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DAILY DIARY

Doug Kass

Thank God It's Fr... Oh, Wait...

Is it Friday yet? I have been on an extended research call that continues!
Thanks for reading my Diary.

Enjoy the evening.

Be safe.

Position: None.

Chart of the Day Part Trois: A Bearish Look Back

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Position: None.

A Fed United (but Fallible)

Fed head Neel Kashkari (a non-voter) sits down with the chief economics correspondent for the Wall Street Journal, Nick Timiraos:

"Fed policymakers are united and committed to bringing down inflation; How much we need to do will be determined partly by the supply side."

- Markets are getting the Fed's message; the Fed is moving very aggressively

- There is a risk of overdoing it; there is a lot of tightening in the pipeline

- We need to see progress; we are not seeing it yet

- We need to keep tightening policy until we've seen compelling evidence that underlying inflation has peaked and is heading down; when we get to the right level then we need to sit there and pause

- We will not repeat past mistakes of cutting rates once the economy weakens

- Fed policy stance is tight now; not sure it is tight enough

- Getting a lot of mixed signals right now

Position: None.

Auction (Not Much) Action

Today's 5-year auction (like Monday's 2-year auction) was weak:

* 3 basis points above when issued

* bid to cover (2.27) well below one year average of 2.42.

* dealers took down the third highest percent of the year

Here is a 15 year history of the 5-year U.S. note yield (via Peter Boockvar/Bloomberg):

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Position: None.

SPY Steal

Added to (SPY) at $364.45.

Position: Long SPY; short SPY calls and puts

Yield Up on 10 Year

The 10 year U.S. note yield is +9 bps to 3.97%.

Position: Long TLT Treasuries

Market Breadth, Movers and Heat Map

The internals at 10:52 AM:- NYSE volume 181M shares, 4% above its three-month average;- NASDAQ volume 1.04B shares, 17% below its three-month average;- VIX index -3% at 31.30

Breadth

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% Movers

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Heat Map

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Position: None

Boockvar on Inflation Expectations

From Peter (note the continued drop -- albeit from high levels) in inflationary expectations:

The September Conference Board's index on consumer confidence rose to 108 from 103.6 in August and that was above the estimate of 104.6. Thanks mostly to lower gasoline prices and a still good labor market, this figure is at the best since April. Both the Present Situation and Expectations rose m/o/m. One yr inflation expectations fell to 6.8% from 7%.

Those that said jobs are Plentiful rose 1.8 pts after dropping by 1.6 pts last month. Those that said they are Hard to Get fell .2 pts which is a 5 month low. The employment component improved by .4 pts to match a 5 month high. Of note, those expecting an Increase in Income was up 1.8 pts to the most since November 2021.

Spending intentions were mixed as they rose 1 pt for auto's but fell a touch for homes. Plans for purchases of a major appliance was up 3.5 pts to a 5 month high.

Bottom line, as stated above, the drop in gasoline at the same time the labor market continues to hang in there and wage earners are seeing higher wages all combined for the lift in confidence. It bottomed at 85.7 in April 2020 and stood at 132.6 in February 2020. Thus, we've retraced about half of the covid decline.

Consumer Confidence



One yr Inflation Expectations



New home sales in August totaled 685k annualized, well better than the forecast of 500k and comes after the drop to 532k in July (revised up by 21k). Sales rose in all four main regions. With a slight uptick in homes for sale with the big boost in sales, months' supply fell to 8.1 from 10.4 (long term average is 6). The very volatile median home price was up 8% y/o/y after a jump of 15% in July.

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Bottom line, at the very end of July and into the first few weeks of August, the average 30 yr mortgage rate fell back below 5.50% from about 5.75-5.80% in most of July and almost 6% in mid June. While of course they are back above 6% again now, maybe that slight downtick resulted in more contract signings of new homes in August. Either way, with the mortgage rate now at 6.72% according to Bankrate, the August lift in new home sales is likely fleeting.

New Home Sales



After the negative prints seen in the NY, Philly, and Dallas manufacturing surveys and the +1 for KC, today the Richmond Fed said its regional index was zero but that was better than the estimate of -10. New orders and backlogs were negative for a 6th straight month. Cap ex spending though did rise m/o/m. Employment went to zero from +11 at the same time wages jumped 13 pts (while only one region, confirms what the Conference Board said). Finished goods inventories were still negative but went positive for raw materials. Prices paid and received both moderated again.

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Expectations for Shipments 6 months out rose 3 pts after falling by 5 last month. The other internals were pretty mixed.

Bottom line, as seen so far with the regional manufacturing surveys, we have 3 in contraction and 2 flat lining. When we look at the first 3 quarters of 2022 (after Q3 gets reported next month), that will pretty much sum up the economy in that we are at best flat lining and at worst in a recession.

Richmond Mfr'g

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Position: None

As Bonds Go, So Do Equities

As mentioned yesterday in "What's Bonds Got To Do With It?" I have a bead on fixed income/ (TLT) today.

If we can get a rally in bonds, equities will likely follow.

Position: Long TLT

For Those Who Are Counting

My cost basis on (TLT) buy is $102.18.

Position: Long TLT

Recommended Reading

From Oaktree on the third quarter.

Position: None

More Tech Trades

I've added to Meta (META) , Amazon (AMZN) and Alphabet (GOOGL) on the pullback.

Position: Long META AMZN GOOGL; Short META calls GOOGL calls

The Data Matta

More from my buddy Peter Boockvar: 

Home prices in July according to S&P CoreLogic moderated to a 15.8% y/o/y pace in July from 18.1% in June. That is the slowest rate of gain since April 2021 and assume this slowdown will only continue. The gains were still led by the sunbelt cities, Tampa, Miami, Dallas, Charlotte and Atlanta. Phoenix home prices slowed to a 22.4% y/o/y pace from over 30% just a few months prior. Home price gains were below 10% in Minneapolis and in DC and just above that in San Francisco.

Bottom line, to say again, the only question from here is to what extent do prices come down in some markets and slow the pace of increases in others. For the sake of the first time buyer, that would be a good thing in order to offset the pain of higher mortgage rates.

S&P CoreLogic Home Prices y/o/y

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Core durable goods orders in August rose 1.3% m/o/m, well above the estimate of up .2% and July was revised up by 4 tenths. From July, orders rose for vehicles/parts, computers/electronics, electrical equipment, machinery and primary metals. They fell for fabricated metals. Shipments of core goods, plugged into GDP, was in line with its .3% m/o/m gain and July was revised up by one tenth.

Bottom line, there are so many cross currents here. We have the slowing economy, we have a complete upheaval in the timing of both orders and shipments as companies pulled forward activity as to not to get caught short ahead of the holidays, we've had excessive inventories in some areas of the goods market in things people bought too much of the last few years, we've had stop and start manufacturing activity out of China where many goods and parts are shipped here and we still have logistical challenges in terms of ports even as overall transportation costs have fallen. Lastly, these are nominal numbers and thus can be clipped by inflation. Thus, I can't state here any firm conclusion.

Position: None

Recapping Today's Trades (to This Point at Least)

Added to Delta Air Lines (DAL) , United Airlines (UAL) , Hilton Worldwide (HLT) , Bank of America (BAC) , Citigroup (C) , Wells Fargo (WFC) , JPMorgan Chase (JPM) and PNC (PNC) .

Initiated iShares 20+ Year Treasury Bond ETF (TLT) .

BTW, I'm also adding to TLT under $102 on stronger economic data.

Position: Long DAL UAL HLT BAC C WFC JPM PNC TLT

Going Long TLT

I've gone long iShares 20+ Year Treasury Bond ETF (TLT) at $102.47.

Position: Long TLT

Taking an Axe to FedEx

On FedEx (FDX) : Morgan Stanley big-time cut to $125/share price target. Morgan Stanley stays neutral.

Position: None

My Tweet of the Day (and a Response)

Position: None

Subscriber Comment of the Day (and My Responses)

Masterhedgean hour ago

For those who do this professionally it should be obvious what happened in the final few minutes of trading. when the S&P dropped 20 points. This is how that Chicago/Florida firm does business for itself.

dougie kass Masterhedge24 minutes ago

I may be naive here MH, but I dont buy market conspiracies as I remind Mikey all the time.
Dougie 

badgolfer22 dougie kass11 minutes ago

let me remind you that I worked for 2 brokers for 18 years on the trading desk as a MM. I saw wall st firms, traders, salesmen, analysts et al do sneaky, unethical, borderline crooked or downright illegal sh*t all the time. tape painting was just only one of them, it was common...along with a host of other things to 'move' markets. Maybe you didn't see such stuff from the bank analyst dept, but I assure you I did. 

dougie kass badgolfer22a few seconds ago • edited

The notion that Citadel and others routinely manipulate (entire) markets is a difficult notion for me to accept and I have been on the street for fifty years.

Just my view.

Dougie

Position: None

From the Street of Dreams

From Goldman Sachs (I still prefer my term TATA (treasuries are the alternative) to Goldman Sach's TARA (there are reasonable alternatives).

GOAL Kickstart: From TINA to TARA - tactically more defensive post deeper bond sell-off

26 September 2022 ' 9:16PM BST

Last week several DM central banks strengthened their hawkish stance (Norges Bank, SNB, Riksbank, BoE), including the Fed which indicated a greater willingness to keep hiking amidst a weakening economy if inflation remains high. It resulted in another week of negative performance across assets with bonds and equities selling off together. In addition, the larger-than-expected UK tax cuts triggered a sharp sell-off in gilts (and the pound) and further increased upward pressure on real yields globally.

Rising real yields continue to be a major headwind for valuations across assets - US 12m forward P/Es have moved in tandem with US 10-year TIPS yields and lagged the recent move. Current levels of equity valuations may not fully reflect related risks and might have to decline further to reach a market trough. Since the GFC, TINA (There Is No Alternative) has been a key support for equities - with real yields declining materially, stocks were more attractive vs. fixed income, with relatively high equity risk premia (ERP). Investors are now facing TARA (There Are Reasonable Alternatives) with bonds appearing more attractive - the gap between the S&P 500 FY2 EY and 10-year TIPS yield has moved to the low end of its post-GFC range (Exhibit 2).

Real yields are still rising and tend to peak only when the Fed stops hiking, which is likely to take longer with high and sticky inflation. The 'central bank put' is further 'out of the money' - central banks typically require a much larger 'growth shock' to ease and equity/bond correlations are more positive. Although growth risks have picked up, as indicated by cyclicals vs. defensive performance YTD, the ERP has declined (Exhibit 3). Post the recent bond sell-off our market-implied recession probability has increased again led by flatter yield curves and rising MBS spreads to post-COVID-19 highs and is above 40%, which historically has indicated elevated equity drawdown risk (Exhibit 4).

Our US strategists have downgraded their S&P 500 YE target to 3600 with a hard landing scenario of 3400. Similarly we have downgraded our European targets further alongside earning forecasts, which are now c15% below consensus for 2023. With downward pressure on valuations and negative earnings revisions likely into year-end (Exhibit 5), we downgrade equities to UW over 3-month. This is also consistent with our findings that equities tend to suffer in the last phase of a hiking cycle i.e. 3 to 6 months before the peak in US 2-year yields. We upgrade credit to N over 3-month but maintain an 'up in quality' bias: IG credit yields look attractive both in absolute terms and relative to equities - the ERP is relatively low vs. credit spreads (Exhibit 6). With 1-year rates globally set to move close to the pre-GFC levels we remain OW cash for 3 and 12 months. And in our recent Global Strategy Paper: Balanced Bear Despair - Part 4, we recommend several risk mitigation strategies for multi-asset portfolios to maintain equity allocations or re-risk as drawdown risk remains elevated.

Position: None

Premarket Movers

Upside:
- (EQ) +27% (releases positive interim results from Equalise study in subjects with lupus nephritis)
- (AYLA) +24% (announces Fast Track Designation Granted by US Food and Drug Administraiton for AL102 in progressing desmoid tumors)
- (NMTR) +21% (reports positive final results from Phase 2 trial of vurolenatide in short bowel syndrome and successful end-of-Phase 2 meeting with US FDA)
- (AQST) +20% (announces Positive Epiphast II Trial Data for AQST-109 when compared to EpiPen)
- (OCUL) +15% (interim 7-month data from US Phase 1 clinical trial of OTX-TKI for treatment of wet AMD demonstrate 80% of subjects were rescue-free up to 6 months)
- (CHG) +11% (earnings)
- (NLS) +8.4% (hires adviser to launch strategic review, which may include a potential sale)
- (EVEX) +6.8% (BLADE India signs a purchase order for up to 200 of Eve's eVTOL)
- (COIN) +6.0% (US Fed Chief Powell speaks on crypto at conference)
- (LBAI) +6.0% (to combine with Provident Financial Services in all-stock deal valued at $1.3 billion)
- (PLD) +4.7% (names Global Head of Deployment Dan Letter as president and CIO)
- (H) +3.8% (Evercore ISI Institutional Equities Raised H to Outperform from In Line, price target: $100)
- (VLDR) +3.8% (signs multiyear agreement with Stanley Robotics for an automated valet parking solution)
- (BLDE) +3.4% (BLADE India signs a purchase order for up to 200 of Eve's eVTOL)
- (JBL) +3.3% (earnings, guidance; announces $1 billion share buyback)
- (EMR) +3.0% (sells Russia business, equal to1.5% of total fiscal 2021 sales, to local management; no terms disclosed)
- (HTZ) +3.0% (Hertz and bp pulse plan to install a national network of EV charging solutions for Hertz and its customers in North America)
- (SNOW) +2.8% (Needham initiates coverage with Buy)
- (UNFI) +2.8% (earnings, guidance; announces $200M share buyback)
- (HOG) +2.6% (Harley-Davidson, LiveWire and AEA-Bridges Impact Corp. announce closing of business combination)
- (NKLA) +2.6% (announces extension of exchange offer to acquire Romeo Power common stock)
- (RCL) +2.3% (UBS reiterates RCL with Buy, price target: $65)
- (GRAB) +1.8% (Singapore Investor Day guidance)

Downside:

- (RNA) -24% (FDA places partial clinical hold on new participant enrollment in AOC 1001 Phase 1/2 MARINA trial in adults with myotonic dystrophy type 1 (DM1)
- (XCUR) -5.3% (enters into definitive agreement with CBI USA, Inc. for $5.4 million equity financing; to implement strategic measure to cut cash burn and prioritize strategic alternatives, cut workforce by 66%)
- (FERG) -3.2% (earnings, guidance)
- (NSC) -1.5% (UBS cuts NSC to Neutral from Buy)

Position: Short RCL

2 Casino Upgrades

Jeffries upgrades Wynn Resorts (WYNN) and Las Vegas Sands (LVS) this morning.

Be careful as both gapped higher on Monday.

Position: None

The Book of Boockvar

My pal Peter Boockvar, chief investment officer with Bleakley Advisory Group, on the imminent slowdown in economic growth: 

At least from a very short term perspective, the Daily Sentiment Index data has reached big extremes. The DSI for the SPX and Nasdaq is down to just 5 (0-100 range). The Dollar index is up to 97 bullish and at 7 for bonds. In other words, the rubberband has been stretched pretty tight so that is the set up for today's bounce in stocks and bonds around the world and reversal in the dollar. Emphasis here on 'short term.'

In the UK in particular, the 2 yr yield is down by 24 bps after spiking by 124 bps in the prior 5 trading days. The 10 yr yield is lower by a more modest 8 bps after jumping by 111 bps since last Monday. The pound is bouncing by 1.1% after the puke the last few days. I do think the pound is a buy here but in no way imply that the worst is over.

Chicago Fed president Charlie Evans does vote next year, he's a known uber dove who wanted higher inflation when it was low and he was interviewed on CNBC Europe this morning. He expressed the first hint, albeit a modest one, that at least one member of the Fed is aware of the risks of going really fast with rate hikes. "Well, I am a little nervous about exactly that" he said in terms of the lags of what they are doing. But, it's not going to stop more hikes from here as he also said that he see's the Fed hiking until March and then taking a time out but didn't reveal where that end rate would be. He did though imply 4.25-4.5% which is where the Fed dot plot is by yr end and not far from where the fed funds futures are priced for March 2023. He also said if inflation starts to really recede by then, they can start cutting rates next year.

Not all of his colleagues are on board with that last point though as many want to keep rates elevated for a period of time after they stop hiking. Mester yesterday said that policy "will need to be in a restrictive stance, with real interest rates moving into positive territory and remaining there for some time."

Here were some quotes from yesterday's Dallas manufacturing index for September that declined to -17.2 from -12.9 and was worse than the estimate of -9

Primary Metals Mfr'g:

"Our order rate has decreased over the past month. We are only working four days on some of our equipment."

"We see the general economic situation worsening, but our customers are still buying because the oil industry is still making money and they see a bright future even though they will not talk about it."

"We are living in Alice in Wonderland...it just gets worser and worser."

"Our company has been extremely fortunate to have developed a strong presence in the medical market, which is doing very well at the present time. However, our business in the elecronics market is starting to contract."

Computer and Electronic Product Mfr'g:

"We still have issued with items needed to produce, and lead time issues with processors and aluminum. It is causing a cash crunch."

"The personal electronics market shows signs of weakness and is expected to weaken further. Other markets, especially auto's, remain strong. Inventory builds are reported throughout all channels."

Transportation Equipment Mfr'g:

"There is no optimism in the most positive outlook. Interest rate hikes will hit our industry hard. Poor federal policies and spending are just more economic piling on."

Furniture and Related Product Mfr'g:

"We are beginning to see a slowdown in requests for bids on projects."

Textile Product Mills:

"Sales have started to slow this summer, as has our general outlook on business over the short and long term. Inflation and general uncertainty seem high with customers; as a luxury product producer, we expect sales to fall as customers cut discretionary spending."

Printing and Related Product Mfr'g:

"We continue to be very busy; however, it feels like things are starting to slow down some, and I believe we will be slower in the coming months than we have been."

Position: None

I'm a Travelin' Man

I neglected to mention that I purchased small initial positions in Delta Air Lines (DAL) , United Airlines (UAL) and Hilton Worldwide (HLT) on Monday afternoon. 

My comment from yesterday:

Sep 26, 2022 ' 02:07 PM EDT DOUG KASS

Remember the 'Great Reopening'?

Remember the excitement for travel ( (DAL) and (UAL) ), entertainment ( (LYV) ) and lodging ( (HLT) ) stocks earlier this year as the impact of Covid was waning?

Well, look at these stocks.

I have been doing a lot of research in the last week for the purpose of culling out some opportunities.

Position: Long DAL UAL HLT

Tweet of the Day (Part Trois)

Position: None

Chart of the Day (Part Deux)

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Position: None

Tweet of the Day (Part Deux)

Position: None

Themes and Sectors

This table is a rich resource for short-term traders:

Themes and Sectors

View Chart »View in New Window »

Position: None

Chart of the Day

Peak tightening of financial conditions (gone parabolic)?

FINANCIAL CONDITIONS CONTINUE TO TIGHTEN, APPROACHING MULTI-YR HIGHS

US FINANCIAL CONDITIONS vs. 30Y FIXED MTGE RATE

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Position: None

More Night Moves: A Quick Look at Overnight Futures

* The unprecedented instability of currencies and interest rates have underscored the likely end of the salad days of easy financial conditions and hold the key to the prospective course of global equity markets during both the overnight/morning and regular trading sessions.

* Crashing non-U.S. currencies and rapidly rising worldwide bond yields -- the byproduct of ill-timed (2021-22) and now hawkish monetary policy (and what appear to be related reverse currency wars) -- are moving multiple standard deviations from the mean.

* Investor sentiment is sour. Previous bullish strategists (Goldman and others) are now confidently bearish, bulls are now talking about limited downside (and not so much about the upside), put buying set a record on Friday, AAII Bears are at March 2009 levels and last night the S&P oscillator dropped dramatically to -13.81 vs. -10.66% the day before and about -2.50% for most of the previous week. This is a deep oversold.

* Goodbye TINA, hello TATA ("Treasuries Are The Alternative"): I believe the bond rout is creating an opportunity in both fixed income and, in the fullness of times, in equities.

* The yield on the U.S. 2-Year Note is lower by five basis points overnight after having advanced for 13 consecutive sessions.

* While market inflation data has noticeably moderated (softening labor and commodities) in recent months, this morning soft commodities and energy product prices are broadly higher (lessened recession fears?).

* Stock futures have responded in kind (higher) -- as we suggested in our columns yesterday afternoon.


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

- Bob Seger, "Night Moves"

Brent oil is +$1.56.

Soft commodities are broadly higher -- oddly this might be a positive for stocks this time (as recessionary fears may be abating).

S&P futures initially bolted higher, stabilized, ripped to +57 and have settled down to about half that rise at 6 a.m.


Going forward, during these volatile markets, I will now keep a bead on volatility (as well as currency rates). This morning VIX is -$1.07 to $31.19 (yesterday at this time VIX was a disturbingly +$2.74 to $32.66).

Gold, which collapsed last week and early this week, has rallied (weakly) and is now +$8.60. I still can't work it up to buy precious metals.

We are seeing stabilization in non-U.S. currencies this morning.

Bond yields continue to represent the greatest risk to equities, and with rates spiraling ahead equities grow harder to value. Bond yields (the equity market's nemesis) are likely responsible for a portion of the market's drubbing recently, and are ever higher. However, for the first time in nearly three weeks the yield on the 10-Year is lower this morning -- down by six basis points to 3.82%. I added to Treasuries on yield strength and price weakness yesterday.

The S&P oscillator gapped higher (more negative) on Wednesday (finally breaking out of a range) and Friday's close moved to an even more oversold level -- at -10.66%. This morning the oscillator is at a huge oversold at -13.81%. The oscillator has been a good short-term trading tool over the last few months! While I am still at only 20% net long, the oversold and other factors have me leaning to add -- but I was demonstrably slow in doing that over the last two days given the unprecedented currency and rate movement. This may change soon if the rate rise abates!

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.

S&P futures peaked at +55 and bottomed at -7. At 6:37 a.m. ET futures were +39 handles.

Nasdaq futures peaked at +194 and bottomed at -19. At 6:38 a.m. ET futures were +175 handles.

Here is a synopsis to some of my columns I believe were important, or in the event you were out yesterday. The principal intent is to review the logic of my market moves and other factors:

Sterling Watch

Before We See Stocks Stabilize We Must See Bonds Stabilize

Remember the Great Opening, Its Not So Great Anymore 

What's Bonds Got To Do With It? (Move over Tina Turner!)

Ten Chart Monday From Charlie 

Here were Monday's trades (I was an active buyer):

* Sep 26, 2022 ' 09:43 AM EDT DOUG KASS

I Am a Busy Trading Boy!

I am trading too actively to do a thorough opener today, so I will do one Tuesday!

Here are today's trades so far:

Added to AdvisorShares Pure US Cannabis ETF (MSOS) , SPDR S&P 500 ETF (SPY) , Invesco QQQ Trust (QQQ) , Meta Platforms (META) , Amazon (AMZN) , Microsoft (MSFT) and Disney (DIS) .

* I initiated a position long (XLF) (financials).

* Added to banks across the board.

* Sep 26, 2022 ' 01:13 PM EDT DOUG KASS

Digging Into the Treasury Chest

Buying more short-dated Treasuries as yields go parabolic.

Position: Long SPY, MSOS, QQQ, META, AMZN, MSFT, DIS, XLF; Short SPY calls and puts, META calls, MSFT calls

Tweet of the Day

Position: None
Doug Kass - Watchlist (Longs)
ContributorSymbolInitial DateReturn
Doug KassVKTX4/2/24-35.66%
Doug KassOXY12/6/23-16.42%
Doug KassCVX12/6/23+8.55%
Doug KassXOM12/6/23+10.96%
Doug KassMSOS11/1/23-29.53%
Doug KassJOE9/19/23-18.03%
Doug KassOXY9/19/23-27.61%
Doug KassELAN3/22/23+28.72%
Doug KassVTV10/20/20+62.60%
Doug KassVBR10/20/20+74.40%