DAILY DIARY
S&P 500 Sectors at Closing
Once Again, With Feeling -- Weak Market Breadth
- NYSE volume 418M shares, 8.5% above its one-month average;
- NASDAQ volume 4.33B shares, 6% below its one-month average;
- VIX: - 4.85% to 12.55
- NYSE Highs: 33 Lows: 3
- NASDAQ Highs: 46 Lows: 48
Closing Breadth
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% Movers
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Earnings After the Bell
Breadth, Stocks That Reported and Nasdaq 100 Heat
Breadth
Stocks That Reported Earnings
Nasdaq 100 Heat Map
Bond Market Update
* Despite this, equities are stable
* I am adding to my short book
Bond prices are at the lows of the day, and yields are at the highs of the day:
* The yield on the two year US note is +3 bps to 4.404%.
* The yield on the ten year US note is +6 bps to 4.153% - breaking out higher?
* The yield on the long bond (30 years) is +7 bps to 4.388%.
The Most Important Read of the Year?
From Mike Boyd (who once ran the treasury desk at Merrill):
The S&P 500's SPX total return over the next decade will be 0.7 annualized percentage points below inflation.
That's the implication of where the "Single Greatest Predictor of Future Stock Market Returns" currently stands. This indicator, introduced in 2013 by the anonymous author of the Philosophical Economics blog, is based on the average investor allocation to equities. The author claimed that it had a better record predicting the market's 10-year return than any other valuation indicator of which he/she was aware. I have extensively studied the indicator and have been unable to find another indicator that does better.
The indicator is contrarian, so higher values are bearish and lower ones bullish. The latest reading of 45.9% is one of the highest since data began being collected in the early 1950s, and therefore is sending a bearish message. Specifically, the latest reading is higher than 93% of all prior ones.
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The accompanying chart plots the average investor allocation on a quarterly basis since December 1951 along with, at each point along the way, the S&P 500's annualized inflation-adjusted total return over the subsequent 10 years. The 0.7% annualized total real return that I derive from the indicator's latest reading is based on a simple econometric model whose inputs are all the values plotted in this chart.
Note that this indicator relies on none of the variables on which other well-known valuation indicators rest, such as earnings, dividends, sales, book value, and so forth. My hunch is that the indicator works because it is a proxy for investor sentiment: When investors become pessimistic, they become way too pessimistic and thereby create the preconditions for a major uptrend. And just the reverse is the case when the average investor's equity allocation is at or near record highs.
This is especially important to keep in mind today, with the S&P 500 at a record high. To the extent that the current bull market has been propelled by investors' trend-chasing behavior, it means that the market is more vulnerable than it otherwise would be.
How valuation models stack up currently
The "Single Greatest Predictor of Future Stock Market Returns" is just one of several valuation indicators that have impressive track records when predicting the stock market's 10-year return. The table below updates where each of these indicators currently stands. All are telling a largely similarly sobering story about the stock market's long-term future return.
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More on Oil
Brent Crude Rallies
Brent crude is enjoying a nice rally from the early weakness.
Now green.
Oil Vey!
Energy stocks are getting jiggy.
The Book of Boockvar
From Peter:
Maybe my long Hang Seng trade has some hope after all with the possibility of 2 trillion yuan (about $280b) of state buying support. After all, is a 'stabilization fund' really any different than the Fed's policy of zero interest rates and QE which is purposely meant to lift asset prices? Not really even though I'd prefer market forces and not government manipulation.
One way of playing this, which we are, is owning the Macau casino stocks which you've heard me mention before. While the economic mood in China is certainly dour, people there still love to gamble. For the first 3 weeks of January, gross gaming revenue is at 110% of its pre Covid pace according to Inside Asian Gaming.
We also own AIA Group, one of the largest insurance companies in Asia that has a 100 yr history and was AIG's Asian business that was spun out when AIG went bust. Trip.com is another, the largest online travel agency in Asia. The Hang Seng rallied 2.6% on the news and still trades at just 7.5x earnings with an almost 5% dividend yield. The H share index trading in Hong Kong was higher by 2.8%.
The BoJ made no policy change overnight as expected but Governor Ueda still seems to be laying the groundwork for an end to NIRP and YCC. He again highlighted the importance of seeing quicker wage gains and some major union negotiations are currently taking place which Ueda talked about. "Prospects of higher wages are gradually affecting sales prices, which is leading to a gradual increase in service prices...If we get further evidence that a positive wage inflation cycle will heighten, we will examine the feasibility of continuing with the various steps we are taking under our massive stimulus program" said Ueda. Sounds like a guy ready to tighten again.
Also, "The likelihood of realizing this outlook has continued to gradually rise." And finally of note, "Based on our current economic forecast, even if we were to end negative rates, monetary conditions will likely remain very accommodative."
So maybe there is a change at their next meeting in March or in April if not. The 10 yr JGB yield rose by almost 2 bps in response to close at its highest level since December 18th, though still well below the early November level. In turn, yields are higher in Europe and the US today. The yen initially sold off upon the no policy change announcement but after people digested the statement and Ueda made comments in his presser, it's now up slightly but off its morning highs.
10 yr JGB Yield
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Overnight moves in the yen
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As we all discuss and debate the state of the US economy ahead of the Thursday Q4 GDP report, I'm going to list here the one liners from the Beige Book seen last week which doesn't sound anything like a 2% growth environment.
Boston:
"Economic activity was down slightly."
New York:
Regional economic activity declined slightly."
Philadelphia:
"Business activity held steady during the current Beige Book period - after falling for most of 2023."
Cleveland:
"District business activity edged up."
Richmond:
"The regional economy grew mildly in recent weeks as consumer spending was flat to increasing modestly."
Atlanta:
"Economic activity grew at a slow pace."
Chicago:
"Economic activity in the 7th District was up modestly."
St. Louis:
"Economic activity has remained unchanged since our previous report."
Minneapolis:
"District economic activity was down slightly."
Kansas City:
"Economic activity in the 10th District declined moderately."
Dallas:
"Economic activity expanded at a modest pace over the reporting period, with most sectors holding steady or experiencing slight growth."
San Francisco:
"Economic activity was stable overall."
We know that tighter monetary policy and higher interest rates is meant to cool the demand side of the economy. What it also does is reduce the supply side too in terms of capacity. Many trucking companies are going out of business in part due to the manufacturing recession and shift in consumer spending to services but also the small operators who jumped into the business when the spending on goods was raging are also leaving. The result is a slow but steady increase in trucking prices, as we see what is going on with container shipping costs.
The Dry Van Rate per Mile closed yesterday at the highest rate since February 2023. It is well below the early 2022 peak for sure but if we want to analyze inflation on a rate of change basis, I'll argue that goods prices have the real potential to tick higher again. I'm waiting to see air cargo prices get updated and haven't since January 10th in what I look at.
Dry Van Rate per Mile
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I forget to mention yesterday the December Taiwan export orders figure which fell 16% y/o/y vs the estimate of down 1%. Exports to the US fell 22% and by 39% to Europe. Orders from China were lower by 3.5%. The global manufacturing recession and less spending on goods continues to negatively impact global trade.
Finally, earnings from Proctor & Gamble still reflects pricing driving revenue growth. Organic sales rose 4% and "was driven by a four percent increase from higher pricing, partially offset by a one percent decrease in organic shipment volumes. Mix had a neutral impact on sales for the quarter."
Pfizer, Bristol-Myers Moves
After we undertook deeper research dives on Pfizer (PFE) and Bristol-Myers (BMY) over the last week, I have eliminated PFE and sold calls against BMY.
The fundamental cases just don't support much higher prices in either of the stocks.
My Tweet of the Day
Selected Premarket Movers
Upside
- (OTLK) +25% (receives FDA agreement under special protocol assessment (SPA) for 90 day non-inferiority study, NORSE EIGHT)
- (TKO) +23% (strength following Netflix deal for WWE Monday Night Raw content; appoints Dwayne "The Rock" Johnson to Board)
- (SRTS) +13% (prelim Q4 revenue)
- (FSR) +11% (expects to sell all remaining 2023 vehicles before end-Q1)
- (ARTL) +6.4% (anticipates filing IND for ART26.12 in 1H24)
- (UAL) +6.2% (earnings, guidance)
- (EDR) +5.7% (strength following Netflix deal for WWE Monday Night Raw content)
- (BILI) +5.5% (China Gaming Regulator (NPPA) to take down draft rules to control spending in video games from website)
- (BABA) +5.4% (reportedly Jack Ma has been buying more shares in Alibaba in recent months)
- (NTES) +5.4% (China Gaming Regulator (NPPA) to take down draft rules to control spending in video games from website)
- (VZ) +4.5% (earnings, guidance)
- (WOLF) +3.8% (Infineon Technologies expands and extends multi-year silicon carbide (SiC) 150mm wafer supply agreement with Wolfspeed)
- (MMYT) +2.5% (earnings)
- (ERIC) +2.2% (earnings, guidance)
- (NFLX) +2.1% (acquires rights for WWE's flagship weekly program, WWE Raw beginning in Jan 2025)
- (PG) +1.6% (earnings, guidance)
- (HAL) +1.5% (earnings; raises dividend)
- (PCAR) +1.5% (earnings, guidance)
Downside
- (VRM) -45% (announces wind-down of ecommerce used vehicle operations and lays off ~800 workers)
- (PRST) -11% (wholly owned subsidiary Presto Automation LLC, entered into a Forbearance agreement; exploring alternatives, in discussions with potential investors for capital raise)
- (LOGI) -6.9% (earnings, guidance)
- (MMM) -6.5% (earnings, guidance)
- (DHI) -5.1% (earnings, guidance)
- (COIN) -4.2% (JPMorgan cuts to Underweight from Neutral, price target $80)
- (GE) -3.9% (earnings, guidance)
- (DOOO) -3.2% (Holder Bain enters into bought secondary offering)
- (IVZ) -3.1% (earnings)
- (RILY) -2.2% (weakness attributed to report of Franchise Group CEO Brian Kahn stepping down amid SEC probe)
More Night Moves: A Detailed Look at Overnight Futures and Why/What Markets Are Moving
* Despite my protestations, the freight train continues to accelerate
* Investor sentiment has moved slightly overbought - the S&P Short-Range Oscillator is at 0.6% v. -0.5%
* This morning, yields are higher and crude oil prices (-$0.88) are lower - gold is climbing (+$3) and bitcoin continues to drop (-3%)
* Stock futures are modestly higher
* The U.S. dollar is lower against the euro
* Ruby Tuesday(?):
She would never say where she came from
Yesterday don't matter if it's gone
While the sun is bright
Or in the darkest night
No one knows, she comes and goes
- The Rolling Stones, Ruby Tuesday
"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 are modestly higher - with one of the smallest evening and early morning trading ranges . S&P futures peaked at +4 and bottomed at -4. Nasdaq futures peaked at +29 and bottomed at -29. At 7:24 a.m. ET, S&P futures were +2 and Nasdaq futures were +16.
and...
* Commodities are lower. Brent crude is down -$0.77 to $79.31 after being much higher on Monday.
and...
* The S&P Short-Range Oscillator is now overbought - at 0.6% v. -0.5%.
* The VIX is up again to 13.22 (+0.02).
* The U.S. dollar is slightly lower against the yen and up v. sterling and euro.
* Treasury yields are trending higher and as I've mentioned, we may be at the point that lower rates will hurt equities. The 2-Year Treasury yield is +3 basis points at 4.41% and the 10-Year is +4 bps to 4/13%. Over there, the yield on the 10-Year U.K. Gilt bond is also up +4 basis points.
* Overnight, the inversion of the 2s/10s Treasuries curve is moving lower to -28. Real rates remain quite elevated; the 10-year is still about 1.75, again in real terms.
* Gold is up+-$3 and is at $2,025.
* Bitcoin is -$1,300 to $38.8k.
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:
Here were Monday's trades:
* I covered my short (SPY) puts, part of straddle.
Ripple Effects of Nonfarm Payrolls' Downward Revision
From Danielle DiMartino Booth:
Most importantly, to take in the full vista of the economic landscape, one must appreciate Nonfarm Payrolls' downward revision ripple effects, which we'll see - after the fact - in the Coincident Index. Let us count the ways. Downward revisions to aggregate hours lowers Industrial Production. Ditto for lower labor income via revisions' effect on Real Personal Income Less Transfer Payments.
Even Real Business Sales, which includes Retail Sales, could reflect secondary effects from the upcoming jobs picture rewrite. As our friends at Tier1 Alpha noted this morning, any time government jobs surpass the 10% threshold for a given year of job creation, the U.S. economy has succumbed to recession.
In 2023, that figure summed to 25%. As we ponder yet another glaring signpost of wartime fiscal spending in peacetime, all we can do is continue to exercise patience.
FOMO Is Alive And Well on FinTV
* Over time, being emotional and buying equities on the basis of price momentum can be dangerous to your investment portfolio
* I remain a dispassionate and disciplined investor
After the close I had CNBC on (in the background) - though I was not paying much attention.
I enjoy watching CNBC's Fast Money as I often use it as a gauge of general investment sentiment. I should note that CNBC does not have a concession on the herd's (and the consensus') general view - as the entirety of business media is frequently an expression of the consensus.
Last night I did watch this segment as two of my faves, Karen and Guy, were on.
I have several observations about last night's Fast Money segment - shown below:
At the beginning... a bear, Guy, put on the defensive. (NOT FOMO)
At 1:25 mark... "you can't afford to not be involved." (FOMO)
At 2:10 mark... "you have to trade the market you have." (FOMO)
At 2:45 mark... jibberish that I just can't understand. (FOMO)
At 4:30 mark... Karen with some common sense. (NOT FOMO)
At my hedge fund, Seabreeze Partners - with calculator in hand - we manage money based on the relationship between upside reward and downside risk, with an eye on a "margin of safety."
We don't chase price and we sure as hell do not base our investment selections on price momentum - as FOMO is not in our investing vocabulary.
Geopolitical Fragmentation Will Likely Lead to Persistent and Sticky Inflation
From Bramo:
Bramo's and BlackRock's observation is reminiscent of some regular concerns of mine as reflected in my three questions.
FromInvesting in a Storm(October, 2023):
The 3 Questions
As mentioned a year ago in a monthly letter to the Limited Partners of my hedge fund (Seabreeze Partners), I have three questions that I repeatedly ask myself when we invest your capital. Unfortunately, I still don't like the answers to my questions:
1. In a paperless and cloudy world, are investors and citizens as safe as the markets assume we are?
2. In a flat, networked and interconnected world, is it even possible for America to be an "oasis of prosperity" and a driver or engine of global economic growth?
3. With the G-8's geopolitical coordination at an all-time low, how slow and inept will the reaction be if the wheels do come off?
Today there are obvious emerging and overarching levels of uncertainty that are being combined with shifting and worrisome paradigm shifts. The outcomes are potentially dangerous in an already fragile global economy filled with geopolitical strife and deep hate.
We learned a week ago, that these dangers are not restricted to the strained relationships between the U.S., China and Russia - discussed in previous notes. It provides another reminder of the expanded range of political, geopolitical, economic and market outcomes (many of them adverse), that could raise (and lead to sticky) inflation and serve as a dampener on confidence, stability and on stock valuations.
Tweet of the Day (Part Deux)
Charting the Technicals
"The more I see the less I know for sure."
- John Lennon
Bonus- Here are some great links:
From "Jazzy" Jeff Hirsch - February is the second worst month
An Unconfirmed Breakout From Katie
Tweet of the Day
Hedgeye's Keith McCullough makes an important observation about market structure in the U.S. vs. the rest of the world -- and its impact on our markets: