ) short, is that a number of cyclical/value plays in the S&P have had outsized gains in the last few days (autos, oils, etc.) and seem to be vulnerable to some profit taking. 

In some measure this reflects the market structure, products and strategies, that buys strength and sells weakness - referenced in my opener this morning. 

I am trying to use the changing market structure to my advantage.

This morning's opening missive dealt with the concept of conviction, or, in my case, the lack of! 

On the other hand, the one thing I am a bit more convicted about is that - in what appears to be a maturing Bull Market - it might be advisable to stay away from illiquid positions and speculative gewgaws.

In keeping with my housekeeping, I am now out of my AT&T  (T) long position.

I have reshorted SPY at $477.75.

In keeping with my housekeeping efforts - raising cash - I have sold my (IVZ) long this morning.

These 10:40 am breadth numbers and heat map helps to visualize the rotation from growth to value.

View Chart »View in New Window »

View Chart »View in New Window »

Tested negative for Covid... 

As to the markets, the rotation out of growth and into value/financials - I am a proponent of this - continues in full force. 

Ergo, explaining my (QQQ) short.

I have covered both my (SPY) and (QQQ) shorts at $467.60 and $394.30, respectively. 

I will reshort strength.

Like me, Peter is uncertain and lacks conviction: 

The December ISM manufacturing index fell to 58.7 from 61.1 and that was just below the estimate of 60. It also matches the lowest level since November 2020. New orders slipped by 1.1 pts to 60.4 but backlogs were up by .9 pts to 62.8. Inventories at manufacturers fell 2.1 pts m/o/m to 54.7, a 4 month low but did rebound from extraordinarily low levels at the customer level to 31.7 from 25.1, although still well below 50. Employment was up .9 pts to 54.2, the best since April. Exports fell slightly but imports rose. On the supplier and pricing side, supplier deliveries fell 7.3 pts m/o/m to 64.9 and that is the lowest since November 2020. Prices paid declined by 14.2 pts to 68.2 and that is the lowest also since November 2020.

Of the 18 industries surveyed, 15 saw growth vs 13 in November and 16 in October. With prices, 16 paid higher prices vs 18 in the prior two moves. Those seeing 'slower deliveries' totaled 14 vs 16 in November and 18 in October.

The ISM bottom line was this, "The US manufacturing sector remains in a demand drive, supply chain constrained environment, with indications of improvements in labor resources and supplier delivery performance. Shortages of critical lowest tier materials, high commodity prices and difficulties in transporting products continue to plague reliable consumption. Coronavirus pandemic related global issues - worker absenteeism, short term shutdowns due to parts shortages, employee turnover and overseas supply chain problems - continue to impact manufacturing."

With respect to the supply delivery side, "Transportation networks, a harbinger of future supplier delivery performance, are still performing erratically; however, there are signs of improvement."

My bottom line is this, understanding that this data only measures the direction of change, not the degree, we have hopefully seen the worst of the supply challenges, especially with the holidays now over (although we still have the delivery crunch ahead of Chinese New Yr) and maybe also a peak in the rate of change with commodity prices. Although I don't believe we've seen the absolute peak in commodity prices as I still think they go higher, notwithstanding any corrections this year.

I do admit that I'm really uncertain how 2022 plays out economically with so many moving parts. While I'm confident that inflation will remain persistent all year, though with a slower rate of change than in 2021, we'll have to see to what extent higher wages offsets that and can companies maintain such high profit margins. What will be the fiscal hangover as while Congress will no doubt come up with another spending package ahead of the midterms, it will be much less than that seen in 2020 and 2021? And lastly, I have no idea how this inventory situation is going to play out in terms of where it normalizes at. How much in goods have companies double and triple ordered? How much in goods is still needed just to get back to normal inventory levels?

Anyone speaking with confidence on how these issues play out have a much better crystal ball than I do. The only thing I'm confident in is that monetary tightening as it plays out will not be painless and inflation will remain sustainable at levels well above where they were pre Covid.

ISM MFR'g

SUPPLIER DELIVERIES

PRICES PAID

Somewhat dated, in November we saw 10.56mm job openings vs 11.1mm in October. While below the 11mm estimate, it still is very high and remains well above the number of unemployed at 6.88mm in November. While omicron messes up the situation, it's clear that demand for labor is still far outpacing supply and why wages will continue higher as leverage shifts to employees. The quits rate went back to its record high at 3% with the absolute number of quitters also going to a record high of 4.5mm people.

JOB OPENINGS

QUITS RATE

* I try hard to be a truth teller in my Diary - even when it makes me sound foolish, uncertain and indecisive

* A consistently confident narrative tells you more about the narrator than the commentary/view

* While I am negative in my market and economic views I am currently not confident today that the market will cooperate with my views - this could change tomorrow

* However, in rare times, one should go for the jugular but not on a steady diet!

"The best lack all conviction, while the worst are full of passionate intensity."
- William Butler Yates

I often take large contrary bets based on a high degree of conviction - even when the market is moving - over the short term - in the opposite direction of my expectations.

In the past it has paid off for me.  But not so much recently!

However, the sort of unpredictability and renewed volatility that we have experienced in the last few months, and that we often see in futures trading overnight - which I chronicle in my "More Night Moves" columns, in addition to other factors (discussed below) do not engender confidence in placing large investment bets. At least not for me.

In the business media few admit to lack of conviction - as many seem to be "selling" themselves or a service - related to investing or trading - or they want to exude confidence because they feel more will listen and/or their "franchise" will grow as readers/viewers react to their heightened conviction.

As a result of my current lack of conviction and until I feel more confident - I plan on keeping my gross and net exposures low.

To accomplish this I will be reducing the size of a number of my longs today - across my entire portfolio.

Here is an oldie but goodie column (that I have updated for present conditions). I wrote the original column several years ago about the subject of confidence that bears repeating:

Conviction is something that few talk about.

To me, it seems many are consistent in their beliefs - rarely vacillating in conviction and always expressing confidence. ("I am bullish or I am bearish are their constant refrains!")

But that is a rather silly notion as we can't be constant in our conviction - particularly in a world of uncertainties.

In a previous mid-2019 column, "Not All Investment Views Are Created Equal," I discuss the concept of conviction:

* All market views are not equal - nearly every investment view should have a different level of conviction

* My short term market outlook is now blurry

I like to write that the only certainty is the lack of certainty.

But, as an old acquaintance recently said to me, today there are more possible outcomes, some of them adverse, than at any other time in history.

Strategists, commentators and other "talking heads" are fond of voicing a strong market view and conviction - even when the uncertainties are considerable. Few say, "I don't know," as I suspect they think it indicates "weakness." That is plain silly and phony. To me, this sort of confident narrative is really a sign of weakness, as conviction can not be consistently strong when viewed against those uncertainties.

Though I don't always succeed, these days in particular, I aim to be flexible in view and opportunistic in practice.

The concept of conviction is rarely discussed when people offer up market views - but I will harp on the subject this morning.

It is said that opinions are like buttholes -- everyone has one (and that includes me!)

It seems that in today's investment world in particular almost everyone has an opinion and a view on nearly everything. In many cases these views are delivered by self-confident messengers who seem to never be in doubt but are often wrong.

It also seems, that the more anonymous the person is, the more confident is the view! The Twitter platform comes to mind.

Few say, "I don't know."

But this is not a representation of reality.

The fact is that a view invariably is associated with differing degrees of conviction.

Nearly every strategist, analyst and portfolio manager is first asked about a "view" in the business media, but I can't remember the important follow up question: "What is your conviction level associated with that view?"

This very simple concept gets little discussion, but it should as it is very important, sometimes as important as a given view itself.

As an example, last night I "liked" Clemson. Based on my analysis I thought the spread of six points (Alabama was favored) was too great given Clemson's talent (of a Trevor Lawrence kind) and momentum, among other factors. But my conviction level was not high, so I wagered a small amount with Badgolfer -- thanks, Mikey! -- on Clemson to win.

The Clemson Tigers easily won the college championship by a score of 44-16, blowing out the Crimson Tide.

It is also true when investing that not all views are equal.

Investment Convictions Today Should Be Lower Than in the Past As Possible Outcomes Multiply

There are several major factors that recently have contributed to my rising uncertainty:

* Global central bankers are about to withdraw liquidity -- The pivot toward tighter money reduces system liquidity. Liquidity and volatility are inversely related, so less liquidity means more volatility and less predictability.
* The market structure has changed -- The dominance of passive products and strategies are also contributing to the new regime of volatility that began in early 2018. In this changing market structure buying begets buying - and selling begets selling.
* Policy uncertainty and political turmoil -- As I wrote in my Surprise List and discussed on Bloomberg yesterday - I expect global harmony to be disrupted on three continents in 2022.
* Omicron appears infectious but not virulent - in other words, manageable. But what happens if another variant appears?
* The world is growing more flat, networked and interconnected -- Non-coordination and lack of cooperation among the largest countries in the world represents a profound and new risk. I continue to ask these three questions every day, as the answers might serve to raise uncertainties but also may be viewed as valuation busters in the fullness of time:

• In a paperless and cloudy world, are investors and citizens as safe as the markets assume we are?
• In a flat, networked and interconnected world, is it even possible for America to be an "oasis of prosperity" and a driver or engine of global economic growth?
• With the G-8's geopolitical coordination at an all-time low, how slow and inept will the reaction be if the wheels do come off?

The reason I want you to remember these questions is that the answers might serve as valuation busters in the fullness of time..."

- Kass Diary, "This Ain't No Seder, I Now Have Eight Questions" (2017)

Differing Conviction Levels and the Uncertainty of Views

"I'm astounded by people who want to 'know' the universe when it's hard enough to find your way around Chinatown."
- Woody Allen

Besides the above five contributors that form the foundation of growing uncertainty, there are other factors that may reduce conviction of views.

Price and trends, and volatility are other important considerations.

The Rare Time of High Conviction Should Be Followed in Practice

"Soros has taught me that when you have conviction on a trade, you have to go for the jugular. It takes courage to be a pig. It takes courage to ride a profit with huge leverage."
- Stanley Druckenmiller

I didn't want to end this missive without mentioning that, though uncertainties reign, when your conviction is high you should not be reluctant "to go large."

In the last 30 years, George Soros and Stanley Druckenmiller are the best practitioners of convicted and concentrated investment positions/bets.

This was also the case, at least for me (on a more limited scale), when the S&P in the last week of December 2018 collapsed to 2340 and I moved to a large net long exposure. The same applies to March, 2020 when I went very long.

Then there is the rare bird, Berkshire Hathaway's (BRK.B) Warren Buffett, who, more than anyone in modern investment history, has a documented history of confidence and large, concentrated portfolio investments that have manifested in the delivery of remarkable investment returns over the last five decades.

Frankly, my conviction levels over the last few years are far lower than they have been in the past, especially when compared to when I started out in the investment business more than four decades ago.

As mentioned, for me, my conviction is strongly a function of rising uncertainties - in policy, politics, market structure and interconnectivity,  as well as the difference between current share prices and my calculus of intrinsic or fair market value. While it is counterintuitive to momentum-based strategies, my conviction generally rises when the spread between current share price and intrinsic value widens. As the spread contracts, my conviction is reduced.

These factors help to explain my weightings - small, medium and large - which tend to be a reflection of my varying conviction levels and the consideration that it is increasingly hard to find the ideal entry point!

So, in the final analysis, all investment views are not equal.

Bottom Line

"Our destiny is frequently met in the very paths we take to avoid it."
- Jean de La Fontaine, Fable 16

For me, this is not the time to be heavily invested.

Others probably feel differently, but I do not believe it is a good time for high conviction exposure, long or short, as the moving parts are multiple and the probabilities attached to various, and even extreme, business/economic outcomes are low.

Based on my recent research, the 4Q2021 and FY2022 consensus estimates for most cannabis companies are a bit too high. 

Until recently the analytical community, with some exceptions, have been late to report this, imho, but if my research is correct we should begin to read this sort of commentary in the next 1-2 weeks. By contrast, some cannabis companies have already begun to reveal the somewhat worsening - relative to consensus expectations - in demand/supply in their recent communiques with investors. 

The positive is that the stocks are on their butts and the low share prices seem to have mostly discounted some state level cannabis market weakness. 

To be realistic, a recently more than expected competitive, and less profitable, market in states like California - widely recognized already - but also in Florida, Massachusetts and Pennsylvania means that cannabis stocks will need legislative advances, which I feel are coming in the short term, to drive positive investor sentiment in the group. 

If I am wrong about the more positive decriminalization/legalization initiatives in January and February - the slightly weakening fundamentals could raise some TAM (total addressable market) concerns. 

This morning we have begun to see some realism from the sell-side, and we are bound to see more in the days ahead. Here, from Cantor:

View Chart »View in New Window »

Goldman Sachs reduces its price target for (IVZ) from $27 to $26.

This follows a downgrade of (TROW) after the close on Monday.

3 days

Yesterday's biggest jump in the 10 yr yield since mid November didn't happen in a vacuum. Of the 12 bps increase, 5 came from inflation expectations and I'm guessing the belief on the balance is the realization that for most, omicron is just a cold and case numbers should be rolling back down again within a month. On the Wednesday before Thanksgiving, before most of us heard of omicron that Friday, the 10 yr yield was at 1.64% vs exactly 1.64% today. The 10 yr inflation breakeven on that Wednesday was 2.62% vs 2.65% today. What's changed from that Wednesday in November is the rise in short end rates with the 2 yr at .78% vs .64% then as the Fed has shifted as we know. Also, the 9 bps rise in the 5 yr yesterday was just about fully matched by the 9 bps increase in inflation breakevens which is back to 3% for the 1st time since that Wednesday when it was at 3.06% before a 10 bp drop that omicron Friday.

Also, the selloff in European bonds were a factor here too. I said many times that you can analyze US growth and inflation rates all you want but where European yields go will be a big influence on ours. The German 10 yr bund yield yesterday rose 6 bps to -.12% which compares to -.37% just two weeks ago. That yield is down 1.5 bps today. If you still must buy that bund having to give 13.5 bps each year, it compares with 10 yr inflation expectations in Germany of 1.81%.

5 yr Inflation Breakeven

GERMAN 10 yr Yield

In the financing environment right now if one is not a small business looking for a bank loan (it's still tough and a personal guarantee is demanded) and instead is in search of VC or PE money, all you need still is being able to breathe and have a power point presentation. While I wish them all the best, I read in yesterday's WSJ about the company Colossal who back in September raised $16mm, double what they were looking for. What do they do? They want to resurrect the wooly mammoth in a very Jurassic Park sort of way. They want to genetically modify the Asian elephant to do this in what they refer to as de-extinction. Here is their website if interested,  and the mammoth was considered an extinct species in 1796 according to Wikipedia. I hope they are successful as this would be interesting to see.

The Caixin December Chinese manufacturing index rose 1 pt m/o/m to 50.9 and that was better than the estimate of little change to 50 and vs 50.6 in October. Caixin said "Firms signaled the strongest increase in output for a year amid a renewed uptick in total sales. However, foreign demand remained lackluster, with export orders broadly stagnant. Improved demand prompted a fresh rise in purchasing activity, but backlogs rose again amid a further drop in staffing levels. Supplier performance meanwhile deteriorated at a softer pace, and inflationary pressures weakened. Notably, average input costs rose at the slowest pace for 19 months." Lower steel prices were specifically cited but I'm sure lower iron ore prices too were a factor, notwithstanding the recent jump.

As for industrial commodity prices generally, the CRB raw industrials index yesterday closed within less than 1% of a record high.

CRB RAW INDUSTRIALS index

Also seen with the PMI's, Vietnam's manufacturing index rose .3 pts to 52.5 while Thailand's slipped by 1.1 pts and back below 50 at 49.5.

Shifting to the European data, Germany said the number of unemployed in December fell by 23k, more than the estimate of 15k but I'm not sure to what extent the survey was done before some recent Covid restrictions. Their unemployment rate fell one tenth to 5.2% which is now within just 2 tenths of its pre Covid level.

France reported its CPI for December and it rose .2% m/o/m which was half the estimate after a 4 tenths rise in November. The y/o/y rate of 3.4% was unchanged from the prior month. As energy is a big factor here, less so for France relative to other European countries because of their large nuclear footprint, the crazy moves in natural gas likely made predicting inflation in December very difficult. I mentioned earlier the move in German bund yields. Before today's 2.7 bps drop in the 10 yr French oat yield to +.22% (yes, a plus sign), the yield last fell on December 17th and rose 26 bps in this time frame.

FRENCH 10 yr Yield

Many in the transitional inflation camp pointed to the 25% drop in lumber prices in November.

"Crickets" now:

Property Stocks Sink After Demolition Order: Evergrande Update

Here is a good review of the commercial office supply/demand in several large metro markets.

S&P futures momentarily dropped by about five handles in last night's futures session and mounted a steady rise early on Tuesday morning.

Now +20 handles.

P.S.: I occasionally review overnight futures trading for a perspective.