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DAILY DIARY

Doug Kass

Minding (or Tending to?) Mr. Market

The last hour of trading was a classic puke ("I want to get out") job.

There is a reason why I have begun to detail the range in Nasdaq and S&P futures trading in the evening and early mornings.

I will discuss the perspective it gives me and how it helps my trading during the regular trading session in tomorrow's opener.

Thanks for reading my Diary and enjoy your evening.

Be safe.

Position: None.

Two Adds

Adding to (LABU) and (XBI) .

Position: Long XBI, LABU

Covering SPY, QQQ

Calling an audible and covering my (SPY) and (QQQ) for small gains ($455.57 and $370.60). 

Previously: 

Jan 19, 2022 ' 12:40 PM EST DOUG KASS

Back at SPY, QQQ

Back short (SPY) and (QQQ) at $457.76 and $372.54, respectively.

Very small-sized for now, with thoughts of selling on a scale higher, with a wide berth to reflect the heightened volatility.

Position: None

More Signs of a Broad, Important and Distributive Market Top

For some time weakness has been seen in meme stocks and gewgaws - but that weakness is expanding. 

Here is a partial list of some popular, large-cap stocks that no longer have "a good look" and appear to be rolling over: 

* Ford

* General Motors

* Nvidia

* JPMorgan

* Goldman Sachs

* American Express

* Visa

* Mastercard

* Salesforce

* Blackstone

* KKR

* T Rowe

* Federal Express

* Every Airline

* Starbucks

* Amazon

Position: Long AMZN

There They Go

Even some of the best stocks like (F) and (GM) are rolling over now. As mentioned last week, I should never have covered my auto shorts.

Position: None

Breadth

Some improvement in breadth at 12:55 pm.Breadth

View Chart »View in New Window »

Heat Map

View Chart »View in New Window »

Movers

View Chart »View in New Window »

Position: None

Back at SPY, QQQ

Back short (SPY) and (QQQ) at $457.76 and $372.54, respectively.

Very small-sized for now, with thoughts of selling on a scale higher, with a wide berth to reflect the heightened volatility.

Position: Short SPY, QQQ

Respectfully

Memo to Scott Rieder (on Fast Money Halftime with Judge Wapner): The market is not the economy.

Position: None

Three Stocks to Watch

Good action in (LABU) , (XBI) and (TWTR) today.

Position: Long LABU, XBI, TWTR

Three Moves

Adding aggressively to Twitter (TWTR) .

Back in (XBI) and (LABU) on weakness.

Position: Long TWTR, XBI, LABU

SPY, QQQ Moves

I have covered my (SPY) and (QQQ) trading short rentals at $455.70 and $369.84, respectively - for a quick profit.

Position: None

Breadth

I mentioned that I put on my trading short rentals in the Indexes - (SPY) and (QQQ) - just a few minutes ago because of weakness in the Russell Index and in financials. 

I would add that the loss of positive market breadth momentum was another reason... as of 10:33 am:

View Chart »View in New Window »

Position: None

Repeating for Emphasis

Jan 18, 2022 ' 09:45 AM EST DOUG KASS

The Period of Bank Outperformance May Now Be Coming to an End

* 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:

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* 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.

Position: Long C, JPM, Short BAC, XLF

I Don't Trust the Rally

I suspect (SPY) and (QQQ)  will be making a series of lower lows in here. 

I am focused on the weakness in the Russell Index and on financials.    

I took small trading short rentals in SPY and QQQ at $459.31 and $374.37, respectively. 

Will short on a scale with a wider berth than usual.

Position: Short SPY, QQQ

Trading Long Rentals

I am out of all my trading long rentals: (GS) , (KKR) , (BX) , (SPY) , (QQQ) , (LABU) (still in (XBI) ), (MSFT) , FB

Position: Long XBI

Tweet, Tweet?

* TWTR's shares are down by more than 50% in the last nine months

* Twitter management faces challenges - but those challenges are not insolvable

* With a market cap of under $30 billion, Twitter is a unique and digestible platform/stock

Yesterday I initiated a buy in Twitter (TWTR) (at around $37.40), after sitting out a more than -50% decline (from almost $80/share) from March, 2021. 

As mentioned yesterday, TWTR's common has been berry, berry good to me, with a large cumulative share price gain over the last five years.

In a world of expensive stocks, especially in the technology space, Twitter, with a market capitalization of less than $30 billion (providing takeover optionality), stands out as a potential winner and favorable reward vs. risk - particularly given its unique, digestible and scarce platform. 

Execution risk has always been the problem for Twitter - the gang that can't hit it straight - as it competes for internet users' time and advertisers' incremental budgets. But, already the company's advertiser returns is making some inroads though measurability and ad targeting must improve in order to remain competitive. To achieve their goals, Twitter needs to personalize the content that users see and it must use its data more effectively. For now, this is a leap of faith as these company challenges remain a work in progress - but there is little doubt that it has management's highest of priorities. 

The company's ability to execute with new or changed products could serve to spur the growth in daily users and improve engagement, better penetrate the advertiser market and ramp both ad load and improve pricing, and could produce big increases in revenues, margins and cash flow and drive earnings power. 

I suspect by the time there is clear evidence of positive results the shares will be trading much higher. 

For 2021, I estimate that the company achieved $5.1 billion in revenues and produced about $1.4 billion of EBITDA with 217 million average users. 

For 2022, I estimate that sales will likely rise to $5.8 billion, cash flow should be unchanged at $1.4 billion with 260 million average users. 

The big opportunity is for next year - should execution improve, with sales at $6.8 billion, EBITDA of $1.7 billion and 305 million average users. 

In terms of price targets - $55 seems reasonable (6x 2023 revenues) - which would be very low considering the company's platform scarcity. But if management can really turn this around and spur faster than expected user growth with new products, which would raise advertiser demand and allow for upside to product pricing - 8x revenues (or $75-$80) is not out of the question.

Position: Long TWTR

The Book of Boockvar

What is noteworthy about the higher labor expenses that JPMorgan, Citi, and Goldman talked about in their earnings calls is that the wage gains are now reaching the upper echelons of the pay scale and it's not just a minimum wage and leisure and hospitality influence. Goldman CEO David Solomon said yesterday "There is real wage inflation everywhere in the economy, everywhere." The CFO said the company was "committed to rewarding top talent in a competitive labor environment." Jamie Dimon Friday said "There's a lot more compensation for top bankers and traders and managers who I should say did an extraordinary job in the last couple of years. We will be competitive in pay. If that squeezes margins a little bit for shareholders, so be it." The CFO of Citigroup last week said "We have seen some pressure in what one has to pay to attract talent. You've even seen it at some of the lower levels, I should say entry levels in the organization."

In today's press release from the December Architecture Billings Index which rose 1 pt to 52, the AIA chief economist said "Since demand for design projects has been healthy over the last year, recruiting architectural staff to keep up with project workloads has been a growing concern for firms. Architecture is one of the few industries where payrolls have already surpassed their pre-pandemic high, so meeting future staffing needs is a challenge that most firms will need to confront." It is likely that it won't be 'one of the few industries' for much longer.

In J.B. Hunt's earnings call last night, the CFO of the $13b+ trucking and transport company said "As I look across our business, the common denominator in terms of our pain points continues to be labor related and wages, salaries, benefits and recruiting trends, in both driver and non-driver. We continue to elevate investments in our people, as was evidenced by our decision to provide a special bonus in December of nearly $11mm to our frontline workers for their efforts in working through the supply chain challenges facing our customers and the industry."

As to when the supply crunch will ease, "As has been stated in previous calls, the impacts of network congestion, labor shortages and general supply chain challenges are well known and have continued to have a meaningful impact on our business and are likely persist, particularly given the heightened challenges evolving around Covid infections across the country."

I will be watching for not only when omicron hopefully fades away in coming months but how the supply stress eases after the crunch ahead of the Chinese new year where they are rushing to get product out beforehand. Of course we'll also be watching the demand side, especially after the very weak retail sales report for December that we saw last week.

So there is finally a plus sign in front of the German 10 yr bund yield at +.004% as of this writing for the first time since May 2019. Like I said last week we also have to keep our eye on Italian yields as they have the largest amount of debt and have benefited the most from ECB QE. Their yield is up by 2.3 bps today to 1.34%, the highest since June 2020.

I want to point out the action in gold and silver over the past few weeks as they have rallied along with bond yields to two month highs for silver in particular. In 2021, the disappointing performance in the face of 7% inflation was on the belief that the Fed was going to tighten and why own gold in that environment. What we're now learning is 2 things, one, why own bonds in a negative real yield environment when hard assets like gold and silver are a much better protection, notwithstanding the lack of income from them, and two, in the 1970's and mid 2000's gold and silver rallied along with the move higher in yields. The reason being because real rates were mostly below zero during those time frames. I remain very bullish and if the Fed blinks at some point in the face of weaker markets and still elevated inflation, that's when gold and silver will really take off.

Gold in orange, Fed Funds rate in white

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You've heard me argue that even if supply constraints ease (which they will), companies will still do their best this year and next to 'recapture margins.' Today in Proctor & Gamble's earnings press release they said of the 6% organic sales growth, half was volume and half was price. The half that was price though was not enough as gross margins fell by 400 bps y/o/y. "Reductions in gross margin were driven by 400 bps of higher commodity costs, 140 bps driven by negative product mix, 60 bps from increased freight costs, and 20 bps of product/package reinvestments. These were partially offset by 130 bps of benefit from increased pricing and 80 bps of gross productivity savings."

This is what Fastenal said in their earnings release today, a great industrial bellwether and very well run company: "The overall impact of product pricing on net sales in the fourth quarter of 2021 was 440 to 470 bps (vs sales growth of 12.8% y/o/y). This increase reflects pricing actions taken during 2021, including in the fourth quarter of 2021, as part of our strategy to mitigate the impact of marketplace inflation, particularly for fasteners and transportation services, on our gross margin percentage. Costs remain significantly above year earlier levels, and we will continue to take actions aimed at mitigating the impact of product and transportation cost inflation as the need arises in 2022."

By the way on ag commodities, the CRB food index yesterday closed at the highest in 10 1/2 years.

With another jump in mortgage rates to 3.64% for the average 30 yr rate, the highest since March 2020, people got off the fence and locked in a mortgage as purchases rose 7.9% w/o/w. They are still though down 12.8% y/o/y but the rise in rates easily could have encouraged people to act sooner rather than later. Directly impacted negatively was the 3.1% drop in refi's and which are down 49% y/o/y.

Avg 30 yr Mortgage Rate


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Lastly, the UK said its December CPI rose 5.4% y/o/y, 2 tenths more than expected while the core rate was higher by 4.2%, 3 tenths above the estimate. The retail price index jumped by 7.5% y/o/y, 4 tenths higher than forecasted. The only respite was the less than expected output and input charges but they were still up 9.3% y/o/y and 13.5% respectively, with the difference being a margin squeeze. In response, gilt yields are higher with the 2 yr yield up by 5 bps to .92% and higher by 15 bps in 4 trading days as the BoE will be hiking again. The 10 yr yield is up by 5 bps to 1.27%, the highest since March 2019. The 10 yr inflation breakeven is up by 1.4 bps to 4.06%. So even when inflation starts to recede, BoE policy and the level of rates will be extremely disconnected from the rate of inflation and price stability is the sole BoE mandate.

UK CPI

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Position: None

An Oldie But a Goodie

(AMC) is trading this morning at $18. 

I wrote this with the shares in the $40s: 

Jul 21, 2021 ' 09:05 AM EDT DOUG KASS

AMC's Adam Aron Should Be Fired and Not Promoted

* Daytraders at Reddit/WallStreetBets are not aligned to the longer term health of AMC

* By kowtowing to these communities, Aaron has jeopardized AMC's financial and operating future

AMC Entertainment's (AMC) Adam Aaron has been promoted to Chairman of the Board.

Rather than be promoted - it is my view that he should be fired.

Here's why:

Jul 08, 2021 ' 09:15 AM EDT DOUG KASS

AMC's Questionable Decision Not to Sell Stock Was Dumb

* And, frankly, I was surprised not one "talking head" challenged that ridiculous policy not to sell additional shares and shore up the company's balance sheet

* Unfortunately, few speak their minds - at least for public consumption

In premarket trading AMC (AMC) is trading near $39/share - approximately - $14/share lower (nearly -30%) than Tuesday.

Two days ago - it feels like two weeks ago! - while many praised his decision not to sell more AMC shares to the public - I was very critical of AMC's Adam Aaron:

Jul 06, 2021 ' 09:00 AM EDT DOUG KASS

Insane in the Membrane...Insane in the Brain

* AMC's CEO cancels plans to sell more stock.

* Huh?

* This is what this market has come to!

"Insane in the membrane
Insane in the brain
Insane in the membrane
Insane in the brain
Insane in the membrane
Crazy insane, got no brain
Insane in the membrane
Insane in the brain"

- Cypress Hill, Insane in the Brain

AMC Entertainment's CEO has decided to cancel the authorization of additional shares because he has listened to his shareholder base that don't want this to occur.

Memo to AMC's Adam Aaron... your shareholder base is comprised primarily of day traders. AMC has about 500 million shares outstanding. On average, over the last three months, 155 million shares trade daily. There have been numerous days in which the entire float has traded! This means AMC's shareholder base is turning over every 3-4 days! This is not similar to listening to an activist group -- who studiously recommends thoughtful longer term strategies -- that makes a 13D filing and is in the investment for the long haul.

This is beyond dumb. Your obligation is to manage and profitably your company intelligently. In cancelling the authorization of new shares you and your Board of Directors are abrogating your corporate duty.

I shorted AMC at about $56 last week and within a day I covered -$8/share lower.

I hope to do it again - should the market's reaction continue positive.

Position: None

Goldman

I am making some small sales in my (GS) trading long rental at $358 now.

Position: Long GS

Some Good Morning Reads

* Amazon's dominance

* Peril lingers for equities. 

* The market is tightening.

Position: Long AMZN

Tweet of the Day (Part Trois)

Position: None

From The Street of Dreams

Barclays reaffirms (GS) with a buy and $505 target.

Position: Long GS

From Here On In, No More 'Taking a Shot'

* Without thorough analysis

* No more living it up in the Hotel California

"Last thing I remember, I was
Running for the door
I had to find the passage back
To the place I was before
'Relax, ' said the night man,
'We are programmed to receive.
You can check-out any time you like,
But you can never leave!'"

- Eagles, Hotel California

Mature Bull Markets can be unforgiving - as we have witnessed during the month of January. 

In an aging Bull Market - that might actually be making an important top - it is important to stick with quality, liquidity and analysis. 

You Can Check Out Any Time You Like, But You Can Never Leave

It is not time for gewgaws, meme stocks or purchasing equities without doing substantive analysis - like I hear in the business media often in January - because the stock has fallen by a considerable amount. 

I have already counselled about avoiding illiquid and speculative stocks: 

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

No HeeHaws In GewGaws (Part Deux)

No bounce in the gewgaws.

Jan 05, 2022 ' 02:25 PM EST DOUG KASS

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.

At this stage in the market please do not purchase any stock without doing research. 

Increasingly I see many in the Comments Section and even "professionals" on Fin TV taking shots - without analysis or because of stuff like unusual call activity - because a stock appears to be cheap meaning, it has fallen dramatically in price. 

Recent examples overheard in the business media include buys of Moderna, MicroStrategy, Marathon Digital, PayPal, Robinhood, DraftKings, Penn Gaming, ARK, etc. 

That is just plain silly. 

And likely hazardous to your investment well being.

Position: None

Out of Index Trading Long Rentals

S&P futures briefly went positive after being -35 handles at 3:15 am or so.

At around 4:55 am I sold my trading long rentals in (SPY) and (QQQ) at $456.70 and $371.45, respectively.

Position: None

Chart of the Day

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Position: None

From The Street of Dreams

Morgan Stanley: 

* Maintains overweight on Twitter (TWTR) , Alphabet (GOOGL) , and Meta FB .

* Price targets of $57 (from $62), $3430 (from $3200), and $395 (from $365), respectively.

Position: Long TWTR, GOOGL, FB

Update

To update the last post, S&P futures at 6:15 am are +12 handles and Nasdaq futures are +61 handles. 

That is quite a rally from the morning lows - and helps to explain why I sold out my Index trading long rentals in premarket trading this am.

Position: None

A Quick Look at Overnight Futures 

A fairly wild evening. 

I am in my office at 3:15 am. 

S&P futures hit a high of +9 and a low of -35. Now -18 handles. 

Nasdaq futures hit a high of +60 and a low of -152. Now -97 handles.

Position: Long SPY, QQQ

Tweet of the Day (Part Deux)

Position: Long GS

Tweet of the Day

Position: None
Doug Kass - Watchlist (Longs)
ContributorSymbolInitial DateReturn
Doug KassVKTX4/2/24-31.72%
Doug KassOXY12/6/23-14.53%
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 KassOXY9/19/23-25.97%
Doug KassELAN3/22/23+37.02%
Doug KassVTV10/20/20+64.63%
Doug KassVBR10/20/20+77.10%