* Go Yankees!

To me, the most important takeaway from today is the total reversal of performance - lower - in bank and most technology stocks. 

This suggests to me that there was more than average FOMO buying, and perhaps, short covering in yesterday's session. 

Thanks for reading my Diary today. 

Enjoy the evening.

Be safe. 

P.S. -  After attending the Astros/ Mets game last night... Jacob deGrom is a beast and the Mets have a good chance this year!

"Yesterday even the "junk" rose - cannabis stocks, meme plays ( (GME) , (AMC) , et. al) and lower-rated, non profitable stocks - a possible sign of a near term market peak."

- Kass Diary, "Is Mr. Market Saying That Equities Will Be a Good Hedge Against Inflation?"

Perhaps the above quote, contained in my opening missive this morning is ringing true today. See GME and other meme stocks today. 

Albert Einstein once wrote, "the only things that are infinite - the universe and human stupidity (and I am not sure about the former)."

For silliness always ends badly as nothing in all the world is more dangerous than sincere ignorance and conscientious stupidity. 

And what we have learned from history is that we haven't learned from history.

Wolf Street on rising home inventories and swooning homebuilder shares.

I have covered the balance of my (QQQ) short at $353.20, and I am adding (at $10.73) to my short May (SPY) $434 puts at $10.70.

I covered half of my (QQQ) short at $353.67 just now.

Howard Marks latest commentary, "The Pendulum In International Affairs" 

From Professor Galloway:



Welcome to the most expensive stock market in history.

· In the early 90s, stock prices were closely correlated with revenues.

· An S&P 500 company with a price-to-sales ratio greater than 10 was unheard of until the dot-com bubble.

· But that divergence has grown over the last 10 years, and by the end of 2021, a record 15% of S&P 500 members had price-to-sales ratios greater than 10.

* Cresco Labs disappoints on top and bottom line

* The proposed acquisition of Columbia Care is being done at a very low price

Yesterday, Cresco Labs (CRLBF) reported a -1% reduction in sales, sequentially - disappointing ($217M vs. $234M estimate) in light of two acquisitions and retail recapture in the Pennsylvania cannabis market. The EBITDA miss was reasonably large at $47M vs. $60M. 

This morning CRLBF announced the all stock acquisition for competitor Columbia Care (CCHWF) .  

Several observations: 

* Cresco's weak results (sales/cashflow/EPS) confirm my continuing fundamental concerns facing the cannabis industry.

* Cresco had $15 million of impairment charges of 2021 vintage acquisitions - not a good sign!

* Cresco only paid a 16% premium off of historically low industry valuations. Some have thought this morning that the deal would be viewed positively for (MSOS) 's price. However, a deal at this level/valuation and with such a small premium should be viewed as disappointing to industry followers.

* I am not certain the deal will pass antitrust muster as there is some reasonably important regional sales overlap. I suspect there would be some mandated asset sales for the deal to go through. 

While the long term opportunity remains very much intact, I am still cautious on the industry's fundamentals and see federal legislation as the principal driver to the shares of cannabis companies. On the later score, and in my mind, the probability of 2022 legislation is growing increasingly less likely.

At 10:41 am:Breadth

View Chart »View in New Window »

Big Movers

View Chart »View in New Window »

Heat Map

View Chart »View in New Window »

From Fed's Mester (FOMC voter and hawk): 

* Do not see a tradeoff between inflation and job mandates.

* Need to get inflation under control for both sides of the mandate

* Balance sheet reductions will have a good effect in not further distorting the yield curve slope

* Reiterates she favors raising rates to 2.5% by year end and front loading hikes

* Do not have any concerns about raising rates and beginning balance sheet reduction at the same meeting - markets can handle it

Today's cost basis on my (SPY) and (QQQ) shorts are $447.64 and $355.22, respectively.

Peter questions whether we now have too many homes for sale: 

New home sales in February totaled 772k, 38k less than expected and January was revised down by 13k to 788k. Keep in mind that the average 30 yr mortgage rate in February according to Bankrate was about 4.10% vs 4.5% today and which compares with 3.55% in January.

Months' supply did tick up to 6.3 from 6.1 and remains about the long term average in stark contrast to the anemic level of existing homes for sale. This is important to keep an eye on because the supply of new homes has been rising notwithstanding all the supply pressures that is more so altering the timing of finishing the home, rather than the starting one. In fact, the number of new homes for sale are at the highest level since August 2008 on the downside of that bubble.

The median home price, which jumps around a lot month to month because of the large influence of mix, was $400,600, up 10.7% y/o/y. That is down from $427,400 and to the mix point, there was a pick up in the sale of homes priced between $200-400k and a decline for those priced above. The average price is now above $500k for the 1st time.

Bottom line, the lack of existing homes for sale and in the face of labor shortages and trouble procuring enough raw materials, appliances, garage doors, windows, etc... builders have the largest amount of homes for sale in 14 years. As household formation is slowing to a crawl, and with now rising mortgage rates, hopefully this leads to lower prices which would better position a 1st time buyer to purchase a home instead of having to rent where prices are rising double digits too. Take note of course if you are long homebuilders but I'm sure you already did because of the recent jump in mortgage rates. I'm not long any myself.

New Home Sales

# of New Homes for Sale

*Hard to get them out on paper as fast as I am trading 'em!

I expanded my May (SPY) $434 puts short at $10.30 this morning in the whoosh lower.

I have added to my (QQQ) short at $354.42.

I also shorted more (SPY) at $447.64 just now.

Well done Pete: 

Pete Barthelme

The Rev post more analogs about how it was a good time to be bullish in June 2008 and April 2020 based on S & P 9 straight 1% or better days in a row. Take those moments in time and compare. They were nothing like today;
Both vicious bear markets preceded 36% and 59%
Valuations all severe lows vs extreme highs
An extremely accommodative Fed vs a extremely tightening Fed
It takes a huge leap of faith to tie these together and an amazing lack of intellectual rigor.
Want to know where FOMO comes from...

Pete Barthelme

A better analog is 2018;
Oct to Nov drops 12% lots of hand wringing, valuations still high
Big rally into early Dec those 4 straight days of QQQ up 2% or more that was being posted last week
Rug pull and 17% drop into Xmas eve (great buying point)
Fed reversal and to the rescue
I'm not sure the Fed will come running this time, more likely they might back off a bit

* I doubt the notion... and I am shorting into the market's recent strength

* Consensus S&P profit expectations are too high

* Corporate profit margins havenever been higher - exposing profitability to the corrosive impact of inflation

The extraordinary rally over the last week has been historical as investors are dancing when the music is still playing:

Importantly, the rally has occurred during a near unprecedented rise in interest rates and inflation. In fact the rise in the yield on the two year US note during the month of March has increased at the fastest rate (+70 bps) in over 18 years:

Yesterday even the "junk" rose - cannabis stocks, meme plays ( (GME) , (AMC) , et. al) and lower-rated, non profitable stocks - a possible sign of a near term market peak. 

But what is most surprising to me has been the strength in growth stocks (read: the Nasdaq) which typically fare poorly in a rising rate environment (I shorted (QQQ) this morning). 

I agree with Mohamed El-Erian that we can not ignore what is happening to the global economy and there is a rising probability of a Fed policy error.  See here and here. 

We are likely moving into a period of "slugflation" globally. Europe is likely entering recession, Russia is entering a depression, China is foundering and a number of debt-laden and commodity importing developing countries are in for very rough times. 

As to the U.S. stock market as a hedge against inflation - we are, today, the tallest midget in the world economy. 

But even when one owns the nicest house in the neighborhood, the value of that home typically declines as it's not immune to "market conditions." 

Working against the inflation protected argument is the magnitude of the inflation and supply chain issues, the abruptness of the change in central bank monetary policy in the face of the accumulation of private and public sector debt, the depth/breadth of geopolitical risks - on three continents - and elevated market valuations. 

Moreover, corporate profit margins have never been higher - exposing profitability to the corrosive impact of inflation and the above. 

The "TINA" Argument Now Seems Fanciful

* The absolute risk free return rate on Treasuries is rising rapidly

* Risk free returns on Treasuries provide a meaningful differential advantage relative to the current S&P dividend yield

This morning I have heard a lot in the business media about the return of TINA - as an explanation of the market advance. 

I don't buy what they are selling. 

As noted in the chart above, the two year US note yield is +70 bps in the month of March! 

The two year US note now yields 2.15% and the 10 year US note yields 2.37% - that's providing about 18 bps a month in risk free return, and comparing very favorably from one month, six months and 12 months ago. 

Moreover, both of these risk free returns are far more and increasingly attractive relative to the current 1.37% S&P dividend yield, which is at a near historic low. 

Here is the 50y year chart on the S&P Index Dividend Yield:

So, to me, the "TINA" argument is just silly today. 

When It Is Time To Sell, You Won't Want To... And When It Was Time to Buy, You Wouldn't Have Wanted to a Week Ago

Today, the S&P oscillator is +4.13% (overbought), while a week ago it was oversold (-5.23%):

Mar 15, 2022 ' 06:14 AM EDT DOUG KASS

When It Is Time to Buy, You Won't Want To

* The S&P short range oscillator hit -5.23% -0 that is way oversold!!!

Bottom Line

I am fading the market strength of the last week as I don't buy the arguments of stocks as an inflation hedge nor do I endorse the notion of "TINA" (there is no alternative). 

I am selling what they are buying.

Markets have rebounded but only commodities and the dollar are above their pre-invasion peak.

Current value vs. YTD pre-invasion peak and post-invasion trough for each asset

View Chart »View in New Window »

I highlighted yesterday the continued weakness in the yen and the issues that could create for BoJ policy in the face of high energy prices where Japan imports most of their needs. Overnight, the 10 yr inflation breakeven rose 4 bps to .84%, the highest since October 2015. The 10 yr JGB yield was up 1 bp to just below .23% and vs the .25% which is the upper end of yield curve control.

We are going to have a whole other extension of this bond roller coaster and selloff if the BoJ gets to the point where they need to start tightening monetary policy. Because of YCC though, the BoJ has dramatically slowed the pace of its bond purchases and its balance sheet relative to GDP has remained flattish over the past year.

10 yr Japan Inflation Breakeven

BoJ Balance Sheet as % of GDP

We see all the curve flattening going on but today I want to highlight the amazing speed at which the 2 yr yield has priced in rate hikes when compared to what has actually happened so far. This is a chart of the 3 month T-bill, tied tightly to the actual fed funds rate, and the 2 yr note yield which has priced in the expected hikes. Quite a quick adjustment on rate expectations.

What's going on in the Northeast? Last week we saw within the NAHB home builder sentiment index a 16 pt drop in the Northeast. In today's release of the February Architecture Billings Index which was 51.3 vs 51 in January, they said this "Despite the continued healthy demand for design services, activity is plateauing as firms face a myriad of external challenges, from staffing to supply chain disruptions to high inflation and rising interest rates. While the rebound from the pandemic has positively impacted firms in most regions, the prolonged lack of demand for design services in the Northeast is of growing concern." Maybe this reflects the household and business spread to lower cost, lower tax areas of the country.

A week after the Bank of England raised rates by 25 bps to .75% and one member didn't want to, UK February CPI rose 6.2% y/o/y and the core was higher by 5.2% y/o/y, both two tenths more than anticipated. The Retail Price Index which is used for inflation linkers, was up by 8.2% y/o/y. As for producer prices, both input and output charges were up sharply. For inputs, by 14.7% y/o/y and for output prices, up 10.1% y/o/y.

As wage growth is not close to matching any of this, real wages are falling sharply in the UK. Last week we saw earnings ex bonus' thru January up 4.8% y/o/y. As all the data was not far from expectations, the 10 yr inflation breakeven is actually down a touch but to a still high 4.28%. After the recent spike, gilt yields are down too as is the pound.

The pain lower income families are experiencing and will continue to do so in light of the higher tax that is inflation is upsetting. Today the UK Chancellor of the Exchequer Rishi Sunak will be in front of parliament today laying out his plan to deal with this.

Core CPI in the UK y/o/y

U.S. financial conditions vs. mortgage rate:

The Russian invasion of Ukraine is a net positive for the German stock market (h/t NorthmanTrader):

I have established a small short in (QQQ) at $355.50 in premarket trading. 

My opener will help to explain this position.

Another one from Bramo: total negative yielding European debt used to be close to $20 trillion.

* The market (and money) never sleeps

"Workin' on our night moves
Trying to lose the awkward teenage blues
Workin' on our night moves
In the summertime
And oh the wonder
Felt the lightning
And we waited on the thunder
Waited on the thunder."

- Bob Seger, "Night Moves"

I described the importance that overnight futures trading holds for me in this column a few weeks ago. It is a guidepost to my strategy in the regular trading session.

Moreover, the overnight/early morning futures holds opportunities as it is (1) inefficient, though liquid, and (2) it seems fear and greed is often exaggerated outside the regular trading session.

It was a very quiet evening/early morning for futures -- until about 30 minutes ago when the S&P futures took a small dip. Gold was +$5.50 and Brent crude was+$1.33 to nearly $117/barrel - normally bearish developments.

Bond yields (of the long end) have dipped -- with a 2 bps move lower in yield.

S&P futures peaked at +12 and bottomed at -13. At 5:41 am ET they were at -12.

Nasdaq futures topped out at +24, dropped as low as -65. At 5:42 am ET they were at -49.

In terms of my trading in the Indexes, yesterday - I traded around my core short position and had no appreciable change in my gross short exposure.