DAILY DIARY
Bye ... For Now ...
I am calling it a day and a week.
As always thanks for giving me this platform to discuss my ideas.
Enjoy the weekend.
Be safe.
Office Space
Speaking of commercial real estate here is a sampling of the stocks:
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Commercial Real Estate Exposure
I spent nearly all morning trying to get a fix on the banking industry's exposure to the commercial real estate markets in the U.S. -- something I have been concerned about for some time. (Note: Vornado (VNO) made a 52-week low this morning)
Yesterday I discussed three factors ( (CRE) exposure was one of the items!) that are weighing on bank stocks: Based on these discussions, I am increasingly concerned about CRE credits.
Mar 02, 2023 ' 02:50 PM EST DOUG KASS
Why Banks May Be Weak
There have been a bunch of useless conversations (without any information) about financial stock weakness in the business media today.
My two bits: I suspect it might be a combination of Blackstone (BX) /Commercial Real Estate headlines, fears going into next week's conferences and updates (funding beta concerns) and the Silvergate (SI) fiasco (which could make regulators get more aggressive).
As mentioned earlier, I reduced my (XLF) position from medium sized to small and pared back some of my remaining individual bank holdings.
I just eliminated XLF at $35.83.
Back in the Straddle
I am putting on a May-June (SPY) $400 put/call straddle now.
About Dry Tinder
Dry tinder is receptive to being lit.
Yesterday, Bostic's comments were merely a match for that tinder. It could have been a favorable data point indicating a cooling economy.
But basically, the market momentum persisted until it didn't.
And 0DTE options are probably a bit of an accelerant.
That said, with the S&P at 4015 (+32 handles today), risk is again beginning to dwarf reward.
At over a 3-1 ratio and with the availability of almost 5.2% on a one-year Treasury bill, equities are unappealing to this observer.
Reducing Live Nation
With sales above $73 I have reduced Live Nation (LYV) position from medium to small in size
Trimming Wells Fargo, Too
I have moved from medium in size to small in Wells Fargo (WFC) .
Banking Some Nice Bank Profits
I have reduced my Bank of New York Mellon (BK) long to small after a great run to almost a 52-week high, vastly outperforming its peers.
The Book of Boockvar
My pal Peter Boockvar, chief investment officer with Bleakley Advisory Group, writes how recent pay hikes are good for employees but not so much for profit margins, plus other stuff:
On the debate over wage growth, in case you didn't see the news this week, a few days ago Delta's pilots secured a 34% pay increase over a 4 yr time frame. There will be an 18% immediate pay raise retroactive to the beginning of the year which will be followed by a 5% increase next year and then 4% raises in the two years after. In the last deal struck in December 2016 totaled 30% over a 4 yr period. Delta has about 15,000 pilots and for any other airline labor deal coming due soon, American does, this will of course set the bar. Good for employees, not good for corporate profit margins.
I forgot to mention the results of February vehicle sales on Wednesday as they totaled 14.89mm at a SAAR. That was above the estimate of 14.68mm and compares with 14.07mm in February 2022 but down from 15.74mm in January and vs 16.83mm in February 2020.
I cannot emphasize enough that while used car prices have cooled a bunch after the historic rise, the supply of new cars over the past 3 years has been so muted that used car prices are going to stay very elevated for a few more years to come. In the 3 years leading into covid, the SAAR averaged 16mm new vehicles (both retail and fleet). In the 3 years since, the average has been 14.3mm. So, we're talking about 5mm less cars sold than otherwise. And now we have record high new car prices at the same time the affordability challenge is only growing with stress now being seen at the subprime level. This said on new cars, if inventory levels continue to improve, more cars won't be selling above MSRP but we also know car companies aren't intent on going back to pre covid levels of days of inventory.
This is a stagflationary set up as it is in housing, still elevated pricing that slows the number of purchases. With housing, little inventory of existing homes could result in only modest declines in pricing in many markets that are not dealing with excessive new builds. This leads to a sharp drop in the pace of transactions with little movement on price. Now some markets where new construction has been more vibrant, the price adjustment will be more pronounced but only in those markets.
Quietly yesterday the 5 yr TIPS inflation breakeven rose another 6 bps to 2.73%, the highest since last August. The 2 yr breakeven rose to the most since last June at 3.31%. I'll repeat my belief again that after the downside of the inflation spike settles out, the sustainable 1-2% inflation dream won't be realized for a while and the reality of 3-4% will be most likely. Sticky inflation is ALWAYS evident with services but now will be more so with goods.
China's reopening helped to lift the February Caixin services PMI which rose to 55 from 52.9. Caixin said "Companies frequently mentioned that the easing of pandemic related restrictions, and reduced disruption to operations, had helped to lift activity and demand in the latest survey period."
Just imagine how brutal of a period it was to run a local restaurant for example where at any point over the past 3 years you had to shut down for a month here, a month there and not have any warning too beforehand. Caixin also said, "The improvement in market conditions and rising new order intakes prompted firms to take on additional workers for the first time in four months."
Hong Kong's PMI was up 2.7 pts m/o/m to 53.9, the highest since May 2022. Singapore's though dipped below 50 at 49.6 from 51.2.
India's services services PMI was up to 59.4 from 57.2. India remains the most exciting EM story out there I still believe and we own Indian stocks.
With respect to the global bond markets, it very well could be the the CPI figures out of Japan is now more important than that seen in the US and Europe because we already know what the Fed and ECB are going to do but much less so with the BoJ and its new governor. The February Tokyo CPI figure rose 3.4% y/o/y headline, down from 4.4% in the month before but helped by energy subsidies. So the BoJ wants higher prices but when they come the government hands out subsidies to offset it, nonsensical. Prices rose 3.2% ex food and energy. That core/core number was up from 3% in January and one tenth more than expected.
The Japanese labor market remains tight too as their unemployment rate fell to 2.4% from 2.5% and the jobs to applicant ratio at 1.35 is just off the highest since covid started. This number though was 1.60 in early 2019.
While the 10 yr JGB remains stuck at .50% (but is a damn that wants to break again and it will) and the 9 yr yield was little changed, the 40 yr yield rose 2.7 bps and the yen is stronger vs the dollar. The 10 yr inflation breakeven was up 2.4 bps to .72%, the highest since late January. The Nikkei rallied by 1.6% and is now up 7% year to date. We remain owners and bullish of Japanese stocks, particularly their banks.
Shifting to Europe, the Eurozone February services PMI was revised slightly lower to 52.7 from 53 initially but that is up from 50.8 in January and the best since last June. The UK services PMI was revised a touch higher to 53.5 from 53.3 initially and up notably from the 48.7 print in January and also the highest since last June. Both the euro and pound are rallying while yields are falling after the recent run up. We know Europe caught a HUGE break this winter with the mild weather and sharp drop in energy prices off their peak.
Helping the euro was more tough ECB talk where the Belgium central bank head in particular, Pierre Wunsch, said they can't rule out eventually taking rates to 4% to deal with inflation.
Selected Premarket Movers
Upside
- (ARDX) +19% (earnings)
- (AI) +16% (earnings, guidance)
- (SOUN) +14% (AI strength following C3.ai earnings)
- (BBAI) +13% (AI strength following C3.ai earnings)
- (APM) +5.6% (completes pre-IND discussions with US FDA on its ALS-4, a first-in-class small molecule drug targeting methicillin resistant staphylococcus aureus)
- (SI) +4.9% (bounce following recent selloff)
- (HPE) +2.1% (earnings, guidance)
- (VMW) +2.1% (earnings)
Downside
- (VERU) -33% (US FDA declines to grant request for (EUA) for sabizabulin to treat hospitalized adult patients with moderate to severe Covid-19 who are at high risk for Acute Respiratory Distress Syndrome (ARDS))
- (CDTX) -18% (files to sell underwritten public offerings of common stock and preferred stock of indeterminate amount)
- (BMRA) -17% (prices 3.33M shares at $2.40/shr for $8.0M in proceeds)
- (CHPT) -12% (earnings, guidance)
- (ZS) -12% (earnings, guidance)
- (MRVL) -8.1% (earnings, guidance)
- (BMBL) -6.3% (prices secondary offering of shares of 13.75M Class A common stock at $22.80/shr)
- (EXEL) -6.3% (Cabozantinib (CABOMETYX) in combination with atezolizumab Phase 3 CONTACT-03 study did not meet primary endpoint of progression-free survival (PFS))
- (DELL) -3.1% (earnings, guidance)
- (MIR) -2.6% (prices ~9.79M shares at $8.75/share)
- (COST) -2.0% (earnings)
From the Street of Dreams (Part Deux)
A few that I am (or have been) involved with:MP Materials' pullback on Tesla comments 'an overreaction,' says Northland
Northland believes the recent pullback in MP Materials is "an overreaction and simply unjustified," arguing this presents "another opportunity for (MP) investors to buy the dip." Tesla (TSLA) indicated in its analyst day meeging that it would be reducing the amount of rare earth materials in its powertrains and MP shares were down 12% driven by the news, but the firm's view is that Tesla's announcement "only underscores the issue of limited supply for NdPr" and further highlights the importance of MP being the largest NdPr producer in North America. Northland keeps an Outperform rating and $48 price target on MP Materials shares.
Green Thumb Industries price target lowered to $12 from $18 at Wedbush 07:26 GTBIF Wedbush analyst Gerald Pascarelli lowered the firm's price target on Green Thumb Industries (GTBIF) to $12 from $18 and keeps an Outperform rating on the shares. The company reported a solid quarter and "strong overall year amid a very challenging environment," the analyst tells investors in a research note. However, with price compression and inflationary consumer pressures expected to persist on a go forward basis, the firm reduced its 2023 revenue estimate to $1.1B and introduced 2024 revenue of $1.2B.
Google facing query share loss for first time ever, says Barclays 06:26 GOOGL, AAPL, MSFT Despite being "years ahead" in artificial intelligence, Alphabet (GOOGL) shares face new risks from higher inference costs with AI assisted search results, and potential query share loss to ChatGPT, Apple (AAPL) , Microsoft's (MSFT) Bing and others, Barclays the analyst tells investors in a research note. The firm believes Alphabet shares are likely to be range-bound until the digital advertising market reaccelerates and competition fears abate later in the second half of 2023. For the first time in Google's history there could be query share loss to competitors, contends Barclays. It thinks Alphabet "is in a new era" but keeps an Overweight rating on the name with a $160 price target. The new era is somewhat discounted in the stock, but the ad market recovery and "several quarters of upside" starting in the seocnd half of 2023 are not, says the analyst.
Morgan Stanley sees catalysts for top pick Apple, ups price target 05:36 AAPL Morgan Stanley raised the firm's price target on Apple (AAPL) to $180 from $175 and keeps an Overweight rating on the shares. The analyst says "pent up" iPhone demand, a Services re-acceleration, "underappreciated" gross margin upside, and Apple's first new product launch in eight years are near-term catalysts for the shares. The firm believes the "upside optionality" of a "subscription shift" unlocks its $230 per share bull case for Apple. It sees a "catalyst-rich event path" over the next 12 months that is underappreciated by investors, including reaccelerating iPhone and Services growth, record gross margins, two new product launches, and the potential introduction of an iPhone subscription program. Morgan Stanley calls Apple its top pick for 2023.
More Night Moves: A Detailed Look at Overnight Futures and Why/What Markets Are Moving
"All spit and spite you're up all night and down every day
A tired man with only hours to go just waiting to be taken away
Getting into the back of a car for candy from some stranger
Watching the parade with pinpoint eyes full of smoldering anger
You can do what you want to whenever you want to
You can do what you want to there's no one to stop you
Now you can do what you want to whenever you want to
Do what you want to whenever you want to
Do what you want to whenever you want to
Though it doesn't mean a thing
Big nothing"
- Elliott Smith, "Ballad of Big Nothing"
An explanation: The Ballad of Big Nothing was Smith's articulation of ultimate existential freedom. The writer exemplified the potentially tragic side of the liberation characteristic of rock and roll, one of many "creeps" and "losers," from Kurt Cobain to Thom Yorke to Beck, who made such great music in the 1990s. Although Smith recognized that we create out of our own reality, like the postmodernism that was perhaps prevalent during that period, he took his constructed quality of experience as evidence that "it doesn't mean a thing." As philosopher Richard Tarnas has put it, we participate in the creation of the world's meaning. Elliott Smith and Kurt Cobain were primarily centered around adolescence, but from which most of us eventually emerge. In a sense, they mediated the 1990s of angst-filled rebellion in the culture at large, which cleared away the previous modern assumptions about the nature of reality in order to create space for something new to emerge.
A message: I expect a market downturn to emerge in the months ahead!
* From trouble ahead, trouble behind to a market that just won't like be much fun (since I quit drinkin') to You Can't Roller Skate With a Buffalo Herd (meaning it's a tough market to navigate these days). And now? The market is down 4-6% from the early February highs - and The Law Won! Wednesday I moved to Long Island's Billy Joel so I can finally find what I am looking for. Yesterday it was all about that (interest) rates. Today it's a market of Big Nothing, grinding sideways between levels of resistance and support.
* There is no change in my base expectation that we may have seen the top in the S&P 500 Index for all of 2023. Again, we seem securely in this range.
* Adjusting for this morning's modest rise in stock futures (at 6:01 a.m.), the S&P sits at 3995. According to my "fair market value" and trading range calculus, there is +105 handles to the upside and -295 handles to the downside. That is a negative 3-1 ratio, which is enough to expand my short book today. (My forecast, which did well to identify the third-quarter 2022 low, may be on tap to have judged the recent top).
* In this trading market I am trading more actively these days. Emphasizing pairs trades, straddles and strangles. But as we move into the higher end of the anticipated trading range, I will be shorting...
"You are never as smart as u think you are when you are making money or as dumb as u think when losing."
-- Unknown
"The stock market will do whatever it has to do to embarrass the greatest people to the greatest extent possible."
-- Wally Deemer
"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"
This daily Futures feature is like inside baseball. I try to show you and write about what I believe thoughtful hedge fund managers are looking at when they awake -- let's call it our normal routine -- setting the stage for their strategy for the day. The market is a complicated mosaic and the more info you have, the better trader and investor you will be!
The market (and money) never sleeps -- and neither do I, it appears! I have previously 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 are often exaggerated outside the regular trading session. I frequently try to capture those efficiencies by trading actively both in the pre- and after-market sessions.
Here are some brief observations I wanted to highlight and a summary of overnight price movements in various asset classes:
* Thursday's close (S&P 3980) is above "fair value" of 3900 and compares to The Chop Bucket of 3700-4100 for the S&P 500. S&P cash adjusted for the climb in futures is now approaching 4000. Ergo, almost a 3x risk versus reward.
* Stock futures were lower most of the evening but have rallied (coincident with the drop in bond yields). S&P futures had peaked at +14 and bottomed at -11.Nasdaq futures peaked at +48 and bottomed at -49. At 6:26 a.m. ET, S&P futures were +13 and Nasdaq futures were +47.
* The S&P Short-Range Oscillator recently moved back further into the negative (oversold). It has gotten increasingly oversold over the last few days. The Short-Range Oscillator closed Thursday at -4.40% and Wednesday at -4.21%; last Friday it was -2.54% and -2.43% last Thursday. For perspective, when the rally started on Dec. 28, 2022, the Oscillator was deeply negative (oversold).
* I have also kept a bead on volatility. In recent days the VIX has exhibited interesting -- some might say flawed -- behavior, falling in both up and down days. This morning, the VIX was at 19.45 (-0.10 ). As volatility declined recently, I took off a lot of my straddles and strangles for a profit. (Over the last two trading days I have repositioned and put back on some of my straddles.)
* The U.S. dollar is weaker against the yen, euro and sterling. The consensus seems to be that the US dollar has peaked, but this chart suggests it is only consolidating its recent gains:
* I have been continually writing that bonds should be at center stage to equity weightings. So it has been in the recent market selloff.
* The Two-Year Treasury yield is -4 basis points at 4.8% and the 10-Year is -7 basis points to 4.005%. Over there, the yield on the 10-Year U.K. Gilt bond is -3 bps after moving much higher all week. See my Barron'sinterview two weekends ago that describes rising rates as the single most important headwind against further stock gains.
Here is a picture on six-month and one-year T bills (from yesterday):
* Despite Bostic's "bullish" comments, hike expectations rose yesterday
As I have written, above any other independent variables the absolute level of rates keeps me from expanding my net long exposure to much higher levels as there is an alternative. And that alternative -- intermediate bonds -- provides generous and equity-like returns. This helps to explain my recent Treasury note buys over the last month.
* The 10s/2s Treasuries curve is back down to -86 basis points,- but still at a near cycle high (chart from yesterday):
Source: Hedgeye
* Commodities (where there are no zero days to expiration options!) are mixed this morning. Brent crude is moving higher to $84.45 (-$0.35).
* Gold is +$14.50 on the weaker US dollar.
Here is a synopsis of some of my columns I believe were important, or in the event you were out for the day and did not read my Diary. The principal intent is to review the logic of my market moves and other factors. I think I have had alot of pretty good content this week:
It's Very Clear... It's All About the Rates
Large Gross, Small Net Exposure
Papa Get the Camera: I Am Taking Baby Steps in Shorting the S&P
The Media Throws Soft Balls and Too Often Fails to Provide Critical Interviews
Yond Cassius Has a Lean and Hungry Look
As Financials Go, So Goes the Market?
And here are Thursday's trades:
* Sold balance of PureCycle Technologies (PCT) and Freyr Battery (FREY) .
* Added to MP Materials (MP) and on strength sold MP calls against.
* Added to Telsa (TSLA) short.
* Mar 02, 2023 ' 11:02 AM EST DOUG KASS
Adding to 6 Shorts
In the modest rally I am adding to the following shorts: (MS) , (KSS) , (LOW) (HD) , (WGO) , (TSLA) .
Positions: Long SPY (S) QQQ (S) MP (M); Short SPY calls (S) and puts (S) QQQ calls (S) and puts (S) MP (M) TSLA (S) MS (S) KSS (S) LOW (S) HD (S) WGO (S)
Mortgage Tweet of the Day
Themes and Sectors
This table is potentially a source of good information for the short-term trader:
Themes and Sectors
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From the Street of Dreams
From J.P. Morgan:EQUITY AND MACRO NARRATIVE: With 10y now above 4%, SPX attempted to break below 3900 yesterday, but revised its momentum and is rallying towards 4k this morning. In absence of major catalysts, yesterday Bostic's speech on rate cuts this summer could be one of the drivers. However, it does appear that Bostic's comment can be viewed either dovish (earlier rate cuts) or hawkish (potentially higher terminal rate) and does not provide new information. That said, we did see some resilience near 3950 for equities. If today's ISM-Srvcs comes in dovish and against recent hot data trend, there is still room for equities to be pushed higher
Chart of the Day
The entire Treasury curve (from a month to the 30-year) now yields more than 4% for the first time since late 2007:
Tweet of the Day (Part Four)
From Charlie...
Showing My Age
I am so old that I remember when the business media was all giggly about Cathie Wood's daily stock activity...
Recommended Viewing
Salesforce's (CRM) Marc Benioff on his ice cream store of activists. From Barron's.
Tweet of the Day (Part Trois)
Over There
Tweet of the Day (Part Deux)
Tweet of the Day
And Another Thing...
I;m adding small to my Tesla (TSLA) short in premarket at $195.41.
