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DAILY DIARY

Doug Kass

A Game of Sheer Lunacy

And the shares are up $30 a share on the news...

Position: None.

Thanks for Reading

I am heading into my last meeting so I won't be making entries in my Diary for the rest of the day.

Thanks for reading.

Enjoy the evening.

Be safe.

Position: None

More COIN

I added to (COIN) on strength (for a change).

Position: Long COIN

Hindenburg on RCL

Hindenburg Research on Royal Caribbean (RCL) ... I agree and I am short both RCL and CCL:

Hindenburg Research @HindenburgRes

We are short $RCL, which we believe to be one of the most dislocated "re-opening" stocks on the market today. The outlook for $RCL and the cruise industry is far more grim than other hospitality and leisure "post-Covid" stories.

Position: Short RCL, CCL

Not Interested in Buying This Dip

While I suspect we could get a couple of percentage rally at any point, it is important to realize that a great many stocks (soldiers) have broken down technically over the last several months. 

Now the generals (read: The Nifty Seven) are breaking down.

For now I am not interested in buying this dip - call me when the next dip occurs! 

I remain of the view that we are experiencing a broad and important market top. 

Two meetings down, a couple of more to go.

Position: None

More Fed Speak

Voting member Jim Bullard is saying today that the 1st rate hike could come in March - this could explain the modest selloff from the highs - and with respect to the balance sheet, "the FOMC could also elect to allow passive balance sheet runoff in order to reduce monetary accommodation at an appropriate pace."

'Could' is the key word here because this whole conversation just depends. Depends on how markets and the economy handle the end of QE, and depends on how markets and the economy handle the initial rate hikes. 

I'll argue that QT is just not going to become a realistic conversation until after the Fed has a few rate hikes under their belt which won't be until at least late spring/early summer.

Position: None

10 Year Note

It is interesting to note that the yield on the 10 year note is only +2 bps now. 

One meeting down, three more to go!

Position: None

Daly Is Not On Board With QT

While SF Fed president Mary Daly does not vote this year, she is seemingly not anywhere close to agreeing to a shrinkage in their balance sheet after I just saw this headline,

*DALY: TRIMMING BAL. SHEET TO COME AFTER NEUTRALIZING FUNDS RATE"

Position: None

Being the Obstetrician and the Mortician in One Week!

* There is nothing wrong with taking a trading profit on a portion of your trading position in C now

Early Monday I made Citigroup (C) my Trade of the Week - the shares traded $61- $61.5 at the week's opening. 

The shares are now trading $64.63, reflecting the swift move out of growth into value. 

Consider taking off some of the trading position if you have a short term timeframe. 

Here is what I wrote on Monday: 

Jan 03, 2022 ' 06:45 AM EST DOUG KASS

Trade of the Week - Buy Citigroup

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.

Position: Long C

Programming Note

I literally have four research calls this afternoon, so my posts will be shorter and less frequent.

Position: None

Reviewing Our Bank Pairs Trade

On Tuesday I initiated a pairs trade - Long (C) /Short (JPM)

Jan 04, 2022 ' 01:50 PM EST DOUG KASS

Pairs Trade

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

Taking into account the payment of a $1 JPM dividend this week, C is trading at $64.45 (+$0.75) and JPM is trading at $164.37 (+$1) or $165.37 (-$2.68).

So, thus far, so good on the pairs trade.

Position: Long C, Short JPM

Boockvar on ISM

Peter on ISM services: 

The December ISM services index fell to 62 from 69.1 and that was well below the estimate of 67. New orders fell by 8.2 pts to 61.5 and backlogs were lower by 3.6 pts to 62.3. Inventories remained below 50, down by 1.5 pts to 46.7. Employment declined by 1.6 pts to 54.9 but after jumping by 4.9 pts in November. The trade components were up but only some service companies report them. On the supply and price side, supplier deliveries dropped by almost 12 pts to 63.9 which is the lowest since March 2021 (again, measuring the direction of change, not degree). Prices paid were little changed at 82.5 but that's still just off the highest since 2005. All 18 industries surveyed saw higher prices paid for the 5th straight month.

Of the 18 industries asked, 16 saw growth vs 18 in the two prior months.

ISM said "Although there was a pullback for most of the indexes in December, the rate of growth remains strong for the services sector" but here's the catch, "respondents have indicated that they continue to struggle with inflation, supply chain disruptions, capacity constraints, logistical challenges and shortages of labor and materials."

While it does seem like we've reached peak strain in the supply chain, many companies are still under a lot of stress and more price hikes are coming. I highlight these quotes to point out that the inflationary environment we are in will still take time to work through. Here they are:

"Supply chain challenges to procure supplies for our restaurants remains our greatest obstacle at present, along with staffing needs. We are considering another price increase after just one in 2021, in August." (Accommodation & Food Services)

"The escalation in costs for materials, fuel, labor, lodging and the like continues to negatively impact margins in an unsustainable direction." (Construction)

"Most upstream production materials are being pressured by constrained supply chains as well as domestic transportation challenges. Vendors are trying not to pass on expenses, but their margins are such that they will need to raise prices. While we have done a good job holding prices down, we will not be able to hold the vendors at bay. All (cost of goods) will be impacted." (Information)

"Activity continues to maintain a steady pace. Inventory levels and outages are persistent with our suppliers; however, starting to see some relief in the supply chain, but not below the critical point yet. Prices continue to be driven up, with shipping costs the largest driver due to inflated pressures on capacity and fuel costs." (Other services)

"Electronic chip shortage is severely affecting deliveries from our supply base, thus impacting our ability to deliver to customers." (Professional, Scientific & Technical Services)

"Long lead times, transportation bottlenecks, delivery inconsistency and price increases continue to affect a range of products." (Retail trade)

"We continue to experience supply chain disruptions across the nation and around the globe, resulting in raw material and subcomponent shortages, longer manufacturer lead times, transportation resource constraints, labor pool issues and significant price increases. Supply management continues to recommend pulling in demand, placing orders earlier than historical lead times for long lead time materials, and qualifying secondary sources of supply (if applicable)." (Utilities)

"Demand is good, but supply chain issues continue to get worse. Trucking availability is worsening. Labor shortages are causing issues. We could do much more business if we had more people and access to more products." (Wholesale Trade)

ISM SERVICES

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SUPPLIER DELIVERIES

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PRICES PAID

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Position: None

Adding to Cannabis

On the cannabis weakness, I have added small to MSOS, AYRWF, GTBIF, TRSSF, and VRNOF this morning.

Position: Long MSOS, AYRWF, GTBIF, TRSSF, VRNOF

Subscriber Comment of the Day

Skeptcl

Briefing:

Coinbase Global: Rating changes, top picks and key themes; U'grade COIN & TASK to Buy, d'grade TIXT & WU to U/P -- BofA Securities (230.13 -4.10)
1/6/2022, 9:31:47 AM ET

BofA's Jason Kupferberg added, "COIN -- Upgrade to Buy from Neutral on increasing signs of revenue diversification beyond retail crypto trading, a trend which could accelerate in '22 and beyond. In addition, our inaugural crypto tracker suggests upside potential to 4Q21 estimates, and COIN has significantly lagged the SPX over the past two months.

Position: Long COIN

An Unplayable Market

One of the things that I have emphasized with some certainty is the new regime of equity volatility.

That is exactly what we are seeing now.

The market is virtually unplayable under these conditions.

Position: None

Rotation Out of Crypto?

See here:

View Chart »View in New Window »

Position: None

Breadth

Weak breadth at 9:55 am.

View Chart »View in New Window »

View Chart »View in New Window »

Position: None

Coinbase Now

I initiated a small long investment in (COIN) at $225 just now.

Position: Long COIN

Chart of the Day (Part Trois)

Speaking of the Munder Net Net Fund:

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Position: None

Buying But When?

I would have preferred a deeper down opening before doing some buying. 

I am not so sure I trust this rally off of the lows - especially with the VIX starting to rise even as the market rallied.

Stay tuned.

Position: None

Citigroup

Adding to (C) .

Position: Long C

Chart of the Day (Part Deux)

The Nasdaq 100 equal weighted Index is underperforming (QQQ) by 1000 bps year over year:

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Position: None

The Evergrande Carnage Continues

Evergrande (EGRNF) bond prices:

YIELD PRICE AXE AXE

TKR CPN MTY CCY BID OFFER MID COD BID SZ ASK SZ

EVERRE 8.25 Mar-22 USD 14.50 16.50 2872.91 -1.50 0.000 0.000

EVERRE 9.5 Apr-22 USD 13.50 14.50 2568.14 -0.50 0.000 0.000

EVERRE 11.5 Jan-23 USD 13.00 15.00 533.81 -0.50 0.000 0.000

EVERRE 10 Apr-23 USD 13.00 15.00 318.35 -0.50 0.000 0.000

EVERRE 7.5 Jun-23 USD 13.50 15.50 221.01 0.00 0.000 0.000

EVERRE 12 Jan-24 USD 13.00 15.00 246.97 -0.50 0.000 0.000

EVERRE 9.5 Mar-24 USD 13.00 15.00 171.02 -0.75 0.000 0.000

EVERRE 10.5 Apr-24 USD 13.00 15.00 172.89 -0.50 0.000 0.000

EVERRE 8.75 Jun-25 USD 13.00 15.00 102.62 0.00 0.000 0.000

Source: Mark Grant

Position: None

A More Hawkish Fed Contributes to the Elevator Down in Equities on Wednesday

* Financial conditions are like tightening

* There is now an alternative and cash may be King

* I favor financials and value stocks

Stocks got schmeissed on a more hawkish Fed yesterday afternoon. 

The surprising Fed minutes conformed closely to my second surprise in my 15 Surprises for 2022 List: 

Surprise #2.

Powell Turns Hawkish - But Monetary Policy Fails to Dent Rising Inflation

Despite accelerated tapering and an attempt to signal slow and steady rate hikes, inflation accelerates well beyond expectations. By February inflation is running close to 8%. Though comparisons are tough, inflation stays well above consensus expectations (sticking at above 5% this summer).

ESG investing, the complete reopening of the global economy and rising geopolitical tensions sends oil to over $110 a barrel.

While Omicron proves far less virulent than initially feared, business closures put in place and uncertainties serve to exacerbate the supply chain dislocations seen in 2021. The continued logistical mess reinforces more (cost push) inflation and mounting inflationary expectations.

The U.S. labor shortage intensifies and wages grow +6%. The shift from"goods to services"demand post Covid actually causes more inflation as, surprisingly, service prices accelerate across the board.

"Slugflation"(sluggish growth and sustained inflation), a distant cousin to "stagflation,"becomes a feature and commonly used term in 2022.

As interest rates increase (in the U.S. and in Europe), the rising higher debt burdens in the financial system - which have clearly institutionalized instability - lead to a new regime of equity market volatility rarely seen in modern investment history. Daily moves in the S&P Index of 2%-3% become commonplace.

The housing shortage worsens, as labor shortages limit home construction and homes for rent companies buy whatever supply they find. Home prices go up by another 15%. Eventually, the high prices for everything will begin to impact affordability and demand, as consumers can't afford to maintain consumption when interest rates ratchet higher later in the year.

The Fed is left in an impossible position of finally realizing it needs to get "serious"about inflation into a slowing economy.

Powell realizes he should have let Lael Brainard have the job.

Treasury Secretary Yellen, recognizing that inflation is materially widening the wealth and income gap (by acting as a regressive tax) encourages Powell to do "whatever it takes" to stop inflation.

Whip Inflation Now (WIN) buttons are distributed nationally.

Powell ends up more Volcker-like than anyone predicted. The Fed Chair turns very hawkish and focuses on inflation - not jobs or stocks. But it is too late and the monetary pivot fails to materially reduce an elevated level inflation as years of monetary excesses are not easily reversed.

In 2022 we learn that there is no monetary policy that remedies the inflationary impact of continued global supply chain and logistical disruptions and imbalances.

In support of my view... from my friends at Miller Tabak: 

Wednesday, January 5, 2022

FOMC Minutes Show a Complete Reversal on Inflation
We anticipated a hawkish shift at the December FOMC meeting. Nevertheless, the December minutes surprised us by just how dramatically the Fed's thinking on the labor market and inflation evolved between early November and December. The change was more profound than suggested by recent FOMC member comments. The Fed's plans to begin rate hikes this spring are even more concrete than we previously believed.

As recently as November, the FOMC maintained its stance that high inflation was "largely reflecting factors that were likely to be transitory." The December minutes provide a surprisingly long catalog of why this is not true. They note that inflation is widespread and that "trimmed mean measures of inflation had reached decade-high levels and that the percentage of product categories with substantial price increases continued to climb." The minutes alarmingly describe "business contacts feeling confident that they would be able to pass on higher costs of labor and material to customers." Most surprisingly, the Fed's view of the labor market noted that "several participants remarked that they viewed labor market conditions as already largely consistent with maximum employment." These comments suggest a rate hike is already past due.

The timing of the shift is odd. Many of the factors that the minutes describe are not recent; we have been writing about many of them since early summer. The minutes also suggest that the Fed's path is not as data dependent as widely believed. A few surprising job reports or covid-19 related developments (more on these below) are unlikely to alter the Fed's path. Likewise, the Fed is very likely to further accelerate its timeline in the coming months. Fed funds futures put the chances of at least three rate hikes this year at 74%, but we think there is a 74% chance of at least four.

Bottom Line

As described a few days ago,  "Could the Setup for 2022 Portend an End to the 12-Year Bull Run?" and in my Bloomberg Interview - cash may be king now: 

* 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

As seen above, I favor financials and value stocks over growth stocks.

Position: None

The Book of Boockvar

Peter on the day after: 

Is it even worth having the discussion now about a shrinkage in the Fed's balance sheet while they are still growing it into March? No. The minutes said 'some' talked about this, not 'several.' Is the Fed going to repeat 2018 when they were hiking rates and letting the balance sheet run off at the same time? Doubtful. Here is a chart of 2018 with the balance sheet in white and the fed funds rate in orange. We had the vol trade blow up in January and February and we know what happened in Q4. Keep in mind that the new Fed Governors that will be appointed from here will be doves and will join the dovish Vice Chair.



Newly voting member St. Louis Fed president Bullard speaks today at 1:15pm and not voting member Daly talks at 11:30 pm. The last time we heard from Bullard he was for 2 hikes this year but he likely was one of those who shifted to 3 at the December meeting.

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In sympathy, bonds around the world got hammered post minutes. In Asia, the South Korean 10 yr yield was up 12 bps, in Australia by 8 bps and even Japan saw a 4 bps rise in its 10 yr to the highest level since April 2021. In Europe, yields are up between 3-6 bps with the German 10 yr bund yield in particular up by another 3 bps to -0.055%, the least negative since May 2019.

With this and as seen in the US yesterday, inflation breakevens are falling on the belief these central banks are going to catch up but again, the key question is to what extent will they tolerate the inevitable tightening of financial conditions. Here's a chart of the Goldman Sachs Financial Conditions Index as of Tuesday, thus doesn't yet reflect yesterday (the lower the easier).



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China's private sector December services PMI rose to 53.1 from 52.1 and that was above the estimated drop to 51.7. Caixin said firms saw "faster increases in both business activity and overall new work. Improved sales and efforts to increase capacity led to a further rise in staffing levels. Nonetheless, backlogs of work continued to increase and at the quickest rate for nearly two years. Cost pressures eased, with both input costs and output charges rising at weaker rates. However, uncertainty over the pandemic weighed on business confidence regarding the year ahead, with sentiment slipping to a 15 month low in December."

Bottom line, China's economy will certainly be on a bumpy ride in 2022 with the continued stress with some residential developers and we'll see where home prices go at the same time Chinese authorities think that locking down will eradicate a virus. As for the latter, we'll see if there is any pivot after the February Olympics. H shares did buck the global equity trend, rallying by 2/3 of a percent while the Shanghai comp was down a modest 1/4 of a percent. Bond yields rose only slightly and the yuan is lower. The Chinese stock market trades at 10x earnings so I'm not sure how much selling is left.

Germany will report its December CPI at 8am and the estimate is for a .4% m/o/m increase and a 5.1% jump y/o/y Ahead of that we saw November PPI for the Eurozone and it increased a whopping 23.7% y/o/y. Good luck Christine Lagarde.

Eurozone PPI y/o/y


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The December UK services PMI was revised to 53.6 from the 1st print of 53.2 but that is down from 58.5 in November and we can blame omicron. Markit said "Total new orders in the service sector increased at the weakest pace for 10 months. Mass cancellations of bookings in response to the omicron variant led to a slump in consumer spending on travel, leisure and entertainment. Survey respondents also noted that renewed pandemic restrictions had slowed the recovery in business services." Notwithstanding this short term concern, "service providers signaled strong confidence about the longer term business outlook. Around 55% of the survey panel anticipate a rise in output during 2022 as a whole, while only 10% expect a decline."

On pricing, Markit said "Higher prices for energy, fuel, transport and raw materials led to another sharp increase in average cost burdens in December. Service providers also widely commented on increased staff salaries amid highly competitive labour market conditions. Measured overall, the rate of input price inflation eased from November's record high and was the slowest for 3 months. Similarly, average prices charged by service sector companies increased rapidly in December but the speed of inflation decelerated for the 1st time since August." Inflation breakevens are little changed today at 3.99% as a BoE survey of CFO's reflect plans of companies to hike prices by 5% in 2022 vs plans for 4.2% back in November. Gilt yields are jumping, along with everyone else. The FTSE 100 is down but UK stocks are cheap.

Position: None

Tweet of the Day (Part Seven)

Position: None

Tweet of the Day (Part Six)

I have a column coming up shortly on why I think the legislative wheel for cannabis is starting to move more rapidly:

Position: None

Tweet of the Day (Part Five)

As mentioned last week I am out of my gold and silver positions.

Position: None

Tweet of the Day (Part Four)

Good stuff from my pal, Lance:

Position: None

Tweet of the Day (Part Trois)

Position: None

More on the Rotation From Growth to Value

I have been a proponent, in my Diary, of a swift and painful rotation from growth to value in 2022 (more in my opener coming up!).

As an example of how badly growth was hit yesterday -- The Investors Business Daily Fifty  (FFTY) declined by nearly 5% yesterday!!

Position: None

A Brief Review of Overnight Trading

Given Wednesday's volatility and wide range of prices, S&P and Nasdaq futures displayed relatively modest movement overnight.S&P futures:

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Nasdaq futures:

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Position: None

Chart of the Day

European bond yields are rising.

Germany +5 basis points today:

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Position: None

Tweet of the Day (Part Deux)

Position: None

Tweet of the Day

Position: None
Doug Kass - Watchlist (Longs)
ContributorSymbolInitial DateReturn
Doug KassVKTX4/2/24-35.66%
Doug KassOXY12/6/23-16.42%
Doug KassCVX12/6/23+8.55%
Doug KassXOM12/6/23+10.96%
Doug KassMSOS11/1/23-29.53%
Doug KassJOE9/19/23-18.03%
Doug KassOXY9/19/23-27.61%
Doug KassELAN3/22/23+28.72%
Doug KassVTV10/20/20+62.60%
Doug KassVBR10/20/20+74.40%