I am running to a follow up research meeting.

Thanks for reading my Diary today.

I hope it had value.

Enjoy the evening.

Be safe.

I am starting to buy back - on a scale - the (SPY) (that I sold above $394) at about $389 now. 

From earlier - only two hours ago! - this afternoon: 

Sep 15, 2022 ' 01:37 PM EDT DOUG KASS

Trading Around Core Position in SPY

I just sold the (SPY) ($394.22) that I purchased yesterday and this morning for a profit.

Trading around my core and taking advantage of machine led programs discussed two columns ago!

I have reduced my net long exposure by almost the amount I raised it yesterday.

I plan to buy back on weakness - when the machines elect to sell!

I have two research calls - at 2:45 pm and 3:30 pm.

Radio silence during the period.

I just sold the (SPY) ($394.22) that I purchased yesterday and this morning for a profit. 

Trading around my core and taking advantage of machine led programs discussed two columns ago! 

I have reduced my net long exposure by almost the amount I raised it yesterday. 

I plan to buy back on weakness - when the machines elect to sell!

* And how to capitalize on the machines and algos

With today's whoosh lower, my calculus of upside/downside improved from 2.5:1 to 3.0:1. 

Accordingly, I have expanded my net long exposure. 

As I discussed yesterday and will again tomorrow morning, the market, and the rotation inside of the market, is not being governed by the opinion of the talking heads in the business media - though they would like to think so - it is principally being influenced by the machines and algos. 

This creates, as we saw late yesterday - in the near 40 handle rally in 10 minutes - the possibility of rapid and abrupt intraday declines and advances. 

From my perch I don't complain about this impact of the quants. 

Rather, I see as part of my charge as taking advantage, opportunistically and dispassionately, of the quants who serve to exaggerate short term market moves.

I gotta write, the degree of confidence on the part of "talking heads" in the business media - in such an era of uncertainty - is mind boggling. 

This comment applies to both bulls and bears - most of whom are "perma."

Last week, the most honest and smartest hedgehogger extant, Stan Druckenmiller, put it well - and similar to my comments throughout this year - that there has rarely been more uncertainty, and range, in outcomes than exist today. 

As for me, I am often wrong and always in doubt. 

My comments in my Diary are always qualified by the words, might, could and may. 

As I repeatedly have said, Grandma Koufax used to tell me to always been cautious because "the Cossacks" might come at any time. 

In fact, I think I will do an opening missive on the subject of excessive confidence tomorrow morning.

I added to Citigroup (C) at $48.58.

I am out of my FIGS (FIGS) short at around $10.30.

I purchased some more (SPY) at $391.68. 

I suspect we could see a selling climax in tech today.

Tech in a freefall.

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.

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.

There is a continued rotation out of growth and into value.

Banks should be the beneficiary.

I own no technology stocks.

My pal/buddy/friend Peter discusses a shakier earnings backdrop: 

Good news that the railroads and its unions have come to a tentative agreement and the rail stocks pre market are ripping higher. On to the next worry.

A few days ago we got a negative preannouncement from Eastman Chemical. Yesterday we got it from Nucor and also at the Morgan Stanley industrials conference Alcoa said "The third quarter is shaping up to be a tougher quarter for us. Metal prices have come down, raw material prices have stayed stubbornly high." Also yesterday, its spin off Arconic lowered guidance and said "third quarter results will be impacted by production outages and other operational challenges in Tennessee and Davenport that had reduced production from planned operating rates.

Additionally, hyperinflationary energy costs are driving increased cost pressures and declining demand in Europe, which are expected to have an increasingly negative impact on third and fourth quarter results." These comments come of course with just 2 weeks left in the quarter and with the strong dollar, still rising labor costs, slowing demand and weakness overseas, it is shaping up to be a really interesting earnings season beginning next month.

This all comes as the Business Roundtable said yesterday that its Q3 2022 CEO Economic Outlook Survey dropped 12 pts from Q2 to 84, the lowest since Q2 2020 but which is still well above the 50 level that is breakeven between expansion and contraction. Plans for hiring dropped 11 pts, those for capital investments declined by 11 pts and expectations for sales fell by 12 pts.

The Roundtable said "The results are consistent with domestic economic conditions, including high inflation and higher interest rates, and persistent global headwinds from the war in Ukraine, including elevated global energy prices and the unfolding energy crisis in Europe." 

Also out yesterday was the August Cass Freight Transportation Index which showed shipments were up 3.6% y/o/y and by 5.5% m/o/m. Cass made it a point to highlight why this figure is better than other transportation data points that are out there by saying the spot market is where the real weakness is (which we've been hearing for many months now) and "to some extent, the stronger Cass data reflect the ongoing shift from spot to contract."

And their caveat to the strength and the factors for it, "The improvement may not be sustainable, especially as pressure increases on interest rate sensitive sectors like capital goods and housing, but the summer improvement likely reflects a combination of: successful discounting campaigns by retailers, seasonal inventory building ahead of the holidays, easing supply constraints, particularly in auto production, and reversal of China lockdown effects in June/July."

With respect to freight rates, they were up by 16% y/o/y in August but that is a sharp slowdown from the 26% y/o/y pace seen in July and they were down by 4.4% m/o/m. "Lower fuel prices were a factor in the decline, but with looser truckload market conditions, further deceleration is very likely. With the tight supply/demand balance in US trucking markets easing considerably this year, industry rates are topping out and set to slow sharply in the months to come."

Reflecting sentiment as of last Friday so before the Tuesday drubbing, Investors Intelligence said Bulls rose to 32.4 from 29.7 while Bears fell 1.5 pts to 28.2. Sentiment also improved in today's AAII data where Bulls were up 8 pts to 26.1, a 3 week high. Bears dropped by 7.3 pts to 46, a 3 week low. There of course are still way more Bears than Bulls in this survey.

The CNN Fear/Greed metric closed yesterday at 42, in the 'fear' category, which compares with 41 one week ago. Bottom line here, sentiment is still pretty cautious to state the obvious but is off the extreme level of a week ago. In terms of using this contrarian data in trying to gauge market behavior in the short term, I feel like we're in no man's land in doing so.

How do you get your imports to rise by 50% y/o/y? Let your currency sharply depreciate and then import most of your energy needs. This is what happened in Japan in August. Exports, also boosted by the weak yen and higher auto shipments, rose by 22%, just under the estimate of up 24%. The combination drove a record high trade deficit in August for Japan. Thankfully the Japanese are turning on a bunch of their shuttered nuclear plants heading into the winter. The yen is weaker on the data and the 10 yr JGB yield closed above .25% for the 2nd straight day at .259%. The game of chicken between the BoJ and the market continues.

Japanese August Trade Deficit

10 yr JGB Yield

On that sovereign bond situation broadly, the German 10 yr bund yield at 1.75%, up 3 bps, is testing its June high of 1.77%. The US 10 yr yield at 3.45% is nearing that 3.50% level it also saw in June. The South Korean 10 yr yield jumped 16 bps overnight to 3.79% vs 3.82% seen in June. Thus, we're approaching a key technical moment here in rate land across the world.

Australia, whose economy is very sensitive to commodity prices and China, saw an increase in employment of 33.5k, about in line with the estimate of 35k. Their participation rate rose 2 tenths to 66.6% and their unemployment was up by one tenth to 3.5%. Along with selling across sovereign bonds around the world, Aussie yields are higher while the Aussie$ is down a touch. The ASX was up by .2%.

Upside

- (NRBO) +47% (enters exclusive license agreement with with Dong-A ST Co., Ltd.)
- (BQ) +13% (earnings)
- (JVA) +12% (earnings)
- (INAB) +6.6% (partners with the Dunbar CAR T-Cell Program at the University of Louisville as the Manufacturing Center for INB-400)
- (ISPO) +6.2% (President Kallery purchases 36K common shares)
- (HITI) +5.3% (earnings)
- (VLD) +5.0% (Kevton Technologies acquires seven Velo3D Sapphire 3D printers)
- (HUM) +4.8% (raises guidance)
- (CSX) +4.1% (White House announces tentative agreement reached with rail companies, unions to avoid strike; Joseph Hinrichs named CEO of CSX, James M. Foote will depart September 26 and will remain as an advisor through early 2023)
- (DHR) +3.8% (intends to separate Environmental & Applied Solutions Segment to create an independent, publicly traded company; raises Q3 Rev outlook)
- (UNP) +3.8% (White House announces tentative agreement reached with rail companies, unions to avoid strike)
- (BFH) +3.6% (reports Aug monthly financial performance metrics)
- (NFLX) +2.3% (Evercore ISI Institutional Equities Raised NFLX to Outperform from In Line, price target: $300)

Downside

- (IRNT) -45% (earnings, withdraws guidance; Co-CEO to resign)
- (ELOX) -44% (Phase 2 combination clinical trial of ELX-02 in Class 1 Cystic Fibrosis (CF) patients did not achieve statistical significance)
- (GMBL) -36% (files to sell common stock and warrants of indeterminate amount)
- (FWBI) -18% (files to sell $12M common stock and warrant offering)
- (LPTH) -15% (earnings)
- (IDYA) -14% (prices 7.6M shares at $10.50/shr)
- (RYTM) -12% (prices 4.8M shares at $26/shr)
- (ARNC) -9.8% (cuts FY22 outlook)
- (NERV) -5.7% (files $200M mixed securities shelf)
- (RFIL) -4.6% (earnings, guidance)
- (NEE) -3.5% (files to sell $2B in equity units)
- (ADBE) -1.2% (reportedly nears the deal to acquire collaborative web design application for interface design, Figma at over $15B)

I am in Lance's boat as I, too, see a trading range (S&P 3825-4225):

* Given my guesstimate of 115 S&P handles of risk and 285 handles of reward (2:5 positive) - I am an incremental buyer on weakness

* I expect stocks, after the huge Tuesday fall, to limp into the weekend

After a systematic and program-based rally of nearly 35 S&P handles in the last few minutes of yesterday's session, things have settled down. 

Overnight, S&P futures held on to an unusually narrow point range of about 17 handles. 

My guess is that we limp into the weekend, after Tuesday's horrible drubbing. 

For now I see no reason to change my approach to Mr. Market. I plan to continue to trade the range, expected to be between 3825-4225:

Source: Lance Roberts

Given the guesstimate of about 115 S&P handles of risk and 285 handles of reward (2:5 positive)- with S&P cash at 3940 - I am an incremental buyer on all weakness.

Added to (SPY) at $393.62.

Good stuff, as usual, from Danielle DiMartino Booth:


Not many British homeowners bought in 1952. If they did the year Queen Elizabeth II began her rule, the value of your property has appreciated by a factor of 140 times, rising from £1,891 to £270,452. The Queen's favorite property, Scotland's Balmoral Castle, fetches a tad more at an estimated £120,000,000. Originally purchased in 1852 by Queen Victoria and Prince Albert, her summer home sits on 50,000 acres with 150 buildings and was fittingly where she spent her last days. "I think Granny is the most happy there. I think she really, really loves the Highlands," described her granddaughter Princess Eugenie in the documentary Our Queen At Ninety.

While at Balmoral, the royals "act as normal people-to a point," Lord Lichfield, a former photographer for the family, said in 1972. The Queen was known to explore the grounds on horseback or behind the wheel of a Range Rover. Her Majesty even did the dishes. "You think I'm joking, but I'm not," former Prime Minister Tony Blair once revealed. "They put the gloves on and stick their hands in the sink. The Queen asks if you've finished, she stacks the plates up and goes off to the sink."

Across the pond, U.S. house price inflation has also risen stoutly though the phenomenon is much more of a recent nature. In the 13 months through June 2022, the S&P Case-Shiller National Home Price Index has expanded near a 20% annual rate (turquoise line). This has provided a persistent windfall for sellers, even those who bought and sold within the last year (just ask QI's Dr. Gates).

From the perspective of your local real estate agents' office, the house price backdrop opened the floodgates of double-digit earnings for an even longer stretch. The producer price index (PPI) for real estate agents posted at least a 10% year-over-year (YoY) gain in every month over the 18 months from March 2021 to August 2022 (purple line).

Higher frequency data suggests home prices are turning hard. At the most fundamental supply/demand level, we're at a near quarter-century imbalance between new home sales and inventory. We've seen as much flagged in the Mortgage Bankers' Association (MBA) Weekly Applications Survey.

After a 12.1% YoY increase as recently as April, the trend in the average home purchase loan size has compressed to one sixth that size thus far in September, a 2.1% YoY advance (orange line). Over time, this high frequency proxy for U.S. house price appreciation has been more volatile than the two other monthly series depicted in the left chart. However, it's been a steady leading indicator, especially around cyclical turning points.

dougie kass

Added to (SPY) at $393.99 (6:59 am)
Dougie

From Marijuana Moment:
Marijuana Banking Sponsors Step Up Reform Push As Industry Holds Over 100 Lobbying Meetings In Congress This Week

Spoos just traded down 20 handles (in the new regime of heightened volatility):

From Liz Ann:

I remain lukewarm on Disney (DIS) (small-sized) and negative on streaming, despite the optimism seen in the business media and from the sell side:

Presenters: Bob Chapek, CEO of Disney, presented at the Communacopia + Technology Conference.

Bottom line: We have three takeaways from the presentation: 1) Disney is so far seeing no indication that the macro environment is impacting its theme parks business; 2) DIS believes the churn implications of its pricing increases will be negligible; 3) Disney still expects to achieve its subscriber and financial targets of 135-165mn core Disney+ subs by F2024 and profitability in DTC by F2024.

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

* Stock futures were mostly higher, following Tuesday's drubbing and Wednesday's modest rally (and late-day recovery).

* Brent crude was modestly lower, -$0.46 to $93.62..

* Gold is down again, -$10.60 -- I still can't work it up to buy.

* Soft commodities showed little price change.

* Bond yields are again slightly higher. The yield on the 10-Year is +3.1 basis points to 3.443%. I added to Treasuries on yield strength all last month.

* With the monumental drop two days ago, the S&P oscillator remains oversold, but less so after yesterday, at -2.08% . 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 higher at the get go.

Brent is -$0.46.

Soft commodities are mixed for the second day in a row.

The 10-Year U.S. Note yield is +3 basis points at 3.43%. I continue to buy Treasuries.

S&P futures peaked at +12 and bottomed at -3. At 5:57 a.m. ET futures were +8 handles.

Nasdaq futures peaked at +44 and bottomed at -18. At 5:58 a.m. ET futures were +13 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:

What To Do After An Historic Drop In Equities? (I thought this was a good read if I don't say so myself!)

The Wild, Wild West

The New(est) Regime of Volatility

Dour Fin Sentiment

I Have Still Cut The Cord on Streaming

Exposure

Tech As In ATMs

The Continued Threat of Market Structure

Here were Wednesday's trades:

* Bought and sold (MSFT) and (QQQ) for nickels and dimes.

* Added to (SPY) at $392 and $391.

* Added to (BAC) , (C) and (WFC) .

Sep 14, 2022 ' 12:50 PM EDT DOUG KASS

Exposure

Getting longer of exposure.

Even the sunshine boys and girls on FIN TV are saddened.

See my opening missive.

This chart is a useful resource for short term traders:

View Chart »View in New Window »

From my friends at Miller Tabak:

Wednesday, September 14, 2022

After the August CPI Report, The Fed Has Only Bad Options

The August CPI report is the most disappointing inflation data of the year. Although August core-CPI inflation (6.8) is lower than May (7.5%) and June (8.4%), those reports were a predictable spike following clear surges in producer inflation and worsening supply chain issues. As a result, we did not raise our estimated peak for the Federal Funds rate from 450-475 bps in either May or June. In contrast, all signs were that supply factors had since improved and we thus expected August core-inflation to come in below 4%.

There are no major macroeconomic factors driving the increase from July to August and we suspect that the jump is partly noise. Two-month averages likely produce a more accurate picture. Core-CPI averaged 8.0% in May-June and has now averaged 5.3% in July-August, a slower improvement than we had hoped for. Furthermore, the August data contain worrying signs that inflation is more entrenched than we previously believed. Two indicators of deeper inflation jumped: trimmed-mean inflation (the middle 84% of price changes) increased from 5.5% to 7.5% (m/m, annualized) in August, while services ex-energy rose from 4.2% to 6.9%.

Figure 1: CPI for Services, Ex-Energy and Trimmed-Mean CPI



This report guarantees a 75 bps rate hike rate at next week's FOMC meeting. We are more interested in where the new Summary of Economic Projections sets the December 2023 Fed Funds rate, a level that should be close to its maximum. We expect the Fed to abandon its unrealistic hopes for an endpoint below 4% and to forecast a 425-450 bps peak. We are also raising our own prediction for the peak Federal Funds Rate to 475-500 bps, a 25 bps increase. We still give the U.S. economy a 60% chance of avoiding recession in 2023.