I am going to call it a day. 

I got up at around 3 am to finish my Surprise List so I am exhausted. 

I suppose today will be another trading session in which breadth was poor as the averages rose - a narrowing and not a broadening market. 

Thanks for reading my Diary today. 

Enjoy the evening. 

Be safe.

Here were strategists' year end 2023 price targets for the S&P Index one year ago:

Given their respective records it is amazing how glib they are today about their 2024 price targets...

Bespoke Asks:

Wolf Street howls about the Fed's confusing messaging.

From Charlie, here.

It is remarkable, to me, that the averages continue their climb in the face of weak breadth for the second day in a row:

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Goldman Sachs lifts its price target by 10% in one month:

* A vast array of unexpected political, geopolitical, economic and market surprises could be on tap for next year

"Concentrate on finding a big idea that will make an impact on the people you want to influence. The Ten Surprises, which I started doing in 1986, has been a defining product. People all over the world are aware of it and identify me with it. What they seem to like about it is that I put myself at risk by going on record with these events which I believe are probable and hold myself accountable at year-end. If you want to be successful and live a long, stimulating life, keep yourself at risk intellectually all the time."

- Byron Wien

In this year's Ten Surprises List for 2024, I am paying homage to my dear pal Byron Wien who passed away two months ago. Here is my recent tribute to Byron. 

In doing so I have abandoned my own format over the last 22 years in favor of adopting Byron's format -- from his style to the brevity and conciseness of his surprises over the last 38 years. (Here was By's Ten Surprises of 2023 Byron Wien and Joe Zidle Announce the Ten Surprises of 2023 - Blackstone). I even included several "also rans" surprises -- just the way Byron did! 

My 10 Surprises of 2024 are as follows:

1. Donald Trump is convicted of obstruction and conspiracy.

In an agreement between the former President and the current President, Biden pardons Trump in exchange for Trump agreeing to leave the 2024 Presidential race. Governor Ron DeSantis finishes third in both the Iowa and New Hampshire primaries and drops out of the race -- with Nikki Haley capturing many of his supporters - closing the gap with Trump. Chris Christie drops out soon thereafter while Vivek Ramaswamy hangs on to the bitter end. Nikki Haley becomes the Republican Presidential nominee. 

In early September, shortly after Biden wins the nomination, the President suffers a health emergency and, like Trump, leaves the race. If Trump indeed has left the race, Governor Gavin Newsom is selected as the replacement nominee for Biden. If Trump is still in the race (and not convicted) and Biden does have a health emergency, the Democrats draft Governor Gretchen Whitmer after first trying to attract Michelle Obama into the fray (she demurs). Whether the contest is between Haley/Newsom or Trump/Whitmer, the winner will be the first woman President...either Nikki Haley or Gretchen Whitmer.



2. In part due to fear that Democrats will continue to hold on to the Presidency, foreign powers step up military confrontations.



The West continues to lose patience with how the war is going with Ukraine as the U.S. backs off of its support. Negotiations on a territorial split begin and Ukraine is forced to give up the East of the country to Russia. 

North Korea, with support from Russia, undertakes skirmishes in the Demilitarized Zone and makes threats to invade South Korea. Iran completes its nuclear buildup which provokes a direct attack from Israel. Though China doesn't invade Taiwan it continues with aggressive war game tactics in the South China Sea. 

The global economy is more susceptible to supply shocks than is generally believed. With Russia and Saudi Arabia conspiring on production cuts, the price of oil exceeds $110/barrel and the price of a gallon of gasoline in the U.S. approaches $6. Shares of Exxon Mobil XOM , Occidental Petroleum OXY and Chevron CVX each rise by over one third next year.



3. There is neither a soft landing nor a hard landing -- just very sluggish real growth in the U.S. economy.



With no negative payroll prints, wages continue to grow at a three to four percent rate as unemployment stays below 4.50%. China's economy starts a surprising recovery causing commodity prices to begin to inflect higher and oil begins a slow but persistent recovery in price. Inflation fails to tick much lower, remaining well above the Fed's target. Nonetheless, with the polls tight and in an effort to influence the election, the Federal Reserve cuts rates twice before July. 

These policy moves and conditions prompt a resurgence in headline inflation, and as discussed above, in a further spike in the price of oil in late summer -- complicating the Fed's desire to cut rates. Though domestic growth begins to trail off in the last six months of the year and unemployment moves higher, no further interest rate cuts occur over the balance of the year. It's slugflation (sluggish economic growth, sticky inflation), clear as day. 

The yield on the 10-year Treasury, which today is at 3.91%, never declines below 3.75% and fluctuates between 3.75% and 4.75% most of the year. A developing US recession, late in the year, sends the budget deficit as a percentage of GDP to 10% or more -- overwhelming Treasury supply and sending the 10-year yield back above 5%. 

The U.S. federal debt problem is no longer shrugged off by investors -- it looms larger in late 2024 and slowly becomes a serious systemic problem in the years ahead. 

Creditors demand more to buy U.S. debt. After the 10-year Treasury yield touches 5.5%, the Fed ends QT and restarts, temporarily, QE - breaking its word of sticking to its inflation target.



4. The S&P Index never exceeds 4900 and drops to under 4100 in the oil price scare.



Despite all the macroeconomic, geopolitical and political drama, the trading range for most of 2024 is the narrowest in years. The S&P Index ends the year with about a 5%-10%  decline. Led by the drop in the shares of Apple AAPL , the Nasdaq ends the year with a decline of between 10% and 20%. The market doesn't broaden out further and the Russell Index also exhibits a loss for the year as many components of the Russell face financial (debt rollover) and operating headwinds.



5. The biggest and most popular stock in the world, Apple, suffers a large percentage loss in 2024 as trade tensions with China escalate.



With China supporting Huawei, Apple loses substantial market share in that country and overall revenues decline again in 2024 (over 2023). Meanwhile, as a result of the Google Anti-Trust case, Google GOOGL stops paying Apple $18 billion in search fees. Apple's shares drop to below $130/share. Berkshire Hathaway BRK.B"doubles down" on its already large Apple stock holdings - raising its position to nearly two billion shares.



6. Fears of credit problems are realized and the banking industry, among others, suffers large loan losses.



Commercial real estate fails to recover in price. A wave of commercial real estate busts create another regional banking crisis and forces the FDIC to negotiate several bank mergers. In 2024, bank stocks return to their 2023 lows.



7. Wall Street's most vicious vultures -- private equity -- are about to get torn to shreds.



With still elevated interest rates, especially in the second half of the year, and a slowing global economy, loan rate resets contribute to a leader in private credit failing. Blackstone's BX shares drop by a third after BREIT (private real estate fund run by Blackstone) and BXMT come under new redemption pressures. Shares of other private equity stocks (Apollo APO and KKR ) plunge as the SEC opens an investigation into the failure of the private equity industry to realistically mark-to-market their portfolios in a timely manner.



8. What would a surprise list be without mention of Elon Musk?



It is revealed that Elon Musk suffers from a serious addiction. Entering an extended stay in rehab, Musk is forced to temporarily relinquish operating control over his companies. Tesla's TSLA shares fall back to the lows of 2023.



9. Warner Brothers Discovery WBD and Paramount Global PARA suffer operationally and financially ("profitless prosperity")



Streaming fails to fulfill optimistic expectations -- the total addressable market is over estimated, content costs remain high and profits are nonexistent. 

On the brink of a liquidity crisis, Shari Redstone sells Paramount (at a discounted price) to private equity. Disney's DIS shares trade in the $70s and corporate raider Nelson Peltz sells out for a large loss. Bill Ackman's Pershing Square hedge fund purchases Peltz's shares.



10. JPMorgan Chase's JPM Jamie Dimon departs the bank and joins either the Haley or Whitmer Administration as Secretary of Treasury.



Marianne Lake becomes CEO of JPMorgan. 

The 'Also Rans' of 2024

Every year Byron used to write that there are always a few Surprises that do not make the Ten, because he either did not think they were as relevant as those on the basic list or he was not comfortable with the idea that they are "probable."

Here are my "also rans" of 2024:



11. The sports story of the year is that Tiger Woods wins a major title. 



12. Goldman Sachs' GS Chief Executive Officer, David Solomon, resigns. He moves to Miami, Florida and becomes a full time DJ. Ericka Leslie becomes the CEO of Goldman Sachs - joining Jane Fraser (Citigroup) and Marianne Lake (JPMorgan) as the third woman to run a major U.S. financial institution.



13. The Court overrules previous decisions and accepts Johnson & Johnson's JNJ use of the "Texas Two-Step" to tackle baby powder liabilities. JNJ shares rise to over $200/share.



14. 0DTE options (zero days to expiration) cause a 3% to 5% flash crash on a day's-end expiration during the summer.



15. In addition to Apple's fall from grace another member of the Magnificent 7 succumbs to "economic gravity" and has a significant earnings disappointment and lowers forward guidance. After closing 2023 near their 52-week highs, during frequent episodes in 2024 the share price performance of the heavily owned (and loved!) Magnificent 7 more resembles the weak absolute and relative underperformance of 2022.

__________ 

Long JNJ common (S) and calls (S), OXY (VL), XOM (L), CVX (S).

Short AAPL (S), BXMT (S), SPY (M), QQQ (VL), APO (VS), KKR (VS), BX (VS).

CNN Fear & Greed Index.

From Peter: 

The NAHB home builder sentiment index for December was 37 as expected, up from 34 in November and vs 40 in October, 44 in September and 50 in August. There was no change in the Present Situation but a 6 pt rebound in Future Expectations was seen, likely helped by the drop in rates, and comes after a 5 pt drop last month. Prospective Buyers Traffic remains in the doldrums, at 24, but up 3 pts m/o/m after falling by 5 pts in November. It was 40 back in July and the last time it was above 50 was May 2022.

The NAHB did cite the drop in rates as helping future sentiment and lifting a touch the buyer traffic.

Bottom line, there is a clear bifurcation going on in the new build market. You either have heft or you don't in terms of managing the current high borrowing costs, ability to get loans and on top of the increased cost of land. The big publicly traded builders have a better ability to deal with all of this, on top of the financial capacity to offer discounts (however configured) to prospective buyers. The smaller builder is at a big disadvantage and I think this is why this sentiment index remains subdued, offsetting the optimism that the big builders still have.

In terms of those discounts, "In December, 36% of builders reported cutting home prices, tying the previous month's high print for 2023. The average price reduction in December remained 6%, unchanged from the previous month. Meanwhile, 60% of builders provided sales incentives of all forms in December, the same as November but down slightly from 62% in October."

NAHB

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Prospective Buyers Traffic

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* And all go on my Best Ideas (Watch) List (short).

Shorting APO $94.80, KKR $84.96 and BX $129.25. 

For rationale, see my upcoming 10 Surprises of 2024 later in the day!

I remain short Apple:

From Arthur Cashin: 

Traders spent a chunk of Friday morning concerned that the powerful and magnificent rally that had begun with Powell's press conference on Wednesday afternoon might, like the unfortunate late - Mr. Housdon, be going to pieces. Part of that reasoning was the beginning of some pushback now that the other FOMC members are out of their quiet period. We heard from Williams of the New York Fed and Bostic of the Atlanta Fed, who appeared to be trying to put a damper on the idea that rate cuts may be imminent. That resulted in some choppy trading, particularly in Nasdaq as we went through the early stages. We alluded to some of that in this late morning update:

12.15.23 LATE MORNING UPDATE - Stocks trade in a slightly mixed fashion, as traders continue to try to absorb the heavily overbought condition resulting from the massive Wednesday afternoon spike. The yield on the 10-year continues to stay below 4%, which continues to boost the market. The VIX even came within a hair of breaking below 12, so they continue to need to churn through this overbought condition. The mix of the rebalancing and the Quarterly Expiration is increasing the volume but hasn't produced a spike in volatility. So, it looks like in the afternoon, they would like to tiptoe into the close and to have a kind of celebratory weekend after the rather victorious couple of days for the bulls. So, stay close to that newsticker and be wary of any surprises, but given these perilous times be sure to stay safe.

Shortly after the update went out, the bulls did seemed to circle the wagons a bit and Nasdaq started to come back in gear as a bunch of the chip stocks were rallying on new upgrades from several brokerage firms and that seemed to put a somewhat warmer bid under Nasdaq and rejoined the Dow in plus territory. That seemed to help the market overall get back in good gear. As we alluded to in the late morning update, the Quarterly Expiration and the rebalancing did swell the volume a good deal, but we could not attribute any major changes in volatility to those factors.



As I say, we went on through the balance of the day and as we moved into the afternoon, the bulls seemed to get a stronger grip on things and the rally seemed to get a somewhat stronger purpose and by late afternoon, there was very little doubt that they were going to try for yet one more closing on the upside and that stretches it to, I think, seven weeks, which is rather impressive.

We also will look to how our friends offshore managed to factor in the interest rate moves by both the ECB and some of the other central bankers. They certainly were not as bullish and bubbly as Powell had appeared to be when he seemed to embrace the hint of rate cuts in the new Dot Plot projections. Nevertheless, I think, the offshore action will be important to watch. Overnight, global equity markets are leaning somewhat to the downside, although the specific data is somehow difficult for me to come by.



It has been so since the huge solar flare over a week ago, but I do not see anything in the international press about the global communications being stymied. So, we will figure out the mechanical disfunction is part of my operation or not. In the meantime, we will try to estimate some approximate numbers, but take these with a grain of salt.

In Asia, Japan's government bond yields slipped lower, but it is not doing much lower to help the equity markets. Japan's equity market looks like it closed down approximately 140 points in the Dow. Hong Kong was off about 340 points in the Dow. Mainland China looks like it may be off about 80 and India closed fractionally lower but, take that all with a large grain of salt. The European markets are also leaning toward the soft side and, as we go to press, I would average them out to say equity markets in London, Paris and Frankfurt look like they are trading lower by about 150 Dow points, but again, take that with a of grain salt.



Today's economic calendar is almost non-existent. We get some Housing data and not an awful lot more. We will be looking to see if there is any FOMC commentary. We do not have anything scheduled, but you never know who pops up for a random interview. So, with non-specific information, we will see that the other equity markets are leaning lower, the futures here in the U.S. are fractionally higher as we go to press and again that indication is also a little bit waffly.

Before we wrap, we should take a moment to return you to the 4th grade and your study of money mechanics under your own personal version of Sister Herman Joseph. Everyone is talking about the Fed and cutting rates and what does it mean. Let's go with the simple principle that, if for argument's sake, inflation was rising at a 4% annual rate, if you, as the Fed, raises basic rates to 4%, that would be generally neutral. You are only offsetting where inflation was. If you raised it 4 ½, that would be tightening as you were making the cost of money a little bit higher than inflation.



If in fact, inflation is going to move somewhat lower here and the Fed does nothing with rates, it is basically tightening because they are allowing that point of making cost of money higher than the rate of inflation. So, modern money mechanics would suggest that if the inflation is moving down, the Fed may have to cut rates somewhat just to keep it neutral and if they wish to make it expansive, they would cut more, but it is not something that is simple about how the Fed feels. Modern money mechanics tells us there has to be a relationship between the rate of inflation and the cost of money that Fed puts on things. Alright, class dismissed.

For now, we will stick with the current drill. Things bubbling up on a geopolitical basis means stay close to the newsticker. Keep your seatbelt fastened. Stay nimble and alert and above all, please stay safe.

Upside



-ADBE +11% ADOBE AND FIGMA MUTUALLY AGREE TO TERMINATE $20B CASH-STOCK MERGER AGREEMENT CITING NO CLEAR PATH FOR REGULATORY APPROVALS

-X confirms to be acquired by Nippon Steel for $55.00/shr in an all-cash transaction with EV of ~$14.9B

-CLF +7%

-PGTI +7% to be acquired by Masonite International for $41.00/shr in ~$3.0B cash-stock deal

-M +1% Sycamore Partners could emerge as a bidder for Macy's - press

-AYX +1% confirms to be taken private by Clearlake Capital Group and Insight Partners for $48.25/shr in ~$4.4B deal



Downside



-VFC -6% cyber incident disclosure

-GPCR -45% development program update for its highly selective oral GLP-1 receptor agonist,

-CKPT -50% FDA Issues Complete Response Letter for Cosibelimab

-EBIX -46% files for Chapter 11 bankruptcy protection

-ROKU -3% Seaport downgrade

-AFRM -5% Seaport downgrade

At 9:00 am:

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I've expressed my view of the pernicious impact of a higher interest rate environment that lasts a while because it comes after 15 years of easy money, and in particular for small and medium sized businesses who mostly have floating rate debt and needs the banking system for loans. 'Pernicious' defined by Oxford as "having a harmful effect, especially in a gradual or subtle way." In the weekend Barron's (story originally written a few weeks ago), there is an article that touches on the challenges that small business is having in this higher rate world.  

In the piece, "New York City- based chef Russell Jackson says finding financing for his restaurants has always been a balancing act. But the current combination of high interest rates, high inflation and tight credit has made it more precarious than ever. Since his latest venture, a fine-dining restaurant called Reverence, opened in late 2019, Jackson has kept the operation running with a changing concoction of personal savings, Small Business Administration loans, Paycheck Protection Program funding, private grants, community donations and his first ever corporate credit card, which is already maxed out." Jackson said "We went from manageable to unmanageable very, very quickly, because the interest rates basically quadrupled." 

The article went on to say, "Roughly one in five small businesses view rising interest rates as the top challenge, and half of all small firms are delaying plans to expand because of those rates, says Tom Sullivan, vice president of small business policy with the US Chamber of Commerce, citing survey data jointly collected by the chamber and MetLife." 

And the impact of small business, "Small firms are responsible for roughly two-thirds of all net new jobs and in recent year have accounted for 44% of all economic activity." 

We also have to ask, even if the Fed cut rates by 150 bps in 2024 (I'm being aggressive here but only believe it could be by 75 bps), the average rate paid by small business might still be around 8% vs the average of 5.6% (according to the NFIB) in the 15 years leading into the early 2022 rate hikes and that assumes all else equal in terms of credit spreads. 

Bottom line, the economic impact of higher rates is being felt by small business every day, especially if one has a loan due. As for investment grade companies, they have about $700 billion of debt coming due in 2024 and another $1 trillion in 2025 that will either be paid off or refinanced and if the latter, assume the interest rate will be about double the rate on the loan coming due. These companies will be fine viability wise but higher interest expense will clip earnings. 

Cleveland Fed president Loretta Mester, who does vote in 2024, is pushing back against market rate expectations in an interview in the FT. "The markets are a little bit ahead. They jumped to the end part, which is 'We're going to normalize quickly', and I don't see that." She also said, "The next phase is not when to reduce rates, even though that's where the markets are at. It's about how long do we need monetary policy to remain restrictive in order to be assured that inflation is on that sustainable and timely path back to 2%." 

Austan Goolsbee did the same but doesn't vote in 2024. On Face the Nation yesterday, "We've made a lot of progress in 2023, but I still caution everyone, it's not done. And so the data is going to drive what's going to happen to rates...We've got to get inflation down to target. Until we're convinced that we're on path to that, it's an overstatement to be counting the chickens." 

In Europe, the Slovenian central banker and member of the ECB Bostjan Vasle did the same saying today "Market expectations for interest rate cuts are premature in my view, both with regard to the start of cuts and the totality of moves." 

On Friday, Tiff Macklem, the Governor of the Bank of Canada did the same. After saying that once they are convinced that inflation increases are on a sustained drop, they "will be considering whether and when we can lower our policy rate." However, "I know it is tempting to rush ahead to that discussion. But it's still too early to consider cutting our policy rate." 

Former NY Fed president Bill Dudley wrote a piece today for BN titled "Jerome Powell's Pivot is a Pretty Big Gamble." He said, "The US Federal Reserve and its chair, Jerome Powell, are betting that they can have the best of both worlds - that they'll be able to defeat excessive inflation without forcing the economy into recession. I hope it goes well. Unfortunately, there's still a significant chance it won't." Dudley said "Higher for longer is now in the trash bucket." 

Here is Dudley's main concern after acknowledging what Powell is trying to achieve, "Problem is, the central bank's dovishness also increases the possibility of no landing at all - that is, overheating and persistent inflation that could undermine the Fed's credibility, while requiring renewed tightening and a deeper recession to get things back under control...Powell has repeatedly emphasized that the Fed must finish the job, ensuring inflation gets back to 2% and stays there. Yet the more weight he puts on cutting rates to avoid a recession, the greater the risk of failing to control inflation - and of markets getting a bit, unpleasant surprise." 

Shifting to the auto sector, expect a slowing of sales in 2024. On Friday, for the week ended 12/6, banks had auto loans outstanding at the smallest level since August 2021. I also saw a BN article Saturday titled "Underwater car loans surge to the highest level since 2020" as "Negative equity on automobiles is at the highest level in more than three years, with higher prices and borrowing costs hitting owners." 

'Underwater' defined here as the loan on the car is bigger than its current value. Sounds familiar with what we saw with homes about 15 years ago. Citing Edmonds in the article, "In November, people with negative equity were underwater by an average of $6,054, the most since April 2020 and well above pre-pandemic averages." Also from Edmonds, "We're in this situation where combined with the cost of the vehicles being so high and the interest rates being so historically high, you have a lot of people who are in bad car loans." I'll add, business is good for the auto repo person. 

With the average interest rate on a new car at 7.4% and at 11.6% for a used car, will 150 bps of Fed rate cuts really move the needle after 15 years of much lower rates? Around the edges maybe but... 

Lastly on this, on the industrial side of the economy, it was the auto sector that has been an area of strength as inventories were normalized relative to pre Covid trends. We heard the same from all the semiconductor companies that have autos as an end market customer. 

Auto Loans Outstanding

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Let's hear from Darden Restaurants and what they said on Friday's earnings call as they have restaurants at many different price points (Olive Garden, LongHorn Steakhouse, Yard House, Cheddar's Scratch Kitchen, Ruth's Chris, Eddie V's and The Capital Grille to name most). 

"We've seen some check softness that's being offset by lower inflation, which is why we went to the lower end of our sales range, while increasing our earnings outlook. In fact, if you're looking at our underlying traffic assumption, it still implies flat to slightly negative traffic for the full year." 

Their value chains seemed to do a bit better than the high end. Olive Garden benefited from the 'Never Ending Pasta Bowl' but only "contributed to flat same restaurant guest counts for the quarter." On their Fine Dining segment, comps were down at Capital Grille and Eddie V's "as the Fine Dining category as a whole continues to be challenged y/o/y." 

"Total commodities inflation was flat to prior year for the quarter and slightly better than our expectations, while beef inflation continues to track in line with our expectations, most other categories are seeing some favorability." 

"Restaurant labor was 20 bps better than last year, driven by productivity improvements at our brands as pricing and inflation were roughly equal at 5%." They see fiscal year 2024 pricing actions of 3.5-4%. 

Overseas, Germany's December IFO business confidence index fell to 86.4 from 87.2 and that was below the estimate of a gain to 87.7. Both the Current Assessment and Expectations components fell m/o/m. The IFO's bottom line was simply, "As the year draws to a close, the German economy remains weak." Manufacturing, trade and construction weakness led to the drop while services was slightly up m/o/m but still negative. The market response was mixed as bund yields are little changed, the euro is up while the DAX is down. 

German IFO

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From Danielle DiMartino Booth:

First came the Second World War, then came marriage, then came baby in a baby carriage! An estimated 76 million babies were born in the United States between 1946 and 1964. It wasn't until the tail end of that boom that the most premature of the lot had a fighting chance of celebrating their first birthday. In 1945, the infant mortality rate was 51 for every 100,000 births. By the time Yale New Haven Hospital in Connecticut welcomed preemies to the first neonatal intensive care unit, that number had fallen to 31.

A full halving of that, to 20, awaited the medical advances promised with the birth of Louise Brown, the world's first test tube baby, in 1978. Countless couples who've been blessed with children using in vitro fertilization can attest to how far the treatment of premature babies has come. That infant mortality has slid under 7, a hair of a fraction of 1800's level of 463, is doubly remarkable given the percentage of births that were premature has risen one percentage point to 10.4% from 9.4% since 1980.

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The most vulnerable babies will no longer receive care at Fresno's Community Regional Medical Center, which announced Friday that it was closing its Pediatric Intensive Care Unit. A lack of demand for the beds was provided as the motivation to discontinue care, a reflection of deteriorating demographics. According to the U.S. Census, a record 25% of 40-year-olds have never been married, a fivefold increase since 1980. The dwindling volume of wedding bells ringing highlights the reduced economic growth generated by Millennials vis-à-vis Boomers.



A deep demographic dive undertaken last year by Zelman & Associates found that in the next five years, the population growth of those ages 35-44 will average 1.2% or 0.6 million per year. That contrasts sharply with the leading edge of the Boomers, whose growth was 4.5% annually, or 1.3 million a year.

Geographics also plays a role. Only 4.4% of Louisianans tied the knot in the two years ended 2021, one-sixth the rate of the marriage capital of the U.S., Nevada. Pricey New York is, not surprisingly, near the bottom of the range, at 5.2%, on par with that of California. On Friday, the first out-of-the-gate reporting Federal Reserve District of New York seemingly validated what markets perceive and hope to have been last Wednesday's Powell Pivot. While the Empire State manufacturing survey headline has yo-yoed wildly in 2023, there's been no equivocation in the trend in Backlogs, QI's preferred leading indicator. The -24% December print follows November's -23.2% (yellow bars). For perspective, the sole precedents of back-to-back readings south of -20% were the Great Recession and that of 2001.

On the brighter side, expectations six months out for Capital Expenditures ticked up to 4.2 from 3.0 last month (red line). That said, it's a pittance compared to the post-pandemic peak of 39.7 in January 2022. Displaying New York's concentration in semiconductor manufacturing, the Empire features a unique metric - Future Technology Spending. December's 8.3 level nicely bounced off November's 0.00 (light blue line). Still, it's less than a third of January 2022's 31.9 apex.



As for the ubiquity of the strength, or lack thereof, of the critical subindexes - New Orders, Shipments, Employment, Delivery Time, and Inventories - all five had negative signs in front of them (lime bars). Translating that into the Institute for Supply Management (ISM) equivalent, New York suggests a read of 45.3 (orange line), a continued decline from the ISM's November level of 46.7 (purple line).

We also received the latest read November U.S. Industrial Production (IP) on Friday. As expected after the settlement of the United Auto Workers strike, IP rebounded to 0.2% from -0.9% in October; the level is 0.8% from its post-pandemic high hit October 2022. That read, however, missed the consensus forecast of 0.3% while October was revised down by three-tenths (green line). Net noisy autos from the picture and the read hit the lowest in 21 months; IP Ex-Auto is now 2.0% off its April 2022 peak read (lilac line).



As for what's to come for U.S. IP, S&P Global's flash December print ticked down to 48.2 from November's 49.4. Per S&P, "Manufacturing meanwhile remains a drag on the economy, with an increased rate of order book decline prompting factories to reduce production, cut back on headcounts and scale back their input buying."

Fanning outside the States, there was the slightest sigh of relief in Germany's continued rise out of negativity - its S&P Global headline manufacturing index rose to 43.1, still a deeply recessionary level, but nonetheless less negative than July's post-pandemic low of 38.8. Today's bottom right title of "Sacré Bleu!" was reserved for the shocker print out of the factory sector of Europe's second biggest economy. The continued plunge to 42.0 is not only a lower level than that of Germany, its miles below May 2021's high of 59.4 and a 43-month low.



As S&P warned, "The French economy is sinking into the recession quagmire...Domestic and international orders are plummeting, signaling trouble for employment as job losses extend. The only consolation for the industry lies in falling input prices, but without substantial new order intakes, this is likely to provide only limited relief." One of QI's themes we doubt will fade in 2024 is the globality of recession. Like the United States, the last thing the world's biggest economies need is a continued rise in job losses, yet another reason to delay the walk down the aisle.

The 10-year T-note yield has now melted more than -100 basis points over a 40-day period.

Instead of debating it, we should instead heed the message from it.

Here is when this has happened in the past - a handful of times:

• December 1970 (recession)
• May 1980 (recession)
• November 1981 (recession)
• October 1982 (recession)
• August 1984, June 1985, March 1986 (massive plunge in oil prices)
• December 1987 (Fed ease in response to the crash)
• June 1995 (post Mexican and Orange Country crisis)
• Jun 1989 (response to real estate collapse and lead-up to recession)
• October 1998 (LTCM collapse; Russian debt default)
• December 2008 (aftermath of Lehman failure)
• September 2011 (Greek crisis; growth recession)
• March 2020 (pandemic-led recession)

A vast array of unexpected political, geopolitical, economic and market surprises could be on tap for next year. In early 2024 I will review how well my Surprises did in 2023. 

But before publishing my list this morning, I wanted to note how sorely I will miss Byron Wien's friendship and advice. As well, I will miss comparing my Surprise List with Byron who passed away two months ago. 

Below is my tribute to Byron, which describes our relationship, written in my Diary in October, 2023: 

Byron Wien (1933-2023)

* Byron was a sage and savvy market strategist

* To me he was a cross between Warren Buffett and Satchel Paige

* As a mentor, I have always sought Byron's approval and I wrote today's column as if he was looking over my shoulder...

"Disasters have a way of not happening."

- Byron Wien

I first met Byron Wien in 1980 through an introduction by Scarsdale Fats (Bob Brimberg) The Contrarian: Taking a Cue from 'Scarsdale Fats' - TheStreet and, a bit later, when I became a member of the First Tuesday of the Month Club. The First Tuesday of the Month Club included The Bearded Prophet of the Apocalypse (Tony Cillufo) Link Susan Byrne (Westwood Management), Salomon Brothers' Lou Margolis, Rocker Partners Dave Rocker, (then) Goldman Sachs' Lee Cooperman, JPMorgan's Fran Bovich and a few other investment luminaries.

We quickly became friends and he became an important mentor to me.

If memory serves me right, Byron was orphaned at 14 years of age. His dad, a doctor, had previously passed away when Byron was nine years old. Both his parents suffered from rheumatic fever and had weak hearts. His aunt became his guardian.

He attended Harvard College and got his MBA at Harvard Business School.

Byron's business career (at Morgan Stanley, Blackstone, etc.) is legendary but I have always found his back story more interesting.

Twenty one years ago I began to write an annual List of Surprises, purposely emulating Byron's list which he began in 1986 (sixteen years earlier).

What did I learn from Byron? A lot of things.

But few as important as the quote I started this column with.



Byron did not suffer fools lightly but he accumulated a vast network of friends and investors.

We dueled in our Annual Surprises Lists since 2002. I so anxiously awaited is constructive criticism and responses to my List on TheStreet.com.

Here is a sampling of a portion of his most recent emails Byron sent to me this year, including some nice responses to my Surprise Lists:

Wien, Byron

From:[email protected]

To: Doug Kass

Wed, Aug 16 at 1:38 PM

Dougie

Your Surprise List this year has been remarkably prescient. You do far more reearch these days than I do and it comes through in your accuracy.

Byron

Wien, Byron

From:[email protected]

To: David Rosenberg, Doug Kass

Mon, Aug 28 at 12:03 PM

I continue to think that the rising Federal deficit will restrain the performance of companies and markets indefinitely.

Byron

Wien, Byron

From:[email protected]

To: Doug Kass

Wed, Aug 16 at 1:38 PM

Dougie

Excellent review of the dangers facing the economy and the financial markets

Byron

Wien, Byron

From:[email protected]

To: Ray Dalio, Joseph Rosenberg, Steven Einhorn, Stan Druckenmiller, Doug Kass

Leon Cooperman...

Mon, Jul 10 at 4:00 PM

Stocks are only "right priced" if earnings come through as projected, but earnings will disappoint in a recession, so stocks are vulnerable.

Byron

Wien, Byron

From:[email protected]

To: Doug Kass

Thu, Apr 20 at 6:53 PM

Dougie

Terrific analysis of the current troubled situation.

Byron

Wien, Byron

From:[email protected]

Wed, Mar 15 at 4:52 PM

Dougie/Joe

I agree that Israel will not tolerate a nuclear Iran. How it deals with that is unclear. It does have significant geopolitical implications.

Byron

Wien, Byron

From:[email protected]

To: Doug Kass

Wed, Dec 21, 2022 at 11:34 AM

Dougie

Jim deserves every bit of the accolade you gave him. He is one of the smartest people I have ever met and he shares his wisdom generously.

Byron

Wien, Byron

From:[email protected]

To: Doug Kass

Wed, Aug 24, 2022 at 7:19 PM

Dougie

Nice job on Bloomberg today. Julian was one of the greats and a friend.

Byron

In 2021 I interviewed Byron (with Jerry "The Chief" Jordan) for John Mauldin's Strategic Investment Conference (SIC).

Recently our mutual friend, Dave Rosenberg, interviewed Byron:

Let's go to the tape! Webinar: Webcast with Dave Featuring Special Guest, Byron Wien by Rosenberg Research (bigmarker.com)

My last physical encounter with Byron was at Ira Harris' house in Palm Beach two years ago which was done in Byron's and Anita's honor. As always, he held court (in this case with Jeff Greene, Lee Cooperman, Jerry Jordan, Lowes' Joe Rosenberg and their wives), much like his annual Hamptons Benchmark Lunches enclave every Summer with the greatest minds in Wall Street and Industry. Byron Wien: Complacency Gives Way to Uncertainty - Blackstone Private Wealth Solutions

As to the quote I started this column with (previously referenced), it singularly helped my investment career and was partially responsible for my reliance at calculus of upside reward vs. downside risk.

As someone with a short selling bias, and with multiple economic tragedies and market swoons over the last several decades it was easy to get bearish at the bottom when things (especially to a "first level thinker") were obvious. But Byron taught me that it was always darkest at the dawn and disasters rarely happen. His dictum emboldened me to buy in March, 2009, in May, 2020 and in October, 2022 (among other times).

Byron's greatest talent, at least the way I viewed it, was his ability to identify secular changes.

Though generally upbeat, he has accurately predicted (starting back around 2020) that global economic growth rates would slow relative to history and that there would be a widening schism between the haves and the have nots - the standard of living for many people would be on the descent.

He also accurately predicted a rise in social unrest in the U.S. stating that "the future for those born now is not so bright."

Byron had an endearing twinkle in his eye when he smiled.

An avaricious reader. Byron used to tell me owed a lot to Harvard - he was handpicked by his public high school to apply. I think that is where he got his confidence and he long said he owed a lot to Harvard.

Here is my second favorite quote by Byron:

"I still ski, play tennis, sail and make love, although my skills at all of these have deteriorated. "

Come to think of it, Byron's work ethic was as solid as it gets and his investment wisdom was a cross between Warren Buffett and the legendary baseball pitcher Satchel Paige.

* His quote at the beginning of the column ("disasters have a way of not happening") is reminiscent of Buffett's:

"In the 20th century, the United States endured two world wars and other traumatic and expensive military conflicts; the Depression; a dozen or so recessions and financial panics; oil shocks; a flu epidemic; and the resignation of a disgraced president. Yet the Dow rose from 66 to 11,497."

* Many of his lessons also remind me much of Satchel Paige's philosophies on life:

"Age is a case of mind over matter. If you don't mind, it don't matter."

"How old would you be if you didn't know how old you are?"

" Work like you don't need the money. Love like you've never been hurt. Dance like nobody's watching."

"I've said it once and I'll say it a hundred times, I'm forty four years old."

Ten years ago, in the Jewish Journal, Byron reflected upon the lessons he learned over his first eight decades of his life (I have found it beneficial to read these every few years and you might also!):

Here are some of the lessons I have learned in my first 80 years. I hope to continue to practice them in the next 80:

• Concentrate on finding a big idea that will make an impact on the people you want to influence. The Ten Surprises, which I started doing in 1986, has been a defining product. People all over the world are aware of it and identify me with it. What they seem to like about it is that I put myself at risk by going on record with these events which I believe are probable and hold myself accountable at year-end. If you want to be successful and live a long, stimulating life, keep yourself at risk intellectually all the time.

• Network intensely. Luck plays a big role in life, and there is no better way to increase your luck than by knowing as many people as possible. Nurture your network by sending articles, books and emails to people to show you're thinking about them. Write op-eds and thought pieces for major publications. Organize discussion groups to bring your thoughtful friends together.

• When you meet someone new, treat that person as a friend. Assume he or she is a winner and will become a positive force in your life. Most people wait for others to prove their value. Give them the benefit of the doubt from the start. Occasionally you will be disappointed, but your network will broaden rapidly if you follow this path.

• Read all the time. Don't just do it because you're curious about something, read actively. Have a point of view before you start a book or article and see if what you think is confirmed or refuted by the author. If you do that, you will read faster and comprehend more.

• Get enough sleep. Seven hours will do until you're sixty, eight from sixty to seventy, nine thereafter, which might include eight hours at night and a one-hour afternoon nap.

• Try to think of your life in phases so you can avoid a burn-out. Do the numbers crunching in the early phase of your career. Try developing concepts later on. Stay at risk throughout the process.

• Travel extensively. Try to get everywhere before you wear out. Attempt to meet local interesting people where you travel and keep in contact with them throughout your life. See them when you return to a place.

• When meeting someone new, try to find out what formative experience occurred in their lives before they were seventeen. It is my belief that some important event in everyone's youth has an influence on everything that occurs afterwards.

• On philanthropy my approach is to try to relieve pain rather than spread joy. Music, theatre and art museums have many affluent supporters, give the best parties and can add to your social luster in a community. They don't need you. Social service, hospitals and educational institutions can make the world a better place and help the disadvantaged make their way toward the American dream.

• Younger people are naturally insecure and tend to overplay their accomplishments. Most people don't become comfortable with who they are until they're in their 40's. By that time they can underplay their achievements and become a nicer, more likeable person. Try to get to that point as soon as you can.

• Take the time to give those who work for you a pat on the back when they do good work. Most people are so focused on the next challenge that they fail to thank the people who support them. It is important to do this. It motivates and inspires people and encourages them to perform at a higher level.

• When someone extends a kindness to you write them a handwritten note, not an e- mail. Handwritten notes make an impact and are not quickly forgotten.

• At the beginning of every year think of ways you can do your job better than you have ever done it before. Write them down and look at what you have set out for yourself when the year is over.

• The hard way is always the right way. Never take shortcuts, except when driving home from the Hamptons. Short-cuts can be construed as sloppiness, a career killer.

• Don't try to be better than your competitors, try to be different. There is always going to be someone smarter than you, but there may not be someone who is more imaginative.

• When seeking a career as you come out of school or making a job change, always take the job that looks like it will be the most enjoyable. If it pays the most, you're lucky. If it doesn't, take it anyway, I took a severe pay cut to take each of the two best jobs I've ever had, and they both turned out to be exceptionally rewarding financially.

• There is a perfect job out there for everyone. Most people never find it. Keep looking. The goal of life is to be a happy person and the right job is essential to that.

• When your children are grown or if you have no children, always find someone younger to mentor. It is very satisfying to help someone steer through life's obstacles, and you'll be surprised at how much you will learn in the process.

• Every year try doing something you have never done before that is totally out of your comfort zone. It could be running a marathon, attending a conference that interests you on an off-beat subject that will be populated by people very different from your usual circle of associates and friends or traveling to an obscure destination alone. This will add to the essential process of self-discovery.

• Never retire. If you work forever, you can live forever. I know there is an abundance of biological evidence against this theory, but I'm going with it anyway.

It should be clear by this list as well as the broad market knowledge he delivered over the years that we can all still learn from Byron.

May Byron's memory be a blessing.

Crude oil, after trading +$0.50/barrel overnight, has abruptly moved lower and is now -$0.71/barrel.

* To most, an "up day" (like last Friday) represents the scoreboard

* However, the quality of the advance was poor:

and...

* Sentiment follows price and investor sentiment remains optimistic with the S&P Short-Range Oscillator still an elevated 4.45% (down from previous day of 6.95%) -- but sentiment has not proven to have been a good timing tool!

* This morning the decline in crude seems temporarily stalled and yields continue lower -- stock futures have a bid

* Rainy days and Mondays always get me down:

"Talkin' to myself and feelin' old

Sometimes I'd like to quit

Nothin' ever seems to fit

Hangin' around

Nothin' to do but frown

Rainy days and Mondays always get me down"

- The Carpenters, "Rainy Days and Mondays"  

"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 hold 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 brief observations I wanted to highlight and provide a summary of overnight price movements in various asset classes:

* Stock futures were higher throughout most of the overnight session in another relatively narrow range. S&P futures peaked at +14 and bottomed at +1. Nasdaq futures peaked at +38 and bottomed at -17. At 5:52 a.m. ET, S&P futures were +10 and Nasdaq futures were +18.

And...

* The S&P Short-Range Oscillator remains overbought at 4.45% v 6.95%.

* The VIX remains under 13 at 12.58 (+0.30).

* The U.S. dollar is slightly higher against the yen and sterling, lower vs. the euro.

* Treasury yields continue lower but are approaching levels where recession may be feared. The 2-Year Treasury yield is -4 basis points at 4.419% and the 10-Year is -3 basis points at 3.898%. Over there, the yield on the 10-Year U.K. Gilt bond is -3 basis points (after last week large global yield decline).

And...

* Overnight, the inversion of the 2s/10s Treasuries curve is slightly higher at -53. Real rates remain quite elevated; the 10-year is still about 2.05 (again in real terms).

* Commodities are mostly lower. Brent crude has reversed lower, down $0.38 (after being +$0.74 when I awoke at 3:45 a.m.) to $76.13.

And...

* Gold is -$2 at $2.034 after the recent spate of volatility.

* The newest shiny object, Bitcoin, is -$130 to $40.8k.

Here is a synopsis of some of my columns I believe were important, or in the event you were out for the day and/or did not read my Diary. The principal intent is to review the logic of my market moves and other factors:

Charting the Technicals

10 Things to Be Concerned About After the Awesome November/December Market Rise

Research Update: 1 Out of 8 Ain't Great

CNBC Blather Index: The Pool Is Full 

Here were Friday's trades:

* Covered Costco COST trading short rental for a small loss

* Shorted JPMorgan Chase JPM and American Express AXP trading short rentals

* Long Johnson & Johnson JNJ

There is currently little discussion about the "quality" of the market's advance. 

As an example, here is an important observation about Friday's narrow advance:

* At around 4: am:

Shorted SPY $470.6

Shorted QQQ $401.91