* The decline in the averages understated the broad market weakness...

I just got the breadth (biggest movers, heat map) data and I wanted to deliver it:

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The weakness that followed the (positive) breadth thrusts from last Monday and Tuesday continued.

As mentioned earlier, the rise in global rates (the U.S. bond market was closed) seem to be the reason for generally lower share prices. (High growth - (SNOW) , (CRM) , (NVDA) etc. -- was the most penalized sector, given their long "duration.")

I will have more to say about the markets in my opener tomorrow.

But I would end by writing that it seems that many are growing more confident about the dark side. (Price has a way of changing sentiment! h/t The Divine Ms M)

I added slightly to my net long exposure today -- which stands at about 35%.

Thanks for reading my Diary today.

Enjoy the evening.

Be safe.

None

Like Fed Governor Loretta Meister, Lael Brainard is another academician that sits on the Federal Reserve Board of Governors. 

Her somewhat dovish comments have helped to stabilize the markets. 

I was going to start this post with a quote from the movie, Clueless - but that would be too mean.

Added across the board to banks - in front of EPS releases that commence on Friday.

The reason for the market ramp was a report that the Russians may be open to diplomacy. 

The only thing I am sure of is that we are in a continued regime of heightened volatility.

Looks like a sprain for Daisy - who is resting and on medication!

I have added to (SPY) ($359.14) and (QQQ) ($265.15).

It is my view that the market action over the last week has cast a major blow to investor sentiment. 

My guess is that the surveys, oscillators, etc., will be taken to even more oversold in the time ahead.

Again for emphasis. 

The proximate cause for the weakness in equities today is the steady rise in global interest rates. 

As an example, the two year UK note yield is +28 bps today.

My pal, Sunburn's Brady Cobb, talking weed on Fox Business this morning.

I am a bit surprised that when discussing the weakness in tech shares, the "talking heads" did not comment on the two most important contributing factors:

1. The recent rise in global interest rates which hurts growth/tech stocks as future profits are discounted back by a higher risk free rate of return

2. The numerous tech profit warnings (slowing demand/currency headwinds) and cost cutting measures announced, leading to hiring freezes across the board.

One of my dogs has a limp that I have to address with my Vet - should be back in an hour or so.

I have sold my stake in FibroGen (FGEN) based on three factors: 

* The shares have held up well in the Bear Market of 2022.

* I see no near term share price catalyst.

* The market's general drop has generated more attractive longs based on reward vs. risk than FGEN. 

I would observe that the spike in non-US bond yields is likely responsible for weakness in US equities this morning.

I added to Amazon (AMZN) at $114.88.

* President Biden's Thursday announcement to take the first step towards decriminalizing cannabis, materially derisks cannabis stocks, sets the stage for institutional investment and suggests that we have entered a secular bull market for cannabis equities

* Extraordinarily low valuations, high growth and new end market opportunities coupled with the emergence of a more salutary regulatory climate are likely to result in a virtuous cycle for cannabis stocks

* I know of no individual market sector that possesses as favorable a multi-year reward vs. risk ratio as cannabis

"So (legalizing marijuana) means a lot more to me than just being able to smoke a joint without being arrested."

- Tommy Chong, Up In Smoke

Cannabis is illegal on the federal level and is a Schedule I drug. 

As a result, institutional investors have been essentially barred from investing in the space as the major Exchanges can not list cannabis stocks. Custody issues have only exacerbated and complicated this predicament. So, with most cannabis stocks held almost entirely by retail accounts (in a sense cannabis is the most under owned market sector extant), liquidity has been limited and heightened volatility has been an ongoing and distinguishing feature of cannabis trading activity. 

These factors have provided an inherently unstable situation and weak group to invest in - which has only gotten worse in the risk- off Bear Market of 2022.

Despite near unbearable regulatory, economic and market headwinds, retail cannabis sales have still tripled to nearly $27.5 billion since 2018. By the end of this decade, recreational cannabis sales could triple again. 

Notwithstanding the industry's numerous structural challenges, it has been my past view that the cannabis space with its modest valuations relative to prospective and superior growth, possessed an attractive upside reward vs. downside risk. 

The Biden Pivot Provides a Powerful Catalyst for Cannabis Equities

"To be in a situation where you have no rights whatsoever is something I wish everybody could experience. People's attitudes would change. It would be a better place."

- Tommy Chong 

But I don't want to bury the lede. 

President Biden's federal pardons and intention to review cannabis scheduling under the Controlled Substances Act (CSA) announced late last week mark a fundamental and transformative policy shift. Structural industry challenges will now likely be quickly addressed, providing a pathway for a banking bill - resulting in fairer tax treatment, up listings, access to capital markets, resolution of custody problems and, in turn, institutional participation in the sector. 

Biden's Pivot on cannabis and his stated intentions are consequential catalysts for cannabis equities - likely setting the stage for a secular and potentially dramatic bull market in cannabis equities. 

In fact, I know of no other market sector that has the potential upside relative to the downside that cannabis stocks now possess. 

While my price forecast may sound outlandish and hyperbolic, I expect, and I don't write this lightly, that cannabis stocks could easily triple over the next several years. 

The Very Bullish Investment Case

"Hey! Double bubble! Come on, I'll give you a ride."

- Pedro de Pacas, Up In Smoke

President Biden's announcement on Thursday to pardon all prior Federal convictions for simple possession of marijuana (distribution and trafficking is not pardoned) and to ask the Department of Justice (DOJ) and the U.S. Department of Health and Human Services (HHS) to begin the process of reviewing the inclusion of cannabis on Schedule 1 of the Controlled Substances Act are the first steps towards decriminalizing, rescheduling/descheduling and/or the removal of cannabis from the CSA:

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The President's move has provided a critical pivot point and catalyst upon which the future for cannabis stocks has materially brightened:

President Biden's decision is likely to pull forward the cannabis sector's performance in the months and years ahead: 

* The rescheduling of cannabis has broad and beneficial economic, financial and investment ramifications by redressing structural industry challenges/headwinds relating to access to banking, tax treatment and participation in the capital markets. 

* By pardoning federal offenders, and erasing the need for Democrats to pack justice and equality provisions into a SAFE Banking bill, SAFE appears likely to be ratified in the Lame Duck session (November- January) - paving the way for cannabis industry access to the banking system:

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* A rescheduling beneath Schedule II or removal from CSA would result in a marked reduction in tax rates (with 280e tax provisions - non deductibility of normal operating expenses) being eliminated (see chart below) and a lower cost of capital - leading to vast improvement in profitability, cash flows and valuations:

Source: Echelon

* Exchange up listings and capital markets participation likely lie ahead. 

* In turn, brokerage and custody issues are likely to be resolved. 

* With up listings probable and custody issues remedied, hurdles to institutional ownership, which is non existent today, are removed. 

* Consumer packaged goods companies will probably move ahead with plans to invest in individual cannabis companies. In order to get scale, benefit from expanding state-wide moats and "move the needle," the largest MSOSs will be their targets. 

I Have Been Growing More Optimistic On Cannabis Since August

* Based on lower share prices, deteriorating investor sentiment, likely regulatory relief and still attractive intermediate-term prospects

"Cash combined with courage in a time of crisis is priceless."

- Warren Buffett 

Let's review my recent cannabis industry observations and analysis: 

- Six weeks ago I summarized why the group had increased investment merit and provided a list of reasons why I planned to increase my cannabis industry weighting

Aug 23, 2022 ' 12:15 PM EDT DOUG KASS

Why I Plan to Substantially Raise My Cannabis Holdings

* Let's get Chai!

I plan to substantially raise my cannabis holdings in the days ahead.

The reasons are multiple:

* Price to sales ratios have gradually dropped from over 4x-5x to between 1x-2x as analysts. holders and management have become more realistic in their industry growth expectations.

* State by state legislation continues apace.

* As the larger multi state operators, with reasonable balance sheets, enter new states, they are establishing deeper competitive moats against poorly financed competitors.

* With a growing number of states permitting recreational use of cannabis it seems to me that federal legislation is inevitable.

* With an increased and improving probability of federal legislation, SAFE banking - up listing, Et al. - also seems likely.

* Along with SAFE will be an alleviation of custody issues which have prevented "plain vanilla" institutions from owning cannabis equities.

* Sentiment could not be worse after -75%+ drawdowns over the last two years.

* According to my calculus, and at current levels, the upside reward is compelling and dwarfs the downside risk.

* As previously noted, a naked shorting ban in Canadian listed stocks was instituted last week.

* ETFMG Alternative Harvest ETF (MJ) will begin including U.S. MSOs next week.

- I continued to add into last month's weakness:

Sep 07, 2022 ' 03:45 PM EDT DOUG KASS

Still Chai

"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.

- Two weeks ago, a number of sell-siders and industry fan boys "gave up" and I tweeted:

Dougie Kass

@DougKass

Real irony is that some of the most audacious bulls on cannabis are now pulling back. Which is likely what is needed to bottom out and stabilize the space. I am buying more aggressively as reward v risk grows more compelling

Stifel Summarizes The Bull Case

In the research note below, Stifel explains why they are of the view that cannabis stocks "could rise 3x in the near term":

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Bottom Line

The Biden Pivot on marijuana likely sets the stage for a secular and potentially dramatic bull market in cannabis equities. 

I know of no other market sector that has the potential upside/downside ratio that cannabis stocks now possess.

As we prepare for earnings, I'll repeat here what I said about banks a few weeks ago. Yes, focus on loan loss reserves, loan growth, etc... but I also want to hear about what they are saying about the loss of deposits to higher yielding money market funds (reflected in the continued massive daily use of the Fed's reverse repo facility) and other higher yielding options.

When are we going to start to see higher deposit rates to slow this trend down? I ask this because bank reserves are falling rapidly which both limits the banks ability to lend and means that there is little chance the Fed gets away with as much QT as they hope for. Remember it was the drop in reserves that reached a tipping point that led to the spike in repo rates in late 2019 that drove the Fed to do more QE.

Also of huge importance, and part of the loss of deposits, is what is going on with their holdings of US Treasuries and agency MBS. They are shrinking as a result and at the same time the Fed is doing QT. So the US Treasury market is losing these two buyers. They are also losing foreign buyers (ex hedge funds parked in the Cayman Islands), especially those who are trying to slow the pace or reverse their currency devaluation.

All this at the same time US debts are exploding higher and the budget deficit is about to as tax receipts are at major risk if economic growth continues to slow. As I said on the day the BoE intervened to bailout the pension fund industry and their use of liability driven investments, that bond market hissy fit could be coming to a US theater near you.

Aware of the risks but showing no interest in acting like the BoE was Governor Waller as expressed in his speech last week. He said, "In considering what might happen to alter my expectations about the path of policy, I've read some speculation recently that financial stability concerns could possibly lead the FOMC to slow rate increases or halt them earlier than expected.

Let me be clear that this is not something I'm considering or believe to be a very likely development. I am a little confused about this speculation. While there has been some increased volatility and liquidity strains in financial markets lately, overall, I believe markets are operating effectively...Functioning in the Treasury, equity and commodity markets remains orderly."

If there were to be market trouble, he expressed his confidence in the Fed's swap lines and standing repo facility and "Along with the improved regulatory framework, I believe we have tools in place to address any financial stability concerns and should not be looking to monetary policy for this purpose. The focus of monetary policy needs to be fighting inflation."

The dangerous assumption that he is making is that somehow the US Treasury will ultimately find buyers to take the place of the Fed, foreigners and the banks where the first two are outright selling and the latter continues to buy less as already stated.

US Commercial Bank Holdings of Treasuries and Agency MBS

US Treasury Securities held in custody for Foreign Accounts

As I went thru a bunch of weekend reading, I saw the front page of one of my recent issues of Bloomberg BusinessWeek. This was the cover:

It reminded me of this cover from The Economist in December 2016 right before the US dollar lost 14% of its value over the following 14 months.

Which also gave me flashbacks to this cover in April 2019 not long before you know what:

So let's just say that the new magazine cover is the precursor to notable dollar weakness after an incredible run, what are some of the catalysts that can result in it? I will list a few with the first one being something not many are focused on and that is the direction from here of the US budget deficit as a % of GDP. See the chart below the longer term relationship. Secondly of course is when we near the end of Fed tightening which we're getting closer to. Lastly, it could be an accident in the US Treasury market where foreign selling picks up steam at the same time it has lost the other buyers I've mentioned.

I just look at the impressive performances of the Mexican Peso and the Brazilian Real over the past two years with the help of their aggressive central banks in raising interest rates (the Brazilian central bank started hiking in March 2021 and the Mexican central bank in June 2021) and higher commodity prices to tell me that the US dollar strength has mostly been a plain old interest rate differential thing, helped by the Fed's also aggressive campaign in raising rates.

US Budget Deficit as % of GDP in white, DXY in orange

Shifting back to earnings, the Weekend FT took some stats from FactSet and said "Analysts expect companies listed on the S&P 500 to post earnings per share growth of 2.6% in the July to September quarter compared with the same period a year earlier, according to FactSet data. That has fallen from 9.8% at the start of July, and would mark the weakest quarter since the July to September period in 2020."

Below is a chart of the trajectory of EPS for the S&P 500 according to Bloomberg since 2021:

A big swing factor will be profit margins as you've heard me say many times and I will express again my worries about them in that two of the biggest factors that drove its acceleration over the last decade were modest labor costs and low interest expense. While the latter is fixed for many, there is still an enormous amount of floating rate debt that has reset sharply higher. With respect to the former, consistent 5% type wage inflation is DOUBLE the 20 yr pace leading into Covid. Add in the US dollar strength as another headwind for the big multinationals, to now state the obvious.

One last thing on wages and the labor shortages that companies in service industries are still experiencing. While this is nothing new, after conversations I've had with friends recently that run different service businesses, particularly on the restaurant side, the higher wages that Amazon, Costco, Walmart, Target, Chipotle, etc... now pay their workers with a variety of other benefits, have made it hugely more difficult for small and medium sized businesses to compete and thus, a labor shortage for pockets of the marketplace.

The September private sector weighted China Caixin services index was a big miss relative to expectations. It came in at 49.3 vs 55 in August and well below the estimate of 54.4. Not surprisingly Caixin is blaming Covid "as firms noted disruption to operations and restrictions on travel. New business also declined for the first time in four months, albeit modestly, despite a slight improvement in foreign demand." Business optimism about the coming year fell to the lowest since March.

From Toddo on breadth reversal:

From Wally:

From JPMorgan: 

• CASE FOR 3300: to reach this level in October, think you need a combination of a materially higher CPI print, poor earnings, and an exogenous shock to oil prices. CPI scenario analysis is below but with earnings we likely need to see the Banks miss expectations and guide lower with a cautious view on the consumer and perhaps mention contagion risks created by financial conditions and/or the UK. For oil prices, this could be as simple as Russia retaliating to price caps and cutting supply by 3mm - 5mm bbl/day.

• CASE FOR 4000: to get here this month, think you need to see CPI print dovishly with upside earnings surprises from Financials and Consumers. Here, the magnitude of the CPI print matters. 4000 is ~9.5% away, could we get there in one? If we see CPI print ~6.0%, we could; however, that is very unlikely. I think anything under 7.8% is enough to trigger a move towards 4000 as it would likely be interpreted as official inflation measures catching up to some of the higher frequency measures and setting the stage for more dovish surprises. Further, you could see the bond market begin to remove its 2023 rate hike.

From Twitter

This chart is a good resource for short term traders:

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Bramo on foreign exchange's (dollar strength) drain on corporate profits , something I have been concerned about over the last 45 days. 

More in my opener:

Coming Up in My Opening Missive: The Biden Pivot - Cannabis Equities May Be Poised to Triple By 2025.

I think it is a good read. (still writing it!)

From Doomberg: "Last In Line."

* Following Friday's massive selloff, stock futures had some follow through to the downside in the overnight session.

* Futures have rallied from the evening lows - but still lower from Friday's close.

* The resumption of the market's downturn which began last Wednesday, looks like it may continue in the early going.

* Overnight, non-U.S. currencies, including the Eurodollar, were modestly lower against the U.S. dollar. The U.S. dollar was trading at 1344, or 0.22%.

* Investor sentiment remains 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 two weeks ago Friday, Several other bullish strategists have recently gave up on a Bull. Pessimism continues to permeate the business media. AAII Bears are at March 2009 levels and the S&P oscillator, while growing less negative, remains oversold... but sentiment is not a good timing tool.

* Goodbye TINA, hello TATA ("Treasuries Are The Alternative"): I believe the bond rout continues to create an opportunity in both fixed income and, in the fullness of times, in equities. Depending on one's risk profile, short-dated Treasuries are a reasonable place to be.

* All roads lead to yields! The yield on the U.S. 2-Year Note is higher by sixbasis points overnight after having advanced for 16/20 consecutive sessions. The yield on the 10-Year is also +6 bps... the yield is now at 3.888%, and down from 4.04% about 12 days ago. I am still long TLT.

* Market inflation data has noticeably moderated, softening labor and commodities, in recent months. However, this morning soft commodities are strong higher (wheat, corn, soybeans, copper, etc.), though energy product prices are -$0.80 after recent increases following proposed production cuts. But, for now the market is not focused on these factors and more focused on currencies and global bond yields.

"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"

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

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 are modestly lower (they were much worse at dinner time on Sunday).

In recent weeks, during these volatile markets, I have kept a bead on volatility as well as currency rates. This morning VIX is +1.59 to 32.95, substantially higher from last Wednesday.

Gold, which has collapsed in recent weeks, dropped again (despite nuclear concerns and Russia's retaliation over the weekend) and is down by another -$18/oz.

Brent oil is  $-0.78 to $97.14.

Bond yields continue to represent the greatest risk and opportunity to equities, and with rates spiraling ahead equities grew harder to value in recent months. Bond yields, the equity market's nemesis, are likely responsible for a large portion of the market's drubbing recently. However, yields have begun to trend lower on Monday and again overnight.

The S&P oscillator has slipped to -3.28%. It was -13.81% (more negative) on Monday, September 26. The oscillator has been a good short-term trading tool over the last few months!

Cryptocurrencies are again, lower (-1%). I continue to have zero interest in the asset class. Bitcoin is at $19,280.

S&P futures peaked at -4 and bottomed at -34. At 5:36 a.m. ET futures were -14 handles.

Nasdaq futures peaked at -8 and bottomed at -118. At 5:38 a.m. ET futures were -62 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:

I did not write on Friday as I was out of the office

Here were Friday's trades:

* I did not trade on Friday as I was out of the office.

* I added to (SPY) ($360.69), (QQQ) ($267.13) and I am adding to (JPM) ($105.40) in premarket trading, early Monday morning.

UBS cuts both (F) ("everyone's" favorite EV value play) and (GM) this morning. I should never had covered my auto shorts in August! 

GM price target goes from $56 to $38, while F price target drops from $13 to $10.