As of 4:24 p.m.:

I have a 3:30 pm research call.

I hope to be back in the saddle by 4:30 pm.

From Peter:

Sounding much more like a 1-1.5% type economic growth rate, the Fed’s Beige Book of 12 Districts said, “Most Districts reported slight or modest growth, while two noted no change in activity.”

As for that very bifurcated consumer we keep seeing evidence of, both in terms of where the spend is coming from and what it is being spent on, “Retail spending was flat to up slightly, reflecting lower discretionary spending and heightened price sensitivity among consumers.” The high cost of borrowing resulted in this, “Auto sales were roughly flat, with a few Districts noting that manufacturers were offering incentives to spur sales.”

The most interest rate sensitive part of the economy, housing of course, saw modest demand “and single family construction increased, though there were reports of rising rates impacting sales activity.”

We know what the priority of spend as been on but something to watch if it can continue. “Travel and tourism strengthened across much of the country, boosted by increased leisure and business travel, but hospitality contacts were mixed in their outlooks for the summer season.”

We also know that manufacturing remains under pressure and the Beige Book said “manufacturing activity was widely characterized as flat to up, though two Districts cited declines.” We know too that bank lending has been sluggish as “Tight credit standards and high interest rates continued to constrain lending growth.”

The real trouble remains in CRE, but I heard someone of real estate prominence today on TV repeat what a colleague has said before that the CRE market has bottomed. I can’t disagree more. The Beige Book said, “Conditions in the commercial real estate sector softened amid supply concerns, tight credit conditions, and elevated borrowing costs.” There is more pain to come I believe.

The Beige Book bottom line, “Overall outlooks grew somewhat more pessimistic amid reports of rising uncertainty and greater downside risks.”

From here, I’m going to focus on the inflation and jobs comments as we know that is what the Fed is most focused on, obviously with their Congressional mandates. There was definitely a pick up in those saying their input price pressures remain but they are getting more push back from their customers in passing it on. With the labor market, there is a clear slowdown in the pace of hiring but more options for those that want to hire and still difficulty in filling some skilled positions.

Here is one example of the pushback, “A Montana restaurant and hotel owner was trying to avoid passing further cost increases to customers. "At some point, they will say, ‘I am not paying $20 for a hamburger.'"

Boston:

“Prices increased at a modest pace on average, and input cost movements were mixed. Restaurateurs reported modest increases across a range of food inputs but held menu prices steady, resulting in a further narrowing of profit margins. Hotel room rates increased from a year earlier at a pace of just under two percent, the slowest in recent years. Among manufacturers, input price pressures moderated, and costs were flat in some cases, but one contact noted that plastics and electronics prices remained elevated. 

Output prices increased by an above-average margin at one manufacturer, driven by robust demand and modest cost pressures, but otherwise manufacturers' output prices were up only modestly. Plans called for muted price growth on balance moving forward, as there was concern about consumer pushback from significant further price increases. In fact, one large clothing retailer, in response to recent input price declines, planned to enact modest price reductions on selected items in early fall in a bid to boost sales.”

“Employment was unchanged overall, and wages increased at a slow-to-moderate pace. Labor demand weakened somewhat, as job openings fell slightly, and layoffs picked up a bit. A large clothing retailer let go 150 workers by closing a call center, citing the shift towards more automated customer service technologies as the driver. Headcounts were steady or up slightly among manufacturers… Hiring plans were muted across sectors, mostly aimed at offsetting retirements and other sources of attrition.”

New York:

“Selling price increases remained modest, and input price increases remained moderate. Still, the prices of some inputs have risen more rapidly, especially among service firms. Food and beverage businesses point to rapidly rising costs of cocoa and coffee, and contacts reported that obstructions to shipping in the Suez and Panama canals are causing shipping delays and pushing up the cost of freight, putting additional pressure on selling prices. Businesses expect little change in pricing pressures in the months ahead.”

“On the whole, employment continued to increase slightly, with gains in leisure and hospitality, personal services, and health and education partially offset by ongoing reductions in information, construction, and manufacturing. A contact at an employment agency in New York City reported a notable uptick in hiring among financial services firms. Labor demand and labor supply continued to come into better balance. Still, businesses in the region reported ongoing difficulty finding the workers they need. These shortfalls are particularly acute in the service sector. Firms anticipate solid hiring in the coming months.”

Philadelphia:

“On balance, firm price inflation was modest this period, up from a slight pace in March. Firms reported that increases in prices received for their own goods and services over the past year edged up in the second quarter of 2024 compared with the first quarter. The trimmed mean for reported price changes, based on responses to our quarterly survey, rose to 2.3 percent from 2.0 percent for all firms. Price increases rose to 1.8 percent from 1.2 percent among nonmanufacturers and edged down to 2.8 percent from 2.9 percent for manufacturers.”

“Employment grew slightly, unchanged from last period. Based on our April and May surveys, nonmanufacturers reported slight increases in full-time jobs, unchanged from March, and a slight increase in part-time jobs, up from a slight decline. Manufacturing firms continued to report modest declines in employment and overall declines in the average workweek. Meanwhile, the average workweek for nonmanufacturers ticked up. Staffing and recruitment contacts reported a slight uptick in activity this period, after being steady last period. 

Contacts reported a stronger demand for labor, as some manufacturers and firms with seasonal staffing needs ramp up hiring. More candidates are also searching for jobs, as evidenced by increased visits to staffing contacts' offices. Several contacts reported less staff turnover and a wider candidate pool. For instance, one contact reported receiving 400 résumés for a finance position within the first day of the vacancy being posted.”

Cleveland:

“On balance, nonlabor input costs continued to increase moderately in recent weeks. However, over half of contacts reported no change in input costs. Some restaurateurs said that food costs were increasing at a slower rate or leveled off after a period of rapid increases, and many contacts in other industries reported that the pace of cost increases continued to slow. Some manufacturers noted that they were starting to negotiate with suppliers to bring down costs, with one stating, "We have been able to partially roll back some select suppliers' prices after two years of substantial price increases." Still, many contacts across sectors continued to report cost increases for most services, including legal, accounting, and insurance services.”

“Selling prices continued to increase slightly, though most contacts indicated that they had not changed prices recently. Some firms did not adjust prices because they had previously implemented annual price increases, while others noted that increased competition prevented them from raising prices. One business services contact said that passing along cost increases had become more difficult as customers were more closely managing their costs. Some manufacturing, construction, and retail contacts increased prices selectively, while other retailers reported decreasing prices or offering larger discounts because of decreased demand.”

Richmond:

“Price growth increased slightly in recent weeks, but growth remained at a moderate year-over-rate. According to our most recent surveys, the rate of growth in the prices received by service providers remained elevated at around 4 percent compared to around 2.5 percent for manufacturers. In both sectors, businesses reported that input and labor costs continued to rise, and in some cases, their input costs increased at a faster rate than the prices they received because customers were pushing back on additional price increases. Firms generally expected for growth in prices received to moderate over the next six months.”

“Employment in the Fifth District grew at a moderate pace in the most recent reporting period. Labor availability was mixed. A chartered bus company remained constrained by a lack of quality candidates, but they noted greatly improved conditions and that they were getting close to "normal." A quick-service restaurant reported continued significant staffing challenges in their cafes. Many contacts cited the need for "quality" workers. A seasonal outdoor recreational company was not able to recruit some candidates because of a lack of affordable housing in the area. Firms continued to increase wages and offer bonuses to recruit and retain workers.”

Atlanta:

“Though the pace of wage growth continued to stabilize, elevated labor costs and rising insurance premiums contributed to higher operating expenses. However, food and transportation costs decreased, on balance. Construction costs were highly volatile, with some contacts noting a wide range of bids on a given project. Firms also noted adjusting inventory levels down due to the high-interest rate environment. Some firms reported holding prices steady in response to increasingly price-sensitive consumers, and some firms sought efficiencies to preserve margins, while others maintained the ability to pass through rising costs.”

“On balance, the pace of hiring grew slightly over the reporting period. Several staffing firms reported that job orders were down. Many contacts noted the supply of available talent continued to improve, and turnover rates declined; some firms described turnover as below pre-pandemic rates. However, pockets of shortages remained across the region, varying widely by position, location, and industry. 

Several Florida firms said that declining housing affordability hindered the ability to attract talent, and one non-profit noted that more employers were pondering building workforce housing. Some transportation, warehousing, and industrial development contacts said they were considering reducing headcount later this year to align with weaker demand. Others said that they had backfilled most of their open positions so hiring would be slower this year.”

Chicago:

“Prices rose moderately overall in April and early May and contacts expected a similar rate of increase over the next 12 months. Producer prices moved up moderately. Nonlabor input costs continued to rise, with contacts highlighting increases in energy and equipment costs. That said, there was a slowdown in the pace of cost growth overall. Several manufacturing contacts noted flat, and in some cases decreasing, input costs. Consumer prices rose moderately overall, though one retail sector contact indicated that deflationary price trends continued.”

“Employment rose modestly over the reporting period and contacts expected growth to continue at that pace over the next 12 months. Some respondents, particularly in manufacturing, continued to report difficulty filling higher-skilled positions, and small business support organizations continued to report their clients were having difficulty filling lower-skilled positions. That said, several contacts reported that hiring was not as hard as it had been, and one financial services contact indicated that worker availability was now comparable to before the pandemic.”

St. Louis:

“Prices have increased moderately since our previous report. About one-third of District survey respondents reported higher or slightly higher prices since the first quarter. Just over half of contacts reported similar prices, with the remaining contacts reporting lower or slightly lower prices. These responses appear to be driven by increasing input costs, with over three-fourths of respondents reporting higher or slightly higher nonlabor costs and a similar share reporting higher or slightly higher labor costs. Contacts generally expect current cost pressures and pricing strategies to continue into the third quarter.”

“Employment remains unchanged from our previous report. The labor market continues to be tight, with businesses still struggling to find employees. A manufacturing contact in southern Indiana reported not being able to fill open jobs, and an agriculture contact in the Memphis area noted that low labor force participation was a problem. Some signs of labor mismatch also appeared, with a real estate contact in Louisville reporting a struggle to find employees matching their qualifications.”

Minneapolis:

“Price pressures were unchanged since the last report, as overall prices increased moderately. Most respondents to an April District business conditions survey reported no change to prices charged from a month earlier, while one-third said they increased prices. Input price pressures remained greater, as more than half of firms reported that they increased in April. Reports from contacts across the region indicated that businesses were less able to pass input cost increases to customers, who are feeling stretched budgets. Manufacturing contacts reported that metals prices spiked recently. Retail fuel prices in District states decreased slightly since the previous report.”

“Employment grew slightly since the last report. Labor demand continued to moderate but remained positive. A monthly survey of District firms found that the share of respondents with job openings remained positive, but a slightly larger share noted staffing cuts. Labor demand in construction remained healthy despite widespread reports of slower activity. Hospitality and tourism firms reported increased hiring of seasonal workers in anticipation of rising spring and summer business. A Montana accounting firm noted that it had "a lot of unfilled job openings at all levels." 

Employers were also reporting better labor availability. A Minneapolis-St. Paul hotel owner said the facility was sufficiently staffed and applicant quality "seems to have gotten much better." A winery in central Minnesota said that it received "a lot more applications for part-time [and] seasonal workers this year, which is very encouraging." Not everyone had the same experience. A Minnesota manufacturer said, "I don't expect to fill any of my open jobs. We are increasing our capital expenditures to adapt our processes to smaller headcounts."”

Kansas City:

“Business contacts reported prices for finished goods and services grew slightly over the last month, with declines in auto prices being a notable exception. Growth in input costs continued to outpace selling prices. Amid difficulties to pass higher materials and input costs onto customers, many contacts reported being willing to change selling prices more frequently compared to last year to protect margins when possible. Contacts also reported implementing several new strategies to alleviate cost pressures arising from suppliers for the coming year. Specifically, many businesses reported they are entering shorter duration contracts with vendors, adding escalation clauses that cap cost growth, or including new clauses to allow for renegotiation upon unanticipated cost changes.”

“Tenth District contacts reported hiring activity expanded slightly over the past month. Businesses indicated their priorities in hiring were generally unchanged, with ongoing focus on recruiting early-career and entry-level workers. Mismatches in between open jobs and workers' skills remained an ongoing concern, and many businesses reported they are devoting significantly more resources to training workers to close skill gaps.”

Dallas:

“Prices rose at a modest to moderate pace over the reporting period. A slight ebbing was seen on the manufacturing side, for both materials and finished goods price growth. Multiple manufacturing contacts noted that they were experiencing a strong resistance to price increases, with one saying that customers ask to hold prices to last year's level, which isn't possible given the increases in costs. In services, growth in input prices remained in line with a typical rate while selling price growth slowed to slightly below average. Airlines reported upward cost pressure, partly stemming from elevated maintenance to upkeep older aircraft in the face of supply issues for new aircraft.”

“Employment levels were fairly flat over the past six weeks overall, according to contacts. Job gains were seen in leisure and hospitality, health care, and nondurable goods manufacturing, while headcounts were stable or down slightly in most other industries. Oil and gas companies said they were backfilling vacancies but not looking to materially expand their workforce. The uncertain economic environment has prompted some hiring reluctance. A few contacts expressed doubt whether they will be able to maintain their existing workforce, with a staffing firm noting they are "on a cliff's edge" where they may have to lay people off. There were scattered reports of labor shortages, not concentrated in particular industries other than health care, which contacts said remained significantly understaffed.”

San Francisco:

“Prices continued to increase at a slight pace on net. Contacts emphasized the discrepancy between recent movements in goods and services prices. Good prices—such as for food products, lumber, steel, and building materials—fell or were unchanged, while services prices, particularly for insurance and utilities, rose notably. Several contacts in retail trades and leisure and hospitality reported limited ability to pass higher costs onto consumers, particularly in areas which experienced recent increases in state and local minimum wages.”

“Employment levels were generally flat over the reporting period. Reports of low attrition rates continued, and employers preferred to fill only critical positions. One contact described the labor market to be in a "lock-in" situation—employers are generally not laying off workers, and workers are not quitting as often as in recent years. Employers across sectors reported receiving more applications for entry-level positions than before. 

However, they are still finding it difficult to attract experienced engineers as well as electricians and other skilled trades workers including machinists and welders. Several contacts in the hospitality industry reported hiring more foreign-born workers—on permanent and temporary bases—in recent months to address persistent labor shortages.”

*  (IWM)  -$3 or -1.5%

*  (RSP)  (equal weighted S&P) -1.3%

Compare that with a decline of only -0.6% for the S&P and Nasdaq indices.

Similar to yesterday’s poor 5 yr auction, today’s 7 yr was weak as well and after a mediocre 2 yr. The yield of 4.65% was more than 1 bp above the when issued. The bid to cover of 2.43 was under the 12 month average of 2.56 and the lowest since April 2023. Lastly, dealers were left with 17% of the auction, the most since November.

In response, the 7 yr yield is at the high of the day - see below intraday move after auction results - and at a 4 week high.

As I argued again this morning, don’t ignore what is going on with JGB yields.

7 yr intraday yield move

7 yr Yield

What do super regional banks know? 

* But not quite there yet...

Cannabis stocks continue to be on sale, much like the product itself!

Though it was only very late April/early May when we took off all our cannabis holdings ( (MSOS)  and individual equities), it feels like a long time ago.

To be sure, our sales were materially above the current prices - MSOS is down from $12 to $7.75!

But my concerns expressed in Why I Sold All of My Cannabis Holdings on Yesterday's Sharp Climb Higher (opposition/delay of rescheduling, heavy company debt loads, disappointing micro (price competition), continued custody issues, lack of institutional interest, up listing headwinds and lower TAM than many realize) remain materially intact.

The question is... how much of these concerns have already been discounted?

I am working on that answer!

Cannabis musings over the past month:

Only a Few Good Men?

* More cannabis talk

* I am tough on dogmatic cannabis Perma Bulls who have experienced a decline in MSOS from $40 to $9 and still think they are right on the sector's outlook!

* There is little critical analysis and/or objectivity in their analysis of cannabis stocks...

"The definition of insanity is doing the same thing over and over and expecting different results."

- Albert Einstein

There is little critical analysis and/or objectivity in the analysis of cannabis stocks.

In the main, Perma Bulls, sell side analysts and "paid advisors" deliver the same (too optimistic) pablum week after week. - undaunted by their very wrong-footed evaluation of short- and intermediate- term industry fundamentals.

They are their own worst enemies and, often can't seem or don't want to handle the truth or an alternative view.

It is as if, deaf to their analytical and market shortcomings, the weakness in cannabis stocks are other people's "faults" - Washington, D.C. politicians (especially of a Senator Schumer-kind), naysayers/perma bears,lobby groups (SAM), and those simply opposed to weed use, etc.

Routine daily podcasts and recaps - by those blinded by their biased views - have become narrow and repetitive conversations of an insular (and bullish) cannabis community blinded by not only their lack of objectivity but also, as noted, by redundancy of view and the absence of critical analysis of uninspiring industry fundamentals and overrated longer term prospects.

The same observation applies to cannabis industry conventions and meetings - which I will no longer attend. Again, too much of a "love fest" and too little room for a serious exploration of the industry's challenges and headwinds.

Any critical analysis countered on Twitter or any other platform of social media is met with resistance (and "blocking") by a group of talking heads with no sense of ownership or, seemingly, conscience - as they have led retail lemmings off the cliff (as MSOS has dropped from $40 to $9).

See Albert Einstein's quote above!

Mid-week I offered some bonafide reasons why the upside, for now, is limited and why I took advantage of the swift rise to take profits:

BY DOUG KASS MAY 1, 2024 11:14 AM EDT

Why I Sold All of My Cannabis Holdings on Yesterday's Sharp Climb Higher

• Schedule III does not necessarily resolve uplisting issues.
• Schedule III does not resolve institutional ownership and custody issues.
• So, a further rally in cannabis stocks will be dependent on follow thru of interest by retail investors (who have been consistently burned by purchasing strength over the last 3-5 years).
• An excise tax may be instituted to offset the loss of tax revenues from the elimination of 280e.
• The notice/review/lawsuits issues during the estimated six month comment period could get contentious.
• If Schedule III is not finalized before year end there could be renewed concerns that a new Administration will try to turn back the decision.
• Some portion of the benefit of elimination of 280e may inure to the benefit of consumer (in terms of lower weed prices).
• The total addressable market for cannabis is materially less than consensus expectations.
• State silos create diseconomies of scale.
• State dispensary limitations in popular/large states is a headwind to consumer branding and market penetration opportunities.
• Accounting standards for the cannabis sector are aggressive/weak.
• Managements are still not ready for prime time players.- arguably, their operating and forecasting skills are not yet keenly developed.
• Accumulated debt and non payment of taxes represent a heavy load for companies not delivering returns anywhere near their cost of capital.

Position: None

BY DOUG KASS

MAY 1, 2024 10:15 AM EDT

Here is more support of one of my arguments, among other reasons, that the notice period over the remainder of 2024 will be contentious and could be drawn out:

Marijuana Legalization Opponents Raise Money For Potential Lawsuit Against Federal Rescheduling Move - Marijuana Moment

Bottom Line

I always speak my mind and I don't suffer fools who don't have investment process or whose analysis I believe to be miles long but only inches deep.

I try to anchor my views based on objective analysis and not hope or dogma.

Sometimes I fail in my own analysis but I try to be detailed and objective - to examine not only the positives but the negatives.

That said, I fully plan to return to cannabis equities at a point in which more objectivity (and lower share prices) return to the space and, more importantly, when the upside reward v downside risk warrants such a return.

As I noted in a column earlier this week, cannabis equities (in theory) have the same "open-ended" upside potential of some of the past, important market leaders (and "game changers"):

The Lesson From the 'Game Changers'

They are: Nvidia (NVDA) , Tesla (TSLA) , Lilly (LLY) , and Novo Nordisk (NVO) .

* The perception of near open-ended market opportunities invokes speculation/animal spirits that typically produce much higher stock prices.

* "Game changers" are different than "core compounders" — the former, at a moment in time, are seen to having the sky as the limit whereas the latter have durable, deep and long-lasting competitive moats.

Nvidia (in AI (artificial intelligence)), Tesla (electric vehicles) and Novo Nordisk/Eli Lilly (in GLP-1 drugs) are recent examples of equities that are perceived to be facing "open ended" end-market opportunities — and outsized sales/profits growth — for the foreseeable future.

These stocks are seen to face such promising relative and absolute profit growth that determining terminal price earnings multiples are difficult. And, more often than not, the exceptional growth prospects are accorded a high valuation that, arguably and inevitably, results in so much speculation that historic stock prices and multiples are thrown out the window and animal spirits propel the stocks to almost geometric expansion.

By means of background, I tend to be a value investor. But, at the same time, I realize how one can generate excess returns ("alpha") by committing a portion of my portfolio to more speculative issues with an "open ended" flavor.

Some of my recent buys in biotech, cannabis and on-line gaming have similar characteristics to some of the past winners and game changers named above — in that the upside has that "open ended" character and feeling to them:

* Biotech - Long runway for GLP-1 drugs (Viking Therapeutics (VKTX) )

* Cannabis - New states lead to rising market demand (Florida), rescheduling means elimination of 280-e taxation/, SAFR means uplifting/resolution of custody issues/institutional buying (MSO, Curaleaf (CURLF) , Terrascend (TSNDF), Green Thumb (GTBIF) and Trulieve (TCNNF) )

* On-Line Gaming - Vast market share and penetration opportunities (DraftKings (DKNG) )

^{BY DOUG KASS APR 30, 2024 10:00 AM EDT}

As always, stay tuned...

Position: None

BY DOUG KASS

MAY 3, 2024 7:15 AM EDT

* Mr. Market is broadening... but to the downside!

Yesterday I observed that the market decline was broadening out with the equal-weighted S&P Index materially underperforming the S&P and Nasdaq Indexes.

That was a good "tip off" to today's drop.

Today the same holds true - broadening to the downside:

* RSP (Equal weighted S&P ) -1.06%

* SPY -0.52%

* QQQ -0.34%

* Today the bond market (price) slippage matters...

After being down more than -$1 yesterday,  (TLT) 's descent continues.

Here is an update on the bond market, which has hit new low in prices and high in yields on the day:

* The yield on the 2 year US Treasury note is+1 bp to 4.964%.

* The yield on the 10 year US Treasury note is +5.5 bps to 4.596%.

* The yield on the long bond is +6 bps to 4.724%.

To me, stocks are atrociously valued v. fixed income.

1:45 PM: Fed Bank of New York President Williams (Voter) participates in roundtable with local leaders to hear about business conditions and municipal and community services, Watertown, NY (No text.)

7:00 PM: Fed Bank of Atlanta President Bostic (Voter) participates in moderated conversation on "Economic Outlook and Leadership" before the American Economic Association Conference on Teaching and Research in Economic Education (No livestream. No embargoed text. Audience Q&A expected. No media Q&A.)

From Peter:

I've been saying for a week now (actually a year when the BoJ started to widen yield curve control) that what is happening with the JGB market should not be ignored and I'll say it again today as the 10 yr yield jumped 5.5 bps overnight to 1.085%. 

I've been talking about growing pressure on the BoJ from the Ministry of Finance to stem the yen weakness via more rate hikes, along with the pressures of higher inflation. Today BoJ board member Seiji Adachi said "A monetary policy response would be one option if the impact on the achievement of the price stability target is predicted in the event that prolonged excessive yen weakness is affecting inflation." 

He also talked about a continuing slowing in the pace of JGB purchases. What makes this very notable is that he's a big dove. While JGB yields are higher, the yen still can't get out of its own way but I think it's worth getting long.

In response, the Australian 10 yr yield jumped 14 bps to 4.40%, the German 10 yr bund yield is quietly at the highest level since November at 2.63%, up 4 bps today. The US 10 yr yield is at a 4 week high. I'll also argue again, the epic bond bubble is not done unwinding.

I should mention too that the CRB raw industrials index yesterday closed at the highest level since April 2023 and if you look at the chart below, there is a lot of upside potential from here as it still remains well below the 2022 peak.

10 yr JGB Yield

German 10 yr Bund Yield

CRB Raw Industrials Index

Another weak Dallas manufacturing print seen yesterday of -19.4 followed a soft NY one and a slightly positive index read from the Philly region. This comes ahead of today's Richmond survey. The 6 month outlook also turned negative at -3.3 from +7.9. The rise in commodity prices flowed thru as the 6 month outlook for 'prices paid for raw materials' rose to the highest level since October.

Here were some notable comments:

Food Mfr'g

"Recent developments in the overall economy suggest consumers are resilient and still spending money. Though the Federal Reserve is unlikely to lower interest rates any time soon, the market seems to have adjusted to the delay. Inflation will continue to decline, slowly."

"Volume of new orders has picked up. Demand feels more robust right now than at the beginning of the year. We are still battling cost inflation on raw materials."

"We are still trying to find competent people who want to work. The biggest problem is turnover of new hires. Long-term employees are stable. Young people do not want to work."

Paper Mfr'g

"Orders are down approximately 10 percent."

Printing and Related Support Activities

"We have been very busy and having “hooray” billing months with very nice profits, but that is about to change as things seem to be slowing down, and we can tell that this may be a lean summer. We are fortunate to have some nice projects to carry us through the summer and help cover overhead, but we need additional work to make it be profitable. Our competitors have been really slow, so this does not bode well for our next few months."

Primary Metal Mfr'g

"Our building and construction business remains off. Higher mortgage rates and higher home costs are the main factors. Fewer folks are buying first-time homes. More younger couples are moving into apartments."

Fabricated Metal Product Mfr'g

"Things seem to be slowing down in our manufacturing sector."

"We have orders, but jobs are not being released due to financing holds and uncertainty."

Machinery Mfr'g

"Business is flat at a relatively low level."

"It isn’t much fun to be in business right now, at least in our industry. Our sales team is putting forth a full-court press effort, and we've attempted to add services and product offerings to complement what we do, but it's just tough sledding and has been all year."

Computer and Electronic Product Mfr'g

"We are reaching a cyclical bottom for most end markets after the post-COVID inventory build. We are expecting shipments to more closely follow end-market demand in the second half of 2024."

"Customer volumes are decreasing due to the economy. They are still bullish, but indicators based on outbound shipments show there will be fewer shipments in the future. Technology changes with AI [artificial intelligence] have increased technology deployment and are possibly going to increase production, but it's too early to be a contribution to growth in the next six to 12 months."

"Wage inflation continues to be our biggest issue. We are caught between a rock and a hard place; we have to increase wages to keep our best employees, but we also have to invest capital to improve productivity so we can eventually do more with fewer people. The combined result is substantially less free cash flow for this year and next. The tax increases that President Biden has announced as part of his reelection campaign will have a very significant negative impact on our ability to grow. We will be forced to slow down capital investment and reduce head count if he is reelected."

Transportation Equipment Mfr'g

"Things are in a mess."

Here is what CAVA said last night:

"At a time when consumers are increasingly discerning in how they spend their income, they are choosing to dine at CAVA."

"CAVA same restaurant sales increased 2.3%, driven by a 3.5% increase from menu price and product mix, partially offset by a decline in traffic of 1.2%." That traffic drop is maybe why the stock is down pre market.

On pricing, "we took less than 3% in price at the beginning of this year, and we don't have any plans to take additional price at this time in the rest of 2024."

Labor and related costs rose 30 bps y/o/y as % of revenue and "The increase reflects investments in our team member wages of 8% y/o/y."

"What we're seeing around the low income consumers, when we look at our restaurants and stratify them based on median household income, we're seeing strength across all categories, and in fact, when we look at the top decile of restaurants, we have representation from every income strata in that group of restaurants."

I'll mention again a conversation I had with Neely Tamminga last month who runs Distill and does a lot of consumer surveys and analytics. She said that one reason why Chipotle (and likely CAVA too) is way outperforming other fast casual concepts is that for that $10 of consumer spend, people can get two meals out of it vs a McDonald's where $10 is only getting you one.

While American Airlines cut its guidance, the 8k didn't give much explanation of the main factors. Higher jet fuel costs did seem to be one of them but no color on the demand side.

Dicks Sporting Goods exceeded expectations with comps up 5.3%, double the estimate and said "Because of our strong Q1 performance, our expectations for continued robust demand from athletes and the confidence we have in our business, we are raising our full year outlook."

I'll say again how mixed and uneven I see the US economy being.

Box showered its conference call with the letters AI while reporting top line growth of 5% y/o/y. This is what was said on the demand environment:

"We are starting to see some degree of stabilization. Again, that's different from any kind of inflection point that sort of looking like we're out of the woods on the macro front, but sort of the lack of increase of headwinds I think has been notable in the past couple of quarters. We had strong performance especially in our US enterprise business and federal. I think we're still seeing some degree of pressure on the small and median business segment, but when we look at the business overall, on balance, we were happy with the performance in Q1."

After a pick up seen in the last 3 weeks, the Mortgage Bankers Association said refi's fell back by 14% w/o/w. Purchase applications fell for the 9th week in the past 11 and just off the lowest level since 1995 and we know why.

Vietnam, a manufacturing presence that is only growing, reported May exports up by 15.8% y/o/y, more than the estimate of up 10.6%. Imports jumped by 30% vs the forecast of up 20%.

German consumer confidence continued to improve as the GFK index rose to -20.9 from -24 and better than the estimate of -22.5. They said, "Falling inflation rates combined with significant wage and salary increases are strengthening consumer purchasing power. This has a stimulating effect on income expectations and also reduces consumer uncertainty, which was also reflected in the comparatively high propensity to save in previous months."

Here was the caveat though, "Nevertheless, it can be assumed that German consumers are still very uncertain. There is still a lack of clear future prospects in the country, which leads to little planning security when it comes to purchases. Only when people regain this security will they be willing to invest their increasing purchasing power in larger purchases again."

German Consumer Confidence

Upside

-BOX -2% earnings
-MRO +6% advanced talks with Conoco
-BHP +2% not extending Anglo talks
-OOMA +17% earnings
-IKNA +16% strategic update
-HOOD +3% buyback
-AAP +4% earnings
-AFMD +8% FDA fast track designation
-ANF +1% earnings, raised outlook
-DKS +7% earnings, raised outlook
-CHWY +6% earnings
-ASTS +8% strategic direct-to-cellular partnership with a commitment of $100M from Verizon

Downside

-CAVA -3% earnings
-APPS -8% earings
-AAL -8% cuts outlook
-UAL -1% affirms outlook
-FFIE -40% earnings
-AMPG -6% files 10Q
-VFS -2% conducting a thorough review and considering to further delay a planned $4B factory in North Carolina
-FSLR -2% downgrade

In premarket trading, I have just covered the SPY and QQQ common shorts put on Monday and Tuesday for a quick profit:

* SPY at $526.60

* QQQ at $456.40

Late yesterday morning I moved from very small to small sized short SPY and QQQ common:

Getting Shorter

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.

BY DOUG KASS MAY 28, 2024 11:12 AM EDT

Before this week my Trade of the Week (for an unusual two consecutive weeks) was to short the financial ETF,  (XLF) .

Yesterday a number of components of XLF showed signs of weakness in an up tape (Berkshire -$4, Goldman Sachs -$3, JPM lower etc.). The XLF is down another -$0.25 in premarket trading and looks like it may be rolling over.

I continue to endorse this trade.

Here are my prior updates:

Let's Play Two!

We got the setting - sunshine, fresh air.

We have the team behind us.

So, let's play two!

- Ernie Banks, Chicago Cubs

Last week's Trade of the Week was (XLF) (financials).

So, let's play two - it's my Trade of the Week again!.

Jamie Dimon's remarks were not upbeat at the bank's analyst day, imho - and JPM's shares (-$3.70 today) might be rolling over. Its the second largest component (10%) of XLF

As well, I am cautious on Berkshire Hathaway (-$2 today) - the other large component (13%) of XLF:

Berkshire Hathaway, the Financials and the XLF

Yesterday, on CNBC, three of the four Final Trades on "Halftime" were financial stocks (Berkshire (BRK.B) , Bank of America (BAC) and Citigroup (C) ).

That, in and of itself, might be a good reason to consider selling/shorting financials!

But I have more substantive reasons -- as in a backdrop of "slugflation," and given the sharp share price appreciation over the last month and the extended overbought (and RSI readings) financials are likely vulnerable to a tradeable correction today.

Here are the components of (XLF) .

BAC, C and BRK.B account for 25% of XLF with Berkshire at 13% and JP Morgan (JPM) at about 10%.

A decade ago I was the "credentialed bear" at Berkshire Hathaway's Annual Meeting - asking tough questions sitting on the dais with Warren Buffett and Charlie Munger. I had the time of my life. I have written volumes about that experience and, in general, on Berkshire Hathaway since I began writing my Diary so there is no reason to recount my concerns that Berkshire Hathaway is, at best, a GDP grower.

A lot of Berkshire's success over the last two decades has been Warren's ability to move quickly and invest sizeable sums "on the fly." Berkshire's investment in Bank of America - conceived while taking a bath - was a vivid example of this.

But size and competition now represent bonafide challenges for Berkshire to repeat its successes of the past.

* The company's past success and current size will be Berkshire's greatest enemy over the next decade. Berkshire is simply becoming too big for incremental acquisitions/investments to move the corporate needle. With an accumulated $200 billion in cash, Warren basically admitted recently in his Annual Meeting that the ability to employ large sums of capital have been markedly reduced.

* Berkshire now faces competition for deals that it never had before - private equity, private capital, etc.

* Greg Abel, Warren's successor is able, but with Charlie now gone and Warren getting older - the full input of this remarkable twosome will, in the fullness of time, be absent. Investors might consider getting prepared for this.

* The eventual passing of Warren Buffett will not be accompanied by a corporate paradigm shift (i.e., leading to divestitures, spin offs or sales) as some holders may currently hope for. That plan is certainly not in Warren's DNA - nor is it in Greg Abel's.

Berkshire's shares have appreciated mightily over the last several years - in my view, some of that excellent performance was a sizeable and very timely purchase of Apple (AAPL) .

The Apple investment was Berkshire's most successful investment ever. It is not reasonable to expect that another Apple opportunity lies ahead - that was, simply stated, a once in a lifetime investment for Berkshire.

To summarize, despite CNBC's protestations, the fundamental and investing challenges now facing the company may represent risk to its shares over the next few years - which might result in a challenge for Berkshire to achieve growth in sales, profits and intrinsic value relative to the U.S. economy and S&P 500 Index.

Berkshire represents 13% of XLF.

I added to my XLF short on Thursday.

Position: Short XLF (S/M)

BY DOUG KASS

MAY 17, 2024 8:15 AM EDT

I am sticking with this trade of the week for the second week in a row:

Trade of the Week - Shorting XLF $41.94

For the first time in the recent rally the financials seem heavy. Berkshire (BRK.B) and JP Morgan (JPM) - large components - have reversed early gains.

I would note that many technicians and strategists have recently endorsed financials, apparently in response to the strong relative performance.

Given my economic and rate concerns, I am fading that growing consensus now.

Shorting (XLF) might make some sense as a tradeable idea now.

I added to my smallish XLF short at $41.94 this morning.

Short IWM (M)

Position: Short XLF (S/M), Short IWM (M)

BY DOUG KASS MAY 20, 2024 12:45 PM EDT

The S&P Short Range Oscillator is at -0.17% vs. 0.98%.

It really is amazing what hundreds of billions of dollars worth of infrastructure and enough energy to power a small country can do:

How about this knucklehead trying to justify it all? Apparently, you need to ask the question in a different way, which boils down to doing the work for the AI itself and telling it the word Strawberry has two R’s:

Then again, what can’t count the number of R’s in Strawberry, can still predict earnings better than Wall Street analysts. Which means it can also predict the economy better than the Federal Reserve.

Of course, the average third grader can also predict earnings better than analysts, and the economy better than the Fed, and still not be able to spell Strawberry!

"Knowing the future is not important. Knowing the trend is."

- Jim Roppel

Bonus- Here are some great links:

The Stock Market Isn't Rigged and The Consumer is Fine  

Whither Semis? 

Four S&P Charts   

What Is Happening With The Transports?

* "Slugflation" lies ahead...

As the VIX declined ever lower in recent weeks, we have reflected whatever bearish exposure we have had in long Index puts compared to our previous strategy of shorting Index calls.

With low volatility, we have also avoided straddles and strangles.

My guess is that vol will be rising in the weeks and month's ahead so today's opportunities in being long puts will fade and we will be back in the short calls and straddle/strangle strategy.

* Yesterday's continued strength in the face of higher crude oil and other commodities, lower bond prices (higher yields) and the weakness in the equal-weighted S&P surprised and disappointed us

* But we trade and invest unemotionally so we took advantage of the market anomaly and added to our short exposure on Tuesday

* "Tomorrow was another day"...

As noted, yesterday (into the market strength) I expanded my short exposure:

Getting Shorter (Part Deux)

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).

BY DOUG KASS MAY 28, 2024 3:50 PM EDT

Nonetheless, I was confused by the continued market strength, likely caused by a combination of momentum (FOMO) and the intolerable and machine-learned algos:

After All, Tomorrow Is Another Day!

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

* Crude was +$2.50/barrel 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 we bears were not in on it.

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

But, after all, tomorrow is another day. 

To this observer, everything was not coming up roses:

Everything Is Not Coming Up Roses

* 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.

BY DOUG KASS MAY 28, 2024 4:39 PM EDT

BY DOUG KASS MAY 28, 2024 2:54 PM EDT

_____

Today, as Grandma Koufax used to say, "we shall see what we shall see."

But, so far, with S&P futures -33 handles and Nasdaq futures -130 handles (at 5:45 am) things are making more sense to me.