I have a 4:15 p.m. research call.

Thanks for reading my Diary.

Enjoy the evening.

Be safe.

From Peter: 

Sorry I'm late with this note on the Dallas manufacturing index for March which fell to 8.7 from 14 and which compares with the 6 month average of 9.7. The estimate was 11. Of note, new orders fell to the lowest level since January 2021 while backlogs rose 1.1 pts to its 6 month average. Inventories rose back above zero after 3 months below. Delivery Times rose to a 3 month high and both prices paid and received were up m/o/m. Employment rose but hours worked fell and wages/benefits jumped by 11 pts to the highest level on record dating back 18 years. Capital spending plans grew by 3.4 pts to 19.5, 4 pts above the 6 month average.

With respect to the 6 month business outlook, it declined to 8.2 from 20.6, well below the 6 month average of 17.5 and to the lowest level since it was negative in May 2020. Expectations for both prices paid and received was up as was delivery times. The positive again was the increase in capital spending plans.

There were some important questions asked on inflation, energy and supply challenges.

Question #1, "What annual percent change in wages and input prices do you expect this year, and by how much do you expect to change selling prices?"

On Wages, up 6.9% vs 6.4% when asked in December. On input prices (ex wages), up 8.5% vs 7.1% in December. On passing this on via higher selling prices, they were unchanged at 6.4% and hence the upcoming margin squeeze.

Question #2, "What is the net impact of recent higher energy prices on your business, if any?"

23.4% said no impact, while 38.9% said 'slight negative impact' and 21% said there was a 'significant impact.' About 11% saw a positive impact but that likely came from those in the industry.

Question #3, "Besides higher energy prices, what is the net impact of the Russia-Ukraine war on your business, if any?"

48% saw no impact, while 28.2% said it was a 'slight negative' and 9% said it was significant. 10.5% said they don't know.

Question #4, "What are the primary factors restraining your firm's revenues, if any?

Supply chain disruptions was number one at 50% and that now exceeds 'limited operating capacity due to staffing shortages' which likely is easing because of the end of covid' which stood at 38.6% vs 45.8% in December. Just 15.1% said it was because of 'weak demand' vs 19.4% in December.

Bottom Line

Ahead of the ISM manufacturing index on Friday, the regional surveys have been a real mixed bag. NY was weak, falling into contraction but Philly was better. The Richmond and KC regions also saw manufacturing improvement but some moderation with Dallas. The Markit manufacturing index was up 1 pt m/o/m and Friday's ISM estimate is for a slight increase. I think at this point we're all on watch to see how the US consumer responds to the squeeze on their standard of living and to what extent they cut back on purchases.

We're also of course watching to see how much economic growth slows in Europe. So on one hand we'll have likely more inventory build in some areas but some satiation in others and likely a much more cloudy outlook as for consumer end demand for products but still supply chain challenges. The end result is a real muddied situation.

New Orders

Wages/Benefits

6 month Business Activity Outlook

* We are now within 5% of the 52 week highs...

She comes on like a rose but everybody knows
She'll get you in Dutch
You can look but you better not touch

Poison ivy, poison ivy
Late at night while you're sleepin'
Poison ivy comes a-creepin' around

She's pretty as a daisy but look out man she's crazy
She'll really do you in
If you let her under your skin

- The Coasters, Poison Ivy

* In the second half of last year the meme stocks and unprofitable tech stocks began the long drop lower.

* In early 2022 SPAC stocks and gewgaws crashed.

* Over the last few months auto manufacturer shares have rolled over. Ford (F) and General Motors (GM) , two investment favorites, have gone down in a "straight line."

* Consequently, homebuilders have crashed meaningfully from their highs. Toll (TOL) and Pulte (PHM) are off by a third and price and within a beaner of their 52-week lows.

* Now banks are beginning to roll over - the stocks have underperformed since the disappointing JPMorgan (JPM) and Citigroup (C) reports. 

I sense a developing trend... and some more poison ivy creeping around.

As indicated below, the market breadth (at 2 pm) is weak relative to the Indexes.

Breadth

View Chart »View in New Window »

Heat Map

View Chart »View in New Window »

Another divergence is that, as noted earlier, Qs over Rs and Ss.

Thomas C

Pot stocks cool off as lawmakers submit amendments to marijuana bill

After a steep rally last week, many cannabis stocks are in the red on Monday as a key piece of legislation aimed at legalizing cannabis at the federal level makes its way through the U.S. House of Representatives before a potential vote this week.

The Marijuana Opportunity, Reinvestment and Expungement (MORE) Act sponsored by House Judiciary Committee Chairman Jerrold Nadler (D-NY) seeks to deschedule cannabis from the list of federally controlled substances, among its other objectives.

Marijuana Moment reported a short while ago that Congressional lawmakers across the aisle are submitting their proposed amendments to the bill.

The House Rules Committee meeting where the proposals are taken into consideration ahead of a floor vote has been pushed back to Wednesday. Initially, the meeting was expected to take place on Monday.

Canadian Cannabis names such as Hexo (HEXO -10.4%), Tilray (TLRY -7.4%), Aurora Cannabis (ACB -9.6%), Cronos Group (CRON -9.1%) and Sundial Growers (SNDL -7.5%) are among notable decliners. U.S. multi-state-operators such as GrowGeneration (GRWG -7.7%) and MedMen Enterprises (MMNFF -8.6%) are also trading lower.

Adding to my short calls.

I have covered the balance of my (QQQ)  short at $358.45 for a nice and very short term gain.

I covered half of my (QQQ) short at $359.45 for a nice gain.

Shares of the streaming companies are broadly lower today (Discovery and Paramount are each down by about 3%-7%) as, over the weekend, Barron's Magazine's cover story on The Streaming Wars came to the same conclusion I did in late February: 

Feb 22, 2022 ' 09:35 AM EST DOUG KASS

Streaming and Online Gambling May Be Destined Towards 'Profitless Prosperity'

* Three of the most dangerous words in an investors' lexicon are... "total addressable market"

* A dead cat bounce is possible but challenges towards the road of profitability for streaming and on line gambling suggest the stocks are unattractive from a longer term standpoint

* Maintaining a short in ROKU - a company whose competitive moat is getting flooded

"When the facts change, I change my mind. What do you do, sir?"

- Paul Samuelson

Companies like ViacomCBS (VIAC) , Discovery (DISCA) and Disney (DIS) in the streaming business face formidable obstacles to a path of profitable growth over the next few years.

And companies like DraftKings (DKNG) and Penn Gaming (PENN) in the on line gaming business face similar challenges to profitable growth.

What do streaming and on line gambling have in common?

* High valuations base on the assumption of rapid growth, large addressable markets and the evolution/revolution away from legacy players - television (ABC, CBS, NBC)/movie theatres and brick and mortar gaming properties like Wynn (WYNN) , Las Vegas Sands (LVS) .

* Escalating acquisition costs per customer - rising, outsized and arguably reckless spend on content costs, huge advertising and promotional outlays coupled with ballooning marketing expenses as the players invest in the future.

* Large operating losses, negative cash flows and no free cash flow for years.

* A competitive market place in which numerous competitors are all fighting for market share - with a number of recognizable brands and well financed participants.

* Optimistic out year forecasts reflecting the perception that the companies serve sizeable total addressable markets.

* Seen by investors as growth businesses - streaming and on line gaming IS THE FUTURE.

* High current valuations (against "adjusted" EBITDA forecasts) and both are extremely popular to investors and analysts - capitalized at large numbers.

* Weekly average users (streaming and online gambling) have likely peaked.

* Streaming and on line gambling demand may have been pushed forward - and growth could be less than expected going forward - as the economy opens up as there are a fixed number of hours in the day!

Bottom Line

While the stock prices for industry participants - streaming/online gambling - have been decimated - the likelihood of a path of "profitless prosperity" for years to come is now my baseline expectation.

This assessment is in marked contrast to the optimism of the sell-side on Wall Street and to many money managers who profess optimism.

A dead cat bounce is possible at any time and maybe even likely, but, for now, I would not yet accumulate either streaming or online gambling as long term investment holdings for the reasons above.

My only exposure in streaming and online gambling is my (ROKU) short.

It is my continued view that ROKU, which aggregates and creates a gateway to streaming platforms, will go the way of the Tyrannosaurus Rex - becoming an extinct species subject to a shifting competitive landscape that could result in ROKU, ultimately, not being in the mix as Smart TV competitors - Amazon (AMZN) , Alphabet (GOOGL) , Visio, Samsung, etc. - invade ROKU's market by delivering their own operating systems.

Banks are conspicuously weak in the face of more curve inversions. 

I remain conspicuously bearish on the sector.

Equities sell off a bit based on newswires interview with a senior government official: 

Putin does not appear ready to make a compromise

Not relatedly, this market trades weirdly - and I am continuing to raise my short exposure.

I covered some more May (SPY) $434 puts that I am short under $7.50.

QQQs over Ss and Rs today!

Shorted (QQQ) $361.68.

The added to QQQ short at $362.40.

Peter on the new meme stocks, yield curve inversion and the Yen: 

With Treasury bonds now trading like meme stocks, there is a debate on what parts of the yield curve are best suited in delivering the market message and thus what we should watch. Historically it was the 3 month/10 yr as the best empirically in predicting recessions. Now watching the 3 month yield I believe is worthless as it is directly tied to the actual fed funds rate which we know is badly lagging, to an unprecedented extent, what the Fed now wants to do and what the 2 yr has already priced in.

Thus, 2s/10s and 5s/30s I think are most relevant. Also, I hear from some that QE has distorted the curve too and thus it's tough to gauge what the curve is really telling us. My answer to that is while yes the curve is very much distorted by QE, you can't ignore at least the trajectory of the flattening, whether we invert or not and which we now are.

The 2s/10s is now the most narrow since February 2020 and the 5s/30s has now officially inverted by 1 bp, the 1st time that has happened since March 2006, shortly before the fed funds rate topped at 5.25% and months after the housing bubble started to unwind. A soft landing is wishful thinking, especially with the sharp pace at which we're witnessing this rate repricing at the same time higher inflation is choking consumer spending and global trade/supply remains under pressure.

To the longer term possibility of foreign central banks holding less US dollar based reserves in response to the sanctions slapped on the Bank of Russia, I saw a Bloomberg story today that an ex PBOC advisor is advising China to reduce its holdings of US Treasuries. That is a trend, along with other central banks, that must be monitored especially as the Fed is on the cusp of reducing their holdings.

5s/30s Yield Spread

With the rapidity of this rate rise it is now VERY important to watch out for who has been caught offsides, because someone will be. And I'm not just talking about some derivative trader or a bank or institution that is wrongfooted or someone heavily on margin, I'm also talking about businesses that borrow LIBOR/SOFR plus. According to a Congressional Research Service paper updated a few weeks ago, there are $6 Trillion dollar based LIBOR loans currently outstanding. Add in another $1 Trillion for LIBOR referenced bonds and an additional $2 Trillion of securitizations.

I wouldn't think that a 200 basis point move higher in a very short period of time was in many of the models/budgets when these loans were created. Three month SOFR/LIBOR is still directly tied to the fed funds rate so it's right now at just .64% but it will be rising rapidly this year as is the Fed plan.

I will harp on the yen AGAIN because it is selling off AGAIN and today it's sharp, lower by 1.8% vs the dollar. It's now down for the 14th day in the past 16 and at the weakest level since August 2015 when China was modesty revaluing the yuan vs the dollar. The reason for the selling today is because the 10 yr JGB yield got to .25% and the BoJ came out and said they will buy an unlimited amount of 10 yr paper over the next 3 days in order to keep this yield in line with their YCC range.

Further out on the curve the BoJ is not buying and the 30 yr yield was up 5.4 bps to 1.026% and the 40 yr yield was up for the 5th straight day by 6.5 bps to 1.065%. We are headed toward some conflict I believe between the uber dovish BoJ who welcomes the weaker yen and wants higher inflation and the Ministry of Finance who is choking on screaming energy prices that has to be paid for with a depreciating currency and needs to answer to the Japanese citizenry.

I'll say for the umpteenth time, if you are just looking at your models and thoughts for US growth and inflation only in making a long end yield call, you are not seeing the big picture and the huge influence the direction of European and Japanese yields will have since they were the epicenter of this massive bond bubble via NIRP and all that QE. If the BoJ at some point further widens their YCC yield range, we'll have another global quake in yields.

Yen/Dollar cross rate

10 yr JGB Yield

I'm guessing the drop in oil and other commodities are in response to the decision to shut down Shanghai, with 25mm people, over a few days in two phases in order to test people.

"Friday's equity market did not see a meltdown, nor did it see a series of systems running out of control. It did contain a surprise or two but nothing terribly, terribly exciting.

Stocks started out a little bit even keel, but the bulls quickly got the advantage on rumors about a possible armistice in the Ukraine situation and then things began to shift as other geopolitical rumors showed up. We covered most of that in this late morning update:

'Late Morning Update Geopolitical influences twist and turn equity indices. Early on stocks picked up a bid on reported rumors that Turkey said that Russia and Ukraine are not far apart on a possible armistice. Subsequently unconfirmed rumors that an ARAMCO facility was afire after being hit by a rocket sent Nasdaq and S&P into mild negative territory. The Aramco story did not send oil into plus territory. Should that happen then I think the equity markets will weaken more significantly, but failure of oil to move cast doubt on the Aramco rumor. Keep your eyes and ears open Stay safe.'

The hopes that there might be positive movement on Ukraine kept the bid there and, then somewhat later than I expected, the news finally spread about the missile launch against the Aramco facility. That, however, failed to change the price of oil significantly as I thought it might and, while the bulls seemed to be losing the rally, they made a valiant last half hour Cavalry charge that brought in respectability. The reason for the Cavalry charge was not quickly evident, but each of the indices had a relatively similar percent move during that 30 minute period, which would hint that it was computer driven buying probably by hedge funds or other high professionals and, what triggered their algorithms, as I said, was not particularly evident, but it winds up in the final score anyway.

They ended up with one of the strongest weeks the bulls have had in some time. In fact, by some records, one of the strongest weeks they have had this year. The doubts about the geopolitical situation remained and that may be what confronts us this week. Overnight and over the weekend, equity futures and other markets didn't move significantly. As dawn hits Manhattan on Monday, global futures are ticking slightly higher. It would appear that Zelensky's comment that the Ukraine is ready to pledge an overall neutrality and not to develop nuclear weapons and not to seek membership in NATO has raised some hopes apparently. There has been no response that I can see from Russia. So, I am not sure it is a move along, but traders apparently choose to accept the optimistic side and they are, as I say, marginally better in most trading places.

We will continue to keep our eye on oil, and it seems to continue that inverse relationship with equities. You don't have to make sense of things if they happen. It is one of the basis of superstition. Nevertheless, two events seem coincidental over and over again, it is best to stay out of their way until they begin to disprove things. Yields move much higher and we have the ten-year at 2.5%, but most interestingly, the five year is yielding a bit above that so, that is an inversion to be watched, particularly since there will be a five year auction early this afternoon. That will be something traders will keep an eye on.

So, overall we have a market that is somewhat overbought, hanging its hat on any hints and hopes in the geopolitical area and not developing any keen sense of direction. The Administration has a new tax proposal on corporate buybacks, etc. and it is causing a lot of buzz on financial media. I am not sure it has got an overwhelming chance on Capitol Hill.

So, far today it is the drill. Keep your eye on the newsticker.

Internally, watch oil and yields and we will see how much motivates markets.

The bulls still have control although the overbought condition may drag on them from where they need to be. Stay safe."

We just experienced a rather meaningful move in the last 45 minutes in bonds - up in price, down in yields. 

And I am not sure what the catalyst was!

The move in rates has coincided with about a 15 handle drop in the S&P futures.

From the Comments Section: 

dougie kass

Shorted more (SPY) $453.72.
Dougie

Four-week flows from Global investors into European equity funds.

Weekly flows, EPFR Country Flows

* Is the Gamma Squeeze Over?

* Will Markets Face a Hangover Early This Week?

The markets have risen uninterrupted since mid-March. 

I am always in doubt and often wrong - but my job managing money and writing in my Diary is to logically and intelligently outline my baseline market assumptions and to explain my thinking/analysis. 

So, here is my investment rationale that has lead me to conclude that the market faces short term headwinds: 

Mar 25, 2022 ' 03:20 PM EDT DOUG KASS

Flows Into Call Options and This Week's Gamma Squeeze May Be Over for Now...

"It is a certain truth that the gamma squeeze will be over today - actually it might be over a few hours before the market closes and before actual expiration."

- Kass Diary, Will The Markets Face a Hangover Early Next Week

I said to remember this early morning post - specifically the quote above - reflecting the end of the "gamma squeeze" which might have been instrumental with regard to this week's rally.

Mar 25, 2022 ' 09:32 AM EDT DOUG KASS

Will the Markets Face a Hangover Early Next Week?

* Will the gamma squeeze be over today and will stocks move lower after options expiration?

* Expanding my short exposure now...

Though I might be wrong, remember this post, which is short but may have some important messages!

As we end the first quarter of 2022, both retail (gamblers) and institutional investors (who "need" stocks higher by the last day of 1Q2022) have aggressively been buying weekly call options, particularly on big tech.

This result of the unusually high options activity/gambling is that dealers depress volatility and chase to hedge - feeding on itself.

It is a certain truth that the gamma squeeze will be over today - actually it might be over a few hours before the market closes and before actual expiration.

I am expanding my short exposure - in Indexes and making short rentals in individual large-cap tech stocks - in the face of the early day's futures strength and in front of anticipated weakness, based on my belief that an options hangover may occur early next week.

Apple (AAPL) is trading -$3/share on production cut talk.

Economic Releases: 

Morgan Stanley cuts Citigroup's (C) price target from $75 to $60.

Wolf Street on bonds.

"Markets priced for tighter Fed but not for growth risks... We are downgrading Financials to Neutral... Given our more late cycle view and forecast for a full inversion of the yield curve in 2Q, Financials will have a hard time outperforming" - Mike Wilson, Morgan Stanley 

I agree. Here and here.

* 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 hold opportunities as they are (1) inefficient, though liquid, and (2) it seems fear and greed is often exaggerated outside the regular trading session.

It was a quiet evening/early morning for futures - down early followed by a rally. Gold was -$26.50 and Brent crude was -$4.50 to about $116 a barrel.

Bond yields are sliding.

S&P futures peaked at +6 and bottomed at -22. At 4:50 am ET they were at +2.

Nasdaq futures topped out at +30 and dropped as low as -87. At 4:51 am ET they were at -26.

In terms of my trading in the indexes, Friday I added to my short book.

In early Friday's trading:

Mar 25, 2022 ' 09:58 AM EDT DOUG KASS

Large-Cap Trading Short Rentals

Here are my large-cap trading short rentals discussed in the previous column, with the cost basis:

* (AAPL) $173.87

* (MSFT) $305.40

* (NVDA) $281.63

* (SNOW) $227.70

I wouldn't recommend this strategy to home gamers - just being transparent in my trading/investing.

These are very short term rentals!

I also traded around my core short positions in SPDR S&P 500 ETF (SPY) and expanded my gross short exposure into the late day rally. 

As I said, money never sleeps!