DAILY DIARY
Until Next Time
Thanks for reading my Diary today.
Enjoy the evening.
See you bright and early Tuesday morning.
Be safe.
Be Unemotional
I have long argued that successful trading and investing requires a calm demeanor and dispassionate personality.
Like in mid-January, when emotions flared, recently emotions have also risen.
Breathlessness is the way I described this morning's business media coverage.
Let those actors be volatile and follow the last tick - as there is a reason they are in the broadcasting booth and not on the field.
My advice? Stick with analysis - fundamental and/or technical - and with the assessment of intrinsic value in order to determine upside reward vs. downside risk.
Leave your emotions at the door.
On Talking Heads
Continuing today's theme of criticizing "talking heads", I am reminded of a great quote by Morgan Stanley's (MS) John Mack:
"I pay our traders to make money and I pay Stephen Roach and Byron Wien to be good actors."
My Tweet of the Day (Part Trois)
Market Internals
As mentioned in my Diary and on Twitter - the drop (and divergence) in the Russell Index is being met with overall lousy breadth.
At 12:50 pm:Market Breadth
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Biggest Movers
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Heat Map
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One Swallow Doesn't Make a Summer
From JP Morgan:
One strong day (e.g. last Friday) or week in risk markets does not change our negative outlook that is predicated on weakening macro fundamentals. These include, but are not limited to, rising interest rates and QT, resurging inflation (e.g. persistent move higher in inflation break evens), increased pressure on consumers and corporate earnings, rising defaults, and very high geopolitical risk in Europe, Asia and the Middle East. While the US job market remains very strong and consumer balance sheets are fine at this point, the direction of travel is a slowdown and not acceleration.
Aggressive hiking cycles such the one undertaken by central banks in Europe and the Americas historically didn't end in a soft landing, and the new cycle starts from lows in risk assets and not current highs (e.g. in Europe or US cyclical stocks). In addition to Fed and ECB tightening, the BoJ is likely to exit extreme monetary accommodation in the near future and inject further macro volatility.
While the day-to-day interplay of investors, speculators, the options market, systematic investors, etc. can produce strong rallies, we maintain that risk assets are in a bear market and will not bottom until central banks start cutting rates. Bonds continued to sell off last week amid upside surprises in Euro Area inflation and resilient activity data, which also prompted our economists to revise their terminal ECB rate forecast up to 3.75%.
US HG bond spreads have given up most of their start-of-year rally, and we revise our Euro HG spread forecast up to 200bp. We expect Russia to keep oil output steady to offset gas revenue loss, and revise down our US and European gas price outlooks to reflect the elevated storage levels anticipated by the end of the winter season. In Copper, we revised our 2023 price forecasts 10% higher given a thin buffer for the market to cope with stronger-than-expected demand or further downgrades in supply.
Russell Index
The Russell Index is now down by nearly -1%.
The Most Important Thing
This chart of the S&P dividend yield vs. the one year Treasury bill is the essence of my bearish market view:
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Why I'm Short DXCM
Short (DXCM) now -7% (or -$10) - its the worst performing stock in the S&P Index and in the Nasdaq 100 Index.
My Tweet of the Day (Part Deux)
My Tweet of the Day
Heyy Abbott!
* Regarding my DexCom short...
I am short (DXCM) based on new alternative products that might change the competitive landscape.
Today Abbott Labs (ABT) announced that the FDA has cleared its FreeStyle Libre2 and FreeStyle Libre3 integrated continuous glucose monitoring (iCGM) system sensors for integration with automated insulin delivery (AID) systems:
- Abbott is working with leading insulin pump manufacturers to integrate their systems with the FreeStyle Libre 2 and FreeStyle Libre 3 sensors as soon as possible. The company is partnering with Insulet and Tandem for future integrations in multiple countries, including the U.S. Outside the U.S., Abbott's FreeStyle Libre 3 sensor is already authorized to work with the mylife Loop solution from Ypsomed and CamDiab in Germany, with additional launches in the UK, Switzerland and the Netherlands planned for the first half of this year.
- The modified sensors were also cleared for use by children as young as two years old and for wear time up to 15 days. Current FreeStyle Libre 2 and FreeStyle Libre 3 sensors available today in the U.S. are approved for people four years and older and have a wear time of up to 14 days.
DXCM was trading about -$8.22/share in premarket trading.
Selected Premarket Movers
Upside
- (UNCY) +122% (announces up to $130M financing to commercialize and launch investigational new drug renazorb)
- (BBIO) +55% (announces positive Phase 2 Cohort 5 results of infigratinib in Achondroplasia demonstrating mean increase in annualized height velocity of 3.03 cm/year with no treatment-related adverse events)
- (TCRR) +33% (to combine with Adaptimmune in-all stock deal)
- (AZUL) +23% (earnings, guidance; premarket strength being attributed to the report that Azul reached payment agreements with its lessors representing >90% of its lease obligations)
- (VBIV) +19% (momentum)
- (SRAX) +16% (Freedom Holding acquires LD Micro from SRAX, Inc. for $8.3M in cash and stock)
- (CIEN) +11% (earnings)
- (IKNA) +9.2% (receives FDA Fast Track Designation for novel AHR antagonist IK-175 in combination with nivolumab to treat urothelial carcinoma)
- (CHRD) +5.8% (to enter S&P MidCap 400 Index)
- (CHRS) +5.7% (receives FDA approval for UDENYCA Autoinjector)
- (VIR) +5.5% (JPMorgan Chase and Co Raised VIR to Overweight from Neutral, price target: $34 from $35)
- (RLYB) +4.9% (announces Proof-of-Concept achieved for RLYB212, a novel monoclonal anti-HPA-1a antibody to prevent fetal and neonatal alloimmune thrombocytopenia)
- (CORT) +4.7% (commences Dutch auction for up to 7.5M shares at $19.25-22.00/shr)
- (ASTS) +3.4% (announces teaming agreement with Fairwinds Technologies)
- (GLT) +2.9% (issues FY23 guidance)
- (CRWD) +2.4% (CrowdStrike and Dell Technologies partner to transform commercial PC cybersecurity)
- (STOK) +2.0% (earnings)
- (AAPL) +1.6% (reportedly could have its self-developed 5G modem chip, code-named Ibiza, made on TSMC's 3nm process to debut in iPhone 16 in 2024; Goldman Sachs Initiates AAPL with Buy, price target: $199)
Downside
- (ACRS) -36% (preliminary topline data from 12-Week Phase 2a study of oral zunsemetinib (ATI-450) for moderate to severe hidradenitis suppurativa did not meet primary or secondary efficacy endpoints)
- (ADAP) -27% (to combine with TCRR in all-stock deal; earnings)
- (ESPR) -26% (releases data from study of cholesterol lowering drug, provides business update)
- (SI) -7.3% (suspending Silvergate Exchange Network (SEN) payment network, calling it a a 'risk based decision')
- (SBNY) -4.1% (peer Silvergate suspends crypto payments network)
- (BIRD) -3.3% (Wedbush, Inc. Cuts BIRD to Neutral from Outperform, price target: $3)
- (DV) -3.3% (launches 12.5M share secondary offering by selling stockholders)
The Book of Boockvar
From Peter:
Just because it hasn't happened yet, does that mean it won't?
The economy has absorbed a lot of interest rate body blows and it won't break. The stock market bottomed in mid October and the fed funds rate will soon be 200 bps higher than it was then and while well off their highs stocks act well for sure this year. Does that mean it's all clear? Well, it's certainly sparked plenty of no and mild landing calls and some saying the bear market is over.
Before I give some further opinions of the economic impact of a higher rate regime, let's look at the two recessions/bear markets that took place pre Covid. Alan Greenspan started raising interest rates in June 1999 and finished with a 50 bps rate hike to 6.5% in May 2000. We know the stock market ripped until March 2000 and the S&P 500 almost hit a record high in September 2000.
Was there an all clear? It wasn't until the Fed started cutting rates in January 2001 did the wheels fall off stocks and the recession technically didn't start, according to the NBER, until May 2001. The recession ended in November 2001 but the bear market didn't until October 2002.
Greenspan after cutting rates to 1% in June 2003 then started hiking in June 2004 and after a 'measured pace' of increases that took the fed funds rate to 5.25% by June 2006, the stock market partied on until October 2007 right after the rate cuts had just begun. The recession wasn't declared to have begun until December 2007. The recession ended in June 2009, 3 months after the bear market did and where the bear market bottomed 3 months AFTER the last rate cut.
So yes, just because some things haven't happened yet doesn't mean it can't.
I've talked for a while my worries about the higher for a while interest rate regime and the nicks and cuts it brings to any over levered borrower, either household or business, that has either floating rate debt and/or debt coming due this year. The negative impact is not an event, it is a progression of small ones that adds up. What I want to add here is the economic activity that DOESN'T take place because of the rate shock we've had. What house is not bought because of affordability challenges? And thus the lost growth from new moves in? What roommate is moving back in with their parents because they can't afford the rent and the apartment is given up?
What discretionary spending is not going to happen because consumers tire of paying 20% interest on unpaid credit card balances? What IPO is not taking place because the capital markets only will welcome profitable companies on a GAAP basis? What multi family apartment project was just shelved because the numbers no longer work? What VC investment was held up because expected profitability in 2028 is just not acceptable right now?
What spending will be cut back on because one's new monthly car lease is 45% higher than the last one done 3 years ago? How many more car repossessions do we have ahead of us? How many more keys to office buildings are going to be handed back from here? How many expansion projects might not take place because of a higher cost of capital hurdle? How many new people are not going to get hired from here because corporate profit margins are deteriorating and the earnings recession continues on?
This is all to come and thus it is way too premature to get comfortable just because certain things like a technical recession and more equity pain hasn't happened yet. This again gets to my belief that a vertical move higher in interest rates in one year after 15 years of essentially zero more chips away at economic activity rather than creates a financial event because households and businesses are impacted at different times as debt comes due, resets and economic decisions need to be made.
A main reason to still worry is because of the high leverage and financialized economy and markets that decades of easy money has created. The cure is more equity, more cash needed to replace debt but that takes a lot of time.
While he is a known hawk, ECB Governing Council member Robert Holzmann is talking really tough today as he wants 50 bps rate increases in March, May, June and July. That would take their deposit rate to 4.5% from the current 2.5%. The German 2 yr yield is at a fresh 15 yr high in response, higher by 3 bps today. Their 10 yr yield though is a touch lower and the euro is little changed.
While there is rarely dissent at the Fed, you can just imagine the growing internal disturbances within the ECB as the hawks and doves go at it. Speaking of which, a dovish Council member today Mario Centeno from Portugal is talking about slowing inflation and that the ECB "should not rush to conclusions very fast."
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Five Percent LIBOR!
"In the short run the market is a voting machine, but in the long run its a weighing machine."
- Benjamin Graham
"Price is what you pay, value is what you get!"
- Warren Buffett
The cost of capital (and the risk free rate of return) are fundamental to equity valuations.
For the first time since 2007 three month LIBOR exceeds five percent.
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And over here:
Given the absolute level of interest rates (and relative to the S&P dividend yield of only 1.65%) - one can (and I do!) argue that stocks are more overpriced today than at the December 2021 high.
Bulls call attention to the voting machine of breadth thrusts and upside breakouts above the 200 day moving average.
I prefer the weighing machine.
The voting machine clearly dominates near term price action. But the weighing machine always wins in the end.
The problem is always when!
More Night Moves: A Detailed Look at Overnight Futures and Why/What Markets Are Moving
You never care for secrets I confideFor you I'm just an ornament, somethin' for your prideAlways runnin', never carin', that's the life you liveStolen minutes of your time were all ya had to give
And I think it's gonna be all right
Yeah, the worst is over now
The mornin' sun is shinin' like a red rubber ball
- The Cyrkle,Red Rubber Ball
The market is like a red rubber ball:
* 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. Friday was a market of Big Nothing, grinding sideways between levels of resistance and support. That expectation was shattered by the close of trading last week and, today, many think the worst is over now... I don't!
* Bulls will be emboldened based on the rally off and then above the 200-day moving average.
Here is the growing consensus (after Friday's wicked climb):
"Do not trade as if we're in a bear market, because we are not. The recent reset of Fed Funds expectations helped create the set-up for the bounce from Thursday's intraday SPX low of 3928. We believe the bounce has room" - Wells Fargo's Chris Harvey
* 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, despite late last week's climb, we seem securely in this range.
* Adjusting for the small change in stock futures (at 5:21 a.m.), the S&P sits at 4045. According to my "fair market value" and trading range calculus, there is +55 handles to the upside and -345 handles to the downside. That is a negative 6-1 ratio (much like mid-January's peak), which was enough to expand my short book late Friday. 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 more aggressively.
* Stocks, meet your competition - a "sea change" and new regime of higher interest rates:
* The S&P Oscillator fell meaningfully on Friday to a less over sold -1.53% from a deeper -4.40% oversold. A short term top signpost?
"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:
* Friday's close (S&P 4045) 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 4050. Ergo, almost a 6x risk versus reward.
* Stock futures were modestly lower higher most of the evening but have dropped back to zero in the last hour. The range was narrow. S&P futures had peaked at +12 and bottomed at -8. Nasdaq futures peaked at +68 and bottomed at -35. At 5:26 a.m. ET, S&P futures were -2 and Nasdaq futures were +4.
* The S&P Short-Range Oscillator recently moved back further into the negative (oversold). It has gotten increasingly oversold over the last few days - but Friday's strength corrected the oversold. The Short-Range Oscillator closed Friday at -1.53% compared to 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 19.08 (+0.59). As volatility declined recently, I took off a lot of my straddles and strangles for a profit. Over the last week I have repositioned and put back on some of my straddles.
* The U.S. dollar is stronger 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:
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* I have been continually writing that bonds should be at center stage to equity weightings. Surprisingly, the recent strength in equity has been accompanied by a rise in yields.
* The Two-Year Treasury yield is -2 basis points at 4.844% and the 10-Year is -4 basis points to 3.92%. Over there, the yield on the 10-Year U.K. Gilt bond is -6 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.
* Despite Bostic's "bullish" comments, hike expectations rose late last week:
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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 at a new high of -93 basis points:
* Commodities (where there are no zero days to expiration options!) are broadly lower this morning. Brent crude is moving lower to $84.56 (-$1.25).
* Gold is +$3 despite the US Dollar's strength.
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. Last week was filled with some pretty good content:
Benioff on Salesforce Activists
The Banking Industry's Commercial Real Estate Exposure
And here are Friday's trades:
* Sold out (XLF) and covered (XLF) short calls.
* Reduced (MP) and sold short calls.
* Put on $400 (SPY) put/call straddles (May to June).
* Mar 03, 2023 ' 01:37 PM EST DOUG KASS
Adding to 4 Shorts
Adding to (TSLA) , (MS) , (GE) and (WGO) shorts this afternoon.
__________
Long SPY (S), QQQ (S), MP (S), BK (VS), WFC (S).
Short SPY calls (S) and puts (S), QQQ calls (S) and puts (S), TSLA (S), MS (S), GE (S), WGO (S).
Oil Vey
Important read for those that own energy equities, from Goldman Sachs:
Oil Analyst: A Barrel in the Hand Is Worth Two in the Bush
- Why have oil prices not risen over the past three months despite sharp rises in 2023-2024 global GDP growth expectations? Our main answer is that the oil market, which remains in a spot surplus, is much more a spot asset than an anticipatory asset. This Oil Analyst compares the role of spot and future fundamentals for oil prices.
- Our first approach uses daily news shocks to spot and future oil balances. Our spot shocks (e.g. weather disruptions, economic activity surprises) immediately affect balances and typically last a few weeks, while future shocks often only start to affect balances a few months after the news hits (e.g. OPEC announcement, fiscal stimulus), and can last for years. We find that oil prices appear four times more responsive to a given oil supply shock when happening now than in the future. We estimate that a supply reduction equivalent to a 1% 1-year hit to global output boosts Brent by just over 18% for a spot shock vs. nearly 5% for a future shock.
- Our second approach finds that revisions to forecasts for global growth over the next year significantly move oil prices. However, revisions to more distant future global GDP growth estimates do not significantly affect oil prices, but do drive prices of more anticipatory metals and equity assets.
- Our third approach finds that Brent timespreads are strongly negatively correlated with OECD commercial inventory levels 1-4 months ahead. We estimate that a 10% decline in the 1-4 months ahead commercial OECD inventories-to-demand ratio raises the 2m/3y Brent timespread by 25pp, and spot oil prices by $18/bbl (assuming 3y Brent is stable). While the 1-4 months ahead horizon usually captures pricing well, oil markets periodically become more forward-looking when large shocks to future balances are priced in, as happened when the war escalated mid last year.
- Overall, oil prices put a much greater weight on fundamentals today and over the next few months than on more distant horizons. This finding, coupled with the return to deficits we expect in June, and our estimate that oil prices now look somewhat low relative to inventories, support our constructive call. We expect Brent to start grinding higher this month, and reach $100/bbl in December.
Oil Prices Respond 4 Times More to Spot Shocks Than to Future Shocks, Supporting Our View That Prices Should Grind Higher As Spot Inventories Start to Decline Again From June
Spot supply shocks (e.g. extreme weather disruptions) immediately affect balances and typically last a few weeks. Future supply shocks (i.e. OPEC announcements) often only start to affect balances a few months later, and can last for years.
Themes and Sectors
This is a valuable table for short term traders:
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An Important Tweet
Tweet of the Day
Goodbye Credit Suisse
David Herro, a good guy and smart investor, bails from Credit Suisse: