With a stellar advance during May, the bears (me!) had a wonderful (potential) setup today:

* Crude was +$2.50/barrell and most commodities also rose. (Inflation continues to appear sticky).

* Bond prices closed at the low of the day and yields at the high.

* Today's action was imbalanced with the S&P equal weighted index diverged (-0.80%) from the rise in the S&P and Nasdaq. Another divergence and not broadening observation.

We even saw a whoosh lower in the mid-afternoon, which seemed to set the stage for further weakness.

No way Jose.

Equities launched a rapid rise in the last 30 minutes and the Nasdaq closed near its daily high (after looking like it was breaking down).

Frustration? Yes.

Machines and Algos? Also, yes.

The fix was apparently in — but us bears were not in on it.

At day's end I almost sobbed like Scarlett O'Hara.

But, after all, tomorrow is another day. 

-- NYSE volume 409M shares, 3% below its one-month average;

-- NASDAQ volume 5.34B shares, 3% above its one-month average

-- VIX +2.99% to 12.73

Breadth

Nasdaq 100 Heat Map

With the rally off of the lows, and volatility still contained, I am adding to my SPY and QQQ puts.

These are in and out of the money puts for June (monthlies).

Long SPY puts (S), Short SPY common (S)

* Not broadening - in fact, just the opposite

* More divergences are sighted today...

Clear the decks, clear the tracks
You got nothing to do but relax!
Blow a kiss, take a bow—
Honey, everything's coming up roses!

- Ethel Merman, Everything's Coming Up Roses 3% today.

 The equal weighted S&P (RSP) is -0.83% today.

This compares to a -0.21% drop in the S&P Index (cash) and a modest rise in the Nasdaq Index.

This sort of divergence, if it continues throughout the balance of the trading session, will not likely be mentioned by the bullish cabals during the post market close "shows." Nor will the rise in yields be emphasized by those who see and hear no evil.

My CNBC Blather Index (starting from last Monday) is remarkable - there has not been one bear panelist, guest or talking heads compared to tens of bulls.

We are truly in a Bull Market in Complacency.

Everything is not coming up roses.

From Peter:

Treasury yields are rising to the high of the day after the 5 yr auction was poor. The yield of 4.553% was above the when issued pricing of 4.54%, thus tailing. The bid to cover of 2.30 was well below the one year average of 2.47 and the weakest since September 2022. 

And, dealers were stuck with the 2nd highest percentage of a 5 yr auction also since September 2022 at 19.5%. This follows the 2 yr auction earlier today that was mediocre and will be followed by a 7 yr tomorrow.

The 5 yr yield is quietly at a four week high in response. Separately, but maybe an influence, it’s hard to not seeing what’s going on in some commodities today. 

After last week’s pullback, copper is up 2.3%, silver is up 5.3%, gold is up 1%, and WTI is up by almost 3%. Ag prices are more mixed as wheat is at the highest since last July, but corn and soybeans are lower. We remain long and bullish on a variety of commodity stocks.

5 yr Yield

A poor auction takes bond prices to the day's lows.

But, for now, only a dent in equities.

Wolf Street howls about Japanese inflation. 

My favorite Fin TV outlet (tongue in cheek) has reported that GameStop  (GME)  "made" $933 million from a stock sale late last week.

GME didn't make anything - they raised capital and are diluting their existing shareholders.

Stated simply... what idiot writes this stuff?

TLT- iShares 20+ Year Treasury Bond ETF-has just made a daily low as interest rates at the day's high.

Macro don't matter.

* Some breadth deterioration seen lately... continuing today

- NYSE volume 140M shares, flat to its one-month average

- Nasdaq volume 2.25B shares, 20% above its one-month average

- VIX up 4.05% to 12.86

Breadth

Biggest Movers

Nasdaq 100 Heat Map

As posted, on this morning's futures gap in the premarket, I reestablished my short in SPY and QQQ common, but only "baby steps".

I just added to SPY $529.95 and QQQ $458.99 common shorts - moving me from (VS) to (S) sized.

Our love is in the past
(Patta past)
Oh, has it gone so fast
(Patta past)
Why couldn't our love last
(Can't last)
Wop, wop, patta patta pop pop
Shoo wop-doo bop bop, ooh

I'm broken hearted now
Since we have parted now
My mind wanders now and then
Remember then, then
Then, then, then

Remember
Re-mem-mem
Re-mem-mem-mem-ber

- The Earls, Remember Then 

Remember - market structure is a two way street.

It provides exaggerated upside that is followed, in the fullness of time, with exaggerated downside.

From Peter:

As measured by Citi, euphoria is back to matching the mid April highs at .45 in its index and follows the extreme read in last weeks Investors Intelligence survey with the Bull/Bear spread above 40 pts. This index is particularly relevant in terms of its statistical significance according to Citi. As we know markets go up about 70% of the time, when someone argues that the odds of going down are at least 80% a year from now, it's worth taking note. 

Obviously anything can happen but just be aware. Citi says, "Historically, a reading below panic supports a better than 95% likelihood that stock prices will be higher one year later, while euphoria levels generate a better than 80% probability of stock prices being lower one year later."

Ahead of next Friday's May payroll report, this past Friday I learned a new statistic from my close friend Danielle DiMartino Booth and her team's brilliant Quill Research. From their Daily Feather, it cited the biweekly Civic Science Economic Sentiment index:

"Its new job component gauges the outlook for employment prospects and closely tracks the US Economy subindex (in the S&P Global PMI employment component), suggesting respondents view both in the same vein. The deterioration since the January 16th local high of 41.6 through the May 21st reading of 33.5 presaged the early-May jump in household fear measure captured in the UoM consumer sentiment survey. Higher Unemployment Expectations' eight-point leap to 40% in early May was twice a normal month's move." Worth noting.

It still is not helping the yen much but Japanese JGB yields continue to move higher and the 10 yr in particular is up to 1.03%. On Friday, Governor Ueda didn't seen perturbed by the move, which in turn furthers the move. 

He said "Long term bond yields are determined by financial markets in principle. I will continue to carefully monitor moves in the market." It's funny hearing the Governor talk about market driven pricing considering the BoJ owns half the JGB market. This was followed today by the Deputy Governor Shinichi Uchida who said "While we still have a big challenge to anchor the inflation expectations to 2%, the end of our battle is in sight."

I expect another rate increase in July and believe the pressure is building from the Finance Ministry to stem the yen weakness.

10 yr JGB Yield

Considering the ECB is about to cut rates in a few weeks and members debate whether another one will be followed in July, the euro trades remarkably well vs the US dollar and is just a hair from trading at the best level since mid March.

Euro

Of note yesterday, the May German IFO business confidence index was 89.3, unchanged with April and 1.1 pts below expectations. The Current Assessment softened and offset the slight rise in Expectations. Manufacturing, trade and construction continue to recover but services "took a slight hit" said IFO. 

IFO also said succinctly, "Germany's economy is working its way out of the crisis step by step." As for their important export sector, they commented today from a different report, "The export economy is not yet developing any great momentum overall."

German IFO

I've written in the past ridiculing the concept of R* because it's just a Fed driven econometric model output and thus a made up concept. Fed Governor Waller sort of agrees with me as he said on Friday, "One vital fact about R* is that is is a theoretical concept without any reliable and straightforward way to determine its value." 

That of course does not stop them from trying to figure out what it is however and Waller also said, "In the near term I don't see anything that has really caused me to change my view that r-star is relatively low." I'll say, this is another argument that the Fed should not be in the game of setting the price of the overnight interest rate, the market should.

Deutsche sees several states following Illinois to raise gambling tax Deutsche Bank says the Illinois bill to increase taxes on the online sports betting industry, on its own, its not "overly draconian for the operators, and of little consequence to the majority of the operators in the state." However, the industry is positioned to endure state tax pressure for years to come, the analyst tells investors in a research note. The firm believes several states are likely to follow the lead of Illinois with higher tax rate structures, when budget needs arise, including New Jersey, Michigan, Iowa, Indiana, Massachusetts, Arizona, and Kansas. New Jersey and Michigan would be the most punitive, given the well below peer tax rates on the online sports betting side, as well as the relatively low internet casino segment tax rate, contends Deutsche Bank. Shares of DraftKings (DKNG) and Flutter Entertainment (FLUT) are down this morning following the Illinois development.

Oppenheimer sees higher taxes accelerating DraftKings/FanDuel consolidation Oppenheimer analyst Jed Kelly notes that the Illinois State Senate passed a budget to increase OSB taxes through a graduated scale, where largest operators likely pay a mid-high 30% effective tax rate. With DraftKings' (DKNG) shares down -9% in last ten days, Oppenheimer believes some taxation concerns were likely baked in. The firm is not expecting DraftKings to change 2024 IL CAC strategy and thinks more states raising taxes would negatively impact 2025-2026 buy-side EBITDA. However, Oppenheimer sees higher regulation/taxes accelerating DraftKings/FanDuel (FLUT) consolidation based on their ability to deploy brand spend, promo-sophistication, and product enhancements on a national scale. The firm remains a DraftKings buyer on any share-pullbacks related to unfavorable legislative outcomes, and keeps an Outperform rating on the shares with a price target of $60.

* Relating to my previous post...

We are at a time where stock prices obscure analysis.

As I suggested in the last column, AI chips will be subject to the same marketplace dynamics that have controlled semiconductors over the last 40+years.

Demand is always overestimated at peaks as double and triple ordering becomes the norm.

Scarcity becomes oversupply suddenly if unpredictably.

The present mania of "AI" is likely putting off that point in time to a degree that is hard to fathom.

But end it will (though timing is uncertain!) and the dynamics of passive investing will cause it to have very large effects on the wider market. 

Upside

-INSM +132% (plans to file brensocatib NDA with US FDA in patients with bronchiectasis in 4Q24 with anticipated US launch in mid-2025)
-CORT +30% (primary endpoint met in Pivotal Phase 3 GRACE Trial of Relacorilant in patients with hypercortisolism)
-GME +23% (completes at-the-market equity offering program; momentum)
-AGIO +22% (announces $905M purchase agreement for Vorasidenib royalty)
-ARCT +18% (announces positive development for Cystic Fibrosis Program)
-TDS +17% (US Cellular and Telephone and Data Systems confirm to sell US Cellular's wireless operations and select spectrum assets to T-Mobile for $4.4B, including a combination of cash and up to ~$2B of assumed debt)
-USM +12% (US Cellular and Telephone and Data Systems confirm to sell US Cellular's wireless operations and select spectrum assets to T-Mobile for $4.4B, including a combination of cash and up to ~$2B of assumed debt)
-KTTA +9.4% (announces publication of data showing PAS-004 strongly inhibiting NRAS mutant cancer cell lines with IC50 values ranging from 0.024 to 0.306 µM)
-VERA +7.8% (receives U.S. FDA Breakthrough Therapy Designation for Atacicept in Immunoglobulin A Nephropathy (IgAN))
-BZUN +5.9% (earnings)
-CLNN +4.2% (provides update on Its NIH-Funded Expanded Access Program for CNM-Au8 in ALS)
-ATRI +4.1% (to be acquired by Nordson for $460/shr in cash in ~$800M deal)
-NCLH +3.2% (Mizuho Securities Raised NCLH to Buy from Neutral, price target: $24 from $21)
-DUOL +3.0% (JMP Securities Raised DUOL to Market Outperform from Market Perform, price target: $260)
-NVDA +3.0% (momentum)
-ENLV +2.9% (files to sell $15M registered direct offering; selling 3.6M ordinary shares at $1.40/shr)
-CRWD +2.3% (hearing price target raised at MS)
-FUTU +2.3% (earnings)
-OPRA +2.2% (collaborates with Google Cloud to power its browser AI with Gemini Models)
-OC +2.0% (files to sell notes due 2027, 2034 and 2054)

Downside

-DKNG -6.4% (Illinois Senate passes bill that increases sports betting tax)
-RVPH -5.9% (announces $3M registered direct offering priced at-the-market; selling 1.9M shares at $1.58/shr)
-AY-5.2% (to be acquired by Energy Capital Partners led consortium for $22.00/shr in cash)
-SE -5.0% (Indonesia to probe Shopee's and Alibaba's Lazada local units over possible breaches of competition rules)
-DAC -3.3% (earnings) 

12:55 AM: Fed Bank of Cleveland President Mester (Voter) and Federal Reserve Board Governor Michelle Bowman (Voter) participates in policy panel discussion on "The Effects of Conventional and Unconventional Policy Instruments" before the 2024 Bank of Japan - Institute for Monetary and Economic Studies Conference, Tokyo (Text available. No livestream)

9:55 AM: Fed Bank of Minneapolis President Kashkari (Non-Voter) speaks and participates in panel before the Barclays-CEPR International Monetary Policy Forum (Audience Q&A expected. No media Q&A. No text. Livestream at minneapolisfed.org/live);

1:05 PM: Fed Board Governor Cook (Voter) and Federal Reserve Bank of San Francisco President Mary Daly (Voter) participates in discussion on "AI and the Economy" before the "AI-nomics: The Nexus of GenAI + the Economy" event hosted by the Federal Reserve Bank of San Francisco ( Q&A from moderator. No Cook text. No Daly prepared remarks. No Daly media availability. Webcast here. 

* There are literally no critical assessments regarding the amazing climb in NVDA shares or in the rapid adoption of AI.

* None, Zero, Nada!

* But the hype machine and the unanimity of "group stink" are endless.

* So this layperson will "take a shot" by extending last week's critical "analysis" of NVDA and observations/concerns about AI adoption...

* I am from Missouri - 'Show Me'

One of the big picture questions I proposed in last week's analysis was how many data centers worth of Nvidia  (NVDA)  products are being sold per quarter?

It had also dawned on me that a fair bit of the buildout itself may have been on spec. Take CoreWeave for example (as I did below in my May 24 column). How much did they buy, how much is installed and how much product is just sitting out there waiting for demand?

The bigger picture issue also confounds me because all this business is being done. But as best as I can tell, actual end demand – consumption of generative AI - may actually be flat to down based on the disclosures about ChatGPT usage rates. It is the same for the competitors as well, who look to have flatlined. 

The fact that growth has flatlined also suggests this stuff may not nearly be as useful as it is being portrayed. Should still be in a rocket stage of growth, but this early in the cycle, it has already flattened. That is abnormal to say the least. Hot new products have a beautiful S-curve (growth) that lasts a long time and is very smooth.

Coincidentally per article below and repeating for emphasis.... I have never seen so much money being thrown at something whose growth has flatlined this early in its life cycle, and still does not work well despite all the hype about improvements, which is probably why growth has flatlined -- because people still end up having to double check everything and it is a net loss in productivity.

This is the thing to really watch – the end use applications. How well do they work, and how much demand to they have – especially if it needs to be actually paid for. I do not know how this is going to play out, but this is what really needs to be watched. Supply and demand have to balance at some point. Demand is actual end consumption of the output. The output needs to get better and become more useful.

The chief complaint appears to be that ChatGPT is prone to outputting inaccurate information.

“As a matter of fact,” writes the EDPB, “due to the probabilistic nature of the system, the current training approach leads to a model which may also produce biased or made up outputs.”

Consider AI's power consumption and how incredibly expensive it is to operate -- power, water, and the capital cost of the chips and data centers themselves. The end product, that is currently being given away for free, has now seen its demand flatten at a very low base. Since when does so much money get thrown at a product that doesn’t seem to work well and that people don’t seem to want to use even when they don’t have to pay for it? What would demand be if the end product was priced in such a way as to cover the cost and generate a return on what was being delivered?

Regardless of where things currently stand, part of me --like many others -- really do think this is the next internet. Although some of the stocks might already be capitalized that way. Then, another part of me -- given the remarkable share price advances -- thinks we might be in the process of destroying capital faster than AMC  (AMC)  and GameStop  (GME) .

The other odd thing is if this stuff does end up really working (both the output and the total system cost of delivering the output), and nobody has a job, well then what happens? Universal Basic Income for everyone? Who pays for that then? What are people supposed to do all day? Feed the robots?

Each Nvidia high-power AI chip consumes roughly as much electricity each year as three electric vehicles.

To be clear, I do not claim with any degree of certainty to know how this will play out. But I am also pretty comfortable stating that just because the entirety of the media and politicians, plus the venture capitalists and Wall Street analysts, say something will be the case, does not mean it will be the case.

EV’s were supposed to be the solution to all the world’s ills. By now, according to model revision 500 from ARK, we were all supposed to be being picked up in self-driving autonomous TSLA robotaxis. Oops. The reality is, speaking broadly, many consumers really don’t like EVs. There is range anxiety and all sorts of other issues.

Without government global subsidies and government and media propaganda, as well as huge regulatory pressure from the administrative state, these things would be going nowhere fast. Many years into it now, without the benefit of government subsidies, the vehicles still remain dis-economic from a total cost of ownership perspective (gas cost savings are not made up due to the higher $ cost of the vehicle for the equivalent car without the subsidy). 

Nor do we have the grid to service them, and I have no idea how we power both this, and AI. The government destruction of tax dollars in this regard has been meaningful. Just wait until we need to figure out a way to dispose of all the batteries too. Something tells me all the EV owners won’t want the expired batteries anywhere near their backyards!

Alternative energy? Relatedly and one more thing that is incredibly dis-economic and nothing close to what we were told. Maybe the idea behind relying on alternative energy is for everyone to freeze and starve to death, and that solves the theoretical carbon problem?

mRNA vaccines? Weren’t they supposed to be the cure for cancer now too? Anyway, turns out they are terrible and don’t even work for Covid and have all sorts of side effects that we were not told about.

Video conferencing? Turns out everyone is going back to the office and doing it the old fashioned way. Whaddya you know? Turns out (in the main), that the technology we had hundreds of years ago, called meeting face to face, yields better results.

Look at how the stock prices of anything to do with all of the above product offerings have done over the last several years.

Between the media, politicians, VCs, and Wall Street analysts -- I am not sure who is the worst. All I know is the VCs, who throw their weight behind all of this crap to drive up the hype (white papers, tweets, political donations, media, the whole deal), don’t seemingly believe in any of it either. They send their kids to private schools where no cell phones or social media are allowed. Then they try to build cities in the middle of nowhere, to escape the urban hellscape all of their policies have helped to create. 

But for the time being, this is all business for everyone. The venture capital funds support the companies, Wall Street analysts chirp and their firms gets paid to take them public, trade the stocks and raise the capital.

The hype machine is endless.

But I am from Missouri (and not long NVDA) - show me!

From last week:

A Deep Dive Into Nvidia - Tongue in Cheek!

(DKNG)  is trading lower following an Illinois Senate budget approval which introduces a sizeable sports betting tax. 

I plan to move to a large position at current levels.

More on this later in the trading day.

I added at $37.19.

With S&P futures gapping up to +16 handles, I reestablished shorts in  (SPY)  and  (QQQ)  common at $531.05 and $459.96, respectively.

"Life is a tragedy when seen in close-up,
but a comedy in long-shot."

- Charlie Chaplin

Bonus - Here are some great links:

NVDA, Super Man

Semi Power 

TSLA, AMZN Surge

Are Cracks Appearing?