* Victory!

Victory, for now, at least -- so I think we deserve a little Johnny Drama. 

But, tomorrow is another day, Scarlet.

Coinbase, my "Trade of the Week" led the way, closing more $30 off its lows and $20 over my published price in the column:

Jan 24, 2022 ' 09:34 AM EST DOUG KASS

Trade of the Week - Buy COIN $171.48

Speculative.

With risk assets and cryptocurrencies all deeply oversold, my "Trade of the Week" is buy Coinbase (COIN) .

As I suggested, the Russell Index led - rising by over +2.3% on the day :

Jan 24, 2022 ' 01:55 PM EST DOUG KASS

Adding to IWM

The Russell could potentially be the first Index to be higher on the day if the momentum continues.

I have been adding to (IWM)  over the last two days.

I added some new long positions - Sofi (SOFI) , Federal Express (FDX) , Live Nation (LYV)  -- as well as adding to existing positions.

.
Thanks for reading my Diary today - I hope it was helpful.

Enjoy the evening.

Be safe.

A lot more tomorrow morning, early.

I initiated an investment long in Federal Express (FDX) this afternoon.

Live Nation (LYV) purchased at $105.33.

It's my view that the market has the potential of rallying bigly - as many are justifiably scared of selling in the last 30 minutes, based on the last few trading sessions.

Breadth

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Heat Map

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Movers

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It's Monday and I am exhausted.

Anyone else feel the same way?

Break in! 

(IWM) in the green. 

Mission accomplished?

I have been adding to (IWM) over the last two days.

The Russell could potentially be the first Index to be higher on the day if the momentum continues.

Coinbase (COIN) , My Trade of the Week, is making a good move in the stretch.

I added to the following long positions today: (AMZN) , (BA) , (C) , (COIN) (initiated), (DIS) , (DKNG) , FB , (GS) , (GTBIF) , (IWM) , (JPM) , (MSFT) , (MSOS) ,  (NVDA) , (PYPL) , (SOFI) (initiated), (TWTR) , (UPLD) , (SONO) , (QQQ) , and (SPY) .

Long above.

Why not? 

Got the last one!

Bitcoin is quietly making a nice move off of the lows. I have added to (COIN) .

Could it portend a stabilization in equities?

Recent bearishness in equities is overdone, and out of line with activity momentum, easing bottlenecks, and what we expect to be a strong earnings season. While some are concerned that rising input prices will eat into margins, we expect margins to remain resilient thanks to strong activity and prices outpacing wage inflation.

At midday there is total panic and forced liquidations.

Here is a screen shot of the most mentioned stocks on WallStreetBets in 2021:

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I thought it might be helpful to explain the changes in my portfolio's exposure since year-end. 

* I ended the year at about 2% net long.

* As equities declined in the first two weeks of January I raised my net long exposure to approximately 12%.

* After the close Thursday and throughout Friday I added another 10% of my cash reserves into the market - putting me at about 23% net long.

* I have moved to a bit over 25% net long this morning.

The January Markit US manufacturing and services composite index fell to 50.8 from 57 with most of the decline driven by a nearly 7 pt decline in services to just above 50 at 50.9. Manufacturing slipped 2.7 pts to 55. Markit is blaming the supply side and omicron for the weakness.

Specifically with services Markit said, "labor shortages, employee absences and the omicron wave reportedly weighed on growth." They said the demand side hung in pretty well but did moderate. "Demand conditions held relatively firm, however, as new business rose strongly. The rate of growth was the softest for four months, but was broadly in line with the series average. New business from abroad expanded for the 3rd month running." Employment rose "at a modest pace." Backlogs fell to the "slowest since May 2021."

With respect to pricing, on the input side it fell to the slowest in almost a year but "the uptick in costs was linked to supplier price hikes and soaring wage bills." And notwithstanding the moderation in input prices, "Relatively firm demand conditions allowed companies to pass-through some input cost increases, as the rate of charge inflation accelerated to a series high." Inflation and covid resulted in business confidence for service providers to fall to a 3 month low.

On the manufacturing front, "new order growth slowed to the softest rate since July 2020. Alongside labor and material shortages stymieing the upturn, firms noted that customers were keen to reduce spending amid sharp hikes in costs." With the capacity side, "supply chain issues abounded, which further hampered production and weighed on client demand." Specifically on prices, "The rate of cost inflation eased again in January and was the slowest since May 2021. Although still marked overall, there were signs of pressure waning. Similarly, the pace of charge inflation softened and was the least marked since April 2021." The inventory build slowed too as did backlogs. With employment, "labor shortages, a high turnover of staff and reports of the non-replacement of voluntary leavers led to the 1st decline in manufacturing employment since July 2020." There was an increase in optimism as confidence for the coming quarters rose to the highest since November 2020 "amid hopes of stable supply flows and a reduction in the impact of Covid."

Bottom line, omicron has hurt the supply side, both supply chains and labor, much more than the demand side but hopefully with omicron essentially going away in the coming month, that will ease but what then will it be with demand?

US PMI

In the search for a short term market bottom, the 14 day RSI in the SPX is at the lowest since late February 2020 at 22. The 7 day RSI is at just 9. It got to 8 on February 28th 2020.

I have covered my (PTON) short.

I have initiated a small long investment in (SOFI) at $12.10.

Added to (MSFT) $286.50 and FB $296.50.

I added to (SPY) at $430 and $429.

I added to (QQQ) at $345 and $343.

The seven day RSI (relative strength index) in the S&P Index is down to 9.5 so we may be close to a short term bottom here.

Breadth at 9:57 am:

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I just covered my (BAC) and (WFC) shorts.

Everyone is out with their Fed predictions, both in 2022 strategy pieces and ahead of the meeting this week. Most though are 'all else equal' analysis in response to the current high levels of inflation but we know historically there is always an equal and opposite reaction, for every action, as one of Newton's laws say. The reaction of course is not just where inflation goes from here but also how the broad economy and financial markets handle it, I guess stating the obvious. You've heard me say that debt levels, market valuations, economic activity and monetary policy all sit on a foundation and are calibrated in a world of 1-2% inflation, however.

To this, I saw a review over the weekend in the FT on the new book by Christopher Leonard titled "The Lords of Easy Money: How the Federal Reserve Broke the American Economy." It particularly highlights the viewpoints of ex Fed president Thomas Hoenig. He said this, which is similar to my point, "We've built an entire economic system around a zero rate. Not only in the US but globally. It's massive. Now, think of the adjustment process to a new equilibrium at a higher rate. Do you think it's costless? Do you think that no one will suffer? Do you think there won't be winners and losers? No way."

So bottom line and my 2 cent prediction, I think after ending QE and getting 50-75 bps of rate hikes under their belt, the Fed will then see the economic and market reactions, and where the yield curve lies. Then, if the curve has flattened, they'll start QT in an attempt to steepen it. If the curve still steepens because the market doesn't think they are tightening enough, they'll do more hikes. In other words, after an initial attempt at trying to regain credibility on inflation, they will still be very reactive thereafter to the state of their financial and economic surroundings.

Moving on, I'm not going to pretend to predict how this Russia/Ukraine situation plays out but I can't imagine Putin pissing off Xi and doing anything before the Beijing Olympics.

Ahead of the US PMI from Markit, the Japanese manufacturing and services index for January fell to 48.8 from 52.5 and was all driven by a sharp drop in services in response to omicron. The manufacturing component actually rose .3 pts m/o/m. With respect to the outlook which still remained positive for both, manufacturing sentiment fell to a 5 month low while that for services fell to a one yr low. Yields, inflation breakevens and the yen were little changed while the Nikkei was up .2%.

In Australia, its January composite index fell sharply to 45.3 from 54.9 and also because of covid as the services component fell to 45 from 55.1. The manufacturing index slipped to 55.3 from 57.7. Markit said "Supply issues meanwhile remained prevalent, with lengthening of lead times, reports of supply shortages and labor constraints persisting and made worse by the latest surge in covid cases. This has led to input price inflation worsening which may well lead to further selling price pressures, especially when demand later recovers."

Separately in the region, December consumer prices in Singapore rose .5% m/o/m, 5x the estimate and up by 4% y/o/y mostly driven by higher energy prices. The core rate was up by 2.1%, 3 tenths more than anticipated and after a 1.6% rise in November. That headline gain was the most since 2013 and the core rate the quickest since 2014 and both a reminder of how global the inflation pressures are. Singapore stocks remain some of my favorite, particularly its REIT's.

In Europe, the January Eurozone manufacturing and services composite index fell to 52.4 from 53.3 and also led by a drop in services as this component was down by almost 2 pts to 51.2. Manufacturing was up 1 pt to 59 and better than the estimate of 57.5. It does seem that post holiday, supply chains are loosening up a bit. Markit said "most encouraging is the further easing of manufacturing supply chain delays despite the renewed virus wave. Not only has the alleviating supply crunch helped factories boost production, but cost pressures in manufacturing have also moderated." That said however, "prices for goods and services are rising at a joint record rate as increasing wages and energy costs offset the easing in producers' raw material prices, dashing hopes of any imminent cooling of inflationary pressures." So don't send me a chart of the Baltic Dry Index and tell me that we have no inflation anymore even as the Baltic Dry really just mimics the price of iron ore and coal with the former driven by China's property sector right now.

The UK PMI was little changed at 53.4 from 53.6 as services fell by .3 pts as they are powering thru omicron but not without headaches and manufacturing was down by 1 pt to 56.9. Markit said "With hospitality, leisure and travel all struggling due to omicron restrictions, this offset resilient growth in business and financial services. Manufacturers outperformed service providers as a sustained turnaround in materials availability led to the fastest rise in production volumes for 5 months. However, all types of private sector businesses commented on capacity constraints and rising backlogs of work as a result of staff absences in January."

With respect to prices, "Input cost inflation remained stubbornly high and accelerated to its 2nd fastest since the survey began 24 yrs ago (exceeded only by last November's peak). This largely reflected stronger cost pressures in the service sector. In contrast, manufacturers reported a slowdown in purchase price inflation to its weakest since April 2021." The UK 10 yr inflation breakeven is back to 4% on the dot, up by 2.4 bps today but nominal bond yields are lower in Europe and in turn the US in response to the Russian concerns. The US dollar is also up across the board.

The UK bond market has priced in 4+ rate hikes from the BoE this year from the current level of .25%.

With risk assets and cryptocurrencies all deeply oversold, my "Trade of the Week" is buy Coinbase (COIN) .

Speculative.

The S&P is now -100 handles from last night's high in S&P futures.

* I started the year expecting a 15% contraction in price earnings ratios in 2022

* In three brief weeks that valuation reset has almost already occurred in the Nasdaq (-13%) and has been eclipsed by many individual equities

* Investor bullish sentiment has collapsed and the surveys have quickly shifted to very pessimistic

* It is time to apply "second level thinking" and to consider that some of my previous concerns have now been partially discounted in much lower stock prices

* I am back to the "land of the living", and back to slowly investing on the long side

* My net long exposure still remains low but I plan to continue to add subject to attractive opportunities

"When it is time to buy stocks, you won't want to."

- Walter Deemer 

"Buy to the sound of cannons, sell to the sound of trumpets."

- Nathan Mayer Rothschild 

"Price has a way of changing sentiment."

- The Divine Ms M

Beginning after the close on Thursday and throughout Friday I added to my net long exposure - as outlined in our Comments Section and in Sarge's Diary on early Friday morning: 

Jan 21, 2022 ' 06:04 AM EST DOUG KASS

Dougie's Busy Night of Buying

Here is a list of ETFs/stocks I purchased last evening: SPDR S&P 500 ETF (SPY) , Invesco QQQ Trust (QQQ) , iShares Russell 2000 ETF (IWM) , SPDR S&P Biotech ETF (XBI) , PayPal (PYPL) , DraftKings (DKNG) , Penn National Gaming (PENN) , Disney (DIS) , Netflix (NFLX) ($402), Upland Software (UPLD) (new, software name), Facebook (FB) , Nvidia (NVDA) , Microsoft (MSFT) , Sonos (SONO) , Elanco Animal Health (ELAN) , Boeing (BA) and JPMorgan Chase (JPM) . Oh, and Goldman Sachs (GS) .

See you all on Monday morning bright and early.

You have a treat today, The Sarge!

Be safe, everyone!

- Dougie

Today's opener will explain my rationale. 

Equities exhibited a dramatic decline in January and this past week's drop was as swift and deep as anything we have witnessed in many years. 

The S&P Index is down by about -8.3% in January and the Nasdaq Index has fallen by over -13%. However, as bad as those declines were, they belie the much more precipitous drops in many equities. 

As stated, many stocks have fallen by considerably more than the indexes. The most penalized have been profitless, high growth "concept" stocks. Cathie Wood's ARK Innovation Fund (ARKK) is an excellent proxy for this category of speculative stocks - its down by over -55% from its peak a year ago and the drop in the share price has accelerated in recent days:

Small growth stocks (ETF - (IWO) ) have declined by an astonishing 17% in the last 13 trading days.

I am neither a dedicated bear nor a dedicated bull - rather, I approach markets based on our calculation of upside reward vs. downside risk. 

On that score, I have been of the view that equities, in general, were overpriced relative to the apparent risks which we have steadily outlined in my Diary over the last few months. I expressed this clearly in a column of a week ago, Could the Setup for 2022 Portend an End to the 12-Year Bull Run? 

Reflecting those concerns, I have been conservatively positioned - waiting for stocks to fall and for opportunities to arise. 

In light of the recent market decline I have raised my net long exposure. I am still at an extremely conservative posture but the move is reflective of the notion that a number of stocks we monitor have moved into attractive buying levels. 

The market's ungracious decline in the past week has been brutal - unmercifully so for a large number of stocks. Some of the equities that I have wanted to buy and had been expensively priced have now reached more attractive price levels and appear to provide excellent upside reward relative to downside risk. 

Warren Buffett famously said, "In the short run the market is a voting machine and in the long run it is a weighing machine." Though the market is currently in panic/freefall and voting thumbs down - water, ultimately, seeks its own level. The same applies to selected stock prices and valuations, which in the fullness of time could appreciate meaningfully from current levels. 

That said, I continue to hold to some of the concerns I have expressed over the last six months - rising and sustained inflation, the Federal Reserve's pivot, continued supply chain and logistical problems, geopolitical threats and other economic worries. However, with stock prices deflating so rapidly we have to ask ourselves to what extent are our concerns beginning to be discounted? 

I agree with my friend Oaktree Capital's Howard Marks who declares in his book "The Most Important Thing" that, in order to achieve superior investment returns, second level thinking (over firstlevel thinking) produces superior investment returns. 

First-level thinking is simplistic and superficial, and just about everyone can do it - a bad sign for anything involving an attempt at superiority. All the first-level thinker needs is an opinion about the future, as in "The outlook for the company is favorable, meaning the stock will go up." Second-level thinking is deep, complex and convoluted: The second-level thinker takes a great many things into account:- What is the range of likely future outcomes?- Which outcome do I think will occur?- What's the probability I'm right? - What does the consensus think?- How does my expectation differ from the consensus?- How does the current price for the asset comport with the consensus view of the future, and with mine?- Is the consensus psychology that's incorporated in the price too bullish or bearish?

Howard Marks writes that first-level thinking says, "I think the company's earnings will fall; sell." Second-level thinking says, "I think the company's earnings will fall less than people expect, and the pleasant surprise will lift the stock; buy."

Howard's views on second level thinking may apply to today's market as a whole:

First- level thinking says, "The market faces a host of headwinds; let's sell the market." Second- level thinking says, "There are headwinds but everyone knows the headwinds and they have been partially discounted in market prices; let's buy the market."

The issue, of course, is to what degree have our concerns been discounted? And that's the hard part. 

We do know that both sentiment, moving from optimism to pessimism, and stock prices having materially fallen, both indicate that some of our concerns are now becoming adopted by the consensus and, to some degree, have been discounted. 

We also know that when the market feels the worse, as it might be today, it is often an opportunity to buy - for as a former Putnam Management associate of mine, Walt Deemer, once said, "When it is time to buy, you won't want to."

I wonder whether that time - to buy - is rapidly approaching.

Price has a way of changing sentiment (h/t to The Divine Ms M).

And, not surprisingly coincident with the swift drop in stock prices in January, retail investor sentiment has abruptly turned negative over the last two weeks.

This chart of AAII Investor Sentiment demonstrates the heightened negativity:

The Hulbert Sentiment Index is at the most bearish reading since March, 2020:

Coincident with a sharp drop in prices and another measure of intensifying negativity, the total put/call ratio has climbed to the highest level since spring, 2020 (also from Helene):

As to stock prices slowly incorporating and discounting our concerns, we can see the underlying weakness in these two charts in this Wall Street Journal article, "Giant Stock Swings Kick Off 2022" (h/t Whitney Tilson for pointing this out to me). 

The first shows the surge over the past couple of months in stocks hitting 52-week lows each day:

And the second shows how much each stock is below its 52-week high, by market cap and sector:

Month to date, the Nasdaq is off to the worst start to a year in its history - and that includes the deflation of the dot.com boom and in the middle of The Great Recession of 2008-09: 

2022: -13.1%

2008: -11.5%

2016: -10.7%

2009: -8.6%

1996: -5.1% 

The breathtaking January drop in the Nasdaq is further documented and put into an historical perspective in the chart below - constructed at the close of trading on Wednesday. 

If we take into account the substantial declines of Thursday and Friday, the Nasdaq correction is over -17.5%, the fourth worse correction since The Great Financial Crisis. At 65 days, including Thursday and Friday, its already longer than the average post Great Financial Crisis Nasdaq correction of 53 days:

Last month in Could This Portend the End of the 12 Year Bull Market, I exhibited a chart that showed the carnage in the Nasdaq. Since then, that carnage has intensified with the number of Nasdaq Index issues down by greater than 50% from their highs having climbed from 39% to 42%. 

From the 2008 financial crisis, only March 12-April 8, 2020 saw more stocks down 50% or more:

Anyone who has invested in "concept," meme, biotech and smaller cap stocks have realized that the nearly unprecedented pain has been deep as the decline intensified as last week came to a close. The charts below indicate that the smaller the market capitalization, the larger the correction:

Ultimately my mandate in running a hedge fund is to construct a portfolio of equities with attractive reward vs. risk potential superimposed with a fundamental macroeconomic viewpoint and its likely impact on the overall markets. 

Given the magnitude and swiftness of the market's carnage and the developing individual equity opportunities, I should probably consider becoming more aggressive than we were late last week - when we committed an additional 10% of our reserves into stocks. 

However, while we want to be greedy when others are fearful, I remain concerned about inflation, and the consequences of a slowdown in consumer spending, the margin vulnerability to U.S. corporations, a slowing economy in response to the upcoming pivot by the Federal Reserve, and geopolitical threats, etc. 

Moreover, I remain concerned that the changing market structure, in which levered price momentum based products and strategies who know nothing about value but everything about price dominate trading, could result in even more selling over the near term as stocks continue to weaken and as the senior Indices have breached - to the downside - important moving average levels and levels of support. 

On the positive side of the ledger is that our view that Omicron, though infectious, is not virulent, is gaining credibility. Importantly, the pandemic is over and is now an epidemic. Nationwide cases and hospitalizations have peaked and are starting to decline rapidly. Here is the New York City data (h/t again to Whitney Tilson) - in which cases are down about 80% from their peak of a mere three weeks ago:

So, it is likely that the supply chain problems, that have certainly contributed to higher inflation, will begin to be relieved over the next few months. 

Again, the question we ask ourselves today - as we try to incorporate second level thinking - is to what degree have these concerns been discounted in some individual stocks who have declined considerably? 

Remember, we began the year defensively and our thinking - in The Portend column previously mentioned - was that we would see a valuation reset lower in the U.S. stock market of about 15%. In only three weeks we have already seen a lot of that in the -8% and -13% declines in the S&P and Nasdaq Indices. Notably, the expected 15% reduction in price earnings ratios has already been far eclipsed in a number of individual equities - some of which I now find attractive to buy. 

To summarize my current views: 

* In a short period of only three weeks investors have grown fearful, integrating many of the concerns I have expressed over the last six months.

* In duration and amount, the January decline in stock prices is almost unprecedented historically.

* Coincident with lower stock prices and valuations, investor sentiment has deteriorated markedly and, by many gauges, is moving towards a negative extreme.

* Many individual stocks have suffered far greater declines than the averages - some are approaching or already have moved into attractive buying levels. 

As we suggested a week ago, The Era of Irresponsible Bullishness is obviously over - but that doesn't mean that certain stocks represent good value. 

For now, I have settled on a plan to very slowly commit some additional cash reserves into the markets when I see further superior reward vs. risk opportunities develop. 

I will not likely rush to commit my still sizeable cash reserves but I will be opportunistic in searching for values and we will be closely monitoring whether, and how, the fundamental backdrop changes relative to our expectations.

With Bitcoin in a free fall, I have reestablished a small long in (COIN) at $178.25.

I have added to (SPY) and (QQQ) at $436.87 and $349.32, respectively.

Not surprisingly there was a lot of action overnight in the futures market.  

S&P futures hit a high of +35 handles, a low of -17 and are now (5:45 am) -17 handles.

Nasdaq futures hit a high of +155, a low of -89, and are now -89 handles.

There is no bubble in the valuations of FB , (GOOGL) and (AMZN) :