A big thanks for reading my Diary today and all week. (And thanks to the editors for handling a large number of columns today!)

Enjoy the weekend.

Be safe.

* A new Friday column!

-  Covering my (SPY) and (QQQ) shorts early

-  Covering my (GME) short.

Professor Scott Galloway's No Mercy No Malice - "Unlocks."

* If you want to buy, buy quality

One more time with feeling. 

In a mature global economic recovery and in an aged Bull Market -- illiquid and speculative stocks generally underperform.

GME is -$40 lower than last night's high price.

What happens if this line is broken?

The yield on the 10 year US note has risen by 3 bps to yield 1.765% today.

Another compelling reason to own cannabis equities, which I have previously mentioned:

View Chart »View in New Window »

Apropos to one of the last posts, I would note that for every 10 companies I research, on average, I buy only 1-2 of them!

GameStop (GME) is trading at $136.

(I would trade a lot better if I turned off the TV.)

Bad cover!

After listening/watching nearly every commentator on FIN TV buying PayPal (PYPL) over the last two months - it piqued my interest and I spent a few hours on the name. 

It's a pass for me after doing that research. 

The same applies to (SOFI) . 

A pass there, too.

In a sea of red, our "Trade of the Week" - Citigroup (C) - is more than +$5/share since Monday.

Given the magnitude of the drop in Bitcoin prices, I would not be surprised if there is some forced (margin) selling now. 

I expect cryptocurrencies to move materially lower.

The breadth and heat map at 10:43 am:

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View Chart »View in New Window »

I am now out of my VIACP position (+$10 this year). 

I have reduced my common, calls and short put positions - for similar reasons. 

I have covered my (GME) short at $145 for a profit.

Coinbase  (COIN) is disconnecting with the weakness in cryptocurrency prices. 

This is a good thing. 

I added to COIN.

I added to my (MSOS) long on the opening, and shorted more (GME) at $161.

I am long (BABA) and (GDS) . Sized small given obvious risks.

Two downgrades on Starbucks (SBUX) for the reasons I mentioned earlier in the week: 

Jan 05, 2022 ' 06:30 AM EST DOUG KASS

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:



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.

From Peter: 

Understanding that the December payrolls capture net hiring's thru middle of the month, and not all the event cancellations that occurred in the last 2 weeks, the BLS said the jobs count rose by 199k, less than half the estimate of 450k but partially offset by an upward revision of 141k to the two prior months. The private sector contributed 211k of this. Similar though to what was seen in November, the household survey reflected a more robust labor market as 651k jobs were added here after 1.1mm in November. Combine this with a rise of 168k in the labor force and the unemployment rate now has a 3 handle at 3.9%. This compares with 3.5% in February 2020. The all inclusive U6 rate dropped 4 tenths to 7.3% and this was 7% in February 2020.

Hours worked was unchanged at 34.7 but the estimate was 34.8 and last month was revised down to 34.7. The participation rate held at 61.9%. It was steady at 81.9% for 25-54 year olds, this key working age cohort. Average hourly hours jumped .6% m/o/m, 2 tenths more than expected and November was revised up by one tenth to a gain of .4%. Versus last year, they are now up 4.7% y/o/y after a 5.1% print in the month prior. Combining hours worked and the hourly wage, average weekly earnings rose .6% m/o/m and 4.7% y/o/y too. With wages, leisure and hospitality hourly earnings specifically rose .3% m/o/m and 19% y/o/y. They were up .2% m/o/m and 5.2% for manufacturing and .4% and 4.9% respectively for construction.

The employment to population ratio was up another 2 tenths to 59.5% and creeps closer to the 61.2% February 2020 level but still of course well below. While the pool of available labor is still about 1.3mm above its February 2020 level, it is now about 600k below the March 2020 print.

The % of unemployed that are considered 'job leavers' or really quitters, was 11.4% vs the highest since February 2020 last month at 12.3%. The number of unemployed did total 6.32mm, down 483k m/o/m and this compares with the November job opening figure of around 10.5mm.

The service sector added 157k vs 198k in November while the goods side contributed 54k vs 72k in the month before. With goods, manufacturing added 26k vs 35k while construction added 22k vs 35k. Within services, leisure/hospitality added 53k vs 41k in November but this will obviously shift down because of omicron. Trade/transport added 30k vs 40k in the month prior.

Bottom line, while the headline missed expectations, the unemployment rate is now just 3.9% and the 6 month annualized average in hourly earnings is now running at 6%. Because my data feed on this doesn't go back far enough, I believe you have to go back to the 1990's (outside of the April/May 2020 spike) to see a full year of average hourly earnings rising at a 6% clip. The labor market is tight, it's tough to hire and you have to pay more to get what you want. And why the 10 yr yield is now at 1.77%.

UNEMPLOYMENT RATE

PARTICIPATION RATE 25-54

After Germany yesterday said its December CPI rose .3% m/o/m and 5.7% y/o/y, today we saw the full Eurozone CPI which increased by .4% m/o/m and 5% y/o/y vs the estimates of up .3% and 4.8%. Importantly, the core rate was higher by 2.6% for a 2nd month and one tenth more than forecasted. Within this, non energy industrial goods prices grew by 2.9% y/o/y and services were up by 2.4%. Energy prices certainly drove the top line with its 26% jump. While higher than expected, the extent is not much of a surprise and inflation expectations in the region are little changed and yields are slightly up.

While we're watching to see German bund yields get ever closer to zero (today at -.06%), keep your eye on Italian yields where the 10 yr yield is at the highest since June 2020 at 1.29%. I point out Italy because it highlights the conundrum the ECB is in. They've employed a hope strategy on inflation which has turned out to be wrong so far but at the same time they are financing the Italian government vs QE.

EUROZONE headline CPI y/o/y

EUROZONE core CPI y/o/y

ITALIAN 10 yr Yield

Apartment List released its 1st National Rent Report of 2022 and rents in December were flattish, falling by .2% m/o/m, "marking the only time in 2021 when rents declined m/o/m." But, in 2021, rents rose "a staggering 17.8%. To put that in context, annual rent growth averaged just 2.3% in the pre-pandemic years from 2017-2019." If this rent figure was plugged into the shelter/rent components of CPI, you would have US inflation at 10%. Thank you Fed for making housing unaffordable for many who can least afford it.

The positive is maybe we're seeing the beginning of a calming on pricing. That said, according to Apartment List, "many American renters will remain burdened throughout 2022 by historically high housing costs."

In terms of geography, NYC saw the quickest rent growth in 2021 with medium price up 33%. Tampa, Scottsdale, Irvine and Orlando also saw north of 30% gains. Obviously NYC is coming off a very easy 2020 comparison while these other cities saw sharp 2nd half 2020 increases.

I saw another stat yesterday from property management software company RealPage which doesn't point to much of any price relief any time soon. They said the apartment occupancy rate in December hit 97.5%, 2 percentage points higher than December 2020 and the deputy chief economist at RealPage said this, "I don't think most people realize just how crazy that is. Not only is that a record, typically we consider 95-96% to be essentially full."

Consumer price inflation in Tokyo in December was higher by .8% y/o/y, the fastest since December 2019 and all led by higher food and energy prices. Because of the plunge in mobile phone fees, the core/core rate was down though by .3%. We are close to cycling out of those phone charges though. The problem for Japanese workers though, who are seeing a higher cost of living (relatively speaking), is that base pay in November was unchanged. The estimate was for an increase of .5% and thus REAL wages fell.

The 10 yr JGB yield rose another 1.6 bps to .14%, a level last seen in March. The Japanese 10 yr inflation breakeven rose 2 bps to .57%, the highest since May 2018. This is also getting help from the weaker yen.

JGB 10 yr Yield

JAPAN 10 yr Inflation Breakeven

One last thing on inflation, before yesterday's .4% decline, Wednesday's close in the CRB raw industrials index was a record high.

The December Eurozone Economic Confidence index fell to 115.3 from 117.6 and just under the estimate of 116. We can blame omicron as the services component plunged by 7 pts to the lowest since April. Retail and consumer confidence also fell but manufacturing remained strong as did construction. The euro is not reacting as it also digests the inflation data and the slow crawl the ECB is doing in response.

Germany said its exports rose by 1.7% m/o/m in November which exceeded expectations of down .2%. On the other hand industrial production was light. With Germany an industrial and export powerhouse, they've suffered in particular from the shortages of semi's and other supply problems, as we know.

* Cash is still King

While the headline jobs print, a small gain of under 200k, was disappointing - every other data point (unemployment rate, inflation, wages, etc.) was hotter than expected. 

Not surprisingly, the markets initial response is negative. 

I continue to hold on to the following market view: 

Jan 06, 2022 ' 02:12 PM EST DOUG KASS

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.

I expect to see more cannabis stock buybacks. 

Ayr Wellness (AYRWF) , a recent purchase of mine updates its share buyback status: 

MIAMI, Jan. 07, 2022 (GLOBE NEWSWIRE) -- Ayr Wellness (CSE: AYR.A, OTCQX: AYRWF) ("Ayr" or the "Company"), a leading vertically integrated U.S. multi-state cannabis operator (MSO), today provided an update on its stock repurchase program.

Under the program to date, the Company has repurchased 568,000 Subordinate Voting Shares (the "Shares") for a total of over CAD $11 million.

Jon Sandelman, Founder, Chairman and CEO of Ayr Wellness, said, "We continue to be strategic and opportunistic in how we allocate capital, all in support of driving shareholder value. We accelerated our repurchase program in December 2021 to take advantage of pricing pressure caused by end of year tax selling and other technical conditions. We continue to maintain flexibility and take an opportunistic approach to our stock repurchase program, as we believe that Ayr and its U.S. MSO peers are significantly undervalued compared to our operational performance and growth."

The Company previously announced that its Board had authorized the repurchase of up to 5%, or ~2.5 million, of the Company's Shares, the maximum amount allowed for CSE listed companies, for a 12-month period pursuant to a normal course issuer bid.

Piper reiterating overweight on (GTBIF) (my largest individual company cannabis holding - I added yesterday):

Note the analyst's reference to slower near term sales momentum - something I touched on earlier this week: 

Jan 04, 2022 ' 08:30 AM EST DOUG KASS

Cannabis Estimates

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 »

Most don't look at overnight trading, but it gives me a needed perspective. 

Futures experienced some more volatility last night, declining steadily to 4 am and then a quick rally. 

S&P futures (-11 at low and now +10) and Nasdaq futures (-85 at low and now +55):

S&P futures:

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Nasdaq futures:

View Chart »View in New Window »

Surprise # 7. China's Economy Worsens Relative to Even Low Current Expectations

As the engine of global growth, China pulls down world trade and the world's economy.

Accelerating property weakness, excessive debt, negative demographics and political leadership intent on reigning in the accumulation of wealth in public companies all contribute to the much worse than expected downturn in gross domestic production.

With China's political leadership in jeopardy - and, in order to maintain popularity/position (through diversion) - Xi Jinping initiates military confrontations on two fronts. (See Surprise #1)- My 15 Surprises for 2022

As mentioned previously, Chinese consumption trends are deteriorating. 

As the property markets deteriorate... 

All-time low prices on Evergrande debt this morning (source: Mark Grant): 

YIELD PRICE AXE AXE
TKR CPN MTY CCY BID OFFER MID COD BID SZ ASK SZ
EVERRE 8.25 Mar-22 USD 13.00 15.00 3283.42 -1.50 0.000 0.000
EVERRE 9.5 Apr-22 USD 12.00 13.00 2957.37 -1.50 0.000 0.000
EVERRE 11.5 Jan-23 USD 12.00 14.00 587.63 -1.00 0.000 0.000
EVERRE 10 Apr-23 USD 12.00 14.00 340.02 -1.00 0.000 0.000
EVERRE 7.5 Jun-23 USD 12.00 14.00 239.94 -1.50 0.000 0.000
EVERRE 12 Jan-24 USD 12.00 14.00 269.87 -1.00 0.000 0.000
EVERRE 9.5 Mar-24 USD 12.00 14.00 181.79 -1.00 0.000 0.000
EVERRE 10.5 Apr-24 USD 12.00 14.00 183.82 -1.00 0.000 0.000
EVERRE 8.75 Jun-25 USD 12.00 14.00 108.20 -1.00 0.000 0.000

Byron Wien's 10 Surprises for 2022.

Here is my list. 

Compare!

J.P. Morgan lowers estimates and price target (to $180) on Alibaba (BABA) here on Friday morning.

Its thinking:

We are turning more cautious on China's online consumption outlook and cut Alibaba 2021 Dec quarter Customer Management Revenue (CMR) growth assumption to negative 2% YoY from positive 5% YoY. We forecast the negative CMR growth will end in 2022 Jun quarter, admittedly with low visibility. On the other hand, we expect a further sequential step-up in strategic investment in China commerce in 2021 Dec quarter followed by a gradual loss narrowing starting from 2022 Mar quarter. We believe earnings revisions will be the most important share price driver of Alibaba in the next few quarters, besides policy stimulus. As a result, a deteriorating CMR outlook will make the stock vulnerable until the market identifies an inflection point in earnings revisions, in our view. While an earnings cut is, to some extent, anticipated by investors given the weak Nov 2021 online retail growth rate reported by NBS, we think the stock will continue to be under pressure in the near future, despite low valuations. We stay OW with new Dec-22 PT of US$180/HK$175.

Euro-area inflation unexpectedly hits 5%: 

* I am considering the purchase of Alibaba Group Holding (BABA) and GDS Holdings (GDS) .

Despite protestations in some quarters, Charlie Munger's purchase of Alibaba has piqued my interest and I am considering investing in several Chinese securities.

Here, Goldman Sachs (GS) makes the case: 

We have held extensive client conversations in the past 6 weeks to discuss the outlook for Chinese stocks in 2022. We summarize the key debates, recent market developments, and our refreshed views to kick off the new year:

1. Is China investable? We'd say Yes, especially for investors whose investable universe goes beyond the ADR market where forced delisting remains a risk.
2. Slowing GDP growth equals bad returns? No. Our economists look for 4.8% GDP growth for 2022, the lowest on record outside of crisis years. But empirically, decelerating GDP growth has low correlation with stock returns.
3. Can equities perform well on subdued profit growth? Yes, particularly after a "Major" correction and when the equity cycle morphs from "Despair" to "Hope". Our EPSg estimate (7%) is below consensus (13%) for 2022.
4. What could re-rate equities? Policy (easing), politics (transition), and regulation (moderation). China is likely to be an outlier globally to loosen policy in 2022, thereby helping compress the high risk premia embedded in valuations.
5. Is the worst of regulation tightening behind us? We think Yes, in terms of its intensity, and the risks seem well priced per our indicators. Policy clarity is also improving, notably on issues such as VIE and overseas listing.
6. Are valuations really attractive? Yes. Index valuations (12x) are at recent-year lows and at significant discounts to global equities. Forward returns tend to be strong at current PE levels, inline with the results from our macro PE model.
7. Will the property credit turmoil spoil the party? Unlikely. Property activities look set to slow significantly but a contagion scenario could be avoided on GS's base case, inline with the latest pricing in asset markets.
8. Will the zero-Covid policy be relaxed? Not until late 2022, implying a bumpy recovery path for consumer equities, but trading opportunities elsewhere.
9. China A or H? We like both: China A is a big, liquid, growthy but underowned asset class, and we think China H offers compelling tactical upside optionality.
10. Buy laggards (Internet) or winners (policy beneficiaries)? Not a binary decision, but Growth and "Common Prosperity" are the key overlays.

I am specifically looking at BABA and data center company GDS (started doing work on it last night; down big -- trading at 12x EBITDA, 40% EBITDA margins and not in government cross hairs).

I am short Royal Caribbean Cruises (RCL) and Carnival Corp. (CCL) .
Here's more negative cruise line news...

I shorted a small position in GameStop GME Thursday night at $163.

While the shares of GME could drive higher, I doubt it and traders that bid the stock up to $173 are crazy (imho). As I noted yesterday... 

Jan 06, 2022 ' 05:11 PM EST DOUG KASS

A Game of Sheer Lunacy

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