DAILY DIARY
Two Cannabis Tweets
Too Much, Too Soon?
I have reduced my long positions nearly across the board during the rally and in the after hours.
More on Monday.
TGIF
As Grandma Koufax used to say, "I can't even."
I have no clue why the market ramped by 100 S and P handles.
I made a lot of sales into the ramp (too early as it turns out) - based on reward vs. risk.
I have a huge number of tickets to process so that's it for the day - and I need a drink.
A lot to talk about on Monday morning.
Thanks for reading my Diary and enjoy your weekend.
Be safe.
Expiring Options
I have a bunch of options expiring today, so I won't be posting until after the close.
Areas of Near Term Concern
Like some of the reasons from yesterday, some areas of near term concern:
27, 2022 ' 10:39 AM EST DOUG KASS
8 Reasons Not to Chase Here
Reasons not to chase:
* Flattening of the yield curve.
* Weak breadth on the Nasdaq.
* The Russell is awful - now down on the day.
* Crude's strength.
* Tesla's (TSLA) weakness after positive results.
* Financials have little momentum.
* Growth stocks can't hold their gains.
* The perspective of a -75 handle overnight fall in the Spoos (it gives me a perspective of a possible trading range).
* Etc., etc.
As mentioned earlier, I sold out my trading long rentals near the intraday top and I am maintaining my core long positions.
Programming Note
I have a two hour research call between noon and 2 pm.
Long Trading Rentals
With the big turnaround and the S&P trading +37 handles, I am taking off some of my long trading rentals now.
Net Long Exposure
I am at my highest net long exposure in over six months.
Green Brick
Reestablishing (GRBK) long at $22 - the shares have dropped by over $10 recently.
Opportunity Will Soon Be Knocking
* Embrace opportunity, don't shy from it
* When it's time to buy, you won't want to
* Are you kind?
"Well the first days are the hardest days, don't you worry any more
'Cause when life looks like easy street, there is danger at your door
Think this through with me, let me know your mind
Woah-oh, what I want to know, is are you kind?"
- The Grateful Dead,Uncle John's Band
It is my view that, for several years, market participants have underpriced risk as the proper investment strategy in 2019-2021 was to leverage beta.
It is now time to conservatively seek alpha.
Despite an attempted kick save by Apple (AAPL) , S&P futures are now back to the lows of Wednesday night. (S&P and Nasdaq futures are -50 and -150.)
The circumstances have abruptly changed over the last four weeks - month to date the S&P is now -10% and the Nasdaq is -15%.
This month is the worst four week period since October, 2008 and many of the uber confident Bulls have backtracked or have disappeared.
I am quite mindful of the fact that many people have begun to lose a lot of money. As I mentioned yesterday, I have the monthly hedge fund "returns" and people will be shocked how much has been lost by the intelligensia. Some, large, well-recognized funds have losses in the -15% to -20% range in January.
"Don't wait for the right opportunity - create it."
- George Bernard Shaw
This is the time to be deliberate and analytical.
This is not the time to say "I told you so" or, for those that have sidestepped the massive decline, to gloat. This applies to our posts in the Comments Section - this is an appeal to be respectful and mindful that some are having a bad time.
Nor is it time to be critical of those in the business media - frankly, I do this too much and I shouldn't. We can learn many lessons from the recent carnage. Most importantly it is a reminder to where the valuable financial resources lie and where they don't reside.
Many, unfortunately, will panic at the wrong time.
I have slowly begun to buy stocks on the basis of a number of factors - including stress in sentiment and in price - and my net long invested exposure is creeping up.
"If my words did glow with the gold of sunshine
And my tunes were played on the harp unstrung
Would you hear my voice come through the music?
Would you hold it near as it were your own?"
- The Grateful Dead,Ripple
Over the next few weeks I will be offering more individual stock analysis/ideas that I believe have finally entered attractive reward vs. risk zones. Weigh those posts with your other resources and input - in conjunction with your risk profiles.
Here were my thoughts from yesterday morning which I wanted to repeat:
Jan 27, 2022 ' 08:00 AM EST DOUG KASS
Lower Prices Are the Ally of the Rationale Buyer
* Apply second level thinking
* Don't trade off of expected headlines
* Begin to embrace stocks when the herd sees danger at the door
* Avoid "group stink" and constantly evaluate reward vs. risk - it's "the most important thing"
Today I will be very busy trading and I have an early morning (routine) medical examination so my time is short.
Many will ask why I am now, starting late last week, buying the dips - I will make my answer short and sweet because of that lack of time.
I have spent a few months in my Diary explaining that the market was underpricing risk and that the threat of inflation was not transitory, geopolitical risk was soaring, and the Fed has been late to pivot. I also argued that the S&P and the other major indexes were top heavy and were being led by a small cadre of stocks (The Nifty Fifty). This, to me, was very unhealthy.
I was early, but stocks have declined in a massive way in January - but in the months leading to 2022, many stocks were in their own bear markets and you know the stock names.
January has been an unmitigated disaster for many and since price does change sentiment (h/t The Divine Ms M), investor sentiment has dropped like a stone along with plummeting stocks - a prerequisite to stocks reaching attractive levels.
Unlike most of 2021, many stocks now meet my standards for purchase.
Above all, as documented on Monday's column in Buy at the Sound of Cannons - Why I Began to Buy Stocks Late Last Week I explained that I was employing second level thinking and an anticipatory exercise. Essentially what we have been expecting (Fed tightening, etc.) was now occurring and with it brought a dramatic decline in stock prices.
There was nothing really very new that came out of Powell's statement on Wednesday - and, to me, the market has already begun to discount the well- anticipated Fed pivot.
As well, many companies, post EPS releases, will shortly have a window to repurchase their own shares. Remember, the flows from corporate buy backs were the largest source of stock demand over the last 12 months.
But, more importantly, as noted previously, the upside reward vs. downside risk has improved and a growing list of stocks are now attractive.
Well the first days are the hardest days, don't you worry any more
'Cause when life looks like easy street, there is danger at your door
Think this through with me, let me know your mind
Woah-oh, what I want to know, is are you kind?
- The Grateful Dead, Uncle John's Band
Make no mistake about it, there is a lot of fear out there now - portfolios are getting decimated.
But lower prices is the ally of the rational buyer - and, for serious investors, fear, like when S&P futures were down by over -70 handles last night at about 9 pm, is your friend.
For as Wally Deemer writes:
"When It Is Time To Buy, You Won't Want To."
The Book of Boockvar
I keep highlighting the high yield market as something very important to watch to see whether the valuation rethink seen in stocks spills over into economic worries in credit and thus giving us a form of asset price contagion. Well, it continues to soften. Yesterday the yield to worst for the Barclays/Bloomberg high yield index jumped 20 bps to 5.18%. It's the 1st time above 5% since November 2020. Its spread to Treasuries widened by 18 bps to 330 bps, though still below where it was this past November.
For the lowest rung of high yield, the CCC category, its yield to worst rose 14 bps to 7.67%, the highest since December 2020. Its spread to Treasuries is back to 600 bps after getting there this past December. That was wider by 18 bps yesterday. With the possibility of 4-5 rate hikes this year, I don't see anything attractive about this sector at current yields.
The other area of credit to keep your eye on is the leveraged loan space where massive amounts of money have piled into because of the floating rate nature of bank loans. Everyone wants to play Fed rate hikes and are in turn throwing out their credit risk analysis as this area has some of the junkiest credits, with many including private equity deals. The LSTA Leveraged Loan index hit a high one week ago and has since backed off.
JUNK YIELD to WORST
JUNK OAS
LSTA Leveraged Loan Index
Shifting to Asia, Taiwan's manufacturing PMI fell a touch to 55.1 from 55.5. Over the past few years the world has learned how important Taiwan is, particularly Taiwan Semi to the global economy. Markit said "Robust client demand, particularly in overseas markets, supported a further solid increase in total work, while firms continued to add to their payrolls. However, shortages of inputs remained a key concern, and supplier delays weighed on growth of output and drove a further steep increase in backlogs of work. At the same time, companies reported further rapid rises in both input costs and output charges." Taiwan Semi's stocks hasn't avoided the global correction as it's down 7% year to date. The TAIEX itself is lower by 3%.
Vietnam too is now hugely important because of its growing manufacturing presence and prowess. It's PMI rose to 53.7 from 52.5. Vietnam has backed away from its strict Covid approach after learning its lesson last year. Markit said "Both output and new orders increased at sharper rates in the opening month of the year as customer demand continued to improve. In each case the rate of expansion was the sharpest in 9 months." Export orders rose to the best since November 2018. Price pressures did ease but "a key factor behind rising input costs was higher charges for freight and international shipping." I still like Vietnamese stocks. The Ho Chi Minh index was higher by .6% overnight and down just 1.3% year to date.
The January CPI in Tokyo was up .5% y/o/y headline but lower by .7% ex food and energy. Lower hotel prices because of omicron and a tough comparison last year along with lower mobile phone fees (which cycle out in April) were the factors. Higher energy and food prices, exaggerated by the weaker yen, is what kept the headline CPI positive and we'll be adding back more than 100 bps after the cell phone fee situation reverses. The 10 yr inflation breakeven did slip almost 1 bp to .54%. It's still of course low but just off the highest since May 2018. And, the 10 yr JGB yield rose another 1.2 bps to .17% and getting ever closer to the upper band of BoJ yield curve control. That is a 6 year high highlighting that the bond selloff is global.
Don't expect though right now for the 10 yr JGB yield to get above .20% as BoJ Governor Kuroda today said "It's too early and inappropriate to raise interest rates or steepen the yield curve by changing the yield curve control program now."
10 yr JGB Yield
Germany's economy shrunk by .7% q/o/q in Q4, worse than the forecast of a decline of .3%. Versus last year, it grew by 1.4%. A combination of omicron in December which hurt consumer consumption and continued supply problems infected the quarter. Likely too was the economic slowdown in China and who is such a big customer of Industrial Germany. Higher energy prices didn't help either.
In contrast, the French economy expanded by .7% q/o/q and 5.4% y/o/y, above expectations helped by consumer spending. France powers much of its electricity needs via nuclear and thus is less susceptible to spiking natural gas prices. Germany really screwed up with their decision to shut its plants.
As for the economic situation in Europe in January, its Economic Confidence index fell to 112.7 from 113.8 and that was an unexpected fall relative to the estimate of 114.5. Both manufacturing and service components fell as did construction while consumer confidence was little changed and retail sales got back what it lost in December which was hurt by omicron. This is not market moving but we know Europe is dealing with rising inflation, particularly with higher energy prices along with higher labor costs for companies and the manufacturing industries are dealing with the same issues as the rest of us. As the ECB is so far behind the Fed in shifting policy, yesterday's euro fall took it to the lowest since May 2020.
With respect to the DXY, the Daily Sentiment Index is now above 90 so watch for a reversal lower soon.
Eurozone Economic Confidence Index
Really Good Stuff From Danielle DiMartino Booth
Problematic Pluto
We remain of the mind that the U.S. economy is vulnerable because the tea leaves readers will determine, with hindsight, that we've entered an industrial recession. We know from the big build in auto inventories that production lines in Michigan have fired back up. By the same token, the improving trend in jobless claims in the Top 10 states with the highest degree of manufacturing intensity, ex-Michigan (light blue line, middle chart) has stopped improving. Moreover, the abrupt arrest in factory activity is plainly manifest in the stock price of Fastenal (purple line), which peaked on December 31st and has since retreated by more than 13%. Based in Winona, Minnesota, the firm is the largest fastener distributor in North America. You can't manufacture more completed product without what Fastenal spits out - the nuts and bolts, the building blocks of said stuff.
Along these same lines, we've seen factory activity in the heartland district of the Kansas City Federal Reserve weaken since last March, when the New Orders-to-Inventories spread (green line) peaked at 30.0; it has since delved into negative territory in three of the last six months through January. Though we've only got data through December on the national level, we see validation at the national level in the most recent Durable Goods data. The flatlining last month in core capital goods orders ex-aircraft - a clean proxy of factory sector activity outside the hugely volatile and political aircraft sector -- was the weakest print since last February. Ten months does not make for an aberrant trend.
Broaden out to the implications of an industrial recession, one that tends to precede a full-blown economic contraction absent a stimulatory offset on the fiscal or commodities-purchasing front, as in Chinese flows that benefit the rest of the world's economy. The most fundamental manifestation of this broadening in weakness can be seen in the yield curve, which we've harped on for months since the differential between the 2-Year and 10-Year Treasury yields peaked at 157 basis points (bps) on March 19, 2021 (blue line, left chart).
On that note, yesterday's trading activity was nothing short of Biblical. When the FOMC statement was first released, before Powell took to the podium, the curve gapped out to 78 bps. Investors were gratified at the dovish tone of the statement and therefore nonplussed at the aspect of the Fed purposefully slowing the economy, which was not expected by markets.
And then Powell opened his mouth in the Q&A. By the time he repeated "in the background" with respect to the balance sheet roll-off, investors had turned tail. Powell had effectively repeated "watching paint dry" in a different three-word construct, threatening the specter of double tightening, which deeply disturbed risky assets in 2018.
In my view, in trying to be so measured as to commit to nothing, Powell gaffed. In a million years, he would never again double-tighten - shrinking the balance sheet concurrently with raising interest rates. And yet, that's what Powell conveyed by intimating that the Fed's balance sheet run-off could conceivably occur in isolation. The upshot is what transpired after the presser, even as markets priced in five rate hikes, which inherently conflicts with the message being communicated by the yield curve. As of this writing, the 2s/10s has collapsed to 62 bps, indicative of the Fed having, at most, two rate hikes in its chamber.
Markets summarily dismiss the other yield curve, the 5-Year/30-Year (yellow line), which is understandable given the media's obsession with the 2s/10s. Nonetheless, at 44 bps, the 5s/30s has more dramatically flattened from 163 bps on February 24, 2021. Luckily, we've got the ultimate arbiter, the MOVE Index (red line). At 86, it's less than four points shy of its post-pandemic highs and approaching three times its late-September 2020 lows of 37. Credit becoming unhinged, the next step in the unraveling process, would present the Fed with its own Venus moment.
From The Street of Dreams (Part Deux)
Guggenheim reiterates buy on DraftKings, $56 price target, down from $76.
From the Street of Dreams
I added to my Amazon (AMZN) long Thursday.
Here on Friday, Credit Suisse on Amazon; it reiterates an outperform rating with a price target of $4,000 (down from $4,100):
- Event: We preview Amazon's 4Q21 results, which it will report on Feb 3. We lower our price target modestly to $4000 vs $4100 prior as we contemplate a higher fulfillment and shipping expenses for the balance of 2021, offset by higher take rates for 3P. Our FY21/22 EPS ests are now $61.64/$40.85 (vs $63.33/$56.44 prior).
- Investment Case: Investors have been waiting for the first data points to signal accelerated unit/GMV growth, namely greater availability of one/same-day Prime delivery. From a longer term arc of what Amazon has done, the notion that faster delivery allows it to capture a greater share of the consumer's wallet is not new, with the most recent example being the paid units/GMV acceleration following one-day Prime shipping rollout in 1Q19. The arrival of the same for 2H21 was delayed by slower-than-expected hiring for its FCs and the resulting inventory misalignment. That said as Amazon turns inventory ~2x per quarter, the misalignment should have been resolved entering 1Q22. And with the planned retention of the seasonal 4Q hiring into 2022, we believe we are one step closer to seeing greater proliferation of faster delivery after 2 years of capacity constraints. The current capex cycle has been particularly large, as Amazon is now purchasing vs leasing fulfillment assets - as a result, a higher portion of what was variable should become fixed expenses, also pointing the way toward greater FCF dollar unlock longer term. We maintain our Outperform rating, with the thesis based on the following: 1) e-commerce segment operating margin expansion as it grows into its larger infrastructure, 2) optionality for faster-than-expected FCF growth vis-à-vis its advertising segment, and 3) upward bias to AWS revenue forecasts and likely more moderate deceleration path as suggested by ongoing capital intensity in the business.
Valuation: Our DCF-based price target on a 10.5% WACC and 3% terminal growth stands at $4000 vs prior $4100. Higher-than-expected capital intensity for either e-commerce or AWS or extended duration of COVID-19 impact are risks to our price target and estimates.
These Days: More Lessons Learned
* The days of listening to pundits who buy equities on a whim, with little analysis, is over.
* The days of buying a stock based on "unusual call activity" is over - and, arguably, was never here.
* The days of believing a Federal Reserve Chairman is more informed than others is over.
* The days of buying illiquid gewgaws on a whim are over.
The days of basing stock selection on sound analysis and in having a margin of safety are here - but they really never left us.
A Negative Sentiment Extreme?
* The S&P Oscillator is -10.72%.
* 44% of Nasdaq stocks are down by 50% or more from their highs:
Cathie Wood: Stop Trying to Make Fetch Happen
"Gretchen, stop trying to make fetch happen...."
Tweet of the Day (Part Seven)
Tweet of the Day (Part Six)
Get my point? Sentiment is at a very low point.
Tweet of the Day (Part Five)
Tweet of the Day (Part Four)
A Quick Look at Overnight Futures
I described the importance that overnight futures trading holds for me in this column last week; it is a guidepost to my strategy in the regular trading session:
Volatility continued Thursday evening, but a bit more subdued than recently.
During the evening and early morning, S&P futures peaked at +45 handles and were trading -8 at 5:15 a.m..
Nasdaq futures made their high at +200 handles and are now +35.