Richard Grossman Rolf Thrane

It begs to ask the question, why does everyone believe the fed when they say for certain that they're not going to be pivoting and or lowering rates 3 to 6 months out?

Like the fed can see the future, and know what they'll be doing in 6 months.

If anything, those with prescience and experience and those able to read the tea leaves can see that what you have stated is a distinct possibility. So why do so many knee jerk respond to the jaw boning of the fed heads?

The fed just wants to take the mkt down as far as the fight against inflation, and are most likely doing it more aggressively than is actually necessitated.

Powell's ultimate dream, after all of his f'ups, is to retire and wear a tee shirt with a superman like V on it.

Volckerman.

dougie kass Richard Grossman

Rich
The Fed is employing one of its most important tools - jawboning. Powell, supported my comments from Brainard et al, is utilizing the policy tool by which they convince the markets that they mean business.
In numerous academic articles it has been argued (empirically) that jawboning is responsible for up to 90% of the move in interest rates and inflationary expectations.
The whole thing is orchestrated.
If they dont sound adamant they will not be believed.
(Some of us still don't believe them, however! As we recognize they are, essentially, spineless, and certainly not all knowing (as expressed in their inability to see that inflation was not transitory!)

Dougie
__________

And with this post I am on to three successive research calls and meetings. 

Thanks for reading my Diary. 

Enjoy the evening. 

Be safe. 

I will see you all back on Monday morning. 

Tomorrow you will be in the very capable hands of Stephen "Sarge" Guilfoyle.

* Accordingly, I have reduced my net long exposure all morning

"Oh, give me a home, where the buffalo roam
Where the dear and the antelope play
Where seldom is heard, a discouragin' word
And the skies are not cloudy all day
Home, home on the range
Where the dear and the antelope play
Where seldom is heard, a discouragin' word
And the skies are not cloudy all day"

- Dr. Brewster Higley and Daniel Kelley, Home on The Range

I hope the description of my trading over the last few weeks has been a good exercise in illustrating how a hedge fund trades a projected trading range. 

I am fully aware that the tactical strategy of rapid, staccato-like trading moves that I have been making are not for everyone. It is often not for me! 

I also recognize, as I have written in the past, that the more trades you make, and the more decisions needed, the more likely one makes mistakes. 

I would prefer to buy and hold - it is a lot easier and less wearing. 

That said, I certainly don't have the concession on the trading and investing truths. 

My strategy in delivering excess returns is based on reducing a complicated investment mosaic - with many determinants - into an overall market outlook. 

Towards that end, I have recently outlined why the markets may be contained on both the downside (3800 S&P) and upside (4250 S&P) - so trading the range may be all that Mr. Market is delivering to me and my investors. 

Bringing my outlook of a trading range and that we are in the middle of that trading range, let's end by moving from the year 1873 (the year "Home on the Range" was published) to exactly a century later (1973) and Stealers Wheel's "Stuck In The Middle With You"

"Well I don't know why I came here tonight
I've got the feeling that something ain't right
I'm so scared in case I fall off my chair
And I'm wondering how I'll get down the stairs

Clowns to the left of me
Jokers to the right
Here I am stuck in the middle with you"

- Stealers Wheel

* The S&P Index is now exactly in the middle of my expected trading range for the balance of the year.

* I am shorting some out of the money SPY calls against my SPY long. 

With S&P cash +28 handles I am selling some October (SPY) $405-$410 calls short against my long SPY.

Selling some more SPY at $400.61.

The Trades of the Week are meant as just that - a trade. 

Accordingly, I just sold my (XLF) trading long rental - and Trade of the Week - at $33.92, and for a nice and quick gain. 

As most are aware I am long individual bank stocks away from this trade.

Between 2-6 pm I have three separate research calls/meetings... in my continued search for new ideas.

Radio silence during those hours.

Sold some (SPY) at $399.44.

From Peter Boockvar:Reality and the German influence likely gaining traction resulted in the 75 bps rate increase by the ECB that at this point was anticipated. We'll see if Lagarde hints at 8:45am whether we'll see a string of these type of hikes in the meetings to come as they are still so far under the rate of inflation. The Transmission Protection of Italy, otherwise known as the Transmission Protection Instrument, hasn't been used yet as the verbal threat of it has worked so far. We're still awaiting details on how it would actually work if utilized.

As the rate move was not a surprise, the euro is little changed on the day after initially spiking on the news, and then selling off. The German 2 yr yield jumped, dropped off and now is up 2.5 bps on the day at 1.13% vs the 1.23% high it saw in June. Longer end yields across the region are higher too.

Again, initial jobless claims came in below expectations. Today printing at 222k vs the estimate of 235k and that compares with 228k last week, revised down by 4k. As these are holiday time frame numbers, I'd prefer to see the figures in coming weeks to get a more accurate read. The 4 week average did fall to 233k from 241k last week and that is the least since July 1st. Continuing claims, delayed by a week, rose by another 36k to 1.473mm, the most since April 1st.

Bottom line, while the 4 week average of 233k is 63k above the low seen in early April, it still remains at a very low level on an absolute basis. After reading yesterday's Beige Book, it still seems that labor shortages exist and companies are still holding on tight to the workers they have. Also, for those tech workers that are losing their jobs, they seem to be having no problem right now in finding new work.

This all said, with economic activity at best flat lining in the US and certainly contracting in Europe and likely in China, the risk is still for a weaker labor market in the quarters to come.

4 Week Avg in Initial Claims

Continuing Claims

Financial Select Sector SPDR Fund  (XLF) is our Trade of the Week. 

As a reminder and for emphasis, here is my bullish bank thesis: 

Sep 06, 2022 ' 10:10 AM EDT DOUG KASS

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

* There is a growing probability that the banking industry may face an almost picture perfect economic and interest rate backdrop

* I am no Pangloss, but the outlook for traditional banking remains quite strong

* 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)

* For me, it's the time to be an opportunistic buyer during the potential bottoming in the non traditional - capital markets, trading, investment banking - financial industry fundamentals that I expect

* Remember, in banking , the value is the customer base - the industries' deposit/asset bases are "sticky" and higher rates for longer means the value of those deposits are appreciating

In terms of Street Cred, as mentioned previously, I have been following financial stocks since I was a "yute."

1. While earning my MBA at Wharton I was a "Nader Raider." In that capacity I cowrote (three chapters) of the book Citibank with Ralph Nader and his Center For the Study of Responsive Law.
2. My investment career started as a housing analyst at Kidder Peabody - where I produced research on mortgage related equities.
3. At Putnam Management in Boston I was voted by a leading investment magazine as the top ranked buy-side analyst of banks and thrifts.
4. I am currently a Special Advisor to the Board of Directors of Ocwen Financial (OCN) - a leading mortgage originator and servicer.

So, while, at times my head spins regarding cloud, artificial intelligence and other specialized/niche technology stocks - I have a reasonably strong knowledge of many facets of the financial industry.

Turning Much More Optimistic

A month ago I turned more cautious on the market and on bank stocks - since then most large money center banks have declined by about -10% as fears of a deeper recession have returned:

Aug 11, 2022 ' 02:05 PM EDT DOUG KASS

Backing and Filling?

Banks have been the world's fair.

But in keeping with my more cautious market view, I have been selling calls against my positions in (WFC) , (BAC) and (C) .

May be time for the group to rest.

I still see a strong upside for those with 1-3 year horizon.

Given the following set of circumstances it is time to become much optimistic on bank equities - particularly when viewed in an intermediate or longer timeframe:

1. Of note, comments by Federal Reserve Chairman Powell and other Fed members suggest that they have finally come to the realization that inflation will be slow to moderate and, that, resultingly, interest rates will likely remain higher for a longer period of time. As the banking industry is asset/rate sensitive, monetary policy will be an ally to bank profitability, valuations and stock prices.

2. Not reflected in the historically low valuations, the large money center banks have high and improving quality, predictable and more sustainable profit streams which are now benefiting from a rising trend in net interest income and an elevated and a relatively sticky retail deposit base:

When rates are climbing and will remain relatively high, as I expect over the next few years - I view the explosion in those "sticky" deposits as a strengthening asset, similar to a rising deferred revenue line - setting the stage for more predictable and higher profits in the years ahead.

3. As to the current yield curve inversion being considered an industry negative - I don't see it that way as long duration mortgages are no longer as dominant on bank books: Shorter term loans and investments have become more conspicuous on bank balance sheets. Therefore, asset durations have been shortened, lessening the impact of an inverted curve.

4. Banking industry asset tests are unrealistic and too restrictive/stringent. In reality, industry capital is in excess and company repurchases are very accretive to EPS. As the economy recovers in 2024 and forward, it is likely that asset tests will result in regulators allowing more aggressive capital asset strategies.

5. With solid balance sheets and large technology expenditures materially behind them, large U.S. banks have deepened their moats by expanding their franchises and market shares at the expense of non US financial institutions and emerging fin tech players that have materially disappointed their stakeholders.

6. Remember, some inflation is good for banks - as nominal growth is more important than real inflation adjusted growth! Nominal buoys loan, asset and deposit levels.

7. Second quarter results showed the benefit of the recent climb in interest rates - strong growth in NII will be a feature of 3Q2022 and second half results.
8. While credit costs will be rising somewhat, quarter over quarter - loss rates and reserve builds will likely still be very low as debt excesses are contained, consumers have large imbedded and unrealized gains in their homes and in stocks. Our financial system is strong when compared to other economic downcycles.
9. Capital market and mortgage related revenues/profits are already known to be weak - and for obvious reasons: market price declines, slowdown in home turnover, weak investment banking. Nevertheless I vastly prefer banks to brokerages, are less asset sensitive as the later do not benefit from the marked accumulation of industry savings accounts, and the inevitable advance in net interest income.
10. Finally, most large money center banks have an important presence in the consumer banking and mortgage markets. I do not share the dire expectations for the consumer in light of the still healthy housing market, the large unrealized cushion of gains in both equities and in the housing stock, coupled with very low "locked in" mortgage rates of about 3%, and a strong jobs market.

Bottom Line

At the core of my optimism regarding financial stocks are my expectation for greater macro clarity of 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)

My advice is to be opportunistic and to avoid the rear view mirror, the consensus and the downbeat emotions that are the natural byproduct of lower bank stock prices over the last month.

I am now aggressively embracing the weakness in financial stocks - with an eye on a multi-year investment that could take the group much higher when fears of a deep recession recede.

Though only 30 minutes into the day's trading, we have already seen a sharp reversal higher in bank stocks, after yesterday's stellar performance.

I remain a buyer.

"Southern trees bear a strange fruit
Blood on the leaves and blood at the root
Black bodies swinging in the southern breeze
Strange fruit hanging from the poplar trees"

- Billie Holiday,Strange Fruit

Apple's annual September product launch event has come and gone.  

On any strength I plan to reshort Apple based on: 

* Limited New Features With the exception of the severe car crash detection and the emergency communications with satellite technologies, there were limited surprises in the new features of the iPhone 14 models rollout.

* Margin Pressures Likely Despite higher component and supply chain costs, product prices were not increased. This means margins could be pressured.

* Demand Elasticity Lies Ahead A $1250 smart phone is easily deferred in an environment of sticky inflation and slowing economic growth.

* Sector Rotation Unfavorable As noted below, in the early stages of a recession, value stocks top growth stocks (Apple)

* Yesterday's ebullient market was another reminder that opinions are like butts, everyone has one...

* And that trading and investing is a difficult endeavor

* Do your own homework! And hide your children and portfolios from the self confident and two-handed investment strategists

* With yesterday's advance we have moved closer to the middle of the anticipated second half trading range

"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."

- Kass Diary, The Optimist Sees The Opportunity in Every Difficulty

My premise in yesterday's opening missive was that the S&P's upside reward had improved markedly relative to downside risk in the recent market decline. 

Besides a lot of words in that opener I delivered this good looking chart of the S&P Index:

The rest is history - with the S&P Index making a meaningful and near +2% advance yesterday. 

The market's rip occurred in the face of a deep dive by Goldman Sachs' head of investment strategy in a morning research piece suggesting a breaching of the 2022 lows was inevitable! 

Then there was this insane two handed (on one hand this, on the other hand, that) communication - with little or no value - from Deutsche Bank's market strategist, delivered on Twitter by my pal Bloomberg's Jonathan Ferro: 

Jonathan Ferro

@FerroTV

"in the event we slide into a recession, the sell-off has much further to go (S&P 500 3000); but if we do not, we expect the market to rally back sharply to its prior peaks... We maintain our S&P 500 target for year end at 4750"

Deutsche Bank 

This is not an "I told you so", as I am often wrong and always in doubt. 

It is another reminder that Mr. Market does its best to screw the most people - even the "smartest" ones - and that we all should maintain a thoughtful, well-reasoned and sometimes contrarian view of the markets, sectors and individual securities. 

I still think we are in The Chop Bucket - a fairly tight and defined trading range of between 3800-3850 to 4200-4250 in the S&P Index. 

Yesterday's robust climb in the markets took us closer to the middle of that projected range and, overnight, reduced the favorable upside reward vs. downside risk.

Nick Timiraos at the WSJ is at it again, reporting on what the Fed will do at its next meeting in two weeks. They will hike by 75 bps according to him, taking the fed funds range to 3-3.25% and then will slow down the pace of increase in the following two meetings.

On today's front page he said, "The Federal Reserve appears to be on a path to raise interest rates by another .75 percentage point this month in the wake of Chairman Jerome Powell's public pledge to reduce inflation even if it increases unemployment. Fed officials have done little to push back against market expectations of a 3rd consecutive .75 point rate rise in recent public statements and interviews ahead of their Sept 20-21 policy meeting."

We hear from Powell today at 9 am but Timiraos told us all we need to know.

After raising by 75 bps in a few weeks, Powell will likely say what Philip Lowe, the Governor of the Reserve Bank of Australia, who just hiked by 50 bps on Tuesday, said today, "We recognize that, all else equal, the case for a slower pace of increase in interest rates becomes stronger as the level of the cash rate rises." His rationale was similar to what Brainard said yesterday, "We are conscious that there are lags in the operation of monetary policy and that interest rates have increased very quickly."

Now, we're not talking about ending the hikes from here, just reducing the pace as the end game level is still to be determined for both the RBA, the Fed and some others.

In response we're seeing a sharp rally in Australian bonds and it's carrying other sovereign bonds in the region higher. The 2 yr yield is fell by 15 bps to 2.91%, a 3 week low. The 10 yr yield is down by 14 bps to 3.57%, a 2 1/2 week low.

Aussie 2yr

With regards to the ECB and their 8:15 am EST rate announcement, the consensus is for a 75 bps hike and Lagarde really has no choice but to do so. In anticipation, the euro STOXX bank stock index is higher by .50%, still though down a shocking 77% from its 2007 high. There is huge value in European banks that have a lifeline now with positive interest rates but on the other hand they are loaded with the exact bonds that have sold off and they are dealing with a nasty energy led recession and all the bad debts that will be associated with it.

STOXX 600 Bank Stock Index

Positively in Europe, the price of Dutch TTF natural gas is down for a 3rd day, by 7.6% to just under 200 and that is the lowest in a month and thus giving back the Nordstream shutdown rally on Monday. Also, Brent crude is just about back to where it was the day before the Russians invaded. On February 23rd it closed at $87.25 and as of this writing it sits at $88.23.

Dutch TTF Nat Gas

As no action has been taken yet, the Japanese are still relying on verbally trying to talk down the yen but to no avail. There was a get together today with members of the Finance Ministry, the BoJ and the Financial Services Agency and all we got was a comment from the Vice Finance Minister who said "The in the two days of Sept 6-7, the currency has fallen by around 5 yen to the dollar. Fundamentals alone can't justify these moves...If these types of moves continue, the government stands ready to take necessary responses in the FX market, without ruling out any options." 

To be a fly on the wall of that conversation. This seemingly tougher talk does have the yen off its lows overnight but only little changed on the day. Bond yields were flattish overnight as the BoJ stepped up its buying of 5-10 yr JGB maturities. It's amazing that Kuroda still has his job.

The sentiment set up for yesterday's stock market rally was very helpful. Not only was the market oversold but yesterday we a big drop in the number of Bulls in the Investors Intelligence survey (as of last Friday) to 29.7 from 38.4, the lowest since it hit 26.5 in June. Almost all of them went to the Correction side as the Bears fell only slightly to also 29.7 from 30.1 last week.

Today, AAII said Bears fell by 3.8 pts to 18.1 and that is now .1 pts below the June 23rd print of 18.2 and is the smallest number since April. Bears rose another 2.8 pts to 53.3, the highest since late June when it reached 59.3. The CNN fear/greed is at 40 vs 45 one week ago. While it's in the 'fear' category, it is not as extreme as the other figures. Outside of these sharp market rallies, it's still a bear market with the S&P 500 trading at a still rich 17.5x. I don't see how this multiple doesn't compress to 15 or less inevitably.

Upside

- (AMLX) +96% (PCNSDAC members vote (7 Yes; 2 No) that the available evidence of effectiveness IS sufficient to support approval of sodium phenylbutyrate/taurursodiol (AMX0035) for treatment of patients with ALS; FDA is expected to make a decision on AMX0035 (sodium phenylbutyrate and taurursodiol [also known as ursodoxicoltaurine]) by September 29, 2022, under the Prescription Drug User Fee Act for treatment of amyotrophic lateral sclerosis (ALS))
- (ASAN) +23% (earnings, guidance; files to sell $350M private placement of common stock to CEO Dustin Moskovitz)
- (LOVE) +9.1% (earnings)
- (GME) +8.8% (earnings; forms partnership with FTX for digital assets)
- (CZOO) +6.6% (concludes strategic review of its EU business; proposes to wind down EU ops)
- (FSLR) +4.2% (Goldman Sachs Raised FSLR to Buy from Sell, raised price target: $172 from $60.00)
- (SOL) +3.9% (earnings, guidance)
- (BIOX) +3.6% (earnings)
- (CCO) +1.9% (guidance from analyst day)

Downside

- (AEO) -15% (earnings, guidance)
- (CURV) -13% (earnings, guidance)
- (VRNT) -8.8% (earnings, guidance)
- (BILI) -6.5% (earnings, guidance)
- (AVAV) -5.5% (earnings, guidance; files mixed shelf of indeterminate amount)
- (PLAY) -2.4% (earnings)

From Kuppy:

From my old pal Lance:

I am so old I remember the Evergrande crisis:

Another one from Bramo:

From Bramo:

This chart is a good primer for traders with a few days/weeks orientation:

View Chart »View in New Window »

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

* Stock futures were remarkably stable most of the evening and during the early morning hours -- particularly in light of the sharp advance on Wednesday.

* Brent crude was stable overnight, -$0.50 to $87.50.

* Gold is +$3 and still can't get out of its way. I still can't work it up to buy.

* Soft commodities are mostly green.

* Bond yields like stock futures were remarkably unchanged in front of this morning's ECB decision. The yield on the 10-Year is -1.5 bps basis points to 3.25%. I added to Treasuries on yield strength all last month.

* The S&P oscillator remains oversold, falling from -7.36% to a still elevated -6.00%. 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 showed little change overnight.

Brent is -$0.50/barrel.

Soft commodities are advancing.

The 10-Year U.S. Note yield is -1.5 basis points at 3.25%. I continue to buy Treasuries.

S&P futures peaked at +15 and bottomed at -11. At 5:43 a.m. ET futures were -1 handles.

Nasdaq futures peaked at +69 and bottomed at -38. At 5:44 a.m. ET futures were -9 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.

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

Recommended Viewing (Jim ONeill)

A Game of Risk

Still Chai (Cannabis) 

The Beige Book (Peter Boockvar)

Kardashian Goes Private (Equity) 

Banks Get Jiggy 

Chart of the Day (proved prescient...)

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

* Added to (SPY) at $390 and $389. (SPY closed near $398!)

Sep 07, 2022 ' 09:40 AM EDT DOUG KASS

Opening Moves

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

Position: Long SPY, BAC, C, WFC, JPM, PNC, Short BAC calls, WFC calls

* Sold my trading long rental in (OIH) for a small loss.

* Initiated a TLT long:

Sep 07, 2022 ' 10:15 AM EDT DOUG KASS

TLT

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

From my friends at Miller Tabak:

Thursday, September 8, 2022

The Labor Market Will Stand Up to Higher Rates

The August employment report boosts hopes that the U.S. economy will make a soft landing in 2023 and should end any talk that poor GDP growth in the first half of 2022 will lead into an official recession. Chairman Powell is correct, however, that the labor market will have to slow considerably for inflation to come back to 2%. The harder question is to quantify this slowdown. Larry Summers, for example, has suggested that it will take five years of 6% unemployment or one year of 10% unemployment for inflation to return to 2%. An unemployment rate of 6% by September 2023 would require around 3.8 million workers to lose their jobs and would reduce GDP growth by 1.5%. A 10% rate, which we think is highly unrealistic, would entail 10.4 million lost jobs and a 4.2% reduction in GDP growth, obviously meeting the criteria for a significant recession.

Figure 1: Job Vacancies Far Outnumber the Unemployed



Investors should discount this type of overly pessimistic analysis. It misses the mark because it ignores that the U.S. economy currently has a 5.6 million surplus of job vacancies (blue in Figure 1) compared to unemployed workers (red in Figure 1). This is a record surplus and is highly unusual, the unemployed usually outnumber vacancies, even during periods of strong GDP growth. Higher rates are going to damage the job market, but much of their impact will be to eliminate vacancies instead of employment. This will blunt the impact of higher rates on growth. We expect unemployment to rise to only 4.7% in 2023. This will reduce GDP growth by about 0.7%. We also expect labor market productivity to partly bounce back, it is down 2.5% over the past year, which will offset some of this decline. Overall, we see GDP growth over the next year around 1.2%, slow but well above the level corresponding to recession.