As you all can clearly see by the market breadth data -- it was a miserable day.

But I didn't need to remind you!

That said, I feel reasonably good about my trading long rentals as we conclude a short week over the next three trading sessions.

There are more reasonable values finally developing.

Thanks for reading my Diary today.

Enjoy the evening.

Be safe.

I have to pick up a family member at the doctors now. 

Back after the close.

I have covered my Royal Caribbean Cruises  (RCL) and Carnival Corp  (CCL) shorts this morning in the premarket and in the early going.

Sorry forgot to post.

From The Street of Dreams

JPMorgan (JMP) reiterates (GS) buy - just now.

Twitter (TWTR) is now trading at the same level the shares sold for in March, 2018! 

I have traded TWTR about 20 times in the last five years - starting at around $16/share. 

I have made an accumulated $165/share (estimated) over the years - so I might be testing my luck in today's (and Friday's) purchases. 

Frankly, I don't know how the gang that can't shoot straight (Twitter's management) could do a worse job. 

But one can hope. 

My analysis of Twitter later on in the week.

Here is a complete list of stocks I bought today for a long trading rentals: SPY, QQQ, AMZN, BX, C, FB, GOOGL, GS, FGEN, GOOGL, JPM, XBI, LABU, NVDA (sold), TROW, TWTR.

Best performing financial (from the morning) - Goldman Sachs (GS) . 

Went long and added during day - well into my buy level. But if I am such a Smarty Pants, I should have stayed short at $415 a few months ago!

Canadjuneh

Microsoft Corporation

Xbox Goes (More) Vertical in $70B Activision Buy

RBC Capital Markets, LLC

Outperform

NASDAQ: MSFT; USD 305.48

Price Target USD 380.00

Our view: This morning, Microsoft announced plans to acquire Activision Blizzard in an all-cash deal valued at $95/share or $68.7B. To our knowledge, this would be the largest technology acquisition in history (a touch above Dell-EMC), let alone for Microsoft. We're positive on the deal for three reasons: 1) enhances Xbox value proposition as a vertically integrated gaming platform; 2) expands Xbox into the large mobile market opportunity, and 3) strengthens positioning of Xbox for the future of gaming (e.g., Azure/xCloud, Game Pass, metaverse)."

FWIW

I bought a small trading long position in (MSFT) at $304.

I have to take a family member to (another!) the doctor at about 2 p.m.
Radio silence for an hour or so after that.

I bought a very small long position in Alphabet (GOOGL) ($2,720) on the whoosh lower.

Unrelated to the stock market - the U.S. government has tweeted out how to get free Covid tests - I believe it was supposed to have been done tomorrow but someone had a fat finger! 

Here you go https://special.usps.com/testkits

Order now!

Breadth

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Movers at 12:35 pm:

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Adding to the following longs: (GS) , (XBI) , (TWTR) and (LABU) .

* And for aggressive traders, leveraged ETF ( (LABU) - $22.32)

Based on a very deep oversold reading I am making (XBI) my Trade of the Week.

As background, last week I initiated an XBI long: 

Jan 14, 2022 ' 12:56 PM EST DOUG KASS

XBI Purchase

I am initiating a small long purchase (investment) in (XBI) .

I plan to average into a large position on weakness.

The ETF has been in a steady decline over the last year - from $170 to the current price of $96.28 - and is trading at a sizeable discount to net asset value.

Here are the top holdings.

I want a diversified ($7.1 billion of assets) exposure to biotech - and XBI is my choice.

More on this investment early next week.

- Buying more (FGEN) and (XBI) .

- Reloaded on Twitter (TWTR) under $37.50.

What's most noteworthy about the rate move today is the rise in the short end. The one yr yield is over .50% at .513%, up 2 bps and the 2 yr is jumping above 1% at 1.04%, up 7 bps. So while the 10 yr yield is rising too, the curve is flattening further, with the 2s/10s narrower by another 4 bps to 78 bps. The 5s/30s spread is down to 51.5 bps vs 56 bps on Friday. Go back to February 2019 that last time it was this tight for that latter spread. The 10 yr yield itself is at a one year high.

5s/30s Spread

10 yr YIELD

There is a lot of reason to blame the Fed for WAY overstaying their welcome with QE and zero rates and badly misreading inflation that they are now being forced to play catch up with. The other sin, so to speak, was by waiting this long to tighten, they let asset prices further inflate, creating a higher peak at which they inevitably fall when the tightening intensifies. Understand here that the 1.04% 2 yr yield compares to a 1.4% S&P 500 dividend yield and a 4.6% yield to worst for high yield.

This rise in oil prices today puts WTI now above where it was before Biden decided to release crude from the SPR. Betting that the short term impact of that move would be fleeting was a good one because it just further discouraged the drilling of more oil. I remain bullish on oil and gas stocks but acknowledge that in the very short term, this move is getting overbought.

WTI

Another 3 bps and the German 10 yr yield is back to zero. It was May 2019 the last time it had a plus sign in front. I've said before and will again, analyze the US inflation and growth data all you want, much of where the US longer end yields go will be partly determined where the German 10 yr goes and what the ECB does.

GERMAN 10 yr Bund Yield

Proving once again that the Bank of Japan will be the last central bank on earth to tighten policy, Governor Kuroda today said after their meeting that "We're expecting long and short term policy rates to remain at the current low levels, or fall even lower. Raising rates is unthinkable." It's hard to get more clear than that. While JGB's like to hear that and yields are little changed, the 10 yr inflation breakeven is higher by 1.2 bps to .56%. It doesn't sound like much but it is just off the highest since May 2018.

JAPAN 10 yr Inflation Breakeven

Hoping that this is the last covid wave of substance in terms of restrictions, the German ZEW investor confidence in their economy for January jumped to 51.7 from 29.9 and that was well better than the estimate of 32. Current conditions though remain tough as this component fell to -10.2 from -7.4 and less than the forecast of -8.8. ZEW said "The economic outlook has improved considerably with the start of the new year...It is likely that the phase of economic weakness from the fourth quarter of 2021 will soon be overcome. The main reason for this is the assumption that the incidence of Covid cases will fall significantly by early summer. The more positive economic expectations include the consumer related and export oriented sectors and thus a large part of the German economy." This optimism is great to see but the number is never market moving as opposed to the IFO which surveys actual businesses. After a run higher last week, the euro is down for the 2nd day in 3. The DAX is lower by 1% for obvious reason and it's back in the red year to date. For a valuation check of the DAX, it trades at just 14x 2022 earnings estimates with a 2.9% dividend yield.

ZEW

When including the downward revision for November, the UK December jobs increase was below expectations. Jobless claims though fell by another 43.3k and November was revised to a drop of 95.1k which is double expectations. Thru November, the unemployment rate fell to 4.1% and wages ex bonuses rose 3.8% y/o/y as expected but that is below the rate of inflation. Regardless of the mixed jobs data, it's clear that the UK economy is powering thru omicron and the BoE will continue to raise rates this year. Gilt yields are little changed after the jump in the prior two days while the pound is lower. The valuation check on the FTSE 100 is 12.5x times 2022 earnings estimates and with a 4% dividend yield.

I highlight the valuations of the DAX and FTSE 100 to reflect how cheap they are compared to the S&P 500 after a decade of underperformance and with having so little tech.

Following the modest rate cut in China, the Deputy Governor of the PBOC today said they will "open the monetary policy tool box wider, maintain stable overall money supply and avoid a collapse in credit." So this highlights the challenge in many places where credit is too accessible, leverage builds up, an inevitable problem occurs and the central bank eases credit costs as a result.

Big recovery in (BABA) this morning from the lows.

- I am adding to (XBI) under $97.

- I just initiated a (LABU) long (levered biotech) at $22.66.

God awful market breadth.

Breadth

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Movers

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So you all know, the critical thing that made me sell out my aforementioned trading longs - well before I anticipated to! - was the leg higher in bond yields in the last few minutes.

P.S. - Correction from previous post: I sold out all my trading long rentals except Goldman Sachs (GS) .

I sold my trading long rentals for a small profit.

I have taken a number of short term long rentals in the whoosh lower -including (SPY) $457.70, (QQQ) $373.36, FB $319, (NVDA) $261.51, (GS) $349.19, and (TWTR) $37.50.

* Bank and brokerage stocks are "over owned" and too popular now just as industry EPS progress may disappoint in the quarters ahead

I have favored bank and financial stocks for several years but I suspect the sector's outperformance may soon come to an end. 

I am not suggesting marked underperformance of banks and brokerages - just a reduced limited upside and flat to lower relative performance against the S&P Index. 

There are several reasons for a change in my previously bullish position: 

* Domestic economic growth is already about to slow - below is the Empire State Manufacturing Index shortfall just announced:

* The Fed seems destined to tighten into a domestic slowdown. As a result, I expect the yield curve to flatten as a rising federal funds rate will adversely impact economic activity. This is not good for bank industry earnings.

* The modest improvement in loan demand - seen in the last few months - will likely fizzle out if inflation remains elevated and economic growth is slowing relative to expectations.

* Banks have grown too popular and after a lengthy period of outperformance they are everyone's go to value stocks. See my "Group Stink" comments in today 's opener! 

* As seen by (GS) and (JPM) earnings reports, growing costs have and will likely continue to threaten ambitious bank industry consensus 2022-23 EPS forecasts.

* After large credit benefits, and loan loss reserve releases, bank industry earnings face difficult compares during the next few quarters. 

Disappointing earnings and a possible reset of valuations could be an unhealthy cocktail for financial stocks.

* It is also another vivid example of "group stink"

JPMorgan (JPM) is acknowledged as the preeminent money center bank in the U.S. 

Nevertheless its shares took an unexpected -$10/share pounding on Friday after management revealed an EPS release that was riddled with rising costs. 

JPM is a popular stock, with over 70% of the shares owned institutionally - and going into the EPS release, JPM's common traded at nearly 2x book value, far in excess of any banking peer. 

Perhaps, with the benefit of hindsight, JPMorgan's shares were too popular! 

Fortunately, I recently positioned a long (C) /short JPM in a pairs trade bet on an expected narrowing in the valuation differential between the best loved and least loved large U.S. banks. (Note: I covered my JPM short on Friday's sizeable drop.) 

But, the purpose of this column is not to rejoice in a profitable short (JPM) - but rather to emphasize that the problems that led to the bank's sharp price decline will be problems that many other (non financial) companies will face. 

Rising Costs and Peaking Margins Suggest That Consensus S&P 2022 EPS Estimates May Be Too High

At the source of JPM's "disappointment" were rapidly rising costs, and especially a ramp in wages, that pulled down profit results and returns on invested capital, both absolutely and relative to expectations. 

It is important to reemphasize that JPM is the best run money center bank - based on any measure of returns (assets, capital, etc.) - so if Jamie Dimon's team is having problems, everyone else - banks and non banks - likely will as well. 

These risks are demonstrated in the wide differential between reported PPI compared to CPI:

Source: Peter Boockvar

Stated simply, inflation (in costs) not only eats into valuations, it eats into and provides a headwind to profits. 

As an example of the continuing challenges to maintain profit margins by financial companies, this morning, Goldman Sachs (GS) beat on revenue and missed on EPS, as expenses rose by +23% with revenues up by only +8% - and I can't remember the last time that happened!

From my perch, we will find in the next few months that non financial companies not only face the challenge of raising prices to offset rising costs - they face the challenge of extended supply chain disruptions, exacerbating further the ability to sustain profits and profit margins.  

Margins may have already peaked and consensus 2022 S&P EPS estimates may be far too optimistic - and with interest rates rising, rendering some of the ambitious S&P price targets, at best, as very difficult to achieve. 

More Group Stink

JPMorgan's shortfall also underscores the foul odor of the consensus and herd. 

Remember that JPM's shares fell by over 6% after its EPS release (on Friday) when you listen to the pundits, especially when all those pundits are in agreement. 

Would you prefer to be a sheep herded by someone else's opinion or be someone who thinks critically using others' opinions as input? 

Being a sheep is far too easy to many as it requires little effort. 

JPMorgan is an example of why success in the markets is never achieved by simplistic following of other's opinions or of the consensus, but rather, by learning how to digest data and opinions and to be independent in view. 

Bottom Line

Always apply critical thinking when investing and always question the consensus - as Group Stink often has a foul odor.

"He trembled with excitement
His cheeks were quite aglow
And afterword he cried to me, "Encore!"
He pleaded with me so
To have another go
I murmured caressingly

Whatever for?
Once, yes, once is a lark
Twice, though, loses the spark
Once, yes, once is delicious
But twice would be vicious
Or just repetitious."

- Stephen Sondheim, I Never Do Anything Twice

My market view remains very negative. 

Friday's opener, "Twice Though Loses Its Spark", incorporates my concerns: 

This was the most important part of Friday's opener:

1. A general valuation reset lower. On average, over history, a 100-basis-point rise in fed funds rates is associated with about a 15% valuation adjustment lower. Considering today's elevated valuations, that reset has the potential of being more than the historic average.
2. A hard rotational shift from growth to value. To some degree, this reflects the Fed's pivot, which will likely produce higher interest rates, serving to adversely impact discounted cash flow models of long-dated growth stocks.
3. Disappointing EPS growth, probably under 5%, compared to higher expectations. One of the biggest surprises this year has been the resilience of corporate profits. However, contributing potential negative influences include likely margin pressure from higher costs, a Fed tightening, some evidence of pulling forward demand, etc.
4. Modest EPS growth, if any growth at all, when combined with lower valuations could translate into negative overall returns for the S&P in 2022.
5. With continued high inflation - a regressive tax, a continued widening in the income/wealth gap houses a wide range of social, economic and political problems and investment ramifications.
6. A more aggressive Fed than is reflected in general expectations. Less liquidity could result in a marked reduction in flows into equity funds, which has provided unprecedented fuel to the markets in 2021.
7. Continued supply chain problems that, in part, fuel inflation and inflationary pressures to levels well above consensus. It is important to remember that many of the most important supply chains lie overseas, where more restrictive business and social closures have been put in place. In other words, the U.S. doesn't totally control its economic destiny in a flat and interconnected world.

Summary

I ended my "Portend" column two weeks ago with the following:

As I noted earlier, the setup for 2022 is far different than in prior years. Actually, it is far different than at any time in the last 13 years -- a period in which returns for basically all but one of the years has been positive. (Note: 17 out of the last 19 years have shown positive S&P returns!)

Most importantly, fiscal and monetary policy is no longer unbounded and we are likely well past the points of peak economic activity and peak liquidity.

With monetary policy pivoting and the Fed now prioritizing their inflation battle, interest rates will continue to rise - placing pressure on equities, in general and on long duration growth stocks, in particular.

After three years of compounded annual performance of about +23%-24%/year in the averages, a combination of political considerations and well-placed concerns about inflation will likely push the Fed to be far more hawkish than the consensus expects.

I view January's drop in stocks as a possible precursor to the remainder of 2022. If I am correct in view, this would likely result in a new regime of heightened volatility in both the stock and bond markets.

"Irresponsible bullishness" may be over, and the narrowness of the market's advance (which buoyed the Indices) likely approached an extreme ten days ago... just as financial conditions tighten.

Tread carefully as cash is king.

TINA ("there is no alternative"), meet CITA ("cash is the alternative").

Needham favors (MSOS) and cannabis stocks:

The Russell Index: Where Money Goes to Rot!

I have been bearish on Starbucks (SBUX) shares for a while, based principally on labor and cost issues.

Over the weekend, McDonald's (MCD) cited the same problems. 

Market participants are beginning to price in a 50 bps rate rise in March and three more in 2022:

The price of crude oil continues to advance -- rising by +$1.35/barrel this morning.

Any further advance in energy prices may solidify a 50 bps increase in rates by the Fed in March.

I couldn't agree more with Morgan Stanley's strategist (!):

I couldn't disagree more with the RBC strategist:

It was an eventful evening.

S&P futures hit a low of -64 handles early in the morning and are now -53.

Nasdaq futures performed worse -- in large measure because of the ramp in interest rates. Futures bottomed at -340 and and are now -288.

Break in.

After rising by nearly seven basis points in yield, the 10-year U.S. note is up by another six basis points (to yield 1.83%) this morning.

That is the highest yield in over two years.