Closing breadth:

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It is somewhat ironic that Goldman Sachs (GS) released a negative market commentary (over 65 pages worth!) this morning.

Perhaps we set the stage for a very bullish session over the short term with our opener this morning, which suggested upside reward was attractive relative to downside risk:

And, on cue, Mr. Market accommodated by scoring a big gain - with large recoveries in technology and financials.

Sep 07, 2022 ' 08:10 AM EDT DOUG KASS

A Pessimist Sees the Difficulty in Every Opportunity, An Optimist Sees the Opportunity in Every Difficulty

* This morning's opening missive conveys an explanation for my less cautious market stance - why I am now looking up and not looking down

* I don't view the market as having meaningful risk from current levels - nor do I view the upside as particularly robust

* The 2022 lows are unlikely to be breached

* An S&P trading range of between 3800-3850 and 4200-4250 is my baseline expectation for the balance of the year

* After the persistence and magnitude of the recent market decline, the upside reward vs. downside risk has become reasonably attractive

* Shorts protect wealth, longs generate wealth

"An optimist is a person who sees a green light everywhere, while a pessimist sees only the red stoplight... the truly wise person is colorblind."

- Albert Schweitzer

More on the markets bright and early tomorrow morning.

But, for now, a few margaritas may be in order at my favorite watering hole.

Thanks for reading my Diary -- I hope you found it value-added.

Enjoy your evening.

Be safe.

I have been short Figs  (FIGS) for a while. Today a short report from Spruce Point Capital was released: FIGS, Inc. ' Spruce Point Capital Management.'

"The intelligent investor is a realist who sells to optimists and buys from pessimists." - Benjamin Graham 

I am not giving up on cannabis stocks. 

This afternoon I added to (MSOS) long exposure by taking in (covering) some short monthly September calls.

From Peter Boockvar:

In the debate over whether we are in a recession or not (we have a recession for some and not for others I say), the Fed's Beige Book called it a draw using words like slightly, modestly and steady in describing economic activity in the 12 districts. Assume slightly and modestly have the same meaning here and steady means little changed from the prior Beige Book.

Five expanded slightly/modestly (Boston, Atlanta, KC, Dallas and SF), five contracted modestly/slightly (NY, Chicago, St. Louis, Richmond and Minneapolis), and two saw steady activity (Philly and Cleveland).

On inflation: "Price levels remained highly elevated, but 9 Districts reported some degree of moderation in their rate of increase. Substantial price increases were reported across all Districts, particularly for food, rent, utilities, and hospitality services. While manufacturing and construction input costs remained elevated, lower fuel prices and cooling overall demand alleviated cost pressures, especially freight shipping rates. Several Districts reported some tapering in prices for steel, lumber, and copper. Most contacts expected price pressures to persist at least through the end of the year."

This all confirms my stated belief over the past few months that inflation is cooling in some places that were red hot but overall pressures will remain persistent and sustainable, albeit at a slower pace. 

From here I'll just add notable quotes on the labor market. Overall, it is very much a mixed bag with pockets of strength, some of weakness, mostly still labor shortages and higher wages. 

Boston

"Employment increased modestly and wage growth held steady at an above-average pace. Although headcounts were flat in most cases, two manufacturers managed to boost their staffing levels by moderate and large margins, respectively. Across sectors, most contacts said that attracting and retaining workers remained very challenging, even after having raised their wage offers for new and/or existing employees...Contacts said that nonwage incentives, such as remote work options, flexible schedules, and career training, remained important for attracting and retaining employees...Contacts who commented on the labor outlook expected labor shortages to persist, but not worsen, moving forward."

New York

"Employment increased modestly despite ongoing worker shortages, though businesses reported some improvement in labor availability and there have been scattered reports of layoff. One upstate New York employment agency noted that demand for workers has abated a bit but remains solid, especially in technology-related fields. A New York City agency reported that hiring has remained strong and workers remain hard to find. Businesses in the manufacturing, distribution, and information sectors indicated that they continue to add staff, on net. Firms in all major industry sectors except construction, retail, and finance plan to add staff in the months ahead." 

"Businesses across all major sectors except finance continued to report widespread wage increases. However, one employment agency noted a leveling off in wages, and another indicated that the pace of wage growth was slowing. Businesses across all sectors plan to raise wages further in the months ahead." 

Philadelphia

"Employment grew slightly - slower than the prior period's modest pace. Scattered reports of layoffs, attrition, and hiring freezes have increased since the prior period. One staffing company reported slower job orders, noting order activity is approaching levels consistent with prior recessions. The share of firms reporting employment increases edged down from the prior period...Overall, most firms still describe hiring and retention as a top concern. However, many contacts, including staffing firms, noted a slight easing of labor supply challenges in recent months, with more workers applying for open positions." 

"Firms continued to note that wage growth subsided in recent months. However, wage inflation remains widespread and appears to have maintained a moderate pace." 

Cleveland

"Employment increased modestly. While most contacts said that staffing held steady, nearly a third indicated that they had added to their payrolls in the prior two months. Several business contacts acknowledged that they had curbed hiring plans from earlier in the year, but many indicated that because of persistent worker shortages they continued to run shorthanded and were playing catch up with staffing...Based on contact reports, labor availability recently increased somewhat." 

"Increased availability of workers along with a modest pullback in hiring may have contributed to a slight easing in wage pressures. The share of contacts reporting pay increases has been edging down since the beginning of the year but remained elevated. In many cases, contacts suggested that they had paused pay increases after generous pay hikes in prior periods. While the percentage of contacts offering higher pay decreased, those who hiked wages often did so "to blunt the effects of inflation" on their workers. In addition, many said that pay increases were still high by historical standards." 

Richmond

"Since the last report, the Fifth District labor market remained tight while employment grew strongly. Firms continued to report off-cycle wage increases to attract and retain workers and planned to raise wages again on their typical annual cycle. Several contacts reported reducing hours of service or turning down work because they did not have enough employees. An increasing number of contacts mentioned concerns about a possible economic downturn, but this has not slowed down their hiring and many firms expected to increase their employment in the next six months." 

Atlanta

"Sixth District labor market pressures eased modestly since the previous report, as several employers reported an uptick in applicants and some lessening in turnover. However, conditions remained tight and several noted ongoing automation efforts designed to reduce labor reliance...No business contacts reported layoffs, but several said that they had begun to shrink headcount through attrition, reduce open positions, and fill positions more slowly. Several firms anticipate layoffs amid slowing demand later this year and into next year." 

"Most employers reported persistent upward wage pressure. Many firms tried to offset higher wages with bonuses and per diems to attract workers and incentivize attendance and productivity. Enhanced benefits options were also offered. The outlook for wage growth was mixed; some expect wage growth to remain strong, while others anticipate it will subside over the next year." 

Chicago

"Employment increased moderately over the reporting period, and contacts expected a similar pace of growth over the next 12 months. Many contacts continued to report difficulty in finding workers across sectors and skill levels. One contact in construction said they had rushed completion of a restaurant in time for a local festival, but the restaurant couldn't open because of lack of staff. Still, a number of contacts said finding workers had become easier...Overall, wage and benefit costs increased rapidly and were aimed both at attracting new workers and retaining existing talent. In addition to labor market tightness, contacts cited high inflation as an impetus for workers requesting wage increases." 

St. Louis

"Employment activity has been mixed since our previous report. Contacts across the District continue to report that workers remained scarce. Several St. Louis public schools temporarily suspended school bus services because of a shortage of drivers. Some firms utilized flexible hours, bonuses, and increased entry-level pay to fill jobs and retain workers. In contrast, some Arkansas contacts reported recent signs of the labor market easing, including wage pressures beginning to level out." 

"Wages across the District have grown moderately since our previous report. One Louisville-area professional services firm gave workers bonuses to keep up with inflation, and a Little Rock leisure and recreation contact had to raise their skilled labor wages by 15 percent. Some short-staffed firms reported they were continuing to offer incentives to work more hours or on weekends but were still receiving few to no takers." 

Minneapolis

"Employment grew moderately since the last report. Multiple surveys from late July through the last half of August confirmed that labor demand from District employers remained very healthy. A large majority of employers were actively looking for labor in some capacity, including many hoping to add full-time, permanent workers to their total workforce. However, employers continued to report difficulty finding and hiring workers for open positions. Larger firms reported more success in hiring workers compared with smaller firms, but they were also experiencing rising turnover rates." 

"Wage pressures remained strong. A large majority of employers reported higher wages, and those raising wages by more than 5 percent increased modestly from earlier in the year...Among many strategies to attract labor, firms reported that raising wages was by far the most common strategy, followed by increased work flexibility, lowered job experience requirements, better benefits, and outsourcing more work." 

Kansas City

"Employment grew at a moderate pace in the Tenth District, as the overwhelming majority of contacts expressed difficulty in filling newly opened positions. Most businesses pointed to low numbers of applicants, or qualified applicants, as the primary challenge to recruiting. Many contacts also highlighted difficulty in meeting workers' expectations regarding compensation. Worker turnover declined moderately across industries and across District states. Many businesses noted that they have been better able to retain higher quality workers in recent months, although retention continues to be a challenge. Expectations for hiring over the next six months declined modestly as some businesses indicated they do not plan to add to their workforce for the remainder of the year." 

"Contacts reported broadly they made mid-year adjustments to worker compensation that were tied directly to inflation pressures. Nearly all contacts reported wage increases. In addition, many businesses also made one-time bonus payments, added flexibility in work schedules, or adjusted the benefits they offer. Looking ahead, contacts were mixed on whether further changes to wages or other compensation will be needed before the end of the year. Most contacts expressed they would be more likely to continue inflation-related bonus payments." 

Dallas

"Robust employment growth continued, though the supply of workers remained tight. Among 367 Texas business executives responding to a Dallas Fed July survey, 62 percent were trying to hire and a vast majority cited lack of applicants as an impediment. Workforce shortages were particularly acute in manufacturing, where one contact said they have the highest unfilled job rates in recent history and another noted the labor pool was more like "a labor puddle." Transportation services firms are experiencing shortages of drivers and pilots. Oil and gas firms noted widespread hiring but also significant challenges getting qualified applicants." 

"Wage growth remained high as firms tried to attract and retain employees amid the dearth of labor. Among Texas business trying to hire, more than half said workers looking for more pay than offered was an impediment. Staffing agencies in particular described a large gap between what employers were willing to pay and the wages job hunters were expecting. Contacts noted high turnover at low-skill positions and openings filling at higher pay rates. Others said they were having to pay sizable bonuses to attract talent." 

San Francisco

"Hiring activity continued to grow at a modest pace, although a notable portion of recruiting efforts was dedicated to replacing existing employees rather than expanding payroll...Reports indicated some improvement in employee retention, but many employers continued to highlight persistently high turnover rates. Several business and community representatives noted that worker fatigue has become a more significant driver of voluntary quits. Employers of skilled trades workers highlighted early retirements and skill mismatch as additional constraining factors. Many contacts revised their future hiring plans due to the uncertain economic outlook."

"Wages grew further over the reporting period but at a more moderate pace. Reports indicated that the increasing cost of living across the District, including the rising costs for essential expenses such as food and rent, continued to drive wage pressures upward. Several manufacturers and financiers reported some easing in salary expectation from new hires. Nonetheless, employees across sectors continued to demand more comprehensive benefits, flexible work arrangements, and upfront hiring incentives."

I have been a bear on private equity stocks ( (BX) , (KKR) ) for some time. 

The decision by Kim Kardashian to start her own private equity company pretty much sums up what I think about the sector!

Booyah banks! 

(XLF) is our Trade of the Week.

Not a bad looker: 

S&P Cash - Two Years

I just sold out the (SPY) trading long rentals at $394.80 that I purchased lower on Tuesday and today.

I have taken off my small trading long rental in (OIH) for a modest loss this morning.

I am covering some more Digital World Acquisition (DWAC) today. 

In a filing with the SEC, the company agreed to pay a bit less than $3 million to extend the vote for another three months. 

After the vote failure and the extension... my base case is that the company pays another $2.875 million in three months for one more extension of the vote.  

My expectation is that in six months from this week, $10.20/share is returned to shareholders. 

That's only 50% lower from here - so after a huge tumble from the highs of over $170/share I will cover some more stock at current price in the low $20s.

Michael Krauss

Doug, I 100% agree on the short term oversold condition of the market. To that end, I am much more comfortable shorting towards the upper part of your range, than buying towards the lower part. I still believe the 4325 200 day moving average failure will mark the highs for the next 6 months. I am happy to be mostly invested in Treasury money market funds above 2%, and Treasury bills above 3%.

Having done very well riding the up & down cycles since 1982, I am totally in a wealth preservation, "TATA" mindset. Besides the market, I have zero confidence in the economic and intellectual capacity of our elected leadership, and the ability of anyone Globally to temper geopolitical risks.

Again, it's my belief that the 2009-2022 bull market is over, Treasury yields have broken their 40 year secular downtrend, and the 13 year mindset of plowing most of one's earnings into Equities will be sorely tested with SPX reaching 2800-3300 in the next 12 months.

I have a corporate Board of Directors meeting between 1-3 pm today. 

It's a Zoom call so I will be able to scribble down some columns during that period - but less frequently than usual!

From Peter Boockvar:

The Bank of Canada raised its benchmark rate by 75 bps to 3.25% as expected after surprising everyone with a 100 bps increase at its prior meeting to 2.50%. They are also continuing with QT. The only commitment from here was to keep raising rates but there was no hint in the statement as to by what pace and how high.

They will know it when they see it, it seems. "Given the outlook for inflation, the Governing Council still judges that the policy interest rate will need to rise further. QT is complementing increases in the policy rate. As the effects of tighter monetary policy work through the economy, we will be assessing how much higher interest rates need to go to return inflation to target."

They acknowledge the drop in gasoline prices in helping to ease the headline inflation figure for July but highlighted ex this "a further broadening of price pressures, particularly in services." As for the economy from here, "The bank continues to expect the economy to moderate in the 2nd half of this year, as global demand weakens and tighter monetary policy here in Canada begins to bring demand more in line with supply."

As there was no shock hike today like there was the last time, although 75 bps is a lot, the Canadian$ is selling off but is really not at a level much different than where it stood just before 10am est. The 2 yr yield is up less than 2 bps but just below the highest since 2008 at 3.63%.

While much of the FX focus is on the euro, pound and the yen and the US dollar's strength against them, the dollar's performance against other commodity currencies has been dramatically different and much more mundane. The CAD today at almost $1.32 is really no different than its 5 yr average of $1.30. The Aussie$ at .67 compares with its 5 yr average of .72.

The Brazilian Real is below its 5 yr average and down sharply from where it was 5 yrs ago but at 5.25, it's been in a tight range of 5-5.50 over the past 2 years as the Brazilian central bank has been aggressively hiking more than anyone, along with the commodity strength. Lastly, the Mexican peso at 20.8 is barely above its 5 yr average of 20 and is well below the early 2020 spike low at 25 to the dollar.

Separately and positively, the price Dutch TTF natural gas is down 9% today and after yesterday's selloff has given back the Monday Norstream1 shut down spike of 17%. The euro is bouncing in response.

CAD

AUD

BRL

MXN

Jim O'Neill is smart and practical. 

Here is his impressive CV.  

Everyone, especially our Bearish subscribers, should watch and listen to every one of Jim's words (he is a "second level thinker") in his CNBC performance this morning.

My Trade of the Week, (XLF) , is getting jiggy after a slow start.

dougie kass

Is the Pain Trade higher now?
Dougie

I have taken a small trading long rental in iShares 20+ Year Treasury Bond ETF (TLT) at $108.38.

dougie kass badgolfer22

I wish I had your confidence Mikey.
Not meant as criticism.
But I dont, I have a more measured and middle of the road view now.
Ironically I suspect my net long exposure is close or less than yours
dougie

badgolfer22 dougie kass

I'm over 80pct cash right now...if I factor in puts, probably 90pct. I see no reason to buy now when I look at my charts and see june lows will be targeted..soon. but that's just me. other than the severe short term oversold, what's the bull case here? you don't need to answer that but I personally don't see one. I'm hoping you get your bounce--like I said yesterday. I wanna reload shorts and puts above 4000/4100 spx

dougie kass badgolfer22

as noted this morning i see a relatively narrow trading range
no hyperbole from me
i dont expect lows to be breached and i dont see robust upside
all of this is spelled out in my opener
many of the negatives are known some are improving (inflation, supply chain)
neither a bear nor bull be i.
i am managing my risk and sit at 25% net long.
my long position will grow on market weakness.
dougie

I aggressively added to (SPY) and all five bank holdings on the weaker opening. 

Upside

- (BIVI) +34% (reports topline results from an investigator-sponsored exploratory biomarker and imaging trial of NE3107 for the treatment of Alzheimer's Disease)
- (BPTS) +31% (announces 'very promising' top line results of its phase 2-3 COVA clinical study in COVID-19-related respiratory failure)
- (IMRA) +24% (disclosed entered into an Asset Purchase Agreement with Cardurion Pharma)
- (COUP) +11% (earnings, guidance; authorizes share buyback program)
- (AVYA) +7.1% (reportedly plans to cut jobs and take other cost cutting measures)
- (ELDN) +6.4% (FDA clears IND application to evaluate tegoprubart in IgA nephropathy)
- (VNET) +6.0% (appoints new certifying accountant, effective Sept 7th)
- (ASO) +5.7% (earnings, guidance)
- (PINS) +3.3% (Wolfe Research Raised PINS to Outperform from Peer Perform, price target: $28)
- (AMTX) +2.3% (finalizes $7B of supply contracts for 100% of Riverbank plant production of sustainable aviation fuel and renewable diesel for up to 10 years)
- (GIII) +2.1% (earnings, guidance)

Downside

- (PATH) -22% (earnings, guidance; partners with Snowflake to launch data integration on the data cloud)
- (OWL) -13% (downside momentum)
- (NIO) -5.3% (earnings, guidance)
- (NWL) -4.3% (cuts guidance)
- (PYCR) -4.1% (prices 5M share secondary offering at $27.35/shr)
- (MTCR) -2.6% (Equillium to acquire Metacrine in all-stock transaction worth $26M)

* This morning's opening missive conveys an explanation for my less cautious market stance - why I am now looking up and not looking down

* I don't view the market as having meaningful risk from current levels - nor do I view the upside as particularly robust

* The 2022 lows are unlikely to be breached

* An S&P trading range of between 3800-3850 and 4200-4250 is my baseline expectation for the balance of the year

* After the persistence and magnitude of the recent market decline, the upside reward vs. downside risk has become reasonably attractive

* Shorts protect wealth, longs generate wealth

"An optimist is a person who sees a green light everywhere, while a pessimist sees only the red stoplight... the truly wise person is colorblind."

- Albert Schweitzer

Global equities are down nine days in a row - the worst losing skein in over 11 years. 

Along with lower stock prices, investor sentiment ("price has a way of changing sentiment," h/t The Divine Ms M) has soured and many retail and institutional investors are positioned defensively based on the expectation that the market will soon breach the June 16, 2022 lows. 

As I will describe in this morning's updated market outlook, this contrarian with a calculator in hand, is growing less cautious and taking advantage of the recent and relentless drop in stock prices: 

* I don't see a break to new lows in the S&P Index.

* I see a trading range for the S&P over the balance of the year between 3800-3850 and 4200-4250.

* Equities now provide a reasonable upside reward vs. downside risk.

* My net exposure is still low at about 25%, but I am incrementally adding to my net long exposure into the recent weakness.

* I continue to see a mild and brief recession.

* Importantly, supply chain bottleneck problems are easing, which will alleviate inflationary pressures, as noted below in a tweet this morning by my friend Liz Ann Sonders:

* While inflation will remain "sticky" it has peaked and inflationary forces will decline measurably in the time ahead.

* The biggest headwind to equities is climbing interest rates which provide a bonafide alternative to stocks - this limits the market's upside. 

Today's opening missive is an adaptation of a letter that I sent out (last week) to the Limited Partners of my hedge fund, Seabreeze Capital Partners, LP.
__________ 

In late July, my Diary outlined a more cautious market stance that I had adopted after the position-driven and machine/algo aided rally from the mid-June lows.

Many of our major concerns previously expressed four weeks ago remain intact:

1) While we have been in the "Peak Inflation" camp, we think inflationary pressures will be more stubborn than the consensus expects - in our base case of a "mild and brief" economic recession. Structural headwinds to lower inflation remain - wages, rents and the price of durable goods.

2) The easing of financial conditions in the summer has run counter to the Fed's intent. As seen over the past week, Chairman Powell and several Federal Reserve members have clearly pushed back the notion of a soft pivot  - that many on Wall Street erroneously interpreted.

3) I expect a continued hawkish Federal Reserve. A major difference between today and prior bear markets continues to be Fed policy. During the previous eight bear markets the Fed responded with easy money every time (with rate cuts and quantitative easing, etc.) This year the Fed is doing the opposite - hiking rates and starting to shrink their balance sheet into a weakening domestic economy.

4) Non-U.S. economic prospects - especially in China and EU - have not improved. In fact, the global economic outlook has measurably deteriorated in the last two months.

5) I remain concerned about the buildup of private and public debt loads which, in the fullness of time, act as a governor to growth.

6) The earnings season, though better than many feared, has still not been good as forward guidance has disappointed and has raised more questions about prospective trends in profitability. Overall S&P profits are down year over year when adjusted for the strong contribution of energy companies. As previously discussed, the Producer Price Index (PPI) has eclipsed the Consumer Price Index (CPI) in each of the last 19 months - suggesting that companies will find it more difficult to pass on price increases and that consensus earnings expectations are likely too high.

7) Investor expectations and sentiment remain elevated, albeit lower than in July.

8) Though valuations have recently fallen, on average they still remain high relative to history.

To these eight factors, let's add two more concerns:

• The relentless strength of the U.S. dollar will adversely impact U.S. companies' profitability.
• The continuing rise in open market interest rates provides a competitive alternative to equities, as noted below in a column I recently wrote in my Diary on Real Money Pro:

Aug 31, 2022 ' 09:00 AM EDT DOUG KASS

Goodbye TINA, Hello TATA

* The rise in interest rates represents a bonafide challenge that limits the upside to stock prices and valuations

Move over TINA ("There Is An Alternative") and say hello to my new friend TATA ("Treasuries Are The Alternative").

It is tautological that the dramatic rise in open market interest rates over the last 15 months represents an unadulterated headwind that likely will limit the future upside in equities.

Higher interest rates tend to adversely impact corporate profitability and stock prices.

Most fundamentally based investors use a dividend discount model to forecast the price of a company's stock based on the theory that its present day price is worth the sum of all of its future dividend payments when discounted back to their present value. Importantly, higher interest rates mean future discounted valuations are lower as the discount rate used for future cash flow is higher.

Here is a demonstration of the interest rate rise over the last 14 months:

The 1-Year US Treasury yield has moved from an all-time low of 0.04% (14 months ago) up to 3.43% (today) - to the highest level since December, 2007.

The rise in interest rates doesn't mean that the markets can't experience rallies - markets can.

It does mean, that in all likelihood, the upside to equities and to valuations are limited. 

Employing "Second Level Thinking"

It should be emphasized that, increasingly, all 10 of our concerns are slowly being recognized and being discounted. This is one of the core reasons why I am skeptical that the market has meaningful risk from current levels and why the 2022 lows may not even be breached. 

A mild and brief recession is at the core of my more optimistic tone this morning. Here are some of the economic "buffers" that are supportive of our claims: 

"At the core of my optimism regarding financial stocks are my expectation for a mild and brief recession, contained credit issues, a solid labor market, a relatively healthy consumer - armed with large unrealized gains in equities and in the housing stock - a still healthy housing market, a view towards higher interest rates (for longer), a strong and under levered U.S. banking industry/system with healthy structural economic underpinnings and, as a starting point, low relative (0.5-0.6x) and absolute valuations (8-9x)."

- Kass Diary, With Growing Macro Clarity, Banks May Emerge as a (The) Leading Market Sector in 2022-3 (September 6, 2022)

While I might be wrong in my market assessment, "second level thinking" remains a guiding force and ray of light for Seabreeze.

The market's immutable rule is that it will do whatever it has to in order to inflict the greatest pain on the greatest number of people. Thus far, 2022 has emerged as a good example of that rule.

The market remains one of the most difficult to navigate in my investing career. With the profoundly important changes in market structure as passive investing products and strategies overwhelm active investing, short term market moves are intense and exaggerated.

In the book The Money Game (1968), Adam Smith (the pseudonym for George Goodman) wrote that "if you don't know who you are, this (the stock market) is an expensive place to find out." At Seabreeze we may, at times, be wrong in market view but our path is clear and we know who we are. As T. Boone Pickens once said, "The older I get, the more I see a straight path of where I want to go. If you are going to hunt elephants, don't get off the trail for a rabbit."

* My strategy incorporates the notion of capitalizing on emotional human and price influenced non-human (algorithms and machines) behavior - as fear (and greed) incite trading/investing action far more urgently than does the impressive weight of historical evidence and the prospective fundamental outlook. Investors, it has been said, think in herds. They go mad in herds and they only recover their senses slowly. We try to take advantage of market participants' emotion - on both the long AND short sides. I firmly recognize that lower stock prices are the ally of the rational investor and higher prices are the enemy of the rational investor.

* "Second level thinking" is the watchword of my investing faith. Markets can rally when adverse conditions are discounted. This helps to explain why bull markets are borne out of bad news - and why bear markets are borne out of good news!

* I am a contrarian armed with a calculator in hand and balance sheets/income statements in the other hand. My fundamental and value orientation and my steadfast requirement of a "margin of safety" in my individual equity selection is unaffected by the behavior of crowds which we describe as "group stink". 

My unemotional and opportunistic trading and investing style, at times, has and can benefit from this new regime of volatility. Nevertheless, the market remains challenging and, for now, I continue to view the return of capital as having precedent over return on capital. This helps to explain my 25% net long exposure. 

At Seabreeze we are certain that attractive long opportunities will surface, we are less certain when they will surface. That said, we are starting to pick on the long side. 

I am constantly on the alert for opportunity - especially when investors are losing their heads and acting emotionally - both on the downside and the upside.

My friend and former boss, Lee Cooperman (who was liberally quoted in last month's letter to Seabreeze investors and in my Diary), often says that opinions are like butts, everyone has one. So keep Lee's quote in mind, particularly when it comes to our short term market forecast (which follows)!

We have begun to add to our relatively low net long exposure in recent days. My sense is that developing long opportunities may be forthcoming over the short term. Perhaps, if the market's persistent decline continues, sooner than later! 

In general I expect a "chop bucket" over the balance of 2022 with my baseline expectation that the S&P Index will trade in a narrow range of 3800-4250. (Precision of view is not intended.) With S&P cash currently at about 3910, an increased amount of equities have recently become attractive and candidates to purchase - even despite my broader market concerns, which, as I have noted, are slowly being discounted.

The true enemy of investors is dogma. As always, I will change my view if the circumstances and/or if my fundamental expectations change.

I am constantly on the hunt for high quality investments that can be purchased at attractive prices. But, smart investing doesn't necessarily consist of only buying good assets but of buying assets well. This is a very important distinction that very, very few people understand.

In his book How To Lie With Statistics, Darrel Huff wrote, "In a Bear Market, he who loses the least wins." So far so good for Seabreeze as we have performed well on a relative and absolute basis this year. 

Looking Up, Not Down

"Both optimists and pessimists contribute to the society. The optimist invents the aeroplane; the pessimist, the parachute."

- George Bernard Shaw 

As I have frequently noted, I fully recognize that shorts protect wealth but that longs generate wealth. 

I look forward to continuing the process of slowly and incrementally positioning on the long side - as the market drops towards the lower end of my expected trading range. This more positive stance appears justified as some of the risks I outlined today are starting to being discounted ("second level thinking"). 

I am now looking up and not looking down.

I just added to my (SPY) long at $390.01.

Many find this chart as helpful for short term (3-5 day) positioning:

View Chart »View in New Window »

An important one, and part of my less cautious market thesis, from Liz Ann:

Did you sell when the CFO of (MSFT) did (h/t Keith McCullough):

Another one from Bramo:

From Bramo:

* The market (and money) never sleeps -- and neither do I, it appears!

* Stock futures were noticeably lower most of the evening - but have rallied in the early morning session.

* Brent crude is basically unchanged, +$0.34 to $93.16.

* Gold is +$2.20 and still can't get out of its way. I still can't work it up to buy.

* Soft commodities are a touch higher.

* Bond yields are slightly lower after barreling ahead in recent days. The yield on the 10-Year is -2.7 bps basis points to 3.313%. I added to Treasuries on yield strength all last month.

* The S&P oscillator remains oversold, at -7.36% . The oscillator has been a good short-term trading tool over the last few months!

"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 here. 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.

Stock futures are modestly higher after falling most of the evening.

Brent is +$0.34/barrel.

Soft commodities are mixed to higher.

The 10-Year U.S. Note yield is +2.7 basis points at 3.31%. I continue to buy Treasuries.

S&P futures peaked at +13 and bottomed at -27. At 5:24 a.m. ET futures were +3 handles.

Nasdaq futures peaked at +58 and bottomed at -101. At 5:26 a.m. ET futures were +21 handles.

Here is a synopsis -- and link -- to some of my columns I believe were important. The intent is to review the logic of my market moves and other factors. 

Why the Virtus Terranova U.S. Quality Momentum ETF (JOET) Makes Sense as a Long Term Investment 

The Big Headwind Today 

With Growing Macro Clarity, Banks May Emerge as a (The) Leading Market Sector in 2022-3 

Trade of the Week - Buy XLF 

More Investing/Trading Screwups 

Why I Am Not Buying the DIS Weakness 

Here are my trades from Tuesday (Seabreeze was an active buyer on weakness):

* Bought (XLF) at $32.54.

* Added to (C) , (WFC) , (JPM) , (PNC) and (BAC)

* Added to (SPY) $389.41.

* Took a small (OIH) long.

* Back buying (GRBK) after a big sell off in homebuilders. ($22.55).
__________

Long SPY, DIS, XLF, OIH, GRBK, C, WFC, JPM, PNC, BAC.

Short SPY puts, WFC calls, BAC calls - my bank short calls all expire in the third week of September.

Wolf Street on the return of the 6.25% mortgage.