Closing Market Internals: Less than meets the eye:

• New York Stock Exchange volume is 377 million shares, 12% below its one-month average;
• Nasdaq volume is 4.16 billion shares, 14% below its one-month average;
• VIX down 2.52% to 12.75

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* After the close

AXP is among my newest short positions.

From Jefferies on Cannabis:

Weed Weekly summarizes each week's main events with key thoughts and considerations. This issue catches up on three weeks over the holidays. Unsurprisingly, newsflow has been light. Most notable was the DEA revealing its cannabis schedule review is currently happening. While this was assumed to be the case, confirmation of such is welcoming, and suggests we could get a decision sooner rather than later.

Rescheduling looks best hope of near-term legislative change: There are three potential legislative developments that are being closely watched over the coming months that could be important positive catalysts for the cannabis sector. These are SAFER Banking, Rescheduling, and a possible new Cole Memo.

On SAFER Banking, we are increasingly of the view it will be difficult to pass in this Congress and updates the last few weeks would seem to confirm this.

First, on Tuesday, December 19, Punchbowl News released its year-end Canvass Capitol Hill Survey, in which they asked top Hill staffers and K Street leaders their predictions for 2024, in which only 19% thought any type of cannabis reform, including SAFER Banking, was "likely".

Second, reflecting the challenging backdrop for SAFER, on Wednesday, December 20, in a floor speech by Senate Majority Leader, Chuck Schumer, while listing "SAFE Banking and cannabis reform" as a top priority for 2024, alongside other areas, he flagged how "there's a lot we must do" in the second half of the 118th Congress, while reaching bipartisan agreement also "won't be easy."

With SAFER Banking prospects now looking very thin, much of the hope now likely turns to rescheduling, where we think the near-term outlook is much brighter.

As background to this, remember, back in October 2022, Biden ordered a review of the current status, and then in August this year HHS followed up with a recommendation it be rescheduled, from its current Schedule 1, likely to Schedule 3. However, the final decision now lies with the DEA.

Although it was assumed the DEA was now in the process of undertaking its review, we got official confirmation of such on Wednesday, January 3, with Punchbowl News reporting on a letter the DEA head sent to House lawmakers dated December 19 that said the DEA is "now conducting its review." The fact that the review is actually ongoing is encouraging for us, and makes us believe we will likely get a decision sooner rather than later.

Importantly, we think it is also likely that DEA agrees with the HHS recommendation, and calls for cannabis to be moved to Schedule 3. As a reminder, if we do see rescheduling, there are two main positive considerations around this.

First is operationally, and specifically - assuming the move is the Schedule 3 or lower - the fact that 280e provisions would go away meaning that cannabis companies would pay federal tax rates the same as any other company, and not in excess of 80% as is the case currently. This would hugely support cash flows, as well as the ability to invest further behind growth once again.

Second is possible implications for uplisting to major exchanges and opening the space up to institutional involvement, something which is very limited to date, and the main reason - in our view - that multiples are so depressed and do not accurately reflect the fundamental outlook.

While rescheduling alone may not be enough for capital market changes, if we also see this alongside things like SAFER Banking and a new Cole Memo, prospects become much greater in our opinion. Critically, however, we think uplisting - to NASDAQ or NYSE at least, as opposed to TSX - is very unlikely on the basis of SAFER Baking and a new Cole Memo alone, and making rescheduling the key contributor to making it happen.

Thanks for reading my Diary today.

Running out to a research meeting.

Enjoy the evening.

Be safe.

I am out of my (MSOS) position.

The machines and algos are moving the averages around in a random fashion today. 

This is a good thing for opportunistic investors that have a sense of the intrinsic value of your individual holdings and invest unemotionally - by taking advantage of rapid daily/weekly swings.

I have sold, on two occasions/rallies today, more Index calls short. 

On the declines I took in my Index common shorts (small) for a nice profit from last night and early this morning.

The value trap, known as Disney (DIS) , is making a multi-week low today.

Energy stocks are unpopular these days as investors are fully preoccupied with large cap tech. 

As evidence to this, today, despite a near +$2/barrel rise in Brent crude, all oil-related equities are weaker in the trading session. 

A Berkshire Hathaway Put?

With Occidental (OXY) we have some takeover optionality away from the price of oil - reflecting Berkshire Hathaway's (BRK.A) (BRK.B) continuing interest. 

Berkshire purchased over ten million shares less than one month ago.  

The shares have declined by about $5/share in recent weeks. 

I like the reward v. risk at the current share price. 

In fact, I am back purchasing calls on the name.

Here is the latest commentary from Oaktree's Howard Marks... "Easy Money."

- NYSE volume 127M shares, 18% below its one-month average

- Nasdaq volume 1.49B shares, 15% below its one-month average

- VIX up 0.69% to 17.17

Breadth

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Biggest Movers

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Heat Map

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S&P 500 Index

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Recent shorts in private equity ( (APO) , (KKR) , (BX) ) and credit cards ( (AXP) , (COF) ) are providing downside leadership today.

I have a scheduled quarterly Regulatory Committee Meeting for one of the Public companies I serve on the Board of Directors from 10:30 am to 11:30 am.

Radio silence.

McDonald's (MCD) continues to be a dog with fleas.

I am proud of this contrarian call a week or so ago.

From Peter:

With Fed Governor, and thus voting member, Michelle Bowman echoing what Lorie Logan said about the risks to inflation from an easing of financial conditions, they are both basically saying, the more markets rally, the less cuts you see. Yes, Bowman is acknowledging the need to implement some cuts if inflation further moderates, which it will, but here is another Fed member pushing back in her own way on market expectations for 6 cuts.

I'll say again, we might get 6 cuts but it will be because the unemployment rate will be 4.5% or higher. By the way, the Fed comments over the past week have taken away one of the markets 6 25 bps rate cut expectations as of year end 2023 and have reduced them now to 5.

Bowman did not mention the balance sheet and QT but on the heels of Logan's comments over the weekend, Joseph Wang, The Fed Guy on X, made yesterday this great point, "Linking the pace of QT with RRP balances is a bad idea because you essentially outsource your QT timeline to Treasury. The end result would be zero RRP, very high reserve levels and a huge Fed balance sheet."

The NY Fed's Consumer Expectations survey had more interesting info than just the inflation stats. It was good to see the continued drop in expectations for inflation at the one, three and five yr time frames and driven by lower price guesses for rent, college, and food. They were unchanged for gasoline and medical care. On the flip side of the optimism, one year spending expectations fell to the lowest level since September 2021.

The percentage of those who don't expect to make a minimum debt payment over the next 3 months saw its 2nd highest print since the Covid shutdowns at 12.42%. Adding to the consumer worries, expected earnings growth decreased by .2 percentage point to 2.5%, the lowest level since April 2021. "The decline was driven by respondents with at most a high school diploma."

Bottom line on the above, it's of course nice to see the rate of price increases slow but it's clear that consumers are getting more stressed from the cumulative rise in inflation over the past 4 years.

With respect to the labor market, the answers to the employment questions improved. Also of note, "Perceptions of credit access compared to a year ago were largely unchanged" but with the drop in interest rates over the past few months, "Expectations about credit access a year from now instead improved."

One yr Inflation Expectations

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One yr Ahead Household Spending Growth Estimate

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More on the consumer, late yesterday the November consumer credit data was released and the month saw the biggest one month increase in revolving credit outstanding, mostly credit cards, since November 2022 at $23.7b. Now, this is seasonally adjusted and DOES NOT include Buy Now Pay Later, but that is a pretty large increase right before the holidays. And, for those who don't pay off their monthly balances are paying a 23% interest rate to borrow.

I guess the pre-announcement period has started right before earnings reports start to flood us. If you didn't see the Microchip comments of note, here they are:

"The weakening economic environment that our customers and distributors faced during the December 2023 quarter resulted in many of them wanting to receive a lower level of shipments as they took actions to further de-risk their inventory positions. Many customers also had extended shutdowns or closures at the end of the December quarter as they managed their operational activities.

The impact of these and related factors was that certain backlog that we had planned to ship when we provided our guidance on November 2, 2023 did not ship to customers before the end of the December quarter. As a result, our preliminary revenue indication for the December 2023 quarter is to be down sequentially about 22% compared to our guidance of down 15% to 20%, which we provided on November 2, 2023."

For those not familiar with Microchip, according to their website, "The company's solutions serve more than 125,000 customers across the industrial, automotive, consumer, aerospace and defense, communications and computing markets." Thus, pretty diversified and touching a lot of industrial target markets.

Extreme Networks also lowered guidance and they call themselves "a leader in cloud networking." Their press release said "Our revised fiscal quarter outlook reflects industry headwinds of channel digestion and elongated sales cycles. In late Q2, we saw multiple large deals pushing out to future quarters."

Container Store also reduced its guidance. "The challenging business trends we experienced in the 2nd quarter continued. General merchandise categories underperformed compared to our expectations and were relatively consistent with our 2nd quarter performance."

MSC Industrial, a large industrial and manufacturing parts distributor and a good proxy on these sectors, reported earnings and missed both top and bottom line estimates. They have similar end markets as Fastenal who reports next week. They said "Average daily sales declined .4% y/o/y, slightly better than the Industrial Production index, as a result of softening demand through the quarter." They acknowledged "a slower start to the fiscal year."

Lower mortgage rates helped to lift the monthly Fannie Mae Home Purchase Sentiment index to 67.2 pts in December, up 2.9 pts m/o/m. "In December, a survey high 31% of consumers indicated that they expect mortgage rates to go down, while 31% expect them to go up, and 36% expect rates to remain the same."

Also, "Although consumer perceptions of homebuying conditions remain overwhelmingly pessimistic, that particular component ticked up slightly m/o/m, with 17% of consumers now indicating it's a good time to buy a home, compared to 14% last month, a survey low."

FYI, the average 30 yr mortgage yesterday is still a very high 7.04%, more than double its 2021 level, according to Bankrate.

One of my possible 'trade offs' I listed on January 2nd for this year was that the Fed cuts short term rates but long term rates rise.

Avg 30 yr Mortgage Rate

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Manheim said yesterday that in December and for 2023 vs 2022, wholesale used car prices fell 7% and down by .5% from November. Welcome relief for sure but this index is still up 30% from February 2020.

Manheim Index

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The NFIB small business optimism index for December rose to 91.9 from 90.6 and that is the best level since it touched here in July. I mentioned last week the slowing need for employees as Plans to Hire fell to the lowest since June. Job openings were unchanged m/o/m as were the compensation components after last month's jump in wage plans. Capital spending rose 1 pt after falling by 1 pt in November. To the lowered guidance from Microchip and Extreme, Plan to Increase Inventory fell 2 pts to -5%, the lowest since April.

Those that Expect a Better Economy did improve by 6 pts and by 4 pts from those that Expect Higher Sales. There was also a rise in 'earnings trends' and a 3 pt increase in credit conditions, though small business are paying 9.8% on loans, up .5 percentage point. Higher Selling Prices were unchanged.

Notwithstanding the m/o/m increase in confidence, and likely because it is still well below the 50 yr average of 98 and businesses are paying 9.8% on loans on average, the NFIB chief economist continued to sound grumpy. "Small business owners remain very pessimistic about economic prospects this year. Inflation and labor quality have consistently been a touch complication for small business owners, and they are not convinced that it will get better in 2024."

I'll add my bottom line and talk specifically about the high cost of capital, paying a 9.8% interest rate on a small business loans hurts and it compares with the 10 yr average of 5.9% and the 5% and under it was at in 2020 and 2021.

NFIB

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Avg Rate of Small Business Loan

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The December Tokyo CPI ex food and energy was up 3.5% y/o/y as expected vs 3.6% in November. The headline print was 2.1%, slowing from 2.3% and also in line. That core/core rate is well above 2% and why we will finally see the end of NIRP this year. The 10 yr inflation breakeven did rise 2.4 bps to 1.19%, the highest in 3 weeks. JGB yields though fell 2 pts at the 10 yr and 40 yr maturities.

Taiwan said its December exports jumped by 11.8% y/o/y, more the double the estimate and led by tech shipments to the US (maybe Nvidia orders juiced it). Exports to China fell 6.4% y/o/y.

Following the soft factory order report for November seen yesterday, German industrial production was too, falling .7% m/o/m instead of rising by .3% as expected. The German economy we know is challenged because of its heavy manufacturing exposure and the slowdown in China.

Upside

- (MCRB) +35% (announces VOWST commercial launch update and US FDA Fast Track Designation for SER-155)
- (JNPR) +23% (HP Enterprise nears deal to buy company as soon as this week for EV ~13.0B)
- (ELTX) +16% (Nature Medicine publishes updated preliminary Phase 1 data from AMPLIFY-201 Phase 1 Solid Tumor Study of ELI-002)
- (SLS) +14% (receives FDA Fast Track Designation for SLS009 for Treatment of Relapsed/Refractory Acute Myeloid Leukemia and Provides Updated Data for Phase 2a Study of SLS009 in Relapsed/Refractory Acute Myeloid Leukemia Patients)
- (MTCH) +13% (Activist investor Elliott said to have ~$1.0B holding and discussing with Board the company's under-performance and how to fix)
-CATX +11% (enters into Strategic Agreements with Lantheus including equity investment, co-development options, and expansion of manufacturing capability)
-NTBL +11% (files to withdraw previously disclosed $100M mixed shelf)
- (BARK) +9.8% (reports prelim Q3 revenue)
- (CUTR) +9.7% (earnings)
- (CRBP) +9.6% (US FDA clears IND Application for anti-avß8 monoclonal antibody (CRB-601))
- (LEXX) +9.2% (mentioned in editorial published by NetworkNewsWire within Dynamic Brand Portfolio section)
- (SRPT) +9.2% (momentum)
- (CUTR) +8.8% (reports prelim FY revenue)
- (AEVA) +8.6% (Daimler Truck and TORC Robotics select Aeva to supply advanced 4D LiDAR Technology for Series-Production Autonomous Trucks)
- (TLRY) +5.6% (earnings, guidance)
- (URBN) +5.6% (reports holiday sales)
- (MXCT) +5.0% (reports prelim Q4 revenue)
- (ACMR) +4.5% (raises FY23 guidance, provides initial FY24 guidance)
- (AYI) +4.5% (earnings)
- (MDXH) +4.0% (earnings, guidance)
- (TFFP) +2.4% (announces acceptance of late-breaking abstract for presentation at the 44th Annual International Society for Heart and Lung Transplantation (ISHLT) 2024 Meeting)
- (U) +2.2% (plans to cut about 1,800 employee roles, a 25% workforce reduction)
- (ESTA) +2.0% (reports prelim Q4 revenue, places 2M common shares in private placement)

Downside

- (GRFS) -37% (pressure from short seller Gotham City Research report)
- (NEOG) -9.8% (earnings, guidance)
- (CGC) -7.7% (places 7.0M units at $4.29/unit in $30M capital raise to pay down debt)
- (MSM) -6.8% (earnings, guidance)
- (EXTR) -6.3% (cuts Q2 revenue guidance)
- (SNX) -3.9% (earnings, guidance)
- (ES) -3.7% (expects Q4 after-tax other-than-temporary impairment charge $1.4-1.6B)
- (ACI) -3.2% (earnings)
- (MCHP) -3.1% (cuts Q3 revenue guidance)
- (CAH) -3.0% (raises FY24 guidance, affirms long-term financial targets)
- (JEF) -2.4% (earnings, raises share buyback authorization)
- (NARI) -2.4% (earnings, guidance)
- (ZUMZ) -2.0% (reports holiday sales, guides Q4 to low-end of provided range)

At 8:50 am:

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At 8:09 am:

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It is reverse goldilocks in the market without memory from day to day.

This morning crude and yields higher, stock futures lower. 

The best friend of the bears here is a rally. 

I have been bearish but a rally that creates overwhelmingly positive sentiment would get me more enthusiastic on the short side. 

Valuations and fundamentals make risk/reward awful on the long side but momentum doesn't care until it does...

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

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From JPMorgan: 

US: Futs are lower amid a risk-off tone; bond yields are lower and cmdtys are weaker across all 3 complexes. USD is flat. With earning kicking off later this week and our HC conference, this may be the calm ahead of the proverbial storm. The major macro data points are CPI and PPI on Thurs and Fri, and prints may be market-moving as the bond market tries to determine the timing of the first rate cut among March, May, and June. Feroli maintains his call for cuts kicking off in June. The biggest single name story is in BA and some 737 being grounded; BA is -8.5% pre-mkt.

and...

EQUITY AND MACRO NARRATIVE: The SPX lost 1.5% last week, breaking its 9-week winning streak, after gaining 14.9%. Defensives outperformed as investors take a cautious tone to start the year. While economic consensus is for a soft landing, the markets are not yet reflecting that reality.

Our recent client conversations reveal that macro folks are in the soft landing camp while I find that Equity and Credit L/S folks are more bearish. The common thread for the bearish camp is the combination of a still inverted yield curve and the long-and-variable lags to existing monetary policy means that one or more things are likely to break in the economy. Further, the bearish client thinking subscribes to the school of thought where the longer the delay, the worse the outcome.

While it appears consensus that the Fed has completed the hiking cycle, we have yet to see the front-end of the yield curve collapse/bull steepening that has accompanied every other ending of a hiking cycle. As investors try to determine the existence and location of the Fed Put, many would be buyers below current levels with some indicating a desire to buy the SPX down 5-10% from current levels. It may be the case that to see a broadening, or the continuation, of the current rally that the yield curve needs to bull steepen, potentially the full disinversion of the 2s/10s spread. Separately, valuation may be a headwind but with real yields expected to fall, that may not be a significant near-term catalyst.

• Consensus GDP forecast is +1.35% for FY24, according to Bloomberg data
• Consensus SPX top-down EPS is $232.20 for FY24 with a YE24 price target of 4,833, +2.9% from Friday's close.
• Consensus bottoms-up EPS is $243 for FY24.

* Why? I don't know...

* Monday's upside move was a surprise to me

* Investor sentiment remains bullish, though the recent market weakness has resulted in a turn down (from deep overbought to more modestly overbought) -- the S&P Short-Range Oscillator is at 2.35% vs. 2.72%

* This morning, it's Reverse Goldilocks in the "market without memory from day to day" with yields and crude oil prices higher and stock futures lower

* The U.S. dollar is again falling against the euro

* Where the investment world is headed, nobody knows:

"Evolution, revolution, gun control, sound of soul
Shooting rockets to the moon, kids growing up too soon
Politicians say more taxes will solve everything

And the band played on

So, round and around and around we go
Where the world's headed, nobody knows

Oh, great googa-looga, can't you hear me talking to you
Just a ball of confusion
Oh yeah, that's what the world is today
Woo, hey"

- The Temptations, "Ball of Confusion" 

"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 have reversed Monday's strength and are lower here on Tuesday morning. S&P futures peaked at -5 and bottomed at -18. Nasdaq futures peaked at -5 and bottomed at -84. At 5:48 a.m. ET, S&P futures were -15 and Nasdaq futures were -79.

And...

* Commodities are broadly higher. Brent crude is up $1.45 to $77.57.

And...

* The S&P Short-Range Oscillator remains largely overbought, but less than last week at 2.35% vs. 2.72%. 

* The VIX is up to 13.26 (+0.18).

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

* Treasury yields are reversing yesterday's weakness. The 2-Year Treasury yield is +3 basis points at 4.377% and the 10-Year is +4 basis points at 4.044%.

Remember what I wrote in my 10 Surprises for 2024:

The yield on the 10-year Treasury, which today is at 3.9%, 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.

Over there, the yield on the 10-Year U.K. Gilt bond is up 3 basis points.

* Overnight, the inversion of the 2s/10s Treasuries curve is moving lower to -3.

* Gold is up $10 at $2,044.

* Bitcoin is -$500 to $42.5k.

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:

The Year in Charts

What Are the Ramifications of the Current Yield Curve Inversion?

I Call BS to Goldman's View That Cash on the Sidelines Will Buoy the Markets

Surprise, Surprise! (Elon Musk)

The Market's Guts

Here were Monday's trades:

* Covered my Select Sector Financial SPDR ETF  (XLF) short for a small gain.

* Bought Exxon Mobil (XOM) , Occidental Petroleum (OXY) and Chevron (CVX) on deep weakness (oil prices collapsed).

"The one fact pertaining to all conditions is that they will change."
- Charles Dow

Doomberg on the equilibrium price of oil.

Wolf Street howls about the decline in wholesale car prices.

From "Jazzy" Jeff Hirsch:

Santa Claus Rally & First Five Days Were Down, but a Positive January Barometer Could Salvage Trifecta

Despite a strong advance today, S&P 500 failed to fully recover its losses from last week and as of today's close, is down 0.1% year-to-date and thus our First Five Day (FFD) early warning system is negative. Since 1950, the previous 26 down FFD were followed by 14 up years and 12 down with an average gain in all years of just 0.3%. The last negative FFD was in 2022 when S&P 500 declined 1.9%. In 2022, S&P 500 went on to decline 5.3% in January and thus our January Barometer (JB) was negative. For 2022, S&P 500 was down 19.4%.

Last week the Santa Claus Rally (SCR) was negative, and today the FFD was negative. At this juncture there are two possible outcomes remaining for our January Indicator Trifecta. Our JB can either be positive or negative. The historical results of both are visible in the following tables.

A positive JB would certainly boost prospects for full-year 2024 even after today's down FFD and last week's negative SCR. Following the previous three occurrences when the SCR and FFD were negative and the January Barometer was positive, S&P 500 advanced three times over the remaining eleven months and for the full year with average gains of 15.1% and 19.9% respectively. The December Low Indicator (2024 STA, page 36) should also be watched with the line in the sand at the Dow's December Closing Low of 36054.43 on 12/6/2023.

At this juncture we remain bullish, and our base case scenario outlined in our 2024 Annual Forecast is still in play. In our forecast, we noted election years are not as strong as pre-election years and we did not expect a repeat of the gains enjoyed in 2023, when the January Trifecta went 3 for 3. There is a sitting president running for re-election which has historically been bullish for the market, the JB could still be positive, and Dow's December Closing Low has not been breached.

In early premarket, I shorted (SPY) ($473.40) and (QQQ) ($403.66) and selected financials -- in anticipation of "Reverse Goldilocks" (slowing economic growth and sticky inflation -- aka "slugflation").