I am in transit back to my office. I saw little of the explosive move in equities this afternoon.

More on the markets in the morning.

Enjoy the evening.

Be safe.

* Russia's central banker wanted out of Ukraine. 

* Where active managers outperform. 

* Interest rates are getting weird.

From Peter Boockvar: 

The March Markit manufacturing and services PMI for the US rose to 58.5 from 55.9 with most of the help from services as this component rose 2.4 pts m/o/m. Manufacturing lifted too, by 1.2 pts to 58.5. The headline number fell to 51.1 in January when omicron was at its peak and it topped last May at 68.7.

With services, "Greater activity was driven by a marked increase in new business that was the sharpest since June 2021, as demand conditions strengthened." This led to "a record breaking rise in backlogs of work." Employment rose to the highest since April 2021. This didn't come for free though as "Inflationary pressures remained substantial, as the rate of cost inflation accelerated to the fastest for three months. Output charges rose at a similar pace to February's record rate as firms sought to pass-through hikes in input prices to clients."

On the manufacturing side, "Stronger expansions in output, new orders, employment and stocks of purchases helped support the overall uptick. Delivery times slowed to the least since January 2021 as post holiday and Covid pressures ease. Price pressures remained intense though "as manufacturers noted broad based increases in prices...Purchasing activity rose at the fastest pace since September 2021, amid efforts to stockpile and protect against future surges in costs." With respect to what is being passed on, there was a "slightly softer increase in selling prices, despite soaring costs burdens." Employment was higher in this sector too.

Bottom line, another drop in the omicron spread definitely helped the service side of the economy and further eased supply/labor challenges. Markit said the 'hospitality' sector was a particular beneficiary. Overall demand for goods and services still remains quicker than supply and thus the continued price issues. Now thrown in much higher energy and food prices. The caveat in all of this was this, "business confidence slipped to the lowest since last October." We have the optimism that covid is essentially over but the problems of war, inflation, and coincident squeeze on household budgets and product/raw material procurement. The yield curve is certainly betting on the latter as the main influence from here.

 Services & Manufacturing

Shorted more (SPY) at $447.27.

Randomness. 

Controlled by algos and machines. 

A regime of heightened volatility. 

An awfully tough market to navigate unless you have a sense of "fair market value" of stocks or the Indexes, imho. 

Shorting strength.

Into this rally I am putting in some bids to take in (cover) some of my (SPY) May $434 short puts and shorting some more $435 calls for May. 

This makes me larger in gross short exposure.

It is often a healthy exercise to review past opinions. 

Three months ago I wrote a column entitled, "Could The Setup For 2022 Portend An End to the 12- Year Bull Run?" in which I opined that the 12 year Bull Market run might be on fumes as we entered 2022. I also concluded that fiscal and monetary policy was no longer unbounded and we are likely well past the points of peak economic activity and peak liquidity. 

The column concluded with some other observations, views and expectations: 

1. A general valuation reset lower. On average, over history, a 100-basis-point rise in fed funds rates is associated with about a 15% valuation adjustment lower. Considering today's elevated valuations, that reset has the potential of being more than the historic average.
2. A hard rotational shift from growth to value. To some degree, this reflects the Fed's pivot, which will likely produce higher interest rates, serving to adversely impact discounted cash flow models of long-dated growth stocks.
3. Disappointing EPS growth (probably under 5%) compared to higher expectations. One of the biggest surprises this year has been the resilience of corporate profits. However, contributing potential negative influences include likely margin pressure from higher costs, a Fed tightening, some evidence of pulling forward demand, etc.
4. Modest EPS growth (if any growth at all) when combined with lower valuations could translate into negative overall returns for the S&P in 2022.
5. With continued high inflation (a regressive tax), a continued widening in the income/wealth gap houses a wide range of social, economic and political problems and investment ramifications.
6. A more aggressive Fed than is reflected in general expectations. Less liquidity could result in a marked reduction in flows into equity funds, which has provided unprecedented fuel to the markets in 2021. (See my Surprise List for 2022.)
7. Continued supply chain problems that, in part, fuel inflation and inflationary pressures to levels well above consensus. It is important to remember that many of the most important supply chains lie overseas, where more restrictive business and social closures have been put in place. In other words, the U.S. doesn't totally control its economic destiny in a flat and interconnected world.

I am reposting the missive this morning as it bears repeating:

Dec 29, 2021 ' 08:23 AM EST DOUG KASS

Could the Setup for 2022 Portend an End to the 12-Year Bull Run?

* The setup for 2022 is far different than 2021.

* After a lengthy period of unbounded fiscal and monetary largesse we are exiting peak economic activity and peak liquidity

* Sell strength and buy weakness?

* The growth and narrow market performance bias into "The Nifty Seven" has grown ever more extreme, conspicuous and worrisome

* Since April 2021, over half of the S&P gain is from only five stocks

* The January effect this year might result in weakness in the anointed "Nifty Seven" as investors defer a tax event and strength in beaten-down value stocks as investors see relative value

* I remain fearful of Omicron not because of its virulence but due to its likely continued impact on supply chains and, in turn, inflation

"Markets are strongest when they are broad and weakest when they narrow to a handful of blue-chip names."

- Bob Farrell's Ten Rules on Investing

Equities are ending the year with a burst of near-unprecedented enthusiasm.

By the end of the week it is likely that the S&P 500 Index will have experienced an outsize annual compounded rate of return over three years of more than 23% per year.

Momentum, temporarily halted with fears regarding the onset of Omicron earlier in the month, has reappeared in an orgy of seasonal and holiday optimism.

Many are buying the strength as the altar of price momentum has been inviting to those passive strategies/products and others that worship there. After all, that strategy has been working.

But those who own stocks away from the favored few know the real pain that has been levied in the markets over the last few months. Sure, the gewgaws have been decimated, but so have a wide swath of popular and profitable stocks. Some random examples are stocks such as SoFi (SOFI) , DraftKings (DKNG) , Citigroup (C) , Twitter (TWTR) , PayPal (PYPL) , General Electric (GE) , any of a number of media and telecom stocks and numerous "stay at home" stocks such as Zoom (ZM) , DocuSign (DOCU) , Peloton (PTON) and so many others.

VIX and other measures of volatility have collapsed abruptly -- in the case of VIX from about 32 to 17 in a matter of a week. Interest rates, by contrast, have done little, though the curve has flattened as short-term interest rates have moved up considerably (the two-year from 20 basis points to 80 basis points) and the 10-year US note yield looks like it will close the year about 50 basis points higher than a year ago.

After rallying by more than 250 handles since a week ago Monday (Dec. 20), market participants have appeared to shred any concerns regarding prospective economic growth, the accumulating U.S. debt load, a degree of political partisanship (in a backdrop of cultural extremism) rarely encountered, a monetary pivot (historically, a one percentage point rise in the fed funds rate reduces valuations by about 15%), still-stubborn signs of continuing inflation, continued supply chain disruptions and logistical nightmares, health uncertainties, a widening income and wealth gap and extended valuations.

Omicron May Extend Supply Chain Disruptions and Raise Inflation

In part, a less virulent Omicron seems to have been a contributing influence to the market rally. Some are even thinking that it will serve to reduce the impact of Covid, transforming the pandemic into an endemic. I would note that a less malignant Omicron has been my baseline expectation since the variant was exposed, but I remain fearful of the knock-on economic consequences from U.S. and non-U.S. imposed restrictions on supply chains.

However, the knock-on impact of Omicron is likely to extend the length of supply chain disruptions and, in turn, could produce unexpectedly stubborn and higher levels of inflation.

On Tuesday, my pal Jim Cramer tweeted this out on a trip to Dollar General (DG) (the scarcity of items has become commonplace):

Jim Cramer

@jimcramer

suboptimal





Are Valuations Justified?

The question is whether the optimism in the face of a very real wall of worries justifies today's valuations and whether the market's extreme bifurcation will have negative market consequences.

While valuations and sentiment are not very good timing tools, I have spent a lot of time chronicling how we are in the 95th to 100th percentile in stock market valuations (Shiller's CAPE, total market cap/GDP, etc.). To me, the following chart (S&P price to sales, which cannot be manipulated by adjustments) best highlights the degree of overvaluation present today:

Source: ZeroHedge

The Era of Irresponsible Bullishness May Soon Be Over

"The year began with a marriage of fiscal and monetary policies the likes of which the world had never seen; the year ends with a potentially failed BBB bill and a central bank that's quickly getting out of the bond buying business."

- Tony Pasquariello, Goldman Sachs

My market view is clear, and for now, wrong-footed.

While there is a possibility that the headwinds listed in this missive may have positive market and economic outcomes, I remain doubtful and I would attach a growing probability that economic growth will slow relative to expectations and that inflationary pressures will continue in the face of supply dislocations influenced in large measure by country and business restrictions, serving to result in disappointing corporate profits.

Putting aside rate hikes, the Fed is ending a $1.44 trillion quantitative easing program in the next three months. That is more than QE1 and QE2 combined and is 40% above the size of QE3. This liquidity faucet is being turned off at the same time the European Central Bank is ending its pandemic emergency purchase program (PEPP). BoE is over, BoC is over and QE from the Reserve Bank of Australia might end in a few months.

With rates hugging the zero bound, the Federal Reserve's monetary pivot will prove problematic to the markets as it now has novel constraints with persistent inflation.

That excess in time and amount of policy has put us in a bind by:

* Stoking a dangerous asset bubble fueled by the liquidity of policy

* Deepening income and wealth inequality

* Embarking on a policy of money printing that has generated inflation from which it will be hard to escape

Reflecting my fundamental concerns, but out of respect for the current price momentum, I am basically in a market neutral position, where I plan to end the year.

What Else Do I Expect for 2022?

As I have written, the only certainty is the lack of certainty, so developing a set of baseline assumptions and conclusions for next year is as hard as it has ever been. But I will take a shot at it and offer my views of what may be in store next year:

1. A general valuation reset lower. On average, over history, a 100-basis-point rise in fed funds rates is associated with about a 15% valuation adjustment lower. Considering today's elevated valuations, that reset has the potential of being more than the historic average.
2. A hard rotational shift from growth to value. To some degree, this reflects the Fed's pivot, which will likely produce higher interest rates, serving to adversely impact discounted cash flow models of long-dated growth stocks.
3. Disappointing EPS growth (probably under 5%) compared to higher expectations. One of the biggest surprises this year has been the resilience of corporate profits. However, contributing potential negative influences include likely margin pressure from higher costs, a Fed tightening, some evidence of pulling forward demand, etc.
4. Modest EPS growth (if any growth at all) when combined with lower valuations could translate into negative overall returns for the S&P in 2022.
5. With continued high inflation (a regressive tax), a continued widening in the income/wealth gap houses a wide range of social, economic and political problems and investment ramifications.
6. A more aggressive Fed than is reflected in general expectations. Less liquidity could result in a marked reduction in flows into equity funds, which has provided unprecedented fuel to the markets in 2021. (See my Surprise List for 2022.)
7. Continued supply chain problems that, in part, fuel inflation and inflationary pressures to levels well above consensus. It is important to remember that many of the most important supply chains lie overseas, where more restrictive business and social closures have been put in place. In other words, the U.S. doesn't totally control its economic destiny in a flat and interconnected world. (See Jim Cramer's Dollar General tweet above.)

Sell Strength, Buy Weakness?

While I recognize that the dominant emotion or view by the many is simply to buy the best-performing stocks (read: The Nifty Seven - Facebook (FB) , Amazon (AMZN) , Apple (AAPL) , Netflix (NFLX) , Alphabet (GOOGL) , Nvidia (NVDA) , Microsoft (MSFT) ), as a consequence of the above and based on other factors, it is hard for me to find much value in today's market.

Again, consider the concentrated performance of the anointed stocks. Since April 2021, more than half of the S&P gains were contributed by only five stocks (Tesla (TSLA) , Microsoft, Nvidia, Apple and Google). That would be fine if the stocks weren't richly priced. Unfortunately, the valuations of the 10 largest S&P stocks are very extended; they sell at more than 68% above their average price-to-earnings ratio of the last 25 years.

Another issue to keep in mind is whether the selling in The Nifty Seven has been deferred to early January in order to avoid a 2021 tax event. Tactically, I am short SPDR S&P 500 ETF (SPY) and Invesco QQQ Trust (QQQ) in anticipation of the possibility of some sort of dump in the league-leading stocks of 2021 in early January.

Finally, some stocks meet my criteria (e.g., ViacomCBS (VIAC) , AdvisorShares Pure US Cannabis ETF (MSOS) , AT&T (T) and Citi (C) , among others) now, but those are in the deep value space where the momentum crowd lacks interest and where tax selling (in a low-volume backdrop) has been conspicuously ugly during the month of December. As today is the last trading day of the year where losses can be taken, I would consider holding one's nose by initiating or adding to some of those value laggards that likely have been beaten down by the aforementioned and what I believe to be rather indiscriminate tax selling.

Summary

"We think about and are taught about money in ways that are too much like physics (with rules and laws) and not enough like psychology (with emotions and nuance). physics isn't controversial. it's guided by laws. finance is different. it's guided by people's behaviors."

- Morgan Housel

The setup for 2022 is far different than 2021.

Actually, it is far different than at any time in the last 13 years - a period in which returns for basically all but one of the years has been positive. (Note: 17 out of the last 19 years have shown positive S&P returns!)

Most importantly, fiscal and monetary policy is no longer unbounded and we are likely well past the points of peak economic activity and peak liquidity.

Irresponsible bullishness may be over, and the narrowness of the market's advance (see Bob Farrell's quote at the beginning of this column) is likely approaching an extreme... just as financial conditions tighten.

The 12-year Bull Market may be on fumes.

My view.

(Note the boldface in which Art questions the "talking heads"... sound familiar?)

Last week's rebound rally did not go up in smoke, but it was certainly smoldering by the end of the day.

The bears had stalemated the bulls and, while they didn't come at them with a Cavalry charge, they ground on them all day and closed not far from the day's lows. We had said in the pre-opening comments that some of the technicals seemed to indicate that the rally might roll over and, while it would be wrong to call one day a roll over, it certainly hints of it. Now, if we continue to see pressure and the bulls can't regroup, we may begin to see that roll over gain in rapidity and angle. At least that is what the old charts tell us that when you get a reversal, it blows up. They tend to selloff slowly and then quickly. So, we will keep an eye out for that.

Again, to repeat, we had said that we had learned sixty years ago that rallies in bear markets are short, sharp and die in low volume and that our friend and fellow trading veteran, Dennis Gartman had pointed out the rather skimpy volume as that rebound rally had progressed. We will wait to see.

No good news from the Ukraine/Russia front and there are growing signs that Putin is becoming more desperate. He is sorely disappointed in his military and, according to unconfirmed rumors, may have several of his generals under house arrest for failure of their units to perform. He also is said to possibly have under house arrest or control, several key members of his intelligence group who had wrongly assessed what the picture would be in Ukraine. So, you certainly wouldn't want to be soccer coach for this guy. You miss one game, and you get the severe severance program.

At any rate, with little news coming on that front, the bulls had not much help and we continued to see hints of inflation that will bear down on the consumer who was thought to be rather well healed after the pandemic but is getting hit on all fronts - food, fuel, housing, etc. So, that may begin to create a problem. As I say, they sputtered and struggled mostly through the day. They tried to come back from the earlier lows, which were found in the early afternoon, but they rolled over again as we came to the close as traders liquidated some positions.

In a giant leap of faith, some of the TV pundits tried to claim that part of today's action may have been rebalancing since to get your asset level back in balance, you probably would have to buy bonds and sell stocks since stocks had outperformed bonds recently, but it is a week until the end of the month and anybody who would rebalance a week ahead of time would be plum crazy because the market could stage some major reverses and change all the weighting that you needed. I think these guys just slip into whatever fallacy they find.

For me, I will stick with the tiring rally and the possible roll over. There were some international features, and we can see that.

Overnight, markets are mixed and somewhat uncertain. Traders assume there is some hesitancy in front of the NATO Summit that will take place today. The questions are, will there be new sanctions? What style will they be? Do they appear to be effective and, can they impact the combat in Ukraine? There are new reports that the Russian causalities are much heavier than initially thought with the killed and wounded figures ranging anywhere from 10,000 up to well over 40,000 and loss of equipment estimated to be as high as 10% to 12%. That would certainly seem to suggest that Russia would have difficulty pursuing its military operation with those heavy losses in both men and equipment, but we will wait and see.

Traders will also be watching as oil trades uncertainly. In recent days, oil and equities have developed a kind of inverse relationship. Presumption in some areas is that the higher price of oil is siphoning money away from consumer just as the Fed as tightening. So, it imposes a further squeeze.

The uncertainty in the oil market is a little bit strange since it is reported that the Caspian pipeline may be knocked out by weather conditions although some cynics are suggesting that Putin may have decided to shut down that petroleum supply under of disguise of weather conditions to try to put the squeeze back on the NATO allies. The point will be learned a little be later when we see how the energy futures decide this game, which I think will be a key factor. Also, whatever concretely comes out of the NATO Summit may have a bit of an impact.

We find ourselves once again thinking about military events, combat and strategy and the question is - how far will a desperate Putin go and we are sure he does feels somewhat desperate at this point with unrest developing at home and economic pressure on the Russian economy. They are partially reopening the Russian stock market and, I am sure the equivalent of Russian plunge protection team may there to prevent absolute chaos from developing further.

So, for now, we will keep an eye on the oil futures and, obviously on the newsticker, particularly any news out of the NATO Summit. The bears don't have full control of the ball, but the bulls do need to regroup after the image of the rally rolling over after the Vernal Equinox. We have a hand full of Fed speakers today. They will be watched, particularly their impact on bond yields and where we are going. So, it looks like we continue to live in interesting times. Don't expect to get much rest during the trading hours. The bulls almost need a positive close here to get some credibility.

In the meantime, stick with the drill. Stay close to the newsticker. Keep your seatbelt fastened and stay safe.

* From $30 to $8!

Yesterday I had some downbeat things to say about (CRLBF) in my Diary - though most of Wall Street's sell-side waxed enthusiastically: 

Mar 23, 2022 ' 12:10 PM EDT DOUG KASS

Cannabis Industry Profits Continue Weak

* 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.

This morning Stifel cuts Cresco Labs from $30 to $8!

Note General Mills' observations on price elasticity of demand (boldface): 

Below is an updated view of the Goldman Sachs Financial Conditions index with the rise over the past week coinciding with the market bounce. Here are some real world examples of what it means to see the rise off record lows, aka some tightening of financial conditions with the rise in the cost of capital. According to yesterday's FT, there were no new IPO's between February 17th and March 14th according to Deallogic. "Outside of a holiday period, it marked the longest period without one since 2017."

Also, "Separate data from Refinitiv showed that cash raised through equity sales has fallen 88% from the previous year to $23.8b, marking the slowest start to a year since 2009." Finally, and with respect to junk rated companies and this applies to both the high yield market and loan market, "Riskier companies whose bonds are rated junk by the big debt rating agencies have borrowed just $38.8b this year, down 71% from a year prior."

GS Financial Conditions Index

After seeing yesterday's new home sales number, here are some key comments from the KBH earnings call last night where they missed on their delivery numbers because of major supply constraints. "While we were not counting on relief from the supply chain challenges, neither did we expect that they would worsen, we underestimated the degree towards the omicron variant would exacerbate an already constrained supply chain and workforce across our trade partners, municipalities, utility companies and even our own employees."

Here are some more details, "Flexible ductwork, which is used in the heating and air conditioning deemed limited in supply due to the lack of stainless steel, a primary component used in the manufacturing...We are beginning to see improvement in the availability of flex-duct, although our teams are not depending on relief in this area to achieve their current delivery forecast."

Also, there were a shortage of "double ovens due to a retooling process, required to meet a change in federal regulation. In January, we were notified by our supplier, we would be short hundreds of ovens for homes that were scheduled for delivery in the 1st quarter." They expect that to get better "in the near term." Here's more, "Garage doors, windows, cabinets, HVAC equipment, and signing, all remain constrained within the supply chain." Overall, "We expect shortages of materials will stay with us throughout this year."

Bottom line according to the CEO, "Our biggest challenge today is completing homes, not selling them, as demand continues to be robust." With rising interest rates and very high prices, that last point of his is about to be tested notwithstanding KBH's optimism.

In light of this further spike in food prices, with the CRB food price index just off a record high after yesterday's close, here are some comments from the General Mills earnings call, a stock owned for our clients and myself. With respect to continued price increases, the CEO said "it's a pretty benign elasticity environment right now, which is not to say there's no elasticity. Certainly as prices go up there will be some level of elasticity, but it's also important to note that it's not in line with historical elasticities given this current environment. And so, our raise on the fourth quarter really is confidence in our underlying assumptions around inflation and pricing." On the cost side, they said they are mostly hedged but they still expect an 8-9% increase in costs "across our full cost of goods, including raw and packaging materials, manufacturing and logistics." The end result, "We expect to drive strong growth in the fourth quarter, fueled by accelerating net price realization" said the CEO.

Shifting to some of the PMI's for March that were released today, Japan's composite index rose to 49.3 from 45.8 mostly driven by a lift in services as more things opened up after the omicron cloud in February but the index is still below 50 (mfr'g is at 53.2) because services came in at 48.7. On pricing, "Firms across the Japanese private sector reported a further intensification of price pressures. Input prices rose at the fastest pace since August 2008 with businesses attributing the rise to surging raw material prices, notably energy, oil and semi's amid deteriorating supplier performance." The yen is weaker again, something I'll keep talking about if this continues because the BoJ is going to have a major problem on their hands, and the world's bond markets in turn, if it does. JGB's were softer again overnight.

Australia's PMI was up .5 pt to 57.1. They are benefiting from its commodity exports at the same time they have fully opened up. The caveat though was this, "Supply constraints worsened, however, contributing to record price inflation for both private sector firms and their clients. Overall business confidence in the private sector fell to the lowest level in almost two years." Because of its heavy commodity exposure, the Aussie$ has been trading great, sitting at its highest level since early November vs the dollar.

Shifting to Europe, French business confidence in March fell to 107 from 113 with particular weakness in manufacturing. Services also softened as did retail (maybe inflation related) while construction was steady. Bottom line, business confidence now matches the lowest level since April 2021. It's hard not to think that Europe is on the cusp of an inflation/war driven economic slowdown.

Further on this, the Eurozone March manufacturing and services PMI fell 1 pt to 54.5 but a bit better than the feared drop to 53.8. Both components fell m/o/m. Markit said "The survey data underscore how the Russia-Ukraine war is having an immediate and material impact on the eurozone economy, and highlights the risk of the eurozone falling into decline in the second quarter." They went on to say, "Had it not been for the easing of Covid containment measures to the lowest since the start of the pandemic, business activity would have weakened far more sharply in March...Businesses are themselves bracing for weaker economic growth, with expectations of future output collapsing in March as firms grow increasingly concerned about the impact of the war on an economy that is still struggling to find its feet from the pandemic." The bold is mine.

The UK PMI in March held in because of the lift in services to 61 from 60.5. Manufacturing though weakened by 2.5 pts. A further reopening helped services, "However, the outlook darkened as concerns over Russia's invasion exacerbated existing worries over soaring prices, supply chains and slowing economic growth. Business expectations are now at their lowest for almost one and a half years, pointing to a marked slowing in the pace of economic growth in coming months." On inflation, "price pressures have spiked higher due to increased energy and commodity prices resulting from the invasion. With March seeing by far the largest rise in selling prices for goods and services ever recorded by the survey." The bold is mine.

I've said that the BoJ will be the last central bank in the world that will tighten policy. I might be wrong as it could be the Swiss National Bank instead. They kept policy unchanged as expected by maintaining its .-75% bank rate and they still believe in its effectiveness.

Lastly on stock market sentiment, the rally over the past week has definitely reversed somewhat the extreme bearishness that was the great set up for the rally. Yesterday, II said Bulls rose to 35.3 from 30.6 with most coming from the Correction side. Bears fell by 1.2 pts w/o/w to 35.3 and thus spot on with where the Bulls are. Today AAII said Bulls jumped 10.3 pts to 32.8 and that is the most since the 1st week in January. Bears fell by 14.4 pts to 35.4 and that is the least since the 1st week in January.

Finally on sentiment, the CNN Fear/Greed index closed yesterday at 43 after hitting 13 a week ago Monday. Bottom line, we've shaken out the extreme level of bearishness to something much more neutral and thus in order to get another leg higher in stocks, we're going to need some better news rather than just a whole lot of bears as the basis for a possible dead cat bounce.

MSCI EM has shifted meaningfully over the years:

Source: Goldman Sachs

* As we make a possible move from a sellers market to a buyers market

I have discussed "Peak Housing" over the last week: 

* More housing concerns. 

* Peter Boockvar on rising home inventories.  

Danielle DiMartino Booth is back into the subject of "Peak Housing" again this morning:

Timing is Everything

The seller's market in the U.S. housing sector reached its maximum bullish point in February 2022. There. We said it. Please enter into evidence Exhibit A - record high home selling conditions (yellow line). This University of Michigan metric, which tracks home sales better than its sister gauge of home buying conditions, hit a level of 168 in February. That translates to a net 68% of homeowners who say it's a good time to sell.Sellers have been reaping the rewards of seriously grabby buyers leap frogging one another and paying six figures over asking prices in a hot panic. (QI's Dr. Gates can personally attest.) To that end, though not illustrated, new single-family homes were on the market a median 2.5 months since completion on an unadjusted and adjusted basis in February (inverted blue line), the lowest reading since the series inception in 1975.This dynamic is poised to shift. The Fed's waxing Volcker (we reiterate doubts harbored until we see actions back words) has helped to noticeably tighten financing conditions in 2022. Freddie Mac's 30-year fixed mortgage rate rose 105 basis points from the last week of 2021 through the week of Fed lift off, pushing rates from 3.11% to 4.16%. The Fed doesn't control mortgage rates, but it can influence them with threats to aggressively slough mortgage-backed securities off its balance sheet.Since we're on the topic, Fed Chair Powell's answer to a question in last Wednesday's presser was instructive: "As we raise interest rates, that should gradually slow down demand for the interest sensitive parts of the economy. And so, what we would see is demand slowing down, but just enough so that it's a better match with supply." The operative word here is: "gradually."On Monday, Powell upped his adverbial stance: "There is an obvious need to move expeditiously to return the stance of monetary policy to a more neutral level, and then to move to more restrictive levels if that is what is required to restore price stability." The operative word here is: "expeditiously," which slaps last week's gradual narrative in the face.For most of 2021, residential real estate was the answer to the inflationary plague. Before the year ended, the nemesis had changed to a place to hide from the rate shock. That's since segued to war game trading and nervous recession chatter. Empty rhetoric or not, Powell's turning up the volume on the rate shock trade signaled the Fed no longer backs house price appreciation running off the rails. Begrudgingly or not, he knows he's done anything but make policy in the "public interest" as he's legally obliged to do.To that end, investors' share of new and existing home transactions rose to 33% in 2021 from 30% in 2020 and 2021; that's a step up from readings in a range of 26% to 29% from 2012 to 2019 (bottom chart). Top that with Redfin data which depict demand for vacation homes collapsing to the lowest level since May 2020 last month (top right chart).As dramatic a turn as that may sound, perspective is key. Benchmarked to pre-pandemic levels, second-home demand was still up a cumulative post-pandemic 35% last month. Still, that's significantly lower than the 87% peak sported in January. According to Redfin, rising mortgage rates clashing with record home price appreciation have hit the second-home market much harder vis-à-vis its primary market counterpart. We have our doubts as to that causal link. We get that vacation homes define optional. But we suspect the tie that binds is the stock market.At times like these, it's beneficial to have the nation's best housing soundboard a keystroke away. Per Ivy Zelman, "While it is clear current sales are being impacted by intentional sales limitations, homebuilders appear optimistic about the prospects for future demand and seem to be extrapolating current strength. Notably, homes authorized but not yet started continue to ascend toward 2006's all-time peak as homebuilders prepare to significantly ramp speculative home production, seemingly downplaying potential demand degradation as home prices continue to rise double digits on an annualized basis and mortgage rates spike."We would say, "The plot thickens." But we know how this movie ends. The seller's market is turning...

My friends at Miller Tabak do not believe an inverted yield curve is a bad omen:

Bond markets are struggling to incorporate the Fed's latest communications. The FOMC itself now forecasts that it will have to overshoot its neutral (2.5%) Federal Funds rate to tame inflation, although it continues to underestimate how high it will have to go (4.0-4.25% in our opinion). We can derive bond markets' expectations of the future Federal Funds rate by removing estimated term premiums from bond yields. Figure 1 shows that Treasury yields now predict that the Federal Funds Rate will rise to 2.3% by late 2023, followed by a slow increase to 2.98%. Figure 1 also shows our forecast, which instead shows the Federal Funds rate peaking at 4.12% in 2024 and then gradually declining to 2.5%.

Figure 1: The Fed's Likely Path Means the Yield Curve Should be Inverted



The misalignment between our forecast and those from Treasuries has two major implications. First, the 2.98% level ten years out suggests that markets could be pricing in almost 50 bps of long-term inflation. This indicates that the Fed could be losing credibility on inflation, which could then require higher and more sustained interest rate increases. Second it greatly complicates the analysis of the yield curve which, with the 10-2 year term spread down to 21 bps, continues to raise alarms. Figure 1 also shows what the yield curve would look like were bond markets to adopt our forecast for FOMC policy. The 10-2 year term spread would be inverted at -38 bps.

The yield curve should continue to flatten, and likely invert, as markets figure out the Fed's probable path. As we wrote last week, an inverted yield curve will not indicate a high likelihood of recession. Rather than blindly following the yield curve, it is critical to understand why it is happening. Inversions in 1989, 2000, and 2006 were worrisome and did lead into recession because they detected sagging demand. There are very good reasons (e.g. household balance sheets) to believe that this is not currently the case. Likewise, the brief 2019 inversion did not foretell the 2020 recession. Its occurrence before the unforecastable shock of covid-19 was coincidence. If the yield curve inverts, it will be due to novel circumstances; a (mostly) credible Fed having to raise rates rapidly to make up for having fallen behind the curve on inflation. An overshoot to 4% will take about 0.75% off U.S. GDP, a drag on growth, but not enough to induce a recession by itself. We still put the chances of a U.S. recession starting within the next year at just 20%.

Read Tom Graff's take on the inverted yield curve here on Real Money Pro.

I have been called to an out of town research meeting at the last moment.

I will be out of the office at lunch time and for most of the afternoon so my posts will be fewer and shorter.

* Lower demand from higher prices seems inevitable and may be an important theme in the second half of this year

Price elasticity measures the responsiveness of the quantity demanded or supplied of a good to a change in its price. It is computed as the percentage change in quantity demanded -- or supplied -- divided by the percentage change in price. Elasticity can be described as elastic -- or very responsive -- unit elastic, or inelastic --not very responsive.

I remain fearful that when we combine much higher prices for consumer products (be it a Starbucks (SBUX) coffee, tickets to Disney World (DIS) , a Ford F-150 (F) , or a home) with rising costs (especially of an energy-kind) and the absence of fiscal stimulus that it is almost inevitable that consumer demand will deteriorate relative to consensus expectations.

If I am correct, optimistic economic and U.S. corporate profit views will likely be scaled back in the months ahead.

I will expand on this theme next week.

* The EPS and production outlook for (GM) and (F) are deteriorating

The tires are the things on your carThat make contact with the roadThe car is the thing on the roadThat takes you back to your abode

- Phish, Contact

The outlook for automobile stocks is deteriorating.

Yesterday Goldman Sachs downgraded their expectations for annual car production.

This solid column is from Danielle DiMartino Booth:

Good Luck Keeping America Rolling


There are times patriotism runs all the way to your undercarriage. In the aftermath of 9/11, President George W. Bush urged U.S. companies and consumers to get back to business. General Motors (GM) Chief Executive Rick Wagoner literally backed the drive, introducing "Keep America Rolling," which featured the debut of 0% interest rate financing on all of its models for up to five years. So successful was the program in luring buyers to showroom floors, the rest of the Big Three and major Japanese automakers followed suit. By November, the recession was over.

In reaction to the economic shock, the Federal Reserve did cut rates, but not nearly as aggressively as the auto lenders. 'Zero Interest Rate Policy" would not be a thing until the next crisis hit. Today, 0% doesn't pack near the same punch for automakers or central bankers. Since GM rolled it out, financing enticement has been utilized on-and-off to clear oversupplied models. From the perspective of economic tea leaf readers, the two-decade old advent acts as a great gauge of the health of U.S. household balance sheets.

In his signature March 15 Auto Market Report, Cox Automotive Chief Economist Jonathan Smoke noted that, "The share of new vehicle financing transactions featuring a zero-percent annual percentage rate is higher, at 10.1% so far in March, from a pandemic low of 6.5% in February. With limited supply, fewer financing offers are being made so far this year compared to the last two years. But the month is starting higher." From the looks of things, the share of zero percent financing deals rose to the highest point since the middle of last year. Smoke gave the uptick a nod but didn't go as far as calling a turn in the trend (that's kind of a no-no in the same way an economist for -- just as an example, U.S. realtors - would have to be circumspect about any signs of slowing in the industry.) With deference to being deferential, turning points have to start somewhere. It's no news to you that Russia's invasion of Ukraine upped the stagflation ante.

The Fed's theoretical hawkishness creates a higher hurdle as interest rates presumably continue to tick up. Color us skeptical after last week's "coming months" with reference to when the Fed would start to shrink the balance sheet to help along the tightening process. Fed Governor Christopher Waller following up by defining "coming" as likely being July cast more doubt on the Fed's commitment and credibility given the inflationary backdrop. Yesterday, Fed Chair Powell tried to play Bad Cop after his Good Cop routine at the podium last Wednesday. He indicated future meetings could see half-point hikes if justified and punctuated this tough talk by adding that if the Fed needed to tighten above the so-called neutral rate (median 2.4%, range 2.0%-3.0%), then so be it. By Monday's close, the entire U.S. Treasury curve, from the 2-year tenor through the long bond, was sporting a 2-handle, a term structure that hasn't been seen since May 30, 2019.

Vehicle buyers are both price takers and rate takers; affordability will be diminished if a rate shock sticks. The question: Will automakers blink? Average new vehicle incentives fell to a post-COVID low of $1,245 in February, down 63.8% versus year ago levels (purple line). The absolute dollar level is more a reflection of near-record prices as the year-over-year (YoY) trend in incentives troughed at 65.7% in December. It follows that, at $45,283, average new vehicle transaction prices also peaked in; the rate of vehicle inflation maxed out in November at 19.6% YoY and had calmed to 17.8% in February (orange line).

Upstream signs also are becoming more evident. The Manheim used vehicle value index has ticked down to 24.1% YoY so far in March (light blue line), off December's 46.6% YoY high and well below April 2021 post-pandemic peak of 54.2% YoY. Zooming in on February, Manheim noted that all major segments except vans saw seasonally adjusted price declines, with SUVs declining the most. While they were quick to note that the seasonal adjustment drove most of the declines, there's an element of denial here in our view. With cash flows challenged by spiking prices for the essentials of energy and food, we're betting we see another seasonally adjusted sequential decline.

Adding the lens of the equity market helps bring the used vehicle price bubble into perspective. Three publicly traded auto retailers -- Auto Nation (blue line), CarMax (red line) and Carvana (green line) - present an interesting divergence that suggests used vehicle demand is underperforming that of new. With each stock price indexed to the COVID-19 low point of March 2020, Carvana (used-only online) and CarMax (used-only brick and mortar) have both deteriorated from their post-pandemic highs, the former quicker than the latter. Auto Nation that has about a 30% national footprint in the resale market portrays more of a plateauing process. The chart title is all you need to know about the direction of risk.

Zero financing doesn't shock and awe like it once did to. To preserve margins, manufacturers (read: GM) have been loath to throw more cash on the hood during the ongoing supply shock. A forced revival in incentive spending is likely the leading edge of a slowdown in auto demand few in the industry, or at the Fed given officials' insistence on the economy's strength, will willingly acknowledge. Perhaps Jay can share his box of Kleenex with Mary.

Apropos of this post from yesterday:

Mar 23, 2022 ' 03:10 PM EDT DOUG KASS

Meme Me Up Scotty

"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.

In this WSJ column, the Dallas Federal Reserve warns of a global recession if Russian oil is cut off. 

* 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 positively biased evening/early morning for futures. Gold was +$7.80 and Brent crude was +$0.50 to nearly $122/barrel -- normally bearish developments.

Bond yields (of the long end) by 1-2 bps -- after yesterday's large drop in yield.

S&P futures peaked at +28 and bottomed at -2. At 4:29 am ET they were at +26.

Nasdaq futures topped out at +119 dropped as low as -2. At 4:30 am ET they were at +107.

In terms of my trading in the Indexes, yesterday I traded around my core short positions in (SPY) (shorting more on the move higher and adding to my SPY puts short (getting longer) as the market got schmeissed late in the day) and day traded successfully a Nasdaq short.

Net/net I modestly decreased my gross short exposure in the Indexes on Wednesday.

At around 435 am this morning and with the strength of the futures, I have just begun to add back to my SPY short at $446.60.

As I wrote above, money never sleeps!