Skip to main content

DAILY DIARY

Doug Kass

Berkeley Lights Dim

"Just one more thing."

- Lt. Columbo

A former short position, (BLI) , is down 35% after hours following a big miss, lower guidance and CEO departure.

Position: None.

Extraordinarily Weak Performance

Today capped several days of extraordinarily weak market performance -- whether measured by the magnitude, timing or composition of the decline.
I will have more on the markets bright and early tomorrow morning as I have a 4:15 research call.

Thanks for reading my Diary.

Enjoy the evening.

Be safe.

Position: None

Bad Breadth

Breadth and Map at 3:50 p.m. 

Breadth

View Chart »View in New Window »

Map

View Chart »View in New Window »

Position: None

The Ash Heap of Speculation

It has been my consistent view that, too often, over the last several months, market commentators have spewed out investment ideas/recommendations that had little fundamental or thoughtful substance - except that the stocks were rising or that there might have been "unusual call activity." 

This is really not criticism but it is the reality of what I have observed. 

I have been openly critical of what I thought to be the superficiality and lack of analysis - and, frankly, at times I have been overly critical. 

But the reality is also that many of these previously touted names - forgotten by the commentators - are now piling up on the ash heap of speculation that occurred in the last 2-3 years. 

Names like Robinhood, Zoom, Peloton, Tilray, Sofi, Coinbase, AMC, GameStop, Wayfair, Mara, Light Speed, Carvana, Sleep Number, Ginkgo Bioworks and Microstrategy come to mind. 

I could go on and on -- but by now you all get my point. 

And my point is that genius is a rising market.

Position: None

Subscriber Comment of the Day (Part Deux)

badgolfer22

Dan Niles
@DanielTNiles
·41m
"current economic outlook was much stronger, with higher inflation and a tighter labor market than at the beginning of the previous normalization episode...also...the [Fed's] balance sheet was much larger"-Fed minutes. Acknowledging Fed is behind the curve in dealing w/ inflation

Position: None

Leave the Gewgaw, Take the Value (Part Deux)

No Hee Haws for the Gew Gaws! (h/t to subscriber herdmt)

Position: None

Buying MSOS

My largest - and only! - buy today was (MSOS)

I will explain why in the morning.

Position: Long MSOS

Grammy Awards Cancelled

The Grammy Awards (CBS) have been cancelled due to Omicron - according to Variety.

Position: Long VIAC common and calls

Growth Portfolios

The amount of carnage in growth portfolios in the last few days is almost unprecedented in time and magnitude. 

Position: None

Peter Boockvar on the Fed Minutes

There is no question that Fed members are becoming more worried about the higher inflation that they've so aggressively tried to stoke. A sentence that stands out from the just released FOMC minutes from their meeting 3 weeks ago said this: "Participants noted their continuing attention to the public's concern about the sizable increase in the cost of living that had taken place this year and the associated burden on US households, particularly those who had limited scope to pay higher prices for essential goods and services."

These are the same participants who decided not too long ago to implement inflation symmetry around 2% where they would tolerate a period of higher inflation to offset a time frame where inflation was under 2%. From the beginning I expressed how terrible a policy it was and maybe Fed members are now learning first hand for themselves if quotes like this are any indication.

What also seemingly is spooking Fed members on inflation was reflected in this line, "participants widely cited business contacts feeling confident that they would be able to pass on higher costs of labor and material to customers."

After talking about the quickened taper process, participants said "it may become warranted to increase the fed funds rate sooner or at a faster pace than participants had earlier anticipated." They then shifted to this, "Some participants also noted that it could be appropriate to begin to reduce the size of the Federal Reserve's balance sheet relatively soon after beginning to raise the fed funds rate. Some participants judged that a less accommodative further stance of policy would likely be warranted and that the Committee should convey a strong commitment to address elevated inflation pressures." That said "a measured approach" is what they recommend, seemingly rather than aggressive.

Bottom line, while rates are rising in response, with the 10 yr yield touching 1.70%, these minutes do follow the expectations the market has for maybe 3 hikes after the end of QE in March. As for the possibility of shrinking their balance sheet and raising rates at the same time, Powell tried this in 2018 and after a 20% stock market correction he got scared and of course pivoted soon after. Thus, I don't imagine him trying again.

With respect to the markets, we're seeing first hand my fraternal conjoined triplets analogy first hand as at least markets and Fed policy are tightly conjoined and where it goes from here will highly influence economic activity.

Position: None

Avoid 'Em

Meme and gewgaws taken to the woodshed today. 

Avoid 'em: 

Jan 04, 2022 ' 12:20 PM EST DOUG KASS

Stay Away

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.

Position: None

FOMC Minutes

Here you go!


The Federal Reserve is committed to using its full range of tools to support
the U.S. economy in this challenging time, thereby promoting its maximum
employment and price stability goals.

With progress on vaccinations and strong policy support, indicators of
economic activity and employment have continued to strengthen. The sectors
most adversely affected by the pandemic have improved in recent months but
continue to be affected by COVID-19. Job gains have been solid in recent
months, and the unemployment rate has declined substantially. Supply and
demand imbalances related to the pandemic and the reopening of the economy
have continued to contribute to elevated levels of inflation. Overall
financial conditions remain accommodative, in part reflecting policy measures
to support the economy and the flow of credit to U.S. households and
businesses.

The path of the economy continues to depend on the course of the virus.
Progress on vaccinations and an easing of supply constraints are expected to
support continued gains in economic activity and employment as well as a
reduction in inflation. Risks to the economic outlook remain, including from
new variants of the virus.

The Committee seeks to achieve maximum employment and inflation at the rate of
2 percent over the longer run. In support of these goals, the Committee
decided to keep the target range for the federal funds rate at 0 to 1/4
percent. With inflation having exceeded 2 percent for some time, the Committee
expects it will be appropriate to maintain this target range until labor
market conditions have reached levels consistent with the Committee's
assessments of maximum employment. In light of inflation developments and the
further improvement in the labor market, the Committee decided to reduce the
monthly pace of its net asset purchases by $20 billion for Treasury securities
and $10 billion for agency mortgage-backed securities. Beginning in January,
the Committee will increase its holdings of Treasury securities by at least
$40 billion per month and of agency mortgage-backed securities by at least $20
billion per month. The Committee judges that similar reductions in the pace of
net asset purchases will likely be appropriate each month, but it is prepared
to adjust the pace of purchases if warranted by changes in the economic
outlook. The Federal Reserve's ongoing purchases and holdings of securities
will continue to foster smooth market functioning and accommodative financial
conditions, thereby supporting the flow of credit to households and
businesses.

In assessing the appropriate stance of monetary policy, the Committee will
continue to monitor the implications of incoming information for the economic
outlook. The Committee would be prepared to adjust the stance of monetary
policy as appropriate if risks emerge that could impede the attainment of the
Committee's goals. The Committee's assessments will take into account a wide
range of information, including readings on public health, labor market
conditions, inflation pressures and inflation expectations, and financial and
international developments.

Voting for the monetary policy action were Jerome H. Powell, Chair; John C.
Williams, Vice Chair; Thomas I. Barkin; Raphael W. Bostic; Michelle W. Bowman;
Lael Brainard; Richard H. Clarida; Mary C. Daly; Charles L. Evans; Randal K.
Quarles; and Christopher J. Waller.

Position: None

This Year in Charts

From Charlie! 

See here.

Position: None

Breadth

As you can see by the attached breadth figures, at 1:10 pm Nasdaq breadth has deteriorated markedly:

View Chart »View in New Window »

View Chart »View in New Window »

Position: None

SPY Cover

I have covered my (SPY) trading short rental at $475.78.

I plan to reshort any strength.

Position: None

Chart of the Day (Part Deux)

In the last few days the gap between cryptocurrencies and 10 year breakevens is wider than any time in the equity market rally:


Source: Zero Hedge

Image placeholder title
Position: None

LOD

Low of the day for Spyders (SPY) .

Position: Short SPY

From The Street of Dreams

Societe Generale has downgraded JPMorgan (JPM) to hold with a price target of $175.

Position: Short JPM

Late Morning Update From Sir Arthur Cashin

The bulls continue to try to hang on, although the techs continue to look wounded and are limping.

Pressure on the techs takes the S&P into mild negative territory. There will be some attention paid to the Fed Minutes this afternoon to see if there is any hint about what they may do if the balance sheet turns the tapering more aggressive by switching from a lack of buying to small sign of selling. That probably is doubtful. I think the key will be on the 11th when Powell faces reconfirmation. Once that is done, I think you will see him feel more latitude to say what he believes the Fed should be doing.

Watch the ten year. The feeling is there is some resistance between 1.68% and 1.72%. If they punch up above that, that could bring heavier pressure on stocks.

Stay Safe.

Arthur

Position: None

ARKK breaks $90.

Here is one of my Surprises for 2022

Surprise # 3. After an Early Year Rally to New Highs, The Stock Market Rolls Over

The "innovations" stocks that performed poorly in 2021, all but collapse in 2022 ( (ARKK) trades under $70/share - and that is the best performing ETF in Cathie Woods' universe!). The fallout expands to venture capital, where liquidity tightens.

As private and public companies realize they need to tighten their belts, spending on ads on Meta (FB) , Alphabet (GOOGL) and Amazon (AMZN) declines. The tech mega caps suffer a significand de-rating.

The loss of speculative monies expands into crypto and NFT's, which suffer large draw downs.

Beeple's $69 million digital painting is resold for $10 million at Sotheby's (with Beeple being the only bidder!)

Later in the year, with the economy slowing in response to higher inflation and the Fed tightening more aggressively than anticipated, a full bear market ensues - taking the S&P down 30% from its early year highs.

Position: None

To Put This Week's Rotation Into Perspective

Yesterday the (QQQ) s traded over $403. I remember because I shorted some there and covered much lower. 

Today the QQQs are trading at $393. 

By contrast, (SPY) is virtually unchanged from yesterday. 

Position: Short SPY

More SPY

I added to my (SPY) short on weakness this time.

Position: Short SPY

Subscriber Comment of the Day (and My Response)  

badgolfer22 dougie kass

I know what you're doing, it just doesn't add up. all you're doing is limiting potential gains in C by being short JPM with limited--if any-- downside protection if wrong. in my view, but it's your money, your trade. Either way it makes no sense to explain it to folks on here in my view. This is a trade for multi-billion dollar long/short hedge funds or arbs to put on. not retail, individual traders/investors.

dougie kass badgolfer22

"This is a trade for multi-billion dollar long/short hedge funds or arbs to put on. not retail, individual traders/investors."
PS we have all sorts of different subscribers.
ranging from someone who buys 100 shares of a stock to multi billion hedge funds
some day trade, others invest for years. many in between.
all with different risk profiles as well.
i try to deliver ideas for all of our subscriber stakeholders...incorporating all sorts of styles, timeframes and risk appetites.
dougie

Position: None

Breadth

Mixed breadth picture at 10:20 am.

View Chart »View in New Window »

View Chart »View in New Window »

Position: None

SPY

As suggested, I have reshorted (SPY) at $477.80 on the rally.

Position: Short SPY

Love the Pairs!

My Long C/Short JPM pairs trade is starting to work already.

Position: Long C, Short JPM

Strong Jobs Report

ADP reported 807k private jobs added last month - more than 2x consensus. (Modest downside revision in November.)

Service jobs increased by almost 670k - that is the most in six months. 

Manufacturing added 75k jobs, the best in 15 months, and up from 47k in the prior month. Construction, leisure and hospitality led the way. 

From Peter Boockvar: 

The caveat with all these figures is that "Omicron's impact had yet to be seen" according to ADP and instead benefited from the fade of Delta. Because ADP and the BLS data don't correlate month to month, I would not extrapolate today's data to what we'll see on Friday. The consensus for private sector jobs is 384k from the BLS. We know the demand for labor far exceeds supply so with more workers to be had, the more hiring can take place.

Position: None

Chart of the Day

Image placeholder title

45 Minutes.

· That's how much time passes between the moment you click "Place your order" and the moment your package gets loaded on the truck.

· That includes processing, locating, packing, scanning, and labelling your package before it hits the road.

· Amazon now receives 10 million orders per day (115 orders per second), and 1 out of every 153 American workers is an Amazon employee.

Position: None

More F, GM

I have covered the balance of my (F) and (GM) shorts for a small profit.

As I mentioned yesterday, I planned to be out today, win, lose or draw!

Position: None

Covering F, GM

I covered half of my (F) short at $23.62 and (GM) at $64.74.

Position: Short F, GM

Covering SPY

I covered my (SPY) short rental at $476.42.

I will reshort strength.

Position: None

About the Salesforce Downgrade

The Salesforce (CRM) downgrade is important because it underscores the general pull forward concerns that I have which, in part, form the basis for my expectations of slower than expected domestic economic growth.

Position: None

The Gospel According to Goldman Sachs

Last week a request was made in our Comments Section to produce Goldman Sachs' (GS) favorite stocks for 2002. 

Here you go:

View Chart »View in New Window »

Position: None

The Book of Boockvar

In trying to figure out how supply chains settle out this year and what is the situation with inventories, we saw the December Logistics Managers' Index yesterday that clocked in at 70.1, down 3.3 pts in November. What this means is this, "Growth is INCREASING AT A DECREASING RATE for: inventory costs, warehousing utilization warehousing prices, transportation utilization and transportation prices." As for inventory levels, "growth is INCREASING AT AN INCREASING RATE." With respect to capacity, "warehousing capacity and transportation capacity are CONTRACTING." The large caps are theirs.

With overall growth above 70, it is a level the LMI classifies as "significant expansion," but this inventory commentary is worth keeping an eye on, "Abnormally high inventory metrics, combined with tight capacity and unseasonably high price growth, are the drivers behind this month's continued expansion. They also suggest that some supply chains may now be carrying too much inventory - potentially a result of firms choosing the 'lesser of two evils' and stocking up to avoid potential missed holiday sales. This could foreshadow a coming bullwhip effect in which supply chains over-ordered to avoid shortages and are now dealing with the burden of having too much inventory - or too much of the wrong type of inventory - on hand."

Their bottom line as "considerable stress was put onto supply chains to avoid missed sales during the holiday rush" was this, "The month's report indicates that supply chains are now dealing with the aftermath of this herculean effort. This is likely to continue to strain on supply chain capacity well into the new year, and possibly through to 2023."

I'll just add this, while inventory levels seem to be building, for whatever reason mentioned above, I do believe that the shift from Just in Time to Just in Case will mean generally a higher base level of inventory relative to sales going forward.

And lastly, on the wage front for transportation workers, I saw a story this morning that privately held Lawrence Freight, a truckload carrier, is hiking wages by as much as 40% for company drivers and including an extra 2.5 cent per mile, up to $3,000 annually, in the form of quarterly safety bonuses. The end result will be salaries of up to $88,000 with certain drivers getting up to $92,000 per year.

December auto sales clocked in yesterday at 12.44mm at a seasonally adjusted annualized rate, well below the estimate of 13.1mm and down from 12.86mm in November and which compares with 16.7mm in December 2019. There is no question that the lack of supply is a key factor here but with a record price of both new and used cars, one has to wonder whether consumers are saying 'no way' to these prices and will just drive their existing car longer or buy out their lease which is likely a much cheaper price than the same used car on the market. S&P Global Platts Analytics said they don't see supply catching up to demand with auto production until early 2023. The Boston Consulting Group thinks that it will last into 2024 before stabilizing in 2025.

What this means is higher auto prices for the rest of us but with a mix of price differentials otherwise. For example, if there are still not enough semi's and a finished product can't take place, there will be less demand for steel and in turn iron ore in the meantime.

Why are energy stocks still a buy and energy prices are likely still going higher? Nikkei News today has a story titled "Global exodus from fossil fuel holdings tops 1,500 institutions." In the piece it says, "More than 1,500 pension funds, universities and other organizations around the world have announced that they will divest from fossil fuel assets, doubling from five years earlier and underscoring the surge in sustainable investing. These institutions have roughly $40 Trillion in assets under management." Thus, there will be continued under investment in conventional energy sources which will mean sustainably higher prices.

I bring this all up today to present further evidence of my belief that inflation in 2022 will remain sticky and persistent.

Please give a pass to weekly mortgage applications today as while they try to seasonally adjust, they just don't do a good job around the holidays. Purchases fell 10.2% w/o/w and by 12% y/o/y. Refi's were down by 2.5% w/o/w and by 40% y/o/y.

In Asia, Hong Kong's December PMI fell to 50.8 from 52.6 with the Covid hardline the main reason. The more reasonable approach comes from Singapore and its PMI rose to 55.1 from 52. This said, "the latest survey was taken ahead of heightened Covid concerns which led to the temporary suspension of VTL ticket sales." Supply chains too were a problem, "supply constraints remained prevalent. Longer lead times, manpower shortages and resultant surge in prices all embodied the issues, although these remain linked to the demand-supply imbalances amid the recovery of APAC economies from the latest Delta wave." I remain bullish on Singapore and Singapore stocks where the Straits index is trading at 13x earnings with a dividend yield of 4.2%.

India's services PMI for December fell to 55.1 from 58.1 which still remains at a good expansionary pace but worries about Covid and price pressures are still apparent.

The December Eurozone services PMI was revised down to 53.1 from the initial print of 53.3. That is down from 55.4 in November and the lowest since February 2021. Omicron is definitely the culprit. With pricing, "Although there was a marginal easing of price pressures, we're still in excessively hot territory - increases in both input and output costs were the 2nd quickest on record."

Notable today is the continued rise in European bond yields with the German 10 yr yield up another 4 bps to -.08% and getting ever closer to zero. That is the least negative since May 2019. With the ECB the most offsides central bank with policy relative to the rate of inflation, today Governing Council member Martins Kazaks talked tough. "Don't be misguided that we won't raise rates, or that we won't cut the support if necessary. Of course we'll do our job." Without trying to sound hyperbolic here, I can't emphasize enough how relevant the European bond market means for global rates because of their deeply negative rate policy that resulted in the biggest financial bubble in the history of bubbles. If they actually do their job with respect to price stability, there is a whole lot of pain ahead for European fixed income investors, and possibly for others with any spillover.

GERMAN 10 yr Bund Yield

Image placeholder title
Position: None

A Word About Sarge

To my right, Sarge delivers an extraordinarily value-added commentary every morning. 

After reading today's missive you can see why he is a must read

Sarge produces common sense and logical analysis that combines the fundamental and the technical. 

He does this with a sequence of well-structured arguments that distill the essence of an investment into a package of words that are easily discernable and extremely thoughtful. 

His decades of analytical and trading experience provides a knowledgeable backdrop - a unique asset in a market where many have forgotten the lessons of history. 

It is clear that a lot of work go into every one of his columns. And I know from experience how much work it takes to deliver original and primary analysis. 

Walk don't run to read Sarge daily. 

I do. 

Sometimes twice!

Position: None

Why I Like Pairs Trading

A pairs trade is a trading strategy that involves matching a long position with a short position in two stocks with a high correlation. 

As I am of the view, at the very least, that the Bull Market is aging - a pairs trade provides an opportunity to make money in a more difficult market backdrop. 

The structure/correlation of a pairs trade also provides one with the opportunity to take larger than normal weightings. 

Yesterday I put on a pairs trade of Long (C) ($63.72) and Short (JPM) ($168.16). 

I put on this trade as I believe the multiple (to EPS/tangible book value) has grown too extreme between these two leading money center banks. 

More on Citigroup, here and here

Let's monitor this pairs trade over time to see if my reasoning will prove accurate.

Position: Long C, Short JPM

Some Good Morning Reads

* Is this the greatest Bull Market in history? 

* Millennium spend

* Goodbye Goldman Sachs.

Position: None

Ford, GM

I am shorting more (F) and (GM) in premarket trading.

I am thinking very short term on these short rentals.

Position: Short F, GM

The Great Rotation of 2022

* Has been on full display this week

* With interest rates rising and inflationary pressures likely to remain elevated, this trend may be a condition for most of the year

Image placeholder title

In "Could the Setup for 2022 Portend An End To The 12- Year Bull Run?" and in my Bloomberg interview earlier this week, I argued for The Great Rotation out of growth and into value: 

* The setup for 2022 is far different than 2021.

* After a lengthy period of unbounded fiscal and monetary largesse we are exiting peak economic activity and peak liquidity

* Sell strength and buy weakness?

* The growth and narrow market performance bias into "The Nifty Seven" has grown ever more extreme, conspicuous and worrisome

* Since April 2021, over half of the S&P gain is from only five stocks

* The January effect this year might result in weakness in the anointed "Nifty Seven" as investors defer a tax event and strength in beaten-down value stocks as investors see relative value

* I remain fearful of Omicron not because of its virulence but due to its likely continued impact on supply chains and, in turn, inflation


And in my15 Surprises for 2022I went out on a limb in emphasizing the magnitude of The Great Rotation: 

Dec 29, 2021 ' 12:50 PM EST DOUG KASS

This Would Be a Big Surprise!

Surprise #5 - Value Stocks Materially Outperform Growth Stocks: Shockingly, AT&T outperforms a faltering "The Nifty Seven" (Facebook, Amazon, Apple, Google, Netflix, Nvidia and Microsoft)!

- My 15 Surprises for 2022

One of my Diary's objectives is to consider stuff that is outside of the consensus, things that few consider - and here is a case in point.

Amazon continues to be the worrisome and conspicuous laggard in "The Nifty Seven."

Here is what I wrote on Amazon in my Surprise List:

"As private and public companies realize they need to tighten their belts, spending on ads on Meta (FB) , Alphabet (GOOGL) and Amazon (AMZN) declines. The tech mega caps suffer a significand de-rating."

Now, that would be a Big Surprise!

Position: None

On a Paucity of Toilet Paper and Lack of Availability of Starbucks Coffee Cups and Labor

* Supply interruptions, and the inflation that it brings on, will be a continuing condition throughout this year

Based on our research, I remain of the view that the supply dislocations that intensified late in 2021 will be a condition of most of 2022. 

The importance of this is that inflationary pressures will continue to be intense, and, in turn, leading to the likely pressure on the Federal Reserve to more aggressively tighten. 

In talking to numerous companies and by physically observing at stores around South Florida it is clear that the supply chain dislocations, apparent throughout the last year - which acted as the straw that stirs the drink to inflation - will continue throughout 2022 in its frequency and intensify. 

Here is a photo of a South Florida Publix Supermarket's toilet paper aisle:

Image placeholder title

And, here in South Florida, as previously detailed, many Starbucks are closing early because of a dearth in available baristas and coffee cups and other supplies.

Image placeholder title
Position: None

A Brief Review of Overnight Trading

At the low, S&P futures dropped by about 13 handles in last night's futures session and mounted a modest rise in the middle of the evening.

They are now (5:15 am) +1 handle. I added to my (SPY) short just now at $477.76. 

Nasdaq futures were more volatile, dropping by over 70 handles late in the evening. Now -34 handles. 

I wanted to mention that I have historically done about half of my Index trading outside of the normal trading hours.

Position: Short SPY

Two Tweets From Larry McDonald

Position: None

I Took a Short Rental in F and GM on Yesterday's Share Price Spikes

In case you didn't see this post on Tuesday evening:

Jan 04, 2022 ' 05:33 PM EST DOUG KASS

My Comment of the Day

"Just one more thing."

- Lt. Columbo 

dougie kass

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


I added to my short in premarket trading this morning. 

Position: Short GM, F
Doug Kass - Watchlist (Longs)
ContributorSymbolInitial DateReturn
Doug KassVKTX4/2/24-31.72%
Doug KassOXY12/6/23-14.91%
Doug KassCVX12/6/23+10.81%
Doug KassXOM12/6/23+13.02%
Doug KassMSOS11/1/23-22.80%
Doug KassJOE9/19/23-14.64%
Doug KassOXY9/19/23-26.30%
Doug KassELAN3/22/23+37.02%
Doug KassVTV10/20/20+64.63%
Doug KassVBR10/20/20+77.10%