DAILY DIARY
No Broadening
* Equal weighted S&P Index -1.26%.
* Russell Index -2.42%.
Closing Market Internals
* Yuck!
- NYSE volume 505M shares, 25% above its one-month average
- Nasdaq volume 4.57B shares, 4% above its one-month average
- VIX : +9.62% to 14.61
Breadth
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Biggest Movers
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Heat Map
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Nasdaq 100 Heat Map
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Programming Note
I will be leaving to the airport at the close of trading.
My comments about individual company results will be reserved until early tomorrow morning.
Boockvar on the Fed
From Peter:
Acknowledging the Q4 GDP report the Fed said that "economic activity has been expanding at a solid pace." This versus "economic activity has slowed from its strong pace in the third quarter" seen in the December statement.
Interestingly on the day New York Community Bank has its stock down 40%, the Fed took out the wording, "The US banking system is sound and resilient" likely on the belief that it goes without saying I guess but maybe premature to assume for some. They also took out the wording on "Tighter financial and credit conditions for households and businesses are likely to weigh on economic activity, hiring and inflation" likely because we've seen a complete 180 when it comes to financial conditions. The Fed likely didn't want to acknowledge the easier conditions so as not to distract when and by how much they will cut rates this year. Not very symmetric thinking of course.
They newly said that the "risks to achieving its employment and inflation goals are moving into better balance," however,"The Committee does not expect it will be appropriate to reduce the target range until it has gained greater confidence that inflation is moving sustainably toward 2%." Maybe this is one way the statement was meant to take away a March meeting but Powell will be the authority on this in his upcoming press conference.
The comment on their balance sheet was the same as previous meetings but I'm sure Powell will discuss more in his presser about its fate.
Bottom line, the statement had its changes, but I do believe with the purpose of telling the markets that they remain patient and careful in shifting away from its tight policy. Easy financial conditions and threats to the sharp fall in goods prices definitely complicates their job as does a slowing jobs market on the flip side.
After the sharp fall today, yields ticked up between 2-3 bps post statement release.
Mr. Toad's Wild Ride
Mag 7 v. the Indexes, plus Intraday Microsoft (MSFT) since 4 pm Tuesday.
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Microsoft
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My 3 Takes on the Fed Statement
* No more tightening. (No surprise)
* Rate cuts are coming but need more convincing that inflation is moving towards the 2% target. (So a pushback from March rate rise - which should not be a base case scenario).
* Still data dependent. (Duh!)
My Tweet of the Day (Part Four)
The Fed's Snorefest
Though the business media, needing something to talk about, is analyzing every word in the Fed's proclamation... its the same old same old.
The Fed is signally cuts but giving no indication as to the timing.
From my perch, there is nothing to do off the announcement as we await a number of EPS reports tonite.
Rosie's 'Death Cross'
From Bespoke
Contributor Comment of the Day
From "Meet" Bret Jensen:
Bret Jensen
Rare Trade in 2024 dept.
Did some covered call orders against Intellia Therapeutics, Inc. (NTLA) , a promising gene editing concern.
Stock trades just above $24.50 a share, near 52-week lows. Approximate $2.2B market cap. Nearly $1B of that is represented by the net cash on the balance sheet as of the end of Q3. Based on early trial results, company potential has the best of breed HAE treatment, although that isn't going to hit the market for several years. 7 analyst firms including Oppenheimer and RBC Capital have reissued Buy ratings on the stock so far in 2024. Price targets proffered range from $62 to $95 a share.
Utilized the September $20 call strikes for a net debit on the trade of $16 a share. Stock falls 20% over the option duration, I still make my 25% over 7 and a half months. Around the Vig from a conscientious loan shark these days...........:-)
Thoughts While Watching Fin TV
"We've long felt that the only value of stock forecasters is to make fortune tellers look good. Even now, Charlie and I continue to believe that short-term market forecasts are poison and should be kept locked up in a safe place, away from children and also from grown-ups who behave in the market like children."
- Warren Buffett
My Tweet of the Day (Part Trois)
Programming Note
I will be leaving for Los Angeles tonite for a week.
Nonetheless I will be working and publishing daily!
Market Internals
At 10:47 am:
- NYSE volume 146M shares, 1% above its one-month average
- Nasdaq volume 1.43B shares, 1% below its one-month average
- VIX: +6.31% at 14.15
Breadth
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Biggest Movers
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Heat Map
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Nasdaq 100 Heat Map
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Byron Allen Wants to Take Over Paramount Global
I don't think the Paramount Global (PARA) takeover occurs as proposed.
Fundamentals are eroding and you can't place more debt on the existing debt with the parts becoming less valuable.
I shorted more PARA at $16.64 in premarket trading.
Selected Premarket Movers
Upside
- (SINT) +55% (subsidiary Technology Assessment & Transfer, Inc. to develop 3D printing and ceramic matrix composites (CMCs) with DEVCOM-Army Research Laboratory)
- (ENSC) +44% (announces positive end of Phase 2 Meeting with FDA for PF614 to Treat Severe Pain)
- (POWL) +15% (earnings)
- (MANH) +13% (earnings, guidance)
- (PARA) +12% (Byron Allen makes $14B offer for all shares in Co, said to offer $21.53 per non-voting share, representing >57% premium versus prior close)
- (EAR) +7.5% (debuts two new devices, expanding portfolio of hearing wellness offerings)
- (SYK) +7.4% (expands Prophecy Surgical Planning System to include the new footprint, offering surgeons a comprehensive view of the foot and ankle)
- (LII) +6.7% (earnings, guidance)
- (NVAX) +6.1% (to cut 12% of global workforce, anticipates charge of $4-7M)
- (SYK) +5.8% (earnings, guidance)
- (SBUX) +3.9% (earnings, guidance)
- (SEE) +3.3% (developed the first biobased, industrial compostable tray for protein packaging)
- (COR) +2.8% (earnings, guidance)
- (SWKS) +2.8% (earnings, guidance)
- (CVRX) +2.1% (appoints new CEO)
Downside
- (NYCB) -21% (earnings, guidance)
- (APDN) -18% (files to sell 5.6M in common stock and prefunded warrants through Maxim Group in $3.4M registered direct offering)
- (EXTR) -17% (earnings, guidance)
- (AMSC) -14% (files to sell common shares of indeterminate amount; files $250M mixed shelf)
- (ROK) -8.5% (earnings, guidance)
- (MOD) -8.4% (earnings, guidance)
- (RHI) -7.7% (earnings, guidance)
- (TER) -7.2% (earnings, guidance)
- (MHO) -6.0% (earnings)
- (GOOGL) -5.3% (earnings; said to split up its internal AI ethics watchdog team)
- (AMD) -4.6% (earnings, guidance)
- (MDLZ) -4.4% (earnings, guidance)
- (AVT) -3.7% (earnings, guidance)
- (LC) -3.7% (earnings, guidance)
- (ROP) -3.2% (earnings, guidance)
- (NAVI) -2.6% (earnings, guidance)
- (TSLA) -2.6% (reportedly Musk's $55B Tesla pay package voided by a DE judge)
- (TMO) -2.1% (earnings, guidance)
- (TEVA) -2.0% (earnings, guidance)
Tweet of the Day
More Night Moves: A Detailed Look at Overnight Futures and Why/What Markets Are Moving
* Yesterday I cautioned that trouble may be ahead (Grateful Dead, "Casey Jones") -- that trouble appeared in the after-hours EPS reports on Tuesday
* The overbought climbs further -- the S&P Short-Range Oscillator is at 4.32% vs. 2.98%
* This morning, yields and crude oil (-$0.84) are lower, while gold is climbing (+$6) and bitcoin is -$1k
* The U.S. dollar is modestly higher against most major currencies
* Last night I went to the Opera:
"You give him a thousand dollars a night just for singing? Why, you can get a phonograph record of Minnie the Moocher for 75 cents. And for a buck and a quarter, you can get Minnie."
- Groucho Marx (Otis B. Driftwood)
PS: I took a video of the performance!
"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 broadly lower. S&P futures peaked at -13 and bottomed at -28. Nasdaq futures peaked at -128 and bottomed at -251. At 6:34 a.m. ET, S&P futures were -23 and Nasdaq futures were -206.
And...
* Commodities are mixed. Brent crude is -$0.84/barrel to $82.03.
* The S&P Short-Range Oscillator is now overbought 4.32% vs. 2.98%
* The VIX is up again to 13.45 (+$0.14).
* The U.S. dollar is slightly higher against most major currencies.
* Treasury yields are lower. The 2-Year Treasury yield is -3 basis points at 4.324% and the 10-Year is -2 basis points to 4.03%. Over there, the yield on the 10-Year U.K. Gilt bond is -1 basis point.
* Overnight, the inversion of the 2s/10s Treasuries curve is back up to -30. Real rates remain quite elevated; the 10-year is still about 1.75, again in real terms.
* Gold is up $5 at $2,056.
* Bitcoin is -$1,000 to nearly $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:
Post Market Earnings Reports (a warning)
S&P EPS Estimates Remain Elevated (and too high)
There were no trades on Tuesday.
Before the Techs Reported...
Here is what I wrote yesterday afternoon BEFORE the Tech EPS Reports:
Post Market Earnings Reports
* What I will be looking for...
From my perch it will be very interesting to see to what extent Microsoft (MSFT) and Alphabet (GOOGL) see the rise in costs/expenses as they invest in AI -- at a point in time that is well before revenue is generated.
Repeating For Emphasis... Why I Remain Bearish
The market remains anathema to me - breadth is weak and leadership, which has now gone parabolic, is narrow.
Let's start the day by reviewing the body of my bearish market outlook - as viewed from last Wednesday's column:
My 2024 Market Outlook
There is now a near-universal view -- after a rapid rise in the markets, especially of a Nasdaq-kind -- that stocks are headed higher over the near term and for the full 2024 year.
However, it is important to observe how wrong the confident consensus has been in each of the last two years:
* At the end of 2021, the herd was optimistic. 2022 was a disaster in both the fixed income and equity markets.
* With such a bad experience in 2022, the consensus ended the year wildly confident but this time bearish -- especially on mega tech. And that could not have been further off market as not only did the market rip higher, but tech materially led the way.
* Today the consensus, following the momentum built up in the last three months, is exceedingly bullish -- nary a bear can be found. This is consistent with market technician Helene Meisler's wonderful quote that "price has way of changing sentiment."
There is no more reason to expect the herd's optimistic market calls for 2024 to be closer to the mark than those of 2022 or 2023. While the "group stink" feeding these forecasts may not qualify as a leading contrary indicator of what we should expect this year, the upbeat consensus forecasts should definitely be taken with a grain of salt.
Count my hedge fund, Seabreeze, today, as we were at the beginning of 2023 -- when we were more upbeat than most -- to be outside the consensus, again. This time we are downbeat when almost everyone else is upbeat.
I see a vast array of unexpected political, geopolitical, economic and market surprises that could be on tap for the New Year.
Here are some of my principal concerns:
Equity Risk Premium: Despite the enormity of the drop in yields, the equity risk premium (the S&P earnings yield divided by the risk-free return) is still paper thin - and, historically this is a reasonable predictor of weak markets. The move higher in stocks in 2023 was mostly a valuation reset - and the specific move in the last two months has entirely been a reset of multiples as the 4Q2023 S&P EPS projections are down -6% from the beginning of the fourth quarter and 2024 S &P EPS forecasts are down by -1% to -2% in the same timeframe.
There is to me, a single-minded preoccupation with lower yields and disinflation. To me Treasury yields are still high relative to the lowly S&P dividend yield (at only 1.45%). Moreover, the S&P dividend yield compares unfavorably to the one-year Treasury bill yielding 4.80% and a three-month Treasury note yielding 5.40% - the gap between the S&P dividend yield and Treasuries is at a multi decade wide.
In other words, a reasonable risk free, nonvolatile, and equity-like return can be achieved in short term Treasuries today. If one goes out further to somewhat more risky credit, fixed income returns are in excess of historic equity returns.
Fed Rate Cuts Are Typically Bearish: It is clear that the Fed's tightening cycle is over. But, as seen in the following chart, it is important to recognize that, over time, policy loosening and interest rate cuts are typically equity market unfriendly:
Geopolitical: As I have cautioned the world is no safer than it was three months ago, six months ago or one year ago. Arguably it is less safe. The Black Swans of Geopolitics are being largely ignored despite the danger being equal in my view to just before both World Wars. Indeed, the similarities to 1914 and 1938 are very scary.
Political: Politically we are also in worse shape with an aging President leading the Democratic Party and a multiple times indicted ex-President (likely to represent the Republican Party) contributing to a toxic Washington that has never been more partisan and unequipped or unlikely to compromise in important legislative matters.
Deficit/Debt: On that score the burgeoning U.S. and a $300 trillion global debt crisis are being ignored. Our nation's growing annual deficit and the accumulated debt load (of more than $34 trillion, +500% since 2000) will suppress economic growth:
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The rapidly expanding U.S. debt bill (observed above)- impacted by unprecedented political partisanship and our government's uncompromising policy - is being ignored by both parties as reflected in the expansive, unfocused and undisciplined fiscal policies maintained in the last decade. But, this is an obligation that must be paid.
With global debt growth accelerating at an alarming rate, markets are rallying on expectations of lower interest rates, lower inflation, and strong economic growth, a jigsaw puzzle whose pieces fundamentally don't fit together. Lower inflation and lower interest rates point to slowing economic growth and lower corporate profits which are inconsistent with forecasts for new stock market highs. But a foolish consistency is the hobgoblin of little minds in the ZIRP/QE era, and having crossed the Rubicon into that era, we can never cross back.
The world's debt load represents an existential threat to the global economy. That debt can never be repaid in constant dollars - it can only be addressed by defaults, inflation, and currency devaluation. The day of reckoning for this intensifying crisis is moving closer due to the exponential nature of debt. Investors who ignore this looming threat will suffer terrible consequences in the future; those who factor it into their investment decisions will better protect themselves and even prosper. But make no mistake about it - there is no way to avoid the debt crisis. Ignoring it is not an option and is the equivalent of financial suicide for anyone who sticks his or her head in the sand.
Economic And Corporate Profit Growth Expectations Are Inflated And Inflation Will Remain Sticky: As it relates to a consumer-driven domestic economy, the stacked or cumulative rise of well over 20% in prices since 2020 will likely weigh on both economic and corporate profit growth over the next several years. We are less concerned about a recession this year than an extended period of market unfriendly slugflation (sluggish economic growth and sticky inflation).
The likely future condition of slugflation could deliver a sustained period of higher interest rates than expected - providing both fundamental (debt rollover challenges) and valuation headwinds. (See Howard Marks' explanation of this "Sea Change" later on in our commentary.)
Meanwhile, back to the current situation in which the lingering period of curve inversion (in which short term interest rates have been above long-term interest rates since early 2023) represents a noteworthy valuation threat to equities - that has been dismissed by many.
The last four times the Ten-Year Treasury note yield minus the Three-Month Treasury bill yield inverted, it led to the 1990s recession, the Dotcom Bust, the Global Financial Crisis and the 2020 Recession:
Market Structure: The action in the last three months is proof positive that markets no longer move based on fundamental economic logic. Instead, they are driven by liquidity, flows, momentum and an extremely short-term oriented psychology which is reflected in the popularity of ODTE (zero days to expiration options) that today account for more than 60% of total options trading activity daily. Macro rules markets but not in the sense of traditional macroeconomics but the new macro-structure of markets.
A Sea Change
Back last year, my friend Oaktree Capital's Howard Marks reflected upon an economic "sea change" he expected in the next decade. We agree with his thesis (which has bearing on our investing strategy and tactics), the upshot of which is:
- The period from 1980 through 2021 was generally one of declining and/or ultra- low interest rates.
- This had profound ramifications in many areas, including determining which investment strategies would be the winners and losers.
- That changed in 2022, when the Fed was forced to begin raising interest rates to combat inflation.
- We're unlikely to go back to such easy money conditions, other than temporarily in response to recessions.
- Therefore, the investment environment in the coming years will feature higher interest rates than those we saw in 2009-21.
- Different strategies will outperform in the period ahead, and thus a different asset allocation is called for.
Where I Erred
Since I have been directionally wrong over the last sixty days, I would be remiss (and it would be arrogant of us) if I didn't review why I have been wrong directionally and what I might have missed over the last sixty days:
* I underestimated the animal spirts and price momentum that accumulated during November and December.
* I underestimated the power of the herd - as the pressure to the upside intensified, so did FOMO (the fear of missing out).
* I underestimated the contribution that market structure would have in terms of intensifying the upside to equities - specifically, quant strategies that worship at the altar of price momentum catalyzed the market advance. Active managers came along for the ride. In essence, we live in a world where buyers live higher, and sellers live lower.
* The same applies to interest rates, as the momentum of yields to the downside accelerated, there was more and more buying (and lower yields) on fixed income products.
* I thought interest rates would decline but we underestimated the valuation reset higher in equities even in the face of weakening high frequency economic data.
* I overestimated the concerns that would accompany lower interest rates and did not anticipate the possibility that price earnings multiples would expand to the degree they did.
Nonetheless, given the headwinds cited in this commentary, it is my strong (and non-consensus) conviction that the market's upside reward is now likely dwarfed by the downside risk.
Summary
Christmas came early to Wall Street in 2023, but a New Year's Eve hangover may lie ahead.
Currently the S&P Index is near a record high and "Goldilocks" thinking has been embraced by many market participants as a number of consequential market headwinds are being materially ignored.
I have often seen the acceptance of "Goldilocks" played out many times over the course of my investing career. But "Goldilocks" and a perfect outcome are rarely sustained for very long as ideal scenarios often fail to emerge.
More significantly one important effect of "Goldilocks" is that it leads to high investor expectations and room for potential disappointment and losses.
FT Unhedged recently expressed a similar view:
Yesterday's letter suggested that we think the market's current expectation of solid growth and six rate cuts seemed likely to be wrong in one direction or the other: either strong growth will limit the Fed to close to the three rate cuts it currently forecasts, or growth will be weak and there will be as many cuts as the market expects. In this sense, the market does look to be pricing in too much good news.
There are two important things to keep in mind with respect to market and economic forecasts:
* There is often an inverse relationship between the degree of confidence with which a forecast is delivered and the ultimate accuracy of that forecast.
* Forecasts often say more about the forecaster than the object of the forecast. To borrow a phrase from William Butler Yeats' Among School Children - we often can't distinguish the dancer from the dance:
Labour is blossoming or dancing where
The body is not bruised to pleasure soul,
Nor beauty born out of its own despair,
Nor blear-eyed wisdom out of midnight oil.
O chestnut tree, great rooted blossomer,
Are you the leaf, the blossom or the bole?
O body swayed to music, O brightening glance, How can we know the dancer from the dance?
In a world filled with war, debt and political and geopolitical instability, general uncertainty of economic and profit outcomes and a "sea change" in interest rates -- bullish economic, corporate profit and market forecasts should be strenuously questioned. When those forecasts are almost uniformly bullish, as is the case today, they should be harshly interrogated.
Importantly, the markets are likely underestimating the inflation risks and, therefore, probably overestimating the amount of cutting by the Federal Reserve that is going to take place. Specifically, it is my continued view that wage inflation will likely remain sticky: Based on the likelihood that wage inflation will remain stubborn (and othr factors), we believe inflation will be sticky (literally and figuratively) - and the disinflationary process will get harder from here relative to consensus expectations.
Here are two analogs regarding the difficulty in taming inflation:
* Eradicating inflation is like spilling a cup of coffee on your car's seats. Once it gets in the car seats it's awfully hard to clean up.
* Eradicating inflation is also like trying to diet and lose 20 lbs. The first ten are easy to lose, the next ten are far more difficult. (This might also help to explain why I have been taking Ozempic for the last thirteen months - and, in the process I have lost 50 lbs!)
Regardless, as noted in the body of this letter, rate cuts historically have been bearish for equities.
Finally, valuations are extremely high with most historic metrics (price/book, price/earnings, enterprise/cash flow value, etc.) in over the 90%-tile:
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For now, I have a keen eye towards managing capital conservatively, structuring my hedge fund's (Seabreeze) portfolio defensively by positioning mainly in pairs trades and through opportunistic trading - with a net short bias.
Markets don't dictate my exposure - we are dispassionate in the investing process.
Despite the intensity of the market's current momentum to the upside and the emotional unleashing of animal spirits I manage money dispassionately based on the calculus of upside reward v downside risk with an eye towards "margin of safety."
I am disciplined, always seeking value: I don't chase strength solely in order to participate.
It is my continued expectation that we will get a buying opportunity from lower levels sometime this year.
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 weaker as MegaCap Tech earnings failed to impress. Pre-mkt, AMD -6.7%, GOOG -5.5%, and MSFT -1.6%. This weakness is driving NDX futs underperformance and SMH are indicated -2%, pre-mkt. The balance of MegaCaps are lower as we await the Fed today. Bond yields lower as part of a bull steepening; USD is stronger and cmdtys are mixed. With RTY futs positive, will be see the pain trade (+Value/-Growth with MegaCap underperformance) come to fruition near-term? The macro data focus is on ADP, ECI (Fed's preferred measure of wage inflation), Chicago PMIs, Trsy Refunding Announcement, and then Fed meeting later today.
and...
EQUITY AND MACRO NARRATIVE: So far, the macro narrative continues to support the growth-without-inflation hypothesis. Consumers remain well capitalized, and spending, while disinflation appears to be fully entrenched and by some measure within the Fed's acceptable range. Today's meeting seems unlikely to give material information on timing and March rate cut bets have fallen from ~75% earlier in the month to ~45% currently. Feroli still sees June as the most likely month to see a rate cut. As we get closer to "cut date" we may see a strong impulse for a bull steepening in the yield curve.
I flag this as that phenomenon may support a broadening of the Equity rally to boost Cyclicals and to a certain extent Value. That said, given last night's batch of earnings, which had a high bar, may trigger near-term underperformance from the Tech sector. One example is GOOG, 2023Q3 the stock fell 9.6% post-earnings and took about 2 months to recover those losses. Does negative February seasonality exacerbate the move? As we consider our recent cautious stance, driven by uncertainty around MegaCap Tech earnings, let's see what the Fed says as well as Thursday's batch of earnings (AAPL, AMZN, and META).
Quote of the Month
Thank you Jonesy for this pearl.
The Gospel According to El-Erian
Charting The Technicals
"Trading isn't simple enough to be boiled down to a punchy quote."
- Andreas Clenow
Bonus: Here are some good links:
From 'Jazzy' Jeff Hirsch