It is with great sadness that I report that our wonderful editor, Teddy Cohen, has lost his cousin Judi and her husband.

They both died from gunshot wounds in Israel.

Please join me in sending prayers to Teddy and his family.

I don't really feel like writing for the balance of the day as I am terribly saddened by what has occurred.

Out of respect for their memories and in light of my friendship with Teddy this will be my last post of the day.

Be safe and I will see you back early Thursday morning.

I just added to Schwab SCHW $51.17 and Wells Fargo WFC $39.28.

I have been asked by several subscribers about my weightings strategies.

Here is a repost that explains my methodology:

Apr 25, 2023 ' 07:39 AM EDT DOUG KASS

Risk Management: On Shorting and Sizing (Part Deux)

Over the last two weeks I have gotten a number of questions about my weightings.

Here is an important repost that answers most of the related questions:

Feb 13, 2023 ' 06:10 AM EST DOUG KASS

Risk Management: On Shorting and Sizing -- With Feelings!

A reminder, that going forward, I will be disclosing size positions:

Feb 09, 2023 ' 01:30 PM EST DOUG KASS

Risk Management: On Shorting and Sizing

* Going forward I am going to reintroduce my weightings of individual stocks and indexes in order for subscribers to better gauge my confidence levels

* But remember, everyone has a different risk profile and appetite. I am laser focused on risk control and conservative in portfolio construction

As I mentioned yesterday, in two columns -- Know Your Sweet Spot and Check This Out, patience and sizing -- get little commentary but are essential parts of managing money and in controlling risk.

As well, most should not even sell short.

Given the conversation about Tesla (TSLA) in our Comments Section today I wanted to repeat an important post I originally delivered over two years ago on shorting and sizing.



Dec 09, 2020 ' 09:30 AM EST DOUG KASS

On Shorting Speculative Stocks

* It's not fun, it's not easy, and most should not bother!

* But if you immerse yourself in the more dangerous waters of short selling, consider some of my techniques



I have long written that most people should not short stocks:

* Stocks typically move higher over time. Depending on the time frame analyzed, the major Indices have historically risen by about seven to eight percent annually over the last six to seven decades. The gravitational pull of stocks higher is a formidable headwind to short selling.

* When longs go against an investor, their portfolio weighting moves lower. However, when shorts go against an investor, their portfolio weighting moves higher.

* Many shorts are crowded (in short interest terms) - so short squeezes are commonplace in some of the more popular short names. This means you will not likely short a top!

* Tops in individual stocks tend to be a process - while bottoms in individual stocks tend to be events.

* Above all, reward vs. risk is asymmetric between longs and shorts. Longs can theoretically rise by an infinite percentage, or amount, but shorts can only decline by 100% - in a bankruptcy.

My long weightings (for individual stocks or for Index positions), on average, are typically larger than my short weighting (for individual stocks or for Index positions) for the reasons listed above:

For Individual Stock Longs (Revised)

Very Small: Under 0.75%

Small: Between 0.75% and 1.5%

Medium: Between 1.5% and 3%

Large: Between 3% and 5%

Very Large: Over 5%

For Individual Stock Shorts (Revised)

Very Small: Under 0.25%

Small: Between 0.25% and 1.0%

Medium: Between 1.0% and 2.0%

Large: Between 2.0% and 2.5%

For Index Longs

Small: Under 5%

Medium: Between 5% and 15%

Large: More than 15%

For Index Shorts

Small: Under 5%

Medium: Between 5% and 10%

Large: More than 10%



I have been short them all - the "shiny speculative objects" and gewgaws of the time like Iomega, Snapple, LA Gear, Home Shopping, AOL/Time Warner, etc.

And, though I have the scars on my back to show for some of these shorts, in the main I have profited mightily by adopting a methodology towards speculative, high octane shorts.

My approach is four-fold:

1. Many short valuation or an extended stock chart - that can be a big mistake. For me, all shorts, especially of a high beta kind, should be based on strong fundamental analysis. You better be sure that you are correct in this assessment and in your individual equity analysis!
2. Start small and give shorts a "wider berth" - I typically and initially commit well under one percent of my portfolio to an individual name.
3. I trade more actively around a short position than a long position. The former - speculative grade shorts - are typically more volatile than my longs.
4. In emotional terms, stay dispassionate. The short of a speculative name should not evoke more emotion than the rest of your portfolio.

The last point is an important one. I am currently short Tesla (TSLA) . Three months ago I shorted the stock and made well over $100/share in only a few days. In this rendition, the shares have moved dramatically higher, though less than $100/share. The previous large short term short gain has been forgotten by most - just look at the reaction the move has made on my Twitter thread!

I have approached the $100/share move higher as an opportunity to, dispassionately, short more - ignoring the financial media's hyperbolic coverage, sticking with my analysis of "intrinsic value" for Tesla and I have not treated the position differently in emotional terms than any other long or short position in my portfolio. Most can not be as "level headed" in shorts compared to longs - stated simply they often panic at the wrong time.

Bottom Line

Most should avoid short selling.

But if you elect to travel in these more dangerous investment waters, consider smaller weightings than long positions, and give a short a "wider berth" when adding and stay unemotional.

Bonds slip in price after the Treasury's large ten year auction.

PJM

Apple's most popular models the Pro Max and Pro are showing in stock at many Apple stores on a daily basis. Looks like they are catching up with demand. Rumors of supply chain cuts I'm sure will be coming in the next 2 to 4 weeks as they do like clockwork every 4th quarter.

Since March I have argued that the opportunity, both absolutely and risk adjusted, in credit exceeds the opportunity in equities. 

This morning, Oaktree's Howard Marks commentary delivered the same message.

This Tweet does a good job in debunking the short conspiracy theory of AdvisorShares Pure US Cannabis ETF MSOS  :

Banks all lower after gapping higher in the morning rally. 

From earlier: 

Oct 11, 2023 ' 11:35 AM EDT DOUG KASS

Banks and Financial Stocks

I am laser focused on bank/financial stocks.

They are giving up the early gains.

Words can't describe how badly I screwed up by prematurely covering - for a gain - my shorts in DVA and DXCM . 

Jeez Louise! 

Stick to your damn research, Dougie.

After doing my analysis, I plan to short Birkenstock BIRK at any price near the IPO price.

The flight to safety waffles a bit as traders try to assess reports that U.S. field teams may be on standby, perhaps on developments on the hostages.

That takes a little wind out of the equity rally, and it looks like they want to shift the stock market on to cruise control as they await headlines and see if there are new wrinkles in the hostilities.

That is why we are sitting by the newsticker and keeping an eye on those yields.

Remain alert, cautious and stay safe.

Arthur

I am laser focused on bank/financial stocks.

They are giving up the early gains.

I moved to medium-sized in my Tesla TSLA short ($266).

This is the stupidest thing I've read in a long time! 

It almost seems as if every Treasury Secretary just becomes a political hack salesperson for whom they work for.

From Peter:



After PPI at 8:30 am, the 10 yr note auction will be in focus after the soft 3 yr auction yesterday where short term paper should be much easier to sell than the longer term stuff but not yesterday. The yield on the 3 yr was sold almost 2 bps above the when issued price. Also, the bid to cover of 2.56 was below the one yr average of 2.70 and dealers were stuck with 22% of the supply, the most since October 2022.

As one of a few factors, I do pin some of the rise in long term rates since late July when the BoJ announced the widening to yield curve control (which I think was the main reason), to QT, not just in the US but elsewhere. Yes, when we saw QE1 and QE2 rates rose too but that was a reflation trade and with different circumstances. The big question is how long can QT continue on before the financial plumbing starts to clog up. What level of bank reserves is the 'right' level? Some argue $2.5 trillion vs the $3.15 trillion now.



How much more will their RRP facility shrink? We'll see and Roberto Perli, who basically runs the Fed's System Open Market Account that trades the Fed's balance sheet, said Monday "Recently, our implementation framework has confronted a number of stress tests and performed quite well. This is all encouraging, but we remain cognizant of the risks and uncertainties ahead."

As we've seen QT only once before and it ended in failure, there is not like there is a wide body of historical experience here but I will bet this one ends in failure too. I define failure as things cracking in the financial system well before the Fed's balance shrinks by much and we're left with this perpetually large Fed presence in the markets. And, let's take this one step further, the Fed might be forced to revert back to QE just to help absorb the massive amount of Treasury supply coming down the DC pike.



For perspective, the Fed's balance sheet in February 2020 was at $4.16 trillion vs just under $8 trillion today. If the balance sheet since February 2020 just grew in line with nominal GDP (obviously goosed by the inflation and fiscal largesse since), it would stand instead today at $5.19 trillion. I see no chance it gets anywhere close to that during this QT process.

While more Fed members (now Kashkari) are acknowledging the tightening impact of higher long term interest rates, like a 100 bps rise in the average 30 yr mortgage rate since the last July rate hike that I talked about a month ago as reason to stop, Michelle Bowman speaking in Morocco today again said that the current rate of inflation above their 2% target, state of the tight labor market and that "domestic spending has continued at a strong pace...This suggests that the policy rate may need to rise further and stay restrictive for some time to return inflation to the FOMC's goal." She did however acknowledge that "Financial market conditions have certainly tightened. That allows us a little bit of patience; that we can continue to watch as economic conditions and financial conditions continue to evolve."



In totality, listening to all the Fed speak over the past few weeks, and while Jay Powell will be the finally decision maker, I think there is no chance they hike rates in November and the fed funds futures has the odds at about 20%. AGAIN, either way, higher for longer is a continuous form of monetary tightening, joined by QT, that will ensnare more and more households and companies as debt comes due and future projects get shelved.

In the September NY Fed's Consumer Expectations survey seen yesterday, the one yr and three yr inflation expectations rose one tenth and two tenths respectively to 3.7% and 3.0%. The 5 yr guess slipped by two tenths to 2.8%. Keeping the shorter term expectations from rising further was the drop in price gain expectations for college to 5.8% from a large 8.2% seen last month. There was slight slippage in price estimates for gasoline, medical care and rent but rose for food. As for homes, price gain guesses were 3% vs 3.1% in August. It's truly upside down that price gains continue with mortgage rates approaching 8% but I think we're reaching a breaking point on pricing.

With regards to the labor market, the mean probability that the US unemployment rate will be up in one yr rose 1.6 percentage points to 40.1% but that's in line with the one yr average. There was a drop in those expecting a loss of one's job. Income expectations rose a touch and consumer spending estimates were unchanged.

Here were the key comments on credit access and paying back debt and both weakened further but slightly m/o/m: "The share of households reporting that it is more difficult to obtain credit now than a year ago increased, while the share reporting that it is easier declined. Similarly, respondents' views about future credit availability deteriorated slightly." Those surveyed also expect a further tightening in credit conditions.



On paying back a loan, "The average perceived probability of missing a minimum debt payment over the next three months increased by 1.4 percentage points to 12.5%, the highest reading since May 2020. The increase was largest for respondents below the age of 40, with some college education, and those with an annual household income below $50k."

This whole analysis on how much consumers have in 'excess savings' needs to be differentiated among income groups and we have to understand too that even those with 'excess savings' can still change their spending behavior in response to the sticker shock of inflation and nervousness about the macro environment with both leading to a slowdown in spending.

To the last point, who agrees with me that spending $65-70 for a steak nowadays is absolutely ridiculous?

Pepsi in yesterday's earnings call said this on the consumer, "I do think that we see the consumer right now being more selective, and you see it in a variety of ways, right? You see some trade-down in terms of channels of trade that they're purchasing products in. You see some orientation toward value...we think our revenue outlook accommodates an increasingly cautious consumer next year."

With respect to their inflation expectations, "if you think of pre pandemic inflation being kind of in that 2%, 3% range, inflation is going to be a little elevated relative to that and our pricing will be roughly in line with inflation."

On the higher end of luxury, LVMH said yesterday, "After three roaring years and outstanding years, growth is converging toward numbers that are more in line with the historical average." The stock is down 6% today in Paris in response to the slowdown in Q3 sales growth.

In the face of another rise in mortgage rates, the MBA said purchase and refi applications rose .7% and .3% w/o/w respectively after about 6% drops last week. That purchase figure is off the lowest level since 1995.

Overseas, Taiwan said exports rebounded in September, rising by 3.4% y/o/y, well better than the estimate of down 2.5%. Understand that this is the first y/o/y increase since August 2022. Tech products helped specifically in communication, information and audio/video things. Semi shipment declines moderated. Could this be an initial sign that the global inventory destocking is almost done? I think so. Asian stock markets rallied across the board with the TAIEX in particular up about 1%.

Today's short scale of the Indexes has moved me further net short.

In watching the share price, something is rotten about Apple AAPL .

Scaling higher on my index shorts into this rally.

From Arthur Cashin:

Once again on Tuesday, the financial world was captivated by the actions of a few government officials, but these guys were certainly not among the well-intentioned. What was happening was a major potential unraveling in the Middle East as the hostilities, prompted by the invasion of Hamas troops from Gaza into Israel continued to evolve with more question marks than answers and it presented an interesting situation as markets began to react to it. Monday, there was some anxiety, but some of that was confused and muted by the Columbus Day holiday here in the U.S. and a variety of other holidays around the world, particularly in the Asian area.



Tuesday morning, we came in looking for regrouping and what we got was a one-two punch of a clear-cut part of a flight to safety, which was than augmented by conversations from Fed officials that began on Monday and continued Tuesday, indicating that much of the tightening in financial markets seen in the changes in bond yields and the like were, in fact, doing some of the Fed's work for it and with this commentary coming out plus the tag ends of the flight to safety, yields on the ten-year dropped dramatically and, as we have seen ever since I first brought it up a couple of months ago, the stock market is following the yield around like a puppy on a leash. The move down in yields brought the algorithms roaring in to buy equities.

We had the somewhat strange case of the hostilities beginning to accelerate and concerns about them widening and yet stocks rising higher and higher as we moved along. That seeming paradox continued on throughout the day into the afternoon when we saw a bit of a sign of some second thinking, but not enough to fully change, only to temper slightly the somewhat sizeable gains we had seen early in the morning.



There were a variety of other headlines and news bits out, but none of them more compelling than the idea that yields plunged on a partial residue of the flight to safety that had begun the day before and the continuing easing prompted by the Fed commentary, which also had begun the day before and, I would like to leave you with a tale from classic adventurous literature, but it was not a great deal more than what we just discussed, a reaction to a further fall in bond yields.



We will be watching as military operations continue to evolve and see if the situation worsens at all or threatens to expand more than people had thought, but rather than walking you through a three-day class in Machiavelli or Clausewitz on diplomatic and military strategy, let's just stick with Wall Street and the numbers and as we come into the next day of this horrible military situation, we will see what is happening with markets around the world. Overnight, global equity markets are leaning somewhat to the upside.

While it would appear that the Middle East hostilities are about to intensify further, the presumption is it will also bring a further flight to safety. Also, later today, we get the Fed Minutes, but they are considered to be a bit out of date since we recently had a variety of Fed speakers, hinting that the market itself may have done some of the Fed's work.

At any rate, Japan closed up the equivalent of about 110 points in the Dow. Hong Kong was the star in Asia, up the equivalent of about 400 points in the Dow. Mainland China closed marginally higher, up maybe 50 Dow points and India closed up about 170 Dow points. As we go to press, London is trading marginally better, while Paris and Frankfurt are trading off about the equivalent of about 100 points in the Dow.



Today's economic calendar will again be dominated by Fed speakers, perhaps a handful of them with Bowman starting pre-dawn and it being Wednesday, we will get very early mortgage data and then, pre-opening, we will see the PPI coming out. They are assuming not many major surprises. So, bond traders will cross their fingers. Midmorning, we will get the Atlanta Fed's Inflation Projection and then throughout the late morning into noon, we will have more Fed speakers. At 1:00 p.m., we will have a ten-year bond auction.



The Fed Minutes come at 2:00 p.m., which as we said earlier, thought to be a bit stale with the parade of Fed speakers we have had over the past week and a half. The hostilities in the Middle East, as we said, look like they might begin to expand. There is some hint that Hezbollah may begin attacks from Lebanon, but many think that is just for publicity and advertising and will not be a major military effort. Were it to become so, that would be a surprise. The idea, which as I said, is that the flight to safety, which may be reduced to a stroll to safety will likely continue inline with the hopefully mild increases in hostilities.

Given all the geopolitical action, obviously, you want to stay close to the newstickers. Keep your seatbelt fastened. Stay nimble and alert.

We will continue to watch yields relative to the ongoing stroll to safety. We suggest that through all these geopolitical events, you stay alert and most of all try to stay safe.



P.S. - Some amateur James Bond floor types cynically speculate that the rush to provide a U.S. Naval Task Force may be an attempt to give the U.S. some control over any potentially "rash" move against Iran. Things are never what they seem.

I moved to large-sized XOM at $106.81.

I am shorting SPY and QQQ at $435.70 and $369.85, respectively. 

Upside



-TPST +367% (releases new data demonstrating superiority of TPST-1120 arm across multiple study endpoints in randomized First-Line HCC Study)

-VOXX +12% (earnings)

-SHCR +11% (John H. Chadwick disclosed amended 10.4% stake; Submitted a preliminary non-binding proposal at $1.35 to $1.80/shr)

-TUP +11% (momentum)

-PLUG +6.8% (trims FY23 revenue guidance, provides long-term financial targets)

-AZZ +6.7% (earnings, guidance)

-OMH +4.5% (acquires Simply Sakal, leading Singapore tech-enabled property management company for S$4.7M)

-CAVA +4.4% (Morgan Stanley Raised CAVA to Overweight from Equal Weight, price target: $41)

-NVO +3.7% (will stop the once-weekly injectable semaglutide kidney outcomes trial, FLOW, based on interim analysis met certain pre-specified criteria for stopping the trial early for efficacy)

-SLS +3.5% (momentum following receiving of US FDA Orphan Drug Designation for Treatment of acute myeloid leukemia)

-RPD +3.4% (Point72 (Steve Cohen) discloses 5.1% passive stake)

-LLY +2.8% (strength off data from rival Novo Ozempic kidney trial data)

-PDSB +2.5% (announces Interim Safety and Immune Response Data from Phase 1/2 Clinical Trial Evaluating Novel Antibody Drug Conjugate PDS0301 Combined with Docetaxel to Treat Metastatic Prostate Cancer)

-SANA +2.4% (announced a portfolio update to increase its focus on its ex vivo cell therapy product candidates)

-MUX +2.0% (McEwen Copper closes ARS $42B investment by Stellantis)



Downside



-SILK -44% (reports prelim Q3 revenue, cuts FY rev guidance; CEO to retire)

-HYLN -38% (announces strategic review of alternatives for Electric Powertrain Business)

-HOFV -27% (files to sell public offering of common stock and warrants)

-ETWO -18% (earnings, guidance)

-DVA -16% (Novo stops kidney outcomes trial early for efficacy)

-FMS -16% (Novo stops kidney outcomes trial early for efficacy)

-LXFR -14% (reports prelim Q3, cuts FY outlook)

-RGF -13% (files to sell public offering of its Class A common stock of indeterminate amount)

-PSNY -9.0% (files $1B mixed shelf)

-BAX -8.3% (Novo stops kidney outcomes trial early for efficacy)

-NOG -4.5% (prices 6.5M share equity offering; gross proceeds $252.7M)

-BNGO -2.7% (prices $80M Registered Offering and Concurrent Private Placement of Senior Secured Convertible Notes and Warrants)

-HUBS -2.7% (Raymond James Cuts HUBS to Outperform from Strong Buy, price target: $520)

-XOM -2.5% (ExxonMobil confirms merger with Pioneer Natural Resources at $253/shr in $59.5B in all-stock transaction)

At 8:44 am:

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In premarket trading I have moved my XOM buy to medium-sized from small-sized at $107.

I have added to my Apple AAPL short in premarket trading at $178.80.

I purchased XOM in the premarket at $108.55 - following confirmation of the Pioneer merger. 

I plan to hold on to this as an investment.

From JPMorgan:



US: Futs are higher led by Tech as the bond market rally continues. 10Y yield is now -24bps over 2 sessions. USD is flat and cmdtys are mixed with strength in gasoline, heading old, and precious metals. Fedspeak continues to dominate headlines and is one of the drivers of the bond mkt this week; 4x speakers today plus FOMC Minutes. Mkt will look for clues on how the Fed is considering higher-for-longer and any threshold to change policy. Keep an eye on the 10Y auction today, which Jay thinks will be digested smoothly. The macro data focus is on PPI ahead of tmrw's CPI print. The House will vote on a new speaker later today. 

and... 

EQUITY AND MACRO NARRATIVE: PPI and Fedspeak will drive the market today as we receive CPI tomorrow and then banks launch earnings season on Friday. If we see other Fedspeakers adopt Bostic's stance, no more hikes and no recession, then look for this rally to continue especially if macro data prints inline. The balance of this note includes (i) PPI preview; (ii) CPI scenario analysis; (iii) consumer health update from JPM Econ; and (iv) Bank sector earnings preview.

PPI PREVIEW 

We [Feroli & team] estimate that the producer price index (PPI) rose 0.3% in September. Energy prices looked to have climbed again in September after surging in August, and we look for a 2.5% increase in the energy PPI to boost the September headline figure. We also look for a 0.3% move up in the food PPI in September to follow the 0.5% August decline, as this series generally has been flattish lately through some monthly ups and downs. Away from food and energy we believe that the core PPI rose 0.2% in September, which would continue its recent modest upward trend. We believe that core goods prices and services prices continued to trend higher into September and we also expect to see some cooling in construction prices.

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CPI SCENARIO ANALYSIS - print is Thursday, Oct 12 at 8.30am ET

Feroli's sees Headline MoM CPI printing +0.3%, in line with the Street; and he sees Core MoM printing +0.33%, slightly above the Street who is at 0.3%. Feroli's commentary:

We estimate that the consumer price index (CPI) rose 0.3% in September. Like we saw in the August data, we think an increase in energy prices boosted the headline print for September, but the forecasted gain in the energy CPI for September (0.9%) is much more modest than the 5.9% jump reported for the prior month. We also think that food prices in the CPI continued to climb in September at a rate close to the recent average, with the food CPI up 0.2% that month. Away from food and energy, we forecast that the core CPI increased 0.3% in September (0.33% to two decimals)-this would mark the firmest monthly change since May but would still allow the related year-ago inflation rate to continue to moderate to a forecasted 4.1%oya in September (from 4.3% in August).

Within the core index, we think there will be mixed changes across the different main underlying subcomponents. We think that the trends for rental inflation will continue to moderate over time and we believe that tenants' rent increased 0.40% in September while owners' equivalent rent moved up 0.39%. Lodging prices in the CPI have dropped off for a few months through August, but industry figures suggest that this decline did not carry over into September and we forecast basically no change for the related CPI measure.

In other travel-related details, public transportation prices dropped in June and July before jumping in August. We look for a more modest gain to be reported for September, with prices up 0.3% that month. Industry figures also point to some recent firming in vehicle prices, and we estimate that used vehicle prices increased 1.3% in September while new vehicle prices rose 0.3%.

Rounding out some of the other categories within the core CPI, we look for modest 0.1% declines in prices for both communication and medical care, with these September changes continuing recent downward trends for these series. We also look for little change in apparel prices in September, as related prices look to have flattened out in recent months following an earlier upward trend.

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This chart is a valuable resource for momentum-based short term traders:

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