DAILY DIARY
Programming Note
My next meeting is out of the office - and I will unlikely be back by the close.
Breadth, Heat Map and Biggest Movers
Breadth
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Heat Map
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Biggest Movers
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Bear Market Rally?
As exhibited by this important chart of the Nasdaq (I shorted (QQQ) s in the last hour), I would venture to say, possibly...
From Peter Boockvar
Peter on Germany's rising inflation, and the Chicago and Dallas Manufacturing Index:
Instead of seeing no change m/o/m with German CPI for January as forecasted, it jumped .9% and 5.1% y/o/y vs the estimate of up 4.3%. This follows the 6.1% print out of Spain and comes before Thursday's ECB meeting. No doubt higher energy prices were a key factor but services inflation is now elevated too at 3% in Germany y/o/y. In response the German 10 yr inflation breakeven is higher by 7 bps to 1.83%, the highest since mid November. The German 10 yr bund yield now has a plus sign in front of it, however microscopically, at +.014%. Yields are also rising throughout the region and watching the ECB press conference on Thursday will be quite interesting. Again, a lot of where European yields go will help influence where US ones go.
GERMAN 10 yr Bund Yield
The Chicago January manufacturing index rose to 65.2 from 64.3 and that was above the estimate of 61.5. As the number is so volatile month to month, smoothing out has the 3 month average at 64.3 vs the 6 month average of 65.5. I'd give you more details but their website is down.
CHICAGO Mfr'g
The January Dallas manufacturing index fell to 2 from 8.1 and vs the estimate of no change. That's the slowest since July 2020. The components were however mixed. New orders and backlogs rose but inventories, employment, capital spending plans and production were down. Delivery Times eased and both prices paid and received moderated (but see below). Wages/benefits did rose 3.1 pts to the highest on record dating back to 2004.
With respect to the overall business outlook, it rose to 16.5 from 14.6 but just below the 6 month average of 17.4. Expectations for both prices paid and received rebounded but slipped for wages/benefits. Capital spending plans fell to the lowest since November 2020.
It appears that while omicron is mild to our health, it still remains highly disruptive to business activity. In a special question, "Has your business been impacted over the past month by the current surge of Covid?," 70% said yes-negatively, 27% said no with the balance saying yes-positively (maybe drug stores). The main reason for the 'negatively' is 'Increased absenteeism' followed by 'reduced productivity due to alternative work arrangements,' 'new or worsened hiring difficulty' and 'new or worsened supply-chain disruptions.'
There still remains a high level of demand for workers but the impediment remains 'lack of available applicants/no applicants' and 'workers looking for more pay than is offered.' To the question of 'How has the availability of applicants changed over the past month?', just 1.6% said it 'improved significantly' and 12.5% said 'improved slightly.' This was more than offset by about 46% which said it had worsened.
I include quotes from one company in the 'Chemical Manufacturing' business and the other in Printing & Related Product Manufacturing' as a bottom line:
"The cost of raw materials/parts/outside labor continues to increase. It is a tight labor market (a challenge finding talent) to backfill or provide relief to current staff. There is volatility in customer demand (sentiment is still very unknown for some in 2022, as is our ability to ramp up or down with demand swing). Covid is impacting employee availability."
"This manufacturing business is in a state of chaos. Orders are very strong, reflecting panic buying as customers are afraid they won't be able to get their orders on a timely basis. We can't hire enough people to staff our equipment. People are leaving for more money or threatening to leave, which requires us to respond with significant wage increases. Absenteeism is high due to COVID or presumed COVID or because they don't want to work and they know they won't be fired and can probably make up lost wages with overtime. It is virtual chaos."
DALLAS Mfr'g
WAGES/BENEFITS
SPOT Sold
Sold the balance of my (SPOT) at $193 just now.
+12% in one day is a year's return.
Yell and Roar and Sell Some More?
No doubt the hedge funds that have gotten totally schmeissed in January could sustain the rally - and short sellers are squirming - but...
* Some portion of the rally seems to be an obvious end of month markup.
* The S&P cash index is now up by almost 180 handles since Friday morning.
* Brent crude is up another +$0.50
* The two year US note yield is above 1.20% (+3 bps) as the yield curve continues to flatten.
The Book of Boockvar
Good stuff from Peter today:
Exactly one year ago I dusted off my copy of "Manias, Panics, and Crashes" written by Charles Kindleberger back in 1978 as we were in the heat of the Reddit mania and quoted this in a morning note on February 1st, 2021 from the chapter titled "Speculative Manias", "The word mania in the chapter title connotes a loss of touch with reality or rationality, even something close to mass hysteria or insanity. It is used continuously in economic history, which is replete with canal manias, railroad manias, joint stock company manias, land manias, and a host of others."
He went on to say "The a priori assumptions of rational markets and consequently the impossibility of destabilizing speculation are difficult to sustain with any extensive reading of economic history. The pages of history are strewn with language, admittedly imprecise and possibly hyperbolic, that allows no other interpretation than occasional irrational markets and destabilizing speculation. Here are some phrases culled from the literature: manias...insane land speculation...blind passion...financial orgies...frenzies...feverish speculation...epidemic desire to become rich quick...wishful thinking...intoxicated investors...turning a blind eye...people without ears to hear or eyes to see...investors living in a fool's paradise...easy credibility...overconfidence...over speculation over trading...a raging appetite...a craze...a mad rush to expand."
What do periods of manias have in common? "Speculative manias gather speed through expansion of money and credit or perhaps, in some cases, get started because of an initial expansion of money and credit. One can look back at particular manias followed by crashes or panics and see what went wrong. The tulipmania, part of speculative excitement over many objects, was fattened by personal credit. John Law had his Banque Generale, later the Banque Royale; the South Sea Company, the Sword Blade Bank."
"The fact is that money, defined as means of payment in actual use, has been continuously expanded, and existing money has been used ever more efficiently in periods of boom to finance expansion, including speculation."
I highlight all of this for a few reasons, 1)Human nature NEVER changes and what seems like a new era is just a repeat of a previous one but just in a different form, 2)Easy money is the foundation upon which bubbles of any kind form but when monetary policy begins to change in reverse, valuations matter, 3)Buying a stock is not an act of rebellion and sticking it to the man, it is acquiring a partial ownership in a company.
The peak of Gamestop was made on January 27th , 2021. ARKK topped out on February 12th, 2021. Around that time I also included a few E-Trade commercials from 1999 to also highlight how online trading last year was not new however it was portrayed as a new revolution created by Robinhood. Here was my favorite.
Moving on. I want to reiterate my belief that the peak in the rate of change in inflation will come in either February or March and that the intense pressures seen will begin to ease. If correct, the only question then is how soon and quick does it decline. I'll continue to argue that inflation will remain sticky and that a 3-4% range will be the first settling point and we are not going back to 1-2% anytime soon.
To this, I thought Colgate Palmolive had some really interesting comments on their earnings conference call on Friday with regards to inflation. It's helpful too to hear from consumer product companies generally as many of their products are necessities at low price points (like toothpaste, soap, deodorant, etc... in this example) and thus is very informational on how consumer behavior reacts to price changes. The CEO said "no question, given the size of the pricing that we're taking around the world, and you're seeing that from ourselves as well as competitors in other categories, you will see a falloff in volume...So the makeup of the organic growth this year, no question will be driven more by price than by volume, which is a little bit different than what we've seen in historical years."
I say, they are therefore willing to lose volume because they believe the best way to recapture margin is via price. And, everyone is doing the exact same thing in their industry so they can get away with it.
He went on to comment on this, "I'll say that all boats rise in this environment in the sense that everyone is impacted by the inflationary environment. So as a result, you're going to see pricing up pretty consistently across all categories. That plays, as you've heard from others, into elasticity that you're not seeing one competitor move, you're seeing the category move. So elasticity tends to be a little bit less. We will see. It's early days now."
I say, so everyone is going to pay more for toothpaste, toothbrushes, shampoos, soap and deodorants because EVERYONE in the sector is taking the exact same pricing measures. This is what sticky inflation is made of on a micro level.
With respect to non voting member and Atlanta Fed president Raphael Bostic's comments in the FT that they could hike 50 bps at one meeting if needed, he also said he's sticking to his forecast for three quarter point increases this year. Thus, anything is possible either way and I just think he was warning all of us that the Fed is serious about the challenge ahead of having rates at zero and inflation at 7% and they want to do something about it. He said "Every option is on the table for every meeting."
Over the weekend China said its state sector manufacturing index for January fell a touch to 50.1 from 50.3, thus flatlining in the month. The estimate was exactly 50. The services component was weaker too, falling to 51.1 from 52.7. With manufacturing, new orders and backlogs remained below 50 as did employment and inventories. Prices pressures accelerated. But, there was hope for the future as overall Business Activity Expectations increased to 57.5 from 54.3. A similar story played out with services. The Covid stance of the Chinese government post Olympics and how this residential real estate situation plays out will both combine to dictate Chinese economic growth this year.
The private sector January Caixin manufacturing PMI also came out and it fell below 50 at 49.1 from 50.9. The estimate was also 50. Caixin said simply, "The recent uptick in Covid cases in China, and subsequent round of fresh restrictions, weighed on manufacturing performance at the start of 2022." They also said this, "New export business meanwhile fell at the quickest pace since May 2020, and supply chain delays worsened. Average input prices rose at a slightly quicker, but modest rate. Prices charged meanwhile increased following a slight reduction in December." Similar to the state sector optimism, "Manufacturers were confident that output would increase over the next 12 months, often due to forecasts that market conditions will strengthen as the pandemic is brought under control."
Chinese markets are closed for the holiday but the Hang Seng was open and it rallied by 1.1% and the H share index was higher by 1.7%. Both are up for the year after yesterday's notable decline. The Hang Seng index trades at just 11x earnings with a dividend yield of 3% by the way. Cheap.
Ahead of the German CPI print at 8am, Spain said its January CPI rose 6% y/o/y, ahead of the estimate of up 5.3%. In response, the Spanish 10 yr inflation breakeven is up by 5 bps to 1.77%, the highest since mid November. The 5 yr 5 yr euro inflation swap is up by 1.6 bps to 1.84%. European bonds are lower across the board with yields higher. The German 10 yr yield is back to ZERO, FINALLY.
SPAIN 10 yr Inflation Breakeven
GERMAN 10 yr Bund yield
Cannabis
From the WSJ on cannabis, here...(hat tip to Neil The Real Deal!)
My Long Book
I am further reducing my long book.
Out of SPY Long Rental
This morning I purchased (SPY) at $439.72 for a trade:
Jan 31, 2022 ' 07:55 AM EST DOUG KASS
SPY Long
Break in!
I just reestablished a (SPY) long at $439.72 - against a large existing position in SPY March (monthly) short $440 calls.
I sold this position at $443.80 a few minutes ago.
And I have added to my short SPY calls position.
Jammed
I am jammed today so my posts will be less frequent.
End of month, three more conference calls.
From The Street of Dreams (Part Trois)
B Riley maintains a buy rating in (GRBK) with a price target of $27.
I purchased Green Brick (a David Einhorn/Greenlight name) last week:
Jan 28, 2022 ' 10:40 AM EST DOUG KASS
Green Brick
Reestablishing (GRBK) long at $22 - the shares have dropped by over $10 recently.
Tweet of the Day (Part Trois)
In today's opener I ask:
Though its market cap is not that large, I have added one more concern: could a crash in Bitcoin be damaging psychologically to the market?
Morning Musings From Sir Arthur Cashin
The market continued to behave, generally in line with the seasonal pattern, it was another very choppy session and there was a lot of internal testing and re-testing going on, perhaps again it would best to start out with the late morning update that we put out shortly before noon.
Here is what we said:
"Late Morning Update: The markets continue volatile, but as suggested in a somewhat more muted fashion. The range on the Dow is just over 500 points as opposed to the 800/1000 point type swings that we saw in the preceding days. The bulls have been able to maintain the rally thanks in large part as we had suggested to the yield on the ten-year backing away from the 1.85% high. It will clearly be a factor through the balance of the day. If it gets back up to that 1.85%, we expect it to put some pressure on equities. So, the 1:00 auction of the seven year could be very important. The whipsaw is not as dramatic as it had been, but we will see how the balance of the day goes. Stay safe"
The market then did expand the choppiness after the update, later in the day the spread on the Dow widened to almost eight hundred points again. The Dow flipped between positive and negative about six or seven times in the final two hours of trading, which certainly adds up the choppiness for me.
There is however one little glitch and how packed the action is, and that is the Nasdaq was weak enough to make a nominal lower low on Monday's "bottom". We will have to explore that further, it would have been best if all three indices waited as the pattern had suggested for several weeks to retest that bottom.
So it is raising some questions, about how the market may be interpreting the Fed and where we go from here. And the presumption would be that Friday we will also see another choppy session, as we try to build that sideway rectangular stretch that we were assuming, if for a valid retest of the bottom in all three indices.
We will have to go back to the work bench with this new data on Thursdays low in the Nasdaq, and see whether that will change the pattern overall or whether it is an anomaly that we can tend to fit in. Ok, we will have to see if the lower low in Nasdaq in any way violates the overall seasonal pattern.
Regular readers will know that the seasonal pattern has made projecting the market moves even daily and almost eerily accurate process. Therefore I hope a lower low is not violated completely. According to the pattern today should be another bit of a whipsaw choppy session.
Keep your eye on the yield on the ten-year, above 185, it could put some pressure on stocks.
The earnings report and following boost in Apple may help the Bulls a bit this morning, although there's little sign of it. If the pattern reasserts that would be helpful, because it would indicate a couple of more weeks of choppy trading, with a formal retest of Monday's bottom in the last week of February or beginning week of March. We would like to get back to that kind of accuracy.
Today's economic calendar is extremely light, although early this morning we do get the employment cost index, which is one of the Fed's favorite inflation indicators. Therefore traders will watch carefully.
Overnight, the global equity markets appear to be rather nervous and are generally moderately lower. Adding to the nervousness are unsubstantiated reports that Biden told Ukrainian leaders that a Russian incursion is all but certain and will occur once the ground freezes, which will make moving heavy equipment easier. We are hearing that the White house denies that the President made the comment, but markets are nervous, nonetheless. Watch the yield on the ten-year, and the 1.85 percent level.
Also keep an eye on the newstickers or any Geo-political surprises.
Stay safe
Question I Asked Myself Repeatedly Over the Weekend
While in the big picture the market cap is not a large amount of money, could a crash in Bitcoin - and other cryptocurrencies - be damaging psychologically to the market?
Programming Note
I have to meet the CEO of a company I am invested in for coffee (8:30-9 am) and then I have a one hour Board Meeting (9 am-10 am).
So I am pounding out a bunch of articles early!
SPY Long
Break in!
I just reestablished a (SPY) long at $439.72 - against a large existing position in SPY March (monthly) short $440 calls.
Tweet of the Day (Part Deux)
A Quick Look at Overnight Futures
I described the importance that overnight futures trading holds for me in this column two weeks ago. It is a guidepost to my strategy in the regular trading session:
Last night was one of the quietest evenings in the last few weeks.
During the evening and early morning, S&P futures peaked at +14 handles, bottomed at -21 handles and were trading -4 at 5:35 am.
Nasdaq futures made their high at +117 handles, bottomed at -80 handles and are now +58.
From The Street of Dreams
Jeffries maintains hold on Twitter (TWTR) with a $40 price target.
Two Tweets From Keith
Friday Night Light
(In case you missed it) - posted late Friday:
Jan 28, 2022 ' 05:56 PM EST DOUG KASS
Two Cannabis Tweets
Jan 28, 2022 5:56 PM EST
my guy. https://t.co/M6EwNXcz4j pic.twitter.com/VS3INTgnpT - Todd Harrison (@todd_harrison) January 28, 2022 NEW: SAFE Banking Act finds a new vehicle pic.twitter.com/KxYVq2yqDG - Natalie Fertig (@natsfert) January 28, 2022
No Bueno
The two year US note yield breaks out to above 1.20% this morning.
The yield curve continues to flatten.
ARKK
I plan to sell at least half of my ARK (ARKK) trading long rental in the premarket.
My Tweet of the Weekend
Netflix
CEO Hastings buys $20 million of Netflix (NFLX) on the stock price decline.
I recently initiated a long position between $370-$375/share.
Chart of the Day
From Steve Deppe:
"The S&P 500 Technology sector traded down -5%+ last week, yet finished the week in the green. Surely that sort of upside reversal must mean the bottom is in for Technology, right? Right?? Just a bit outside!"
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