DAILY DIARY
Until Next Time
Thanks for reading my Diary today.
Enjoy the rest of the week and the weekend.
You will be in the extremely capable hands of Stephen "Sarge" Guilfoyle and Chris "Not The Designer" Versace on Thursday and Friday.
See you all back at my perch in my Diary on early Monday morning.
Toppy Breadth
VIX to the Upside
The VIX is making one of its most aggressive moves - to the upside - today.
Now trading at 15.08 (+1.24).
My Tweet of the Day (Part Trois)
The Price of Crude vs Occidental
One would think the correlation would be closer:
View Chart »View in New Window »
SPY Move
With the VIX back up to 15, I am averaging into a (SPY) straddle for April.
My Cannabis Tweet of the Day
Bond Market Update
If you are looking for a reason for part of today's market schmeissing - just look at the pressure on yields:
* The yield on the 2-year Treasury note is 4.36% (+14 bps).
* The yield on the 10-year Treasury note is 4.11% (4 bps).
The 2-10s curve is inverted by only about 24 basis points.
Crude Is Green
Crude turns green after being down by nearly -$2/barrel early in the day.
Programming Note
I will be out of the office and not writing on Thursday and Friday, but you will be in the very capable hands of Chris Versace and Stephen "Sarge" Guilfoyle.
Boockvar on NAHB Builder Sentiment
The NAHB home builder index for January lifted by 7 pts m/o/m to 44. Though still under 50 it was 5 pts above expectations. The Present Situation was higher by 7 pts to 48 while the Expectations component jumped back above 50 for the first time since August to 57, up 12 pts m/o/m. Still in the doldrums though is bodies walking the floor of homes as Prospective Buyers Traffic was just 29, though up 5 pts from December.
It's easier to understand why builder confidence rose and that was due to the drop in mortgage rates. According to Bankrate, the average 30 yr mortgage rate started December at about 7.5% and ended the month at 7% and which is where it stands as of yesterday. It peaked last year at around 8% at the very end of October.
Builders are still relying on discounting to drive sales. According to the NAHB, "In January, 31% of builders reported cutting home prices, down from 36% during the previous two months and the lowest rate since last August. The average price reduction in January remained at 6%, unchanged from the previous month. Meanwhile, 62% of builders provided sales incentives of all forms in January. This share has remained stable between 60% and 62% since October."
Bottom line, there is a notable bifurcation in the home building business, those with scale and a strong balance sheet and that have flexibility in terms of pricing/discounting and many of the smaller ones that are still dealing with "supply challenges in the form of higher prices and/or shortages of lumber, lots and labor."
As for the broad home market, including existing, a 7% mortgage rate is still very expensive compared to the prior 15 years and why for the first time buyer, they remain challenged affordability wise. It's also why I think the demand for renting will remain pretty steady while a huge amount of supply comes on line this year (about 1mm units), keeping rents little changed y/o/y price wise which will eventually flow into CPI.
NAHB
View Chart »View in New Window »
Prospective Buyers Traffic
View Chart »View in New Window »
Average 30 yr Mortgage Rate according to Bankrate
View Chart »View in New Window »
Subscriber Comments of the Day
- kenpat06
- TechNova
Air Force One is a BA plane.
They need to add Velcro to the doors.
- Johnthegreek
Yes, who in their right mind?
Oil Vey
The price of crude is almost back to break even on the day - after being -$1.80/barrel.
I have been adding to my three core energy longs.
Market Internals
* At 11 am:
- NYSE volume 160M shares, 8% above its one-month average
- Nasdaq volume 1.67B shares, flat to its one-month average
- VIX: + 8.09% up to 14.96 (breaking out of range)
View Chart »View in New Window »
Breadth
View Chart »View in New Window »
Biggest Movers
View Chart »View in New Window »
Heat Map
View Chart »View in New Window »
S&P 500 Sectors
View Chart »View in New Window »
My Large-Cap Tech Short Package
I have covered the balance of my trading short rental of my high beta, large-cap tech short package for a quick and sizeable profit.
SPY, QQQ and Other Moves
Several days ago I mentioned that I put on a short package of high beta Tech stocks.
All of these positions are getting schmeissed today and I just covered half of the package for a quick and substantial profit.
I just covered my common short in (SPY) $471.33 and (QQQ) $403.65 also for a quick profit.
I remain net short (QQQ) exposure.
Boockvar on Retail Sales
From Peter:
Treasury yields are jumping again after core retail sales in the big holiday month of December exceeded expectations, rising by .8% m/o/m, a large 6 tenths above expectations and November was revised up by one tenth to a 5 tenths increase. Vehicle sales increased by 1.1% m/o/m and higher by 7.2% y/o/y as supply is more plentiful and incentives lift a bit. Building materials rose .4% m/o/m but after falling by one tenth last month and are down almost 6% y/o/y because of the slowdown in DIY due to the very low level of existing home sales.
Online retailing helped to drive the core rate of spend, rising by 1.5% m/o/m and 7% y/o/y. Clothing sales were strong too, rising by 1.5% m/o/m and 3.7% y/o/y. After 3 months of declines, department store sales rebounded by 3% m/o/m but are still lower by 3.8% y/o/y. Spending on restaurants and bars cooled as they were unchanged m/o/m but after a 1.7% jump in November and still up 10.8% y/o/y. Sales of food/beverages rose .2% m/o/m and 1% y/o/y and volume wise is pretty steady but moves around because of price.
Gasoline station sales fell due to lower prices and sales were soft for furniture and electronics with both falling m/o/m. For a 2nd month, sales of health/personal care fell but are still up a robust 8.3% y/o/y and where consumers have been prioritizing spend, along with food.
Bottom line, holiday sales were pretty good in December and well better than anticipated as stated and why Treasuries are selling off again with the 2 yr at 4.32% and the 10 yr at 4.10%. It's hard to separate out what was helped by Buy Now Pay Later and we'll see in a few weeks the extent of credit card usage that was needed to sustain this level of spend as November saw the biggest one month increase in revolving credit outstanding since March 2022. This is important because the savings rate is only at 4.1%.
10 yr Treasury yield move after Retail Sales
View Chart »View in New Window »
Import prices were unchanged in December m/o/m well more than the estimate of down .5% but ex petro prices were about as expected, unchanged too m/o/m. Headline imports are down 1.6% y/o/y and by 1% ex food and energy.
As this is pre Red Sea attack data, we'll wait for the coming months to see to what extent the spike in transportation costs flow thru.
Selected Premarket Movers
Upside
-BFRG +28% (collaboration with Lieber Institute for brain development yields potentially groundbreaking biological stratification of brain expression data)
- (PI) +12% (raises Q4 revenue)
- (SLDP) +9.7% (Solid Power and SK On deepen partnership with three new agreements)
- (NTRA) +9.3% (provides update on Ravgen Trial; $57M was awarded to Ravgen (sought $410M) in damages in the patent infringement case)
- (EOLS) +5.5% (reports prelim Q4, guides initial FY24 revenue)
- (SBGI) +5.2% (reaches global settlement of all Diamond Sports Group-related litigation issues; DSG withdraws $1.5B litigation against Sinclair and others)
- (RCUS) +4.3% (data from Phase 1b Study of Quemliclustat-Based Regimens Showed Promising Overall Survival in Treatment-Naïve Metastatic Pancreatic Cancer)
- (DUOT) +3.6% (secures $2.4M AI subscription and services agreement)
Downside
- (PHUN) -60% ($7.0M Registered Direct Offering priced at-the-market under Nasdaq rules; prices 87.5M common shares at $0.08/shr)
- (TSP) -37% (intends to delist from Nasdaq, effective Feb 8th)
- (DATS) -31% (files to sell public offering of common stock of indeterminate amount)
- (MARK) -23% (entered into an amendment to purchase agreement with Ionic Ventures)
- (ACXP) -19% (reports comparative microbiology/microbiome data for Ibezapolstat from Phase 2b Trial in CDI)
- (SAVE) -18% (multiple broker downgrades following Federal judge blocking deal to merge with JetBlue)
- (DH) -14% (names Founder, Executive Chair Jason Krantz as Interim CEO, effective immediately; Affirms Q4 guidance, issues initial 2024 guidance)
- (ALLK) -13% (Cantor Fitzgerald Cuts ALLK to Neutral from Overweight following restructuring announcement)
- (ADAG) -11% (presents interim results reinforcing Best-in-Class Profile of Masked anti-CTLA-4 SAFEbody ADG126 (muzastotug) in combination with Pembrolizumab in Metastatic Microsatellite-stable (MSS) Colorectal Cancer (CRC))
- (BGFV) -7.7% (reports prelim Q4 revenue, SSS and margins)
- (CVGW) -7.1% (delays release of Q4, FY23 financial results due to need for additional internal investigation; Reports prelim FY23 net sales and announces it is evaluating sale of Fresh Cut Business)
- (MYO) -5.3% (reports prelim Q4 revenue)
- (ALEC) -4.5% (files to sell public offering of common stock of indeterminate amount)
- (FULT) -4.4% (earnings)
- (MAT) -3.9% (Morgan Stanley Cuts MAT to Equal Weight from Overweight, price target: $19)
- (IBKR) -3.8% (earnings)
- (PLD) -2.8% (earnings, guidance)
- (SPWR) -2.3% (adopted a restructuring plan to further advance efforts reducing operating costs due to slower sales driven, in part, by higher interest rates)
Fed Speakers
9:00 am: Fed Vice Chair for Supervision Barr speaks on "Cyber Risk" before the 2nd Annual Massachusetts Institute of Technology/Federal Reserve System Conference on Measuring Cyber Risk in the Financial Services Sector, Cambridge, MA (Text available. No Q&A. RSVP for livestream: https://www.eventcreate.com/e/mit-frs-conference-on-measuring-cyber-risk)
9:00 am: Fed Board Governor Bowman participates in discus- sion, "The Path Forward for Bank Capital Reform," before the U.S. Chamber of Commerce Protect Main Street Lending Event, Washington, DC (No text. Q&A from moderator. No webcast)
3:00 pm: Fed Bank of New York President Williams (Voter) gives opening remarks before hybrid event, "An Economy that Works for All: Measurement Matters," at the Federal Reserve Bank of New York (No text. No Q&A)
The Book of Boockvar
From Peter:
Chris Waller, following Bostic over the weekend, was successful in pulling back the markets from the almost 160 bps of cuts priced in thru December in the fed funds futures market as of last Friday. Now it's about 140 bps which means 100% chance of 5 and a 60% chance of a 6th. That remains though quite different from the 3 that keeps getting talked about from Fed members. Bowman, Barr and Williams speak today but we already heard from Bowman and Williams over the past few weeks so expect nothing new. The odds of a March hike now stand at 62% vs 86% on Friday.
I have to believe it's related to the spike in shipping costs (we'll get updated pricing tomorrow) that has slowly crept up inflation breakevens in the TIPS market as the 5 yr level yesterday closed at 2.25%, the highest in 2 months, though still well below the one yr peak seen last March at 2.79%. I find that 2.25% average 5 yr inflation as easily exceedable and why we're long short term TIPS. The 10 yr TIPS inflation breakeven is at 2.31%, also a 2 month high.
Speaking of shipping, the Maersk CEO said this today in Davos of the Red Sea challenges, "So for us this will mean longer transit times and probably disruptions of the supply chain for a few months at least, hopefully shorter, but it could also be longer because it's so unpredictable how this situation is actually developing."
5 yr Inflation Breakeven
View Chart »View in New Window »
10 yr Inflation Breakeven
View Chart »View in New Window »
The NY Fed yesterday released its Household Spending Survey for December (done every four months) and it said "The survey shows a continuation of the recent declining trend in monthly household spending growth, even though spending growth remains well above pre-pandemic levels."
Quantifying this, "The median increase in monthly household spending compared to a year ago declined to 5% in December 2023, from 5.5% in August and 7.1% in December 2022, but remained well above its pre-pandemic level of 2.5% in December 2019."
In terms of items, relative to August, "The share reporting making a large purchase on home appliances and electronics increased in December 2023...while the share reporting large item spending on furniture, vehicles, home repairs, homes, and vacations fell." Specifically with furniture, and in light of the depressed level of existing home sales, this figure dropped to the lowest since April 2020.
As for spending expectations from here, a growth rate of 3% vs 3.4% in August is the lowest read since December 2020 and "The decrease was broad based across age, income, and education groups." Lower mortgage rates likely raised expectations for buying a home but expected spending on home appliances, electronics, furniture, home repairs, vehicles, and vacations all declined.
Bottom line, if these spending expectations are actually realized, it would be a big reason for economic slowing in 2024.
We saw very muted loan growth from all the big banks that reported Friday and yesterday from PNC confirmed the same thing. Including the Signature capital commitment loans, PNC saw 2% commercial loan growth y/o/y in Q4 and taking this out, loan growth fell 1%, "driven by lower utilization and soft loan demand." Consumer loan growth was up modestly "driven by higher residential mortgage balances, partially offset by lower home equity and credit card balances."
Not surprisingly, "The CRE office portfolio is where we continue to see the most stress."
From Goldman Sachs earnings call:
"As we enter 2024, the potential for rate cuts in the first half of this year has renewed optimism for a soft landing. We are already seeing signs of potential resurgence in strategic activity, which is reflected in our backlog."
With people back from holiday, mortgage applications rose by 10.4% w/o/w with a 10.8% jump in refi's and 9.2% increase in purchases as the dip in mortgage rates, though still high, are taken advantage of.
China reported a bunch of economic data including Q4 GDP which rose 5.2% y/o/y, about where the 5.3% expectation was. December brought another drop in home prices and signs are not yet evident of a bottom in the housing market, which is so crucial in stabilizing their whole economy. Retail sales in December grew by 7.4% y/o/y on easy comparisons but that was below the estimate of 8% growth. IP and fixed asset investment were in line. China also decided to released its youth unemployment figure and magically it fell to 14.9% for 16-24 yr olds from 21.3% in June. This does not include students which make up about 30% of this age group.
I'll include here too some commentary from the China Beige Book which came out yesterday. "China Beige Book's new Q4 data show national revenue and profit growth sliding into year-end, as did investment, hiring, sales volumes, output, and both domestic and foreign orders. Our inflation gauges slowed across the board, though wages, input costs and selling prices remain safely out of deflationary territory." I'll add, once housing bottoms, their economy bottoms in terms of rate of growth.
Stocks in China got hammered again. The Hang Seng, where many companies are multinationals doing business globally, is now trading at a dirt cheap 7.5x 2024 earnings estimates with a dividend yield of 4.8%.
Gilt yields are jumping today after UK inflation in December rose more than expected. Headline CPI rose by 4% y/o/y vs 3.9% in November and vs the estimate of 3.8%. Core CPI grew by 5.1%, the same pace seen in the month before and vs the forecast of 4.9%. Services inflation in particular picked up to 6.4% from 6.3%. Inflation breakevens though are not moving today as the 10 yr stays at 3.45%.
Bottom line, the magically glide path to 2% inflation is easier said than done and AGAIN, eventually getting there for some countries like the US doesn't mean it's staying there.
UK 10 yr Gilt yield
View Chart »View in New Window »
Bloomberg Tweet of the Day
No Worries Here
From The Street of Dreams (Part Deux)
FinTV Blather
More Night Moves: A Detailed Look at Overnight Futures and Why/What Markets Are Moving
* As noted, looking under the hood of the market reveals weakening characteristics (small-cap, equal-weighted, financials all rolling over, contributing to weak breadth:
* The S&P Short-Range Oscillator is back in the negative (modestly oversold) at -1.47%
* This morning yields are mixed, crude oil prices are lower and the U.S. dollar is strong
* Oil vey! (h/t Keith McCullough, Hedgeye):
* Hot core European Union inflation print, weak China data and a hawkish European Central Bank ("no need to move quickly" -- ECB President Lagarde) weighing on stock futures
"Nothing here to fear
I'm just sitting around being foolish when there is work to be done
Just a hang-up call
And the quiet breathing of our Persian we call Cajun on a Wednesday"
- Tori Amos, "Wednesday"
"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 mostly lower overnight. S&P futures peaked at +3 and bottomed at -29. Nasdaq futures peaked at +21 and bottomed at -152. At 5:18 a.m. ET, S&P futures were -21 and Nasdaq futures were -92.
And...
* Commodities are lower. Brent crude is down $1.60 to $70.75.
* The S&P Short-Range Oscillator is moving back to negative (overbought!) at -1.47% vs. 1.17%.
* The VIX is up to 14.52 (+0.67) -- the trend appears to have changed.
* The U.S. dollar is stronger against the yen and weaker vs. sterling and euro.
* Treasury yields are mixed. The 2-Year Treasury yield is +4 basis points at 4.266% and the 10-Year is -2 basis points at 4.048%.
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 by 6 basis points.
* Overnight, the inversion of the 2s/10s Treasuries curve is at -22 basis points.
* Gold is down by $3.20 at $2,027.
* Bitcoin is -$500 to $42.7k.
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:
Not Broadening: It Feels Like Déjà Vu All Over Again (July 2023)
Apple Slides on China Discounting
Very Bad Breadth on Higher Volume
Here were Tuesday's trades:
* Reshorted SPDR S&P 500 ETF (SPY) and Invesco QQQ Trust (QQQ)
* Partial Green Thumb Industries (GTBIF) sale on strength (over $13/share)
From Hedgeye on Apple/China
Themes and Sectors
This is a valuable resource for momentum-based short term traders:
View Chart »View in New Window »
From The Street of Dreams
From JPMorgan:
US: Futs are lower as part of a global risk-off tone. US yield curve is flattening while APAC/EMEA experienced the surge that the US saw in yesterday's session as central bankers pushback on rate cut expectations. Pre-mkt, both Tech and Small-Caps are underperforming the SPX; AMD and NVDA the lone bright spots. Yesterday, the USD had its strongest appreciation since March 2023, +95bps but is flat pre-mkt. Cmdtys are dragged lower by Energy. Today's macro data focus is Retail Sales, a print flagged by the Fed's Waller as being important to understanding the growth story.
and...
EQUITY AND MACRO NARRATIVE: With a relatively light catalyst day, bond yields drove markets for much of the session, though NDX closed unchanged, as investors focused on Waller's comments (summarized below). What may have flown under the radar are 2 notes, one from the Atlanta Fed and the other from FactSet:
- ATLANTA FED- one of their economists published a paper, Is the Last Mile More Arduous, analyzing the last segment of the pathway to 2% inflation, whose two key findings are:
- The notion that the last mile of disinflation is more arduous than the previous miles does not receive compelling support.
- It is unlikely that the Fed needs to exert extraordinary effort in terms of additional policy tightening to bring inflation down the final 1 to 2 percentage points to consistently reach its 2 percent target; such tightening unnecessarily increases the risk of a "hard landing."
- FACTSET ON EARNINGS- in their latest earnings update, they call for at least 4% EPS growth this earnings season despite starting the season -0.1% growth. They mention that actual EPS growth has beaten estimated EPS growth in 37 of the last 40 quarters with the only misses in 20Q1, 22Q3, and 22Q4.
At this stage, it seems unlikely that the Atlanta Fed report will change the minds of voting members whose focus appears to be on (i) above-trend GDP growth and (ii) labor market tightness. However, it is possible that this type of report emboldens bond investors. That said, the probability for March rate cuts fell from about 70% to 67% yesterday; with several more Fedspeakers this week, we may see that probability continue to move lower.
My Tweet of the Day
I Couldn't Disagree More
* And, technically, small-caps look like it is rolling over...