DAILY DIARY
Until ... Later
Thanks for reading my Diary -- I hope it was value added.
Enjoy the evening.
Be safe.
Here Come the Banks: Friday EPS Expectations
Consensus Bank Estimates for Q4 2023:
Chart of the Day
Breadth Is Negative
* And Nasdaq new lows exceed new highs!
At 3:02 PM:
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This Is No Misprint
At 2:30PM -- and despite the powerful rally off of the lows -- all but two sectors are negative.
No broadening:
Raising my short exposure further.
Inflation Alert
My Comment of the Day
* First time, long time...
Dougie Kass
Shorting a group of individual large cap, high beta tech stocks that are extended.
I would not follow me on this trade.
Shorting More Index Calls
With S&P cash now down only -9 handles and Nasdaq cash only -47 I am selling more Index calls short.
I am responding to this possible outcome -- a bearish candle:
A bearish engulfing pattern, which is a technical chart pattern that indicates that lower prices are on the way. The pattern consists of an up candlestick (white or green) followed by a big down candlestick (black or red) that eclipses or "engulfs" the smaller up candle.
SPY Daily Graph as of 12:08 PM
I'm Back, Back in the Saddle Again
Back in the saddle.
Trying to get my sealegs back and digest what has happened since I left!
Back soon.
Volume, Market Internals at Mid-Day
- New York Stock Exchange volume is 138 million shares, 10% below its one-month average;
- Nasdaq volume is 1.50 billion shares, 13% below its one-month average;
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Not Broadening
Remember that the near universal opinion and certainly the consensus, paraded in the business media, was the market was experiencing a healthy broadening - which we have tried to dispel over the last week as the equal weighted S&P and Russell appeared to be rolling over with the financials.
Today financials continue weak ( (JPM) -$2) , the equal weighted S&P is -0.7% and (IWM) -$3 or -1.4% - far worse than the senior averages.
Off to two Board meetings, as mentioned earlier.
Boockvar on Inflation and Claims Data
From Peter Boockvar:
December CPI headline and core both rose .3% m/o/m with the former one tenth above the estimate and the latter in line. The y/o/y gains are now 3.4% and 3.9% vs 3.1% and 4.0% in November. Energy prices rose .4% m/o/m after the big declines in the prior two months but still down 2% y/o/y.
Food prices grew by .2% m/o/m and the monthly gains have been at a pretty consistent .2-.3% pace. They are up 2.7% y/o/y. The price of eating out remained pretty elevated, rising .3% m/o/m for full service and by 4.5% y/o/y. Limited service restaurant prices were up .4% m/o/m and by 5.9% y/o/y.
On the services side, ex energy prices rose .4% m/o/m, the same pace seen in November and 5.3% y/o/y. The rent growth being reflected is still above market with OER up .5% m/o/m for a 2nd month and 6.3% y/o/y while Rent of Primary Residence was higher by .4% m/o/m and 6.5% y/o/y. Medical care costs jumped .6% m/o/m for a 2nd month as we've flushed thru the distortive health insurance calculations.
Health insurance prices rose 1.1% m/o/m for a 3rd straight month. Vehicle insurance prices continue to be ridiculous, rising 1.5% in the month and by 20.3% y/o/y. Thankfully maintenance and repair prices finally cooled, falling by .3% m/o/m, though still up 7.1% y/o/y. Hotel prices were up by .4% m/o/m but after falling by 1.1% in the month before while airline fares rose 1% in December m/o/m, though still down 9.4% y/o/y.
On the goods side, core prices were unchanged m/o/m and up .2% y/o/y. Both new and used car prices were up with the former up 1% y/o/y and the latter down 1.3% y/o/y. When thinking about auto prices in the next year or two, OEM's and dealers don't want to go back to the high inventory levels of pre Covid and we're still recycling thru the reduced pace of new cars which leads to less used cars, eventually, on the market. Apparel prices were little changed m/o/m and up 1% y/o/y. Things related to the home in the 'household furnishings and supplies' category saw prices lower by .4% m/o/m and .9% y/o/y.
Bottom line, I'm not playing the game of taking everything out that goes up as many do to get to some benign inflation stat. Goods prices are back to the pre Covid trend of zero but I don't think it stays there but on the other hand service prices should continue to moderate this year as the reality with current market pricing on rent growth shows up. That said, medical care costs should start increasing again as higher health insurance calculations flow thru.
As markets assumed another a lower than expected inflation read, the bond and stock move was swift in response. The 2 yr yield went from 4.33% to 4.38% quickly but now stands at 4.37% and the 10 yr yield at 4.04% is up from 3.97-.98% just prior to the release.
As for the Fed, the inflation they want to see on a SUSTAINABLE basis will still take time to achieve, if they can, and I don't think Powell is currently in the mind set of cutting 5-6 times this year unless there is a notable jump in the unemployment rate to something north of 4.5%, which is certainly possible. I also don't think he's comfortable with the still high balance sheet size wise and the BTFP is going to end in two months. Interesting times.
Initial jobless claims remained low at 202k vs 203k in the week prior but we're still dealing with pre and post holiday data. The estimate was 210. Continuing claims, less influenced by the holidays fell by 34k w/o/w to 1.834mm but still above 1.8mm for the 11th straight week. The bottom line here remains the same as its been for months. Firing's remain low but the pace of hiring's is slower.
Cash Register Effect
* Phew!
I covered my (SPY) $473.88 and (QQQ) $406.28 shorts on the whoosh lower for a good and quick profit.
From earlier this morning:
Premarket Trades
Early going (before 5 am) shorted (SPY) $477.70 and (QQQ) $410.46.
Small.
Did the same yesterday for a profit.
Stay tuned.
More Energy
Adding to energy on the pullback.
Programming Note
I have a Board meeting from 11:30 am to 2 pm today.
Radio silence.
Selected Premarket Movers
Upside
- (SPEC) +50% (partners with MLab and Mosolf to bring AireCore emissions measurement system to European trucking market)
- (MRT) +15% (announces $2.5M share repurchase program)
- (DCGO) +8.0% (earnings, guidance; rejects short seller report)
- (EBS) +7.9% (awarded pocurement contract valued up to $235.8M to supply BioThrax (Anthrax Vaccine Adsorbed) to the U.S. Department of Defense)
- (ESPR) +5.5% (hearing Tier 1 firm raises price target)
- (GBTC) +4.2% (confirms receipt of SEC approval to uplist Grayscale Bitcoin Trust to NYSE Arca as Spot Bitcoin ETF)
- (CHPT) +4.1% (announces 12% reduction in global workforce and reorganization)
- (HOOD) +3.8% (SEC approves 11 Bitcoin ETF proposals including from BlackRock, Invesco and Fidelity)
- (CHK) +2.7% (acquiring SWN for $6.69/shr in all-stock transaction)
- (SEE) +2.3% (Wells Fargo Raised SEE to Overweight from Equal Weight, price target: $43)
- (NFLX) +2.0% (Exec: Ad-tier service crossed 23M monthly users)
Downside
- (EKSO) -18% (files to sell $4.6M registered direct offering for sale of 3M common shares at $1.55/shr)
- (OPI) -10% (slashes dividend 96% from $0.25/shr to $0.01/shr to increase liquidity and financial flexibility going forward)
- (RELL) -10% (earnings)
- (HTZ) -6.5% (confirms to sell ~20K EVs from its US fleet, ~one-third of the global EV fleet, over the course of 2024; reports prelim Q4)
- (PRAX) -5.1% (prices $150M offering at $35.50/unit)
- (ACOR) -2.9% (to regain global commercialization rights to FAMPYRA by January 2025)
- (KBH) -2.4% (earnings, guidance)
Fed Speakers Today
11:40 am: Fed Bank of Cleveland President Mester (Voter) takes part in Bloomberg interview
12:40 pm: Fed Bank of Richmond President Barkin (Voter) on the economic outlook
Good Observation From El-Erian:
Mohamed A. El-Erian
@elerianm
The US #inflation numbers, while (very slightly) hotter than the consensus forecasts, will neither change the dominant market narrative nor the policy one. It is, however, a bit of a warning shot, especially given that the dis-inflationary process gets harder from here. #economy#econtwitter
Investors Are Greedy as They Chase Price
The Book of Boockvar
From Peter:
Well, maybe QT doesn't end as soon as Dallas Fed president Lorie Logan implied last weekend as NY president John Williams pushed back and seems to be more focused on the level of bank reserves that will dictate the pace of QT rather than when the reverse repo facility shrinks to something close to zero as Logan talked about. In his speech yesterday he said "In its plans, the FOMC said that to ensure a smooth transition it intends to slow and then stop the decline in the size of the balance sheet when reserve balances are somewhat above the level it judges to be consistent with ample reserves. So far, we don't seem to be close to that point." My bold for emphasis.
The other thing of note from Williams, and something I keep trying to mention, was the use AGAIN of the word 'sustained.' He said "I expect that we will need to maintain a restrictive stance of policy for some time to fully achieve our goals, and it will only be appropriate to dial back the degree of policy restraint when we are confident that inflation is moving toward 2% on a sustained basis."
In other words, it is not the downside of the inflation spike that will comfort the Fed completely, it is inflation staying down that will matter and drive the pace of rate cuts.
And all we have to do is again look at shipping rates to test the idea of inflation staying down. The World Container Index updated its shipping price figures today and for the week ended 1/11, the Shanghai to Rotterdam container price of a 40 ft box rose to $4,406 from $3,577 which compares to $1,667 in the last week of December. The Shanghai to LA container cost was up more modestly to $2,790 vs $2,726 in the week before and vs $2,100 in the week before that.
So core goods prices have round tripped on a y/o/y rate of change basis back to zero but maybe won't stay there and just understand too that at some point, inventories will be rebuilt again which would also likely lift goods prices. On the other hand, we should have a good runway of service price deceleration as the rental growth slowdown is reflected in the BLS data.
The Bank of Korea left its base rate at 3.50% as expected and as we all debate the timing of rate cuts everywhere, at least in South Korea the Governor there said no time soon. "If you asked me, personally I think cutting the rate wouldn't be easy for at least the next six months or more. We have to see if the inflation trajectory will take shape in the direction we forecast."
I don't know how much in the know he is but Makoto Sakurai, a former board member of the Bank of Japan, said in an interview yesterday that when it comes to raising rates and getting out of negative rate policy, "The BoJ is completely ready. They are just waiting for one last push from one or two economic data." We'll see but it does seem like we're getting ever closer. The Nikkei by the way was up another 1.8% overnight to a fresh high going back to 1990.
The only thing of note in Europe was the weak industrial production figure out of Italy where it declined by 1.5% m/o/m vs the estimate of down .2%.
Back to the US, here were some of the notable comments from the KB Homes conference call where the stock is trading down pre market over concerns with pricing:
"As our new fiscal year gets underway, market conditions are improving with rates having declined and consumer confidence increasing, all while resale inventory remains low...As interest rates have now declined since the end of our fiscal year, demand has improved significantly...Our orders in December were higher than November, which is unusual, given that December is typically a slower sales month. To us, this speaks to the pent up demand for home ownership."
We know too that builders have been offering discounts to drive sales. KB said "Roughly 60% of our orders had some form of mortgage concession associated with them, including rate locks." And this in part led to this comment, "In the fourth quarter, our overall average selling price of homes delivered decreased to approximately $487,000 due to both mix shifts and the impact of pricing adjustments and other home buyer concessions, such as mortgage rate locks and buy downs."
Their gross margins fell too to 20.8% from 23.9%, "mainly due to price decreases and other homebuyer concessions, along with higher construction costs." Hence the drop in the stock this morning.
More Night Moves: A Detailed Look at Overnight Futures and Why/What Markets Are Moving
* The market's resilience continues apace, but it was the lowest volume day since late November:
* Nonetheless, the capital weighted S&P and Russell Indexes lagged the narrow advance on Wednesday:
* The S&P Short-Range Oscillator is back negative this morning
* This morning yields are lower, crude oil prices higher (I was a large buyer of Chevron (CVX) , Occidental Petroleum (OXY) and Exxon Mobil (XOM) yesterday) and stock futures are stronger
* The U.S. dollar is lower against the euro
* It's all about the animal spirits:
"It's not the strongest narrative
But details aren't imperative
What matters is the way it ends
They've got sixteen mutual friends
And she's got
Animals spirits
And he's got
Heartfelt lyrics
Put them together and you can hear it
It's the song everyone knows"
- VULFPECK, "Animal Spirits"'
"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 overnight. S&P futures peaked at +14 and bottomed at -2. Nasdaq futures peaked at +100 and bottomed at +49. At 6:34 a.m. ET, S&P futures were +6 and Nasdaq futures were +66.
And...
* Commodities are higher. Brent crude is up $1.30 to $78.11.
* The S&P Short-Range Oscillator is moving back to negative (overbought!) at -0.44% vs. 0.41%.
* The VIX is up to 12.84 (+0.15).
* The U.S. dollar is lower against the yen, sterling and euro.
* Treasury yields are weak, apparently buoying stock futures. The 2-Year Treasury yield is -3 basis points at 4.339% and the 10-Year is -4 basis points at 3.988%.
And...
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 down by -4 basis points.
* Overnight, the inversion of the 2s/10s Treasuries curve is flat at -34 basis points.
* Gold is up $10.60 at $2,038.
* Bitcoin is +$750 to $46.9k.
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:
My Tweet: Berkshire Ups OXY (buys 10 million more shares)
The Relationship Between Equity Returns and Unemployment
I Remain an Outspoken Bitcoin Bear (and, coming this morning, Boca Biff is back into cryptocurrency!)
Better Luck Next Time (my Ludacris Forecast was wrong, wrong!)
Another Advance on VERY Low Volume
Here were Wednesday's trades:
* Added aggresively to energy -- OXY (common and calls), CVX and XOM
* Successfully day traded SPDR S&P 500 ETF (SPY) common and Invesco QQQ Trust (QQQ) common -- on the short side
My Tweet of the Day
Themes and Sectors
This table is a valuable resource for momentum-based short-term traders:
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From The Street of Dreams
From JPMorgan:
US: Futs are higher led by MegaCap Tech names which are all higher, pre-mkt. Bond yields are lower with 10Y below 4% and USD flat into the CPI print. Cmdtys rallying across all 3 complexes; most Energy products are now tracking positive on a YTD basis. CPI the focus today; details on scenarios are below. Feroli sees +0.2% MoM (3.2% YoY) for Headline CPI and +0.26% on Core MoM (3.8% YoY). Recent Fedspeak has inflected hawkishly, which is unsurprising given the general easing of financial conditions.
and...
CPI SCENARIO ANALYSIS - reposted from the Jan 9 Morning Briefing
Feroli's full CPI preview is here. Feroli sees Headline MoM CPI printing +0.2%, aligned with the Street's estimate of 0.21%; and he sees Core MoM printing 0.26%, aligned with the Street's 0.25% estimate. On a YoY basis, he sees headline inflation of 3.2% and core inflation of 3.8%, both in line versus the Street. Feroli's commentary:
We [Feroli & team] believe the consumer price index (CPI) rose 0.2% in December. This would be the firmest monthly change since September, as we think that the recent drop in energy prices is now behind us and we look for an unchanged energy CPI in December (in seasonally adjusted terms, despite prices moving down before seasonal adjustment). We also think that food prices in the CPI rose 0.2% in December, in line with the recent upward trend. And away from food and energy, we believe that the core CPI rose 0.26% in December, which would not be a particularly soft print, but it would keep the year-ago change for this measure moderating over time (moving from 4.0%oya in November to 3.8% in December).
We look for mixed changes across the main core CPI components. We think that the rent measures will keep climbing at a solid, though decelerating, pace in December-we forecast that tenants' rent rose 0.34% in December while owners' equivalent rent increased 0.33%. We also look for another solid gain for medical care prices in the CPI (0.5%) as we think that health insurance prices will keep increasing in December because of the BLS's estimation techniques. We also look for a 0.9% increase in new vehicle prices based on our analysis of related industry figures.
But we look for declines in prices across several other core CPI categories. Industry figures tied to used vehicles point to recent weakening, and we forecast a 1.6% drop in the used vehicle CPI for December. And we also think that lodging prices will continue their recent downward trend, falling 0.3% in December. In other travel-related news, we forecast a 0.5% decline for public transportation prices in December. Communication prices generally keep moving down over time, and we expect a 0.1% decline for the related CPI measure in December. Apparel prices in the CPI also generally have moved lower lately through some noisy monthly prices, and we forecast a 0.1% decline for December.
CPI SCENARIO ANALYSIS. The following scenario analysis is NOT A PRODUCT OF JPM RESEARCH, this is a trading desk view from JPM US Market Intelligence.
- [5.0%] Headline MoM prints 0.4% or higher. The first tail-risk scenario would likely reflect an acceleration in Core Services with less of a decline in housing. If this comes to fruition, would look for the bond market to fully remove any probability of a January rate cut, down from 4.5%, and would see a material decline in March expectations, too, which are currently pricing ~63% chance of a cut. Yields would back up and could see a 15-20bps 1-day move in yields. Equities would predictably sell off in this scenario with Defensives outperforming on the move lower. Further, we may see the stagflation narrative return as well as heightened expectations of a hard landing since the implication would be a likely resumption of the Fed hiking cycle if you saw consecutive prints like this. SPX loses 1.5% - 2.25%.
- [25%] Between 0.3% - 0.4%. This would be the hottest MoM print since the October 2023 print, where the SPX fell 4.8% from CPI day through month-end. While this type of print would spike bond yields and push stocks lower, it would still need to be followed up with one or two more similar prints before there would be credible risk that the Fed resumes the tightening cycle. Also, the detail here would matter, e.g., is this an acceleration of Core Services or Housing prices, or perhaps a lack of decline in things such as Used Vehicles or Public Transportation. SPX falls 75bps - 1.25%.
- [45%] Prints in line with consensus, 0.2% - 0.3%. I think this is a net positive for markets despite this showing inflation sticking around the 3%; investors are away of the lag between housing prices and official inflation prints. Further, this would further cement that inflation is "cured". Our colleagues in JPM Private Bank, led by Tom Kennedy, tell us that over the last 6 months, Core PCE is running at 1.9%. Further, if you replace the lagged shelter components with proxies of real-time rents, such as Zillow, then Core PCE is at 0.8%. SPX adds 50bps - 75bps.
- [20%] Between 0.1% - 0.2%. This dovish outcome would also suggest that Headline YoY CPI prints below 3%, a large psychological level for investors. Positioning is no longer the tailwind it was during the 23Q4 rally, but this triggers a rally as well as bringing stronger March rate cut expectations. The final piece to the analysis would be what the Fed does with QT, but this could foreshadow the resumption of the 2023 rally and put all-time highs back to top of mind. SPX adds 1% - 1.25%.
- [5.0%] Prints below 0.1%. Another tail-risk scenario, likely driven by a larger than expected decline in Core/Super Core inflation. The implication would support recent statements from the Fed's Bostic that inflation is falling more quickly than expected. This could also trigger a 20-25bps decline in the 10Y yield and would likely be the catalyst needed to take out 5k in the SPX in 24Q1 unless earnings crater. SPX adds 1.5% - 2.50%.
- WHAT ARE OPTIONS PRICING? My Equity Derivatives colleagues tell me that Thursday's straddle is pricing 1.0% move. Interestingly, Friday's straddle is pricing about a 1.15% move.
- US MKT INTEL VIEW - we see a hawkish print as slightly more likely than a dovish print. Ultimately, we feel that the trends are clear that disinflation is entrenched in the economy. While we understand the comparisons to the 1970s, the economy is structurally different and unless there is an exogenous shock to commodity prices, most likely one that takes WTI through $100/bbl, then it is unlikely that there is a strong enough consumption impulse from the US Consumer to take headline inflation above 4%, which we feel is a necessary pre-condition for the Fed to resume its hiking cycle.
Charting the Technicals
"Think not of what you see, but what it took to produce what you see."
- Benoit Mandelbrot
Bonus: Some Good Links
* Stocks With Upgrade Potential