DAILY DIARY
And That's It
I am done, cooked, fried.
A sincere thanks for providing me with this forum to deliver my thoughts and analysis.
Enjoy the weekend.
Be safe.
Rosie on SVB
From Rosie:
My Take From This Week
The whole world built on zero rates is crumbling.
Tweet of the Week
TGIF
Back to market neutral.
And exhausted.
Once Again, The Russell Is Not Crowing
* And this was a catalyst to my sales on strength
The persistent weakness in small-cap stocks ( (IWM) -1.7%) is conspicuous against only about a -0.30% drop in the S&P and Nasdaq.
TGIF
Back to market neutral.
And exhausted.
Where I Stand
With today's buys - mostly bought on the whoosh lower - I moved from between very small to small net long, to a bit more than small net long.
Small Net Long
Took some more profits - back down to small net long.
Fixed Income Market and Treasuries
Huge moves in the fixed income market - creating nice marks for those that own Treasuries!
The six month bill yield -15 bps, one year bill yield -21 bps and the two year note -25 bps!
Rate sensitive equities, e.g. homebuilders, are prospering.
Contributor Comment of the Day
Decided to have some fun and crunch some numbers re. valuation for major banks Dougie's buying:
Boockvar on Treasuries
From Peter: Treasuries focus on uptick in U3/no wage surprise and faltering diffusion index
February payrolls totaled 311k higher, 85k more than expected, partly offset by a net downward revision of 34k over the past two months. The private sector contributed 265k of these jobs, 50k above the estimate as the government added 46k jobs. The unemployment rate ticked up by 2 tenths to 3.6% as the 177k person increase in the household survey was more than offset by the rise of 419k in the labor force size. The U6 figure was up by 2 tenths too to 6.8%. Job leavers as % of the unemployed was 14.8%, still high but off 15.3% in the month before.
Positively, the participation rate for 25-54 yr olds jumped 4 tenths to 83.1% and is finally back to the Jan/Feb 2020 level. The overall participation rate rose one tenth to 62.5% but still is below the Feb 2020 level of 63.3%. Hours worked slowed to 34.5 vs 34.6 in January and 34.4 in the month before. Average hourly earnings grew by .2% m/o/m, one tenth less than expected and up by 4.6% y/o/y, still almost double the 20 yr average pre covid of 2.5%. Combining the hourly figure and hours worked resulted in no change m/o/m in wage growth but only after a .9% jump in January. Versus last year, they are up 4%.
The service sector added 245k jobs vs 335k in January and 196k in December. Again, leisure and hospitality led the way, hiring a net 105k vs 114k last month and 58k in the month before. Education/health, always consistent, followed with 74k. Jobs added in the 'professional, business services' remained consistent too. The tech layoffs showed up in the drop of 25k in 'Information', the 3rd month in a row of job losses. Retail added 50k but transportation/warehouse lost 22k.
On the goods side, construction added 24k, likely helped by the mild winter. Manufacturing though shed 4k.
There is one big fly in this report and that is the diffusion index which measures the number of industries that are adding workers and those that are cutting and 50% "indicates an equal balance between industries with increasing and decreasing employment." In February it fell to 56. That is the lowest since February 2019 not including covid. So the 'breadth' of job hiring is moderating and will eventually show up in an aggregate slowdown in hiring.
Bottom line, the spread between ADP and the BLS widened further and I don't know what to make of ADP anymore. The Treasury market is focused on the lift in the unemployment rate and no surprise with wages and maybe on the comment I just made on the diffusion index. The rate hike odds of 50 bps are now down to 38%. I see no chance they go 50 bps as stated this morning.Diffusion Index
View Chart »View in New Window »
Participation Rate 25-54 yr olds
View Chart »View in New Window »
RILY Short
The closest short that I have on the books is B. Riley Financial (RILY) - with potentially similar funding and credit issues as I have chronicled.
The shares are down another -$5 today after caving yesterday.
The Book of Boockvar
From Peter: Another accident/Zero chance of 50 bps I believe.
I said last Wednesday that "We must expand our thoughts past the most interest rate sensitive parts of the economy like housing and autos" in trying to connect the economic dots in how this higher rate regime will infect more things. I also said "now I'm also focusing closely on the private equity and venture capital business, two that have partied on over the last decade plus, that rely on generous investor flows of money and have seen deals struck at ever generous multiples over the many years."
That party was then, SIVB and its causes is the hangover now. If we look back over the past year plus, the interest rate shock therapy thrown on the economy is first infecting all the things that were hot, hot, hot (meme, crypto, housing, and now tech VC) and to come is the collateral damage on everything else.
SIVB had a major asset/liability mismatch heavily tilted, as we know, to VC and thus is not a systemic issue I believe. That said, we did hear from Keycorp this week too that highlighted their shrinking net interest income because of rising deposit costs and fraying around the edges on the quality of credit (otherwise known by other bankers as 'normalizing') but that will be mostly an earnings hit rather than a solvency one. Also, which I keep highlighting, there will be stress in parts of the commercial real estate market and the banks that have outsized exposure to it.
I said this week that I didn't think the Fed was going to hike 50 bps in a few weeks after downshifting from 75 to 50 to 25. Today I'll expand on that and say there is ZERO chance they do. Rate hike odds in the fed funds futures market is at 54% of 50 bps.
Ahead of the payroll, I'll repeat the large discrepancy that has grown between what ADP is reporting and what the BLS has. In the 6 months thru February, ADP said about 1.2mm private sector jobs have been added on a net basis. The 5 months thru January, the BLS is almost up to 1.6mm private sector jobs. Today's estimate for the private sector is for another 215k. Thus, just from a mean reversion standpoint and if these two numbers eventually converge, either the ADP is going to start reflecting a ramping up in its job figure or the BLS is on the cusp of a big downshift. I'm taking the latter.
Haruhiko Kuroda, the outgoing BoJ Governor, exited with a yawn last night. He couldn't find enough intellectual energy to even get its deposit rate to zero from .10% on the way out. JGB yields fell sharply in response with 9 and 10 yr yields down about 10 bps and the 40 yr yield lower by 7 bps. The yen is weaker as well and the Nikkei fell by 1.7%, though stocks just followed the US. Now the monetary clean up is being left to Ueda and we'll get their next meeting in April.
Japan also reported its February PPI which rose 8.2% y/o/y which is certainly big but the slowest since September 2021 as energy prices are lower and comps are tough.
For those of us left who still follow gold, Singapore announced that in January they bought the biggest monthly amount ever, purchasing 199 tons. The 2nd biggest was back in 1968 when they purchased 100 tons. Central banks have had a voracious appetite for gold and at some point too, others will.
To Make It Perfectly Clear
I evaluate equities on the basis of upside reward vs. downside risk.
The "intrinsic value" calculus is based on applying probabilities to a set of five different outcomes, ranging from very pessimistic to very optimistic.
I detach myself emotionally.
I hide my portfolio and my children from the knaves looking in the rear view mirror, with analysis miles long but only inches deep, who are non-rigorous of approach and unaccountable.
I am transparent in process - who, when and what - and admit my mistakes.
I am willing to operate outside the herd, rejecting "Group Stink's" foul odor.
I am always looking over my shoulder.
I develop at strategy - the current one consists of five stocks, as expressed this week.
SIVB and Goldman Sachs
Goldman Sachs has been hired to sell SVB Financial Group (SIVB) .
From JPMorgan
EQUITY AND MACRO NARRATIVE: With OIS forwards looking even odds between 25bp and 50bp after Powell's comments on Tuesday and rebound in bonds yesterday, today's NFP may become a narrative-changer for March FOMC rate decision and near-term setup.
Yesterday, SIVB's announcement triggered investor's fear on financial stability amid declining deposit outflow, as well as NII concerns. SIVB plunged 60% while JPM Regional Banks Index (JP1RGB) fell 9% and the broader XLF was 4% lower. Detailed analysis from Financial Specialist Gigi Sparling is further down in this note. On bonds sides, movements was driven by expectations ahead of NFP, Jay Barry notes that front-end yields fell 17bp (largest single day steepening since October 2021) driven by (i) higher initial claims; (ii) risk-off tone in risky assets and inflow to ST treasury; (iii) BoJ; (iv) better sentiment ahead of NFP.
A Very Active Trading Day
I will try my best to keep you up with posts today - but my feeling is that I will be very active trading.
As to my analysis of banks/ (SIVB) - might have to do it over the weekend for Monday.
Also I certainly won't get to new "Levels" until early next week, for sure.
Worth Repeating
For emphasis -- from Thursday:
Mar 09, 2023 ' 08:30 AM EST DOUG KASS
The Greatest Trading Market Ever?
As mentioned previously:
For the near term, we continue to employ these five legs to the stool to our portfolio strategy at Seabreeze Capital Partners LP -- many of which my Grandma Koufax, an outstanding investor, used to call "blocking and tackling":
* Developing good investment longs and shorts that "season" even in a relatively narrow trading range -- We expect this "buy/hold" approach to influence our portfolio strategy more and more this year if stock prices further decline and the reward vs. risk proposition improves.
* Creating sector "pairs" for both trading and investing
* Tactical and opportunistic buys/shorts as we move towards the lower and upper end of the anticipated trading range
* Selling premium -- via individual calls and puts
* Selling strangles and straddles, and also taking in premium
This will change, but for now a buy/hold strategy (read: own 30 stocks "forever") seems likely to be ineffective.
Instead, with the accelerant of ODTE options and momentum based products and strategies - market moves are often exaggerated.
And the lack of predictability of economic, interest rate, profits, inflation uncertainties is a contributor to a new regime of volatility.
The opportunistic, fleet afoot and dispassionate trader/investor can capitalize under this backdrop with this sort of blocking and tackling.
While the spastic moves are somewhat unpredictable and necessitate watching a portfolio's VAR (value at risk), tactical buys/shorts gain a heavier weighting in my investment process these days.
More Longs
Adding to longs after the jobs report.
More Night Moves: A Detailed Look at Overnight Futures and Why/What Markets Are Moving
This magic moment, so different and so newBut like any other until I kissed youAnd then it happenedIt took me by surpriseI knew that you felt it too by the look in your eyes
- Jay and The Americans,This Magic Moment
- The Drifters,This Magic Moment (original)
"There was a great ballroom, the Palladium, at Fifty-third and Broadway and every Wednesday was mambo night," Mort Shuman told rhythm and blues historian Colin Escott. "You would get two or three bands on the same bill. The place was jammed with people who worked in factories. Cleaning ladies. It was a great melting pot and the catalytic agent was Latin music. I was there every night it was open."
Shuman's interest in Latin rhythms transformed R&B love songs, most dramatically through the introduction of the baion bass but equally with the Latin accents that suffuse every one of the ballads he and Doc Pomus composed for The Drifters - "Save the Last Dance For Me", "I Count The Tears and, especially "This Magic Moment," with its swirling strings and crying Ben. E. King lead.
Shuman also loved doo-wop, known in its early days as "tenement music", long before that music had any hip cachet. Doc Pomus, on the other hand, was probably the first white blues singer in Brooklyn in the late forties and while his taste ranged further, the center of it never moved. In their tunes, Pomus became the guardian of the blues. He also found himself, almost by default, the lyricist, since Shuman's strengths were more musical than literary. Pomus wasn't afraid to write corny ("A Teenager In Love") but he also wrote some of the era's more elegantly stated love songs. For sheer lyric felicity, "This Magic Moment" perhaps outstrips even "Save The Last Dance for Me."
Pomus subverts R&B conventions even in the opening couplet, with its distinctly non conversational gait: "This magic moment, so different and so new /Was like any other until I met you." Such stateliness makes this one of the few R&B songs that has the kind of lyric gentility commonly found in tunes by the earlier generation of Tin Pan Alley masters.
Blessed with such fine material, Jerry Lieber and Mike Stoller framed it with the perfectionist exactitude of great musical architects, sculpting around Ben E King's weepy lead - a virtual cathedral of orchestrated rhythm and harmony.
* 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 soon thereafter the market was 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. Thursday was no futures column - lyrics silent! Today, the swoon (and SIVB) took the markets by surprise - in this not so magic moment...
* Bulls and "Moving Monkeys" were emboldened last Thursday and Friday's rally off and then above the 200-day moving average. I have cautioned about this in my Diary, and used the strength to sell/short. I wrote these prescient words in the Comments Section late Wednesday night:
Mar 09, 2023 ' 05:48 AM EST DOUG KASS
From the Comments Section (Last Night)
I ended the day net short.
The technicals I look at - short, intermediate and long term - are crumbling in unison.
It's the first time since last Fall.
This week's loss is the largest since the Spring, 2020 when Covid emerged.
I was buying yesterday's weakness. More on this later.
* Looking back here is an example of the growing wrong headed consensus after last 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 S&P low of 3928. We believe the bounce has room"
- Wells Fargo's Chris Harvey
Even Mike Wilson turned short term bullish but I expect he will recant it soon:
Mar 08, 2023 ' 01:10 PM EST DOUG KASS
Ludacris Forecast
After recently calling for a near term rally, Morgan Stanley's Mike Wilson retreats and turns near- and intermediate- term bearish.
* Regardless of the new regime of volatility, 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. Despite Friday's ramp and Tuesday's and Thrusday's drop, and the business media's breathless hyperbole, I feel we will remain range bound.
* Adjusting for the small drop in stock futures (at 6: 22 a.m.), the S&P sits at 3900, right at my fair market value. According to my calculus, there is an even distribution of upside (+200 handles) and -200 handles to the downside.
* In this trading market I am trading more actively these days. I have been emphasizing pairs trades, straddles and strangles. But now, I will be an incremental buyer on weakness.
* That said, the intermediate term outlook for stocks, remains difficult in light of the competition and a "sea change" and new regime of higher interest rates:
* The S&P Oscillator climbed meaningfully yesterday from -1.19% to -3.96%. More oversold, obviously.
"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 3915) is near fair value and compares to The Chop Bucket of 3700-4100 for the S&P 500. S&P cash adjusted for the modest drop in futures is exactly 3900. Even reward vs. risk.
* Stock futures were lower most of the evening but have rallied in last 30 minutes. S&P futures had peaked at +1 and bottomed at -35. Nasdaq futures peaked at +14 and bottomed at -54. At 6:39 a.m. ET, S&P futures were -2 and Nasdaq futures were +34:
* The S&P Short-Range Oscillator has been a great trading gauge. When it gets oversold, as it did last Thursday (at over -4%), the market robustly rallied. When it moved to less oversold (-1%) we got Wedneday and Thrusday's schmeissing. The Short-Range Oscillator closed Thursday back in the oversold area (-3.96%) compared to Wednesday's -1.23%. 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 22.56 (-0.05). As volatility declined recently, I took off a lot of my straddles and strangles for a profit. I plan to get back into some straddles with the boost in vol.
* For the fourth day in a row, the U.S. dollar is stronger against the yen. It is a bit weaker against the 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:
View Chart »View in New Window »
* I have been continually writing that bonds should be at center stage to equity weightings - it's all about the rates. Rates fell today and with the SVB Financial Group (SIVB) funding situation I expect a continued fall. BUY BONDS! I am.
* The Two-Year Treasury yield is down by another -8 basis points at 4.818 ( we are -20 bps in 24 hours!) and the 10-Year is flat to 3.849 also -8 bps%. Over there, the yield on the 10-Year U.K. Gilt bond is -10 bps. See my Barron'sinterview two weekends ago that describes rising rates as the single most important headwind against further stock gains.
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.
US Treasury Yields: End of 2021 -> Today
1-Mo: 0.06% -> 4.80% 3-Mo: 0.06% -> 5.04% 6-Mo: 0.19% -> 5.32% 1-Yr: 0.39% -> 5.22% 2-Yr: 0.73% -> 5.00% 3-Yr: 0.97% -> 4.66% 5-Yr: 1.26% -> 4.31% 7-Yr: 1.44% -> 4.17% 10-Yr: 1.52% -> 3.97% 30-Yr: 1.90% -> 3.88%
* The 10s/2s Treasuries curve has moved from -109 to -97 in the last 24 hours
* Commodities - where there are no zero days to expiration options! - are broadly much lower again this morning. Brent crude is lower for the fourth consecutive day this week to $81.07 (-$0.52):
* Gold is +$5/oz.
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. (I was out most of the day at meetings). The principal intent is to review the logic of my market moves and other factors:
The Greatest Trading Market Ever?
And here are Thursday's trades:
* Sold Indices in the early morning gap:
Mar 09, 2023 ' 08:40 AM EST DOUG KASS
SPY, QQQ Moves
On the jobs related move to +2 S&P handles, I have sold some (SPY) $399.16 and (QQQ) $297.78.
Mar 09, 2023 ' 12:10 PM EST DOUG KASS
Short Exposure
I continued to expand my short exposure throughout the morning's strength.
Back in a few hours.
* Bought Indices and banks and big tech late in the day- as the S and P fell by nearly -80 handles:
Mar 09, 2023 ' 03:28 PM EST DOUG KASS
Small Net Long
With the S&P -80 handles I have moved from small net short to small net long.
Mar 09, 2023 ' 03:34 PM EST DOUG KASS
Baby Steps in the Banks
* Buying at day's lows
Though I aggressively sold out of 95% of my bank stocks in the last month, I certainly didn't expect the magnitude of the selloff in the sector.
Picking at some longs: (WFC) , (BAC) , (FITB) , (PNC) , (JPM) , (BK) , (USB) .
Mar 09, 2023 ' 03:36 PM EST DOUG KASS
SPY, QQQ
Added to (SPY) $391 and (QQQ) $292.
* Covered some GS and MS (shorted day before!):
Mar 09, 2023 ' 03:44 PM EST DOUG KASS
Covering What I Shorted
I shorted more (GS) $342.20 (-$7) and (MS) $92.20 (- $4) yesterday.
I am now covering what I shorted at.
* Mar 09, 2023 ' 03:55 PM EST DOUG KASS
Alphabet Soup: Adding to Several Names
Added to (GOOGL) , (AMZN) and (DIS) near the lows of the day.
*Mar 09, 2023 ' 03:57 PM EST DOUG KASS
Covering Netflix
Covering some (NFLX) -$15.
__________
Long SPY (M), QQQ (M), JPM (S), WFC (S), BAC (M), FITB (S), USB (S), FITB (S), BK (S), AMZN (S), GOOGL (M), DIS (M).
Short SPY calls (S), QQQ (S), GS (VS), MS (VS), NFLX (VS).
Themes and Sectors
This table provides value to short term traders:
View Chart »View in New Window »
From the Street of Dreams (Part Deux)
From JPMorgan:
Large Bank Sell-Off Overdone - Higher Liquidity, More Diversified; Mgmt Meetings Yesterday Calm
Large bank stocks sold off sharply yesterday following events among a couple of smaller banks. We believe the sell-off was overdone as large banks have a lot more liquidity than smaller banks, they are more diversified with broader business models, have a lot of capital, are much better managed in regards to risk, and have a lot of oversight from regulators.
Tweet of the Day (Part Trois)
From the Street of Dreams
Light Shed Partners' Walter Piecyk downgrades Apple (AAPL) :
We downgraded Apple to Sell from Neutral and established a $120 price target. Our estimates are below consensus on a more conservative outlook for iPhone sales and moderating growth expectations in Services revenue.
My Tweet of the Day
Tweet of the Day (Part Deux)
From Bramo:
Buying Big Banks
I'm buying more money center banks in premarket weakness across the board.
Tweet of the Day
Agree:
Buy Bonds, Nibble At Stocks
In an attempt to not bury the lede and considering the recent share price decline coupled with growing evidence of an economic slowdown, I suspect that bond yields are in the processing of peaking and selected equities warrant some exposure.
I will expand on this theme and my tactical response to the market drop in late February and early March later in the day.
Market conditions necessitated that I cancel my research meetings I planned for today.
Wolf Street on SVB and Banking
Wolf Street on SVB Financial (SIVB) and the banking industry.
Unfortunately, Wolf Street really doesn't get the distinction between SIVB and the large money-center banks.
But I will get into that this morning.