From Peter Boockvar:

Positives,

1)Payrolls grew by 272k, almost 100k above the estimate of 180k. The private sector contributed 229k of this vs the forecast of 165k. Revisions to the two prior months were down a combined 15k. Average hourly earnings rose .4% m/o/m, one tenth more than consensus and the y/o/y pace is up 4.1%. For perspective, this averaged 2.5% per annum in the 20 years leading up to Covid. Hours worked were as expected at 34.3 which is where it was in February 2020. Combine this with the hourly earnings figure and weekly earnings grew by .4% m/o/m and 3.8% y/o/y. The 25-54 yr old age group saw its participation rate rise to 83.6% from 83.5% and that is the highest in 22 years.

2)The May ISM services index rose to 53.8 from 49.4 and that was better than the estimate of 51. The internals were quite mixed though. The breadth was a touch better as 13 industries of 18 asked saw growth vs 12 in April while 5 saw a contraction vs 6 in the month before. The bottom line from ISM reflects the mixed picture, and was goosed by the supplier delivery component. “Survey respondents indicated that overall business is increasing, with growth rates continuing to vary by company and industry. Employment challenges remain, primarily attributed to difficulties in backfilling positions and controlling labor expenses. The majority of respondents indicate that inflation and the current interest rates are an impediment to improving business conditions.”

3)In the May Challenger Jobs Report, they said announced job cuts fell 1.5% m/o/m and lower by 20% y/o/y. Year to date thru May, firing’s are down 7.6% and tech continues to lead the way in cuts.

4)The May Logistics Managers Index rose 2.7 pts m/o/m to 55.6. They said "this increase was largely a function of positive movements in the transportation market and warehousing utilization. This expansion faced headwinds in the 2nd half of the month however, particularly from inventory levels, which moved from expansion to contraction." Also of note was pricing as they are rising again "and are mildly above capacity." Their transportation price index jumped 13.7 pts at 57.8 from a contracting 44.1 in April. That's the highest since June 2022.

5)Auto sales in May totaled 15.9mm at a seasonally adjusted annualized rate (SAAR). That is vs 15.74mm in April, just above the 15.8mm estimate and vs 15.05mm in May 2023. Wards yesterday said "Further confirming as a theme for 2024, growth in May largely was centered in the most affordable CUV (crossover utility vehicle) and car segments. Other sectors during the first five months of 2024 have either recorded sporadic gains or fell into steady decline, including some, such as fullsize pickups, that are coming off lengthy periods of strong results. So far in 2024, market strength is with more affordable small and midsize CUVs and small sedans."

6)The Atlanta Fed’s GDPNow is back above 3% for Q2 from 1.8% earlier in the week.

7)From HP Enterprises: "Enterprise customer interest in AI is rapidly growing and our sellers are seeing a higher level of engagement." Similar to Dell however, "This year's mix shift from networking to AI systems should weigh on our gross margins…As we capitalize on the AI growth opportunity, we also see indications of the market recovery in traditional and cloud infrastructure markets. Orders for traditional service grew sequentially and y/o/y, driven by enterprise public sector and SMB customers in North America and Europe."

8)I’ll give the ECB the benefit of the doubt with its interest rate cut because they made it a point that at least for now it’s more of a tweak rather than a tip off to a consistent rate cutting cycle. They don’t want to give up on the inflation fight and consider the cut more being less restrictive rather than easy. Also the same with the BoC.

9)China said its exports in May rose 7.6% y/o/y, above the estimate of 5.7%.

10)The private sector Caixin services index for China rose to 54 from 52.5 and they said "Business activity and total new orders both grew for the 17th month in a row, increasing at the fastest pace since July and May last year, respectively. Notably, growth in total new orders recorded its fourth consecutive month of acceleration, reflecting a strong recovery in demand...Employment expanded following three months of contraction." As for the Chinese service outlook, "Market sentiment remained optimistic. Surveyed companies were generally confident about future market prospects, although they expressed concerns over the global economic landscape and growing costs of raw materials."

11)Base pay in Japan rose 2.3% y/o/y in April, reflecting the Shunto negotiations, and up from 1.7% in the two prior months. That is the fastest pace of wage growth in 30 years, yes, since 1994.

12)Singapore's PMI rose to 54.2 from 52.6. S&P Global said, "Improvements in demand and output spurred a renewed rise in employment levels, while overall confidence levels also rose." For Thailand it was 50.3 from 48.6 and Malaysia it's at 50.2 from 49.

13)India saw its service PMI remain strong at 60.2 vs 61.4 in April and combined with manufacturing, a composite print of 60.5, outperforming most places in the world.

14)Some stabilization in other manufacturing PMI’s too in Asia: South Korea 51.6 vs 49.4, Taiwan 50.9 vs 50.2, Indonesia 52.1 vs 52.9, Philippines 51.9 vs 52.2, India 57.5 vs 58.4, Japan 50.4 vs 49.6, Australia 49.7 vs 49.6 and the private sector focused Caixin China mfr'g PMI at 51.7 vs 51.4 (in contrast to the drop seen in the state weighted one).

15)The May Eurozone manufacturing PMI was revised a touch to 47.3 vs the initial read of 47.4 but up from 45.7 in April and the best read since February 2023. The final figure for the UK was 51.2 vs 49.1 in the month before.

16)German exports in April were a bit better than expected, rising 1.6% m/o/m vs the estimate of 1.1%.

17)The revision to the Eurozone services PMI was 53.2, little changed with the initial read of 53.3 and vs 53.3 in April and 51.5 in March. This is where Germany is well outperforming France with a services PMI of 54.2 vs 49.3 in France. Italy and Spain, via their tourist industries, are also doing better.

18)The UK services PMI was 52.9, left unrevised and compares with 55 in April and 53.1 in March.

Negatives,

1)In stark contrast to the establishment survey, the household survey said 408k jobs were lost in May and joined with the 250k person drop in the labor force saw the unemployment rate rise by one tenth to 4.0%, matching the highest since November 2021 though historically very low as we know. The all in U6 rate held at 7.4%. The big thing though with the household survey is that about ALL of the jobs lost were in the 20 to 24 yr age cohort, totaling a fall of 474k. Those aged 25-54 saw job gains of 87k and the 55 and older crowd saw only a modest drop of 31k. The participation rate fell 2 tenths and back down to 62.5%. This was 63.3% in February 2020.

2)ADP said 152k private sector jobs were added in May, 23k below the estimate and April was revised down by 4k to 188k.

3)Initial jobless claims rose to 229k from 221k and that was 9k more than expected. As a 232k print dropped out, the 4 week average fell by 1k to 222k. Of note, continuing claims remained elevated at 1.792mm, up slightly w/o/w.

4)Challenger also said “hiring announcements are at their lowest level in a decade. The typical churn in a healthy labor market appears to be stalling.”

5)April Job Openings totaled 8.059mm vs 8.488mm in March and about 300k under the estimate. The hiring rate held at 3.6% which is one tenth from matching the lowest since 2014 not including Covid. The quit rate also was unchanged m/o/m at 2.2%, matching the lowest since 2018, also not including Covid.

6)The May ISM manufacturing index stayed below 50 at 48.7 vs 49.2 in April and below the estimate of 49.5. In terms of overall breadth, 7 of 18 industries surveyed saw growth, down from 9 in the two prior months and that is the least since January. Those seeing growth in new orders shrunk to just 4 from 8 in April and 12 in March. The bottom line from the ISM, “Demand remains elusive as companies demonstrate an unwillingness to invest due to current monetary policy and other conditions.”

7)World container prices continue to spike higher and the problem is not just the lengthier trips but also the lack of containers in China as empty ones don't come back to them as fast as they did. The Shanghai to Rotterdam trip was up 15% w/o/w to $6,032, higher by $762 on the week. It's doubled since late April and is up from $1,667 at year end. That's also triple where it was in February 2020, though still well below the panic peak in 2021 of $14,807. The Shanghai to LA trip was higher by 11% w/o/w to $5,975.

8)Mortgage apps were down 5.2% w/o/w with purchases lower by 4.4% and refis declining by 6.8% w/o/w. The purchase index in particular is just shy of the lowest since 1995.

9)Commercial real estate bank loans saw its biggest one week drop outstanding for the week ended 5/22 since March 2023, when SVB blew up, to $2.99 trillion.

10)From ABM Industries: On why Class B office buildings will continue to bleed, "if tenants are taking less space and they can afford to pay the same amount of rent, you can move to Class A. And that's why Class A has been so resilient, because Class B tenants can move to Class A now."

11)From JM Smucker: "just acknowledging that the consumer is behaving a bit more cautiously. There's been some trade around, if you will, up and down in the category. The cautiousness of the consumer seems to have activated a bit more competitive intensity in the category…The coffee category continues to experience commodity volatility and overall meaningful inflation. In response to recent higher green coffee costs that we will begin to incur during the first quarter, we are taking a list price increase across parts of our portfolio in early June."

12)From Dollar Tree: "In both segments, comp growth was driven by traffic gains that were partially offset by lower average tickets. The average ticket declines reflected weaker discretionary demand, particularly in the Dollar Tree segment."

13)From Five Below: They reported a 2.3% drop in comp store sales and "These results fell short of our expectations as we experienced a meaningful slowdown in sales during the back half of the quarter." And why? "First, our negative comp results were driven by a decline in comp transactions. Second, consumers were more discerning with their dollars, increasingly buying to need. We saw this in the types of products they purchased, choosing more items in our version of consumable categories, such as candy, food and beverage, beauty...Additionally, declining sales and older merchandise trends presented greater comp headwinds than planned."

14)From Lulu: With regards to the US, "As we mentioned on our last call, we've seen a slower start to the year due to several internal factors, including missed opportunity in women's and bags, which we are actively addressing, and some ongoing choppiness in the consumer environment. Our men's business has maintained its momentum."

15)From Ollies Bargain Outlet: "Consumers clearly remain under pressure and are seeking value in making their purchases...Everyone loves a bargain and Bargain is our middle name."

16)From Thor Industries: "In our fiscal 3rd quarter, our independent dealers experienced increased retail activity during the Spring selling season; however, conversion to sales remained difficult in light of the economic pressures on retail buyers. Faced with elevated floor plan interest rates, our independent dealers remain understandably cautious with their ordering patterns; consequently, our independent dealer inventory levels remain suppressed."

17)From Bath & Body Work: they referred a few times to the "dynamic consumer spending environment" and "are taking a prudent approach to our guidance."

18)China May Imports were softer than anticipated, rising by 1.8% y/o/y vs the forecast of 4.3% growth.

19)Taiwan also reported its trade data for May. Exports rose 3.5% y/o/y, well below the estimate of a rise of 9.8%. Likely helped by Taiwan Semi shipments, thanks to Nvidia, exports to the US were up 36% y/o/y while falling by 5.3% to Hong Kong/Mainland China. Imports were almost flat, up by .6% vs the consensus gain of 4.5%.

20)Germany reported soft industrial production and factory order activity in April.

21)The number of unemployed in May in Germany jumped by 25k and that was well more than the estimate of up 7k and compares with 11k in April. Their unemployment rate did hold at 5.9% as expected and the head of the statistics agency there said "The spring recovery hasn't really taken off this year."

22)Modi lost some momentum with his governing mandate.

* Talking heads continue to pass over the weakening breadth .... which today is an understatment as NYSE trailers were nearly 3x advancers!

- NYSE volume 381M shares, 6% below its one-month average;

- NASDAQ volume 3.97B shares, 28% below its one-month average

- VIX: down 2.86% to 12.23

Market Breadth

% Movers

Nasdaq 100 Heat Map

From Jefferies on cannabis:

Weed Weekly (Issue 194): SAFER 'Lite' In Spending Bill Potentially Meaningful

Weed Weekly summarizes each week's main developments, with key thoughts and considerations. Focus this issue is on the new FY25 House spending bill and the surprise inclusion of language reflecting a slimmed down version of SAFER. The key difference — which could be meaningful from a capital markets perspective — is the protection provided to all financial institutions vs specific to depository institutions.

From an investment perspective — as we have written many times — the big factor that is depressing current multiples of US MSOs is the lack of institutional capital. This is due to the current legal status of cannabis and capital market stakeholders fears of federal prosecution.

This has resulted in US cannabis names only trading on the pink sheets, a lack of custodians for the stocks, and compliance departments at institutional investors reluctant to participate. While likely rescheduling to schedule 3 this year could help address this, we believe we also need to see other things like SAFER Banking passed and a likely new Cole Memo.

With regard to SAFER, there are a couple of issues. One, a vote on a standalone bill keeps getting held up, with the latest consensus being that it may not be until the lame-duck session post the election, at the earliest, if at all. Two, the current language of the standalone SAFER bill is specific to providing protections for depository institutions only, so unclear what this would mean for broader capital market participants such as investment banks, exchanges, and institutional investors.

Against this backdrop, there was a potentially meaningful development this week when a GOP House Committee presented its government 2025 fiscal year spending bill. Within this, there is an addition of what could be viewed as SAFER 'Lite'. Notable is that instead of providing protection to depository institutions only per the standalone, the language provides protections to all financial institutions, specifically saying, “none of the funds made available in this Act may be used to penalize a financial institution solely because the institution provides financial services [to a cannabis business].” In the cannabis businesses it lists, it is notable it includes both marijuana and hemp-derived cannabinoid products, i.e., hemp THC.

If we look at the definition of a financial institution from FinCEN, it includes 'banks', as well as 'brokers or dealers in securities'. Therefore, if this was ultimately to pass — there are a number of steps to still go through in the House, and we would also need to see it included in the Senate version — the broader reach for protections vs just depository institutions, alongside rescheduling, a likely new Cole Memo, and then almost certainly, new updated guidance from FinCEN could be sufficient incremental developments to finally open up capital markets activity.

Encouragingly, the bill passed its first obstacle this week, with a vote in favor to move it to full committee, with a full committee vote next week, and then it will be sent to the House floor for a vote should it pass that. So watch this space.

douglas cassel

Gold, silver, copper, platinum down huge. Did some metal based hedge fund collapse?

I have added to my short exposure (on all intraday ramps) in the following names:

* XLG short $44.51

* Reinitiated XLF short $41.57

* Shorted more SPY and QQQ common

I have covered my PWSC short at $22.40 (It is being acquired by Bain Capital for NO premium). PowerSchool to be Acquired by Bain Capital in $5.6 Billion Transaction | Bain Capital

On the positive side of the ledger I added to OXY, MSOS, TCNNF, CURLF, VRNOF, TSNDF and GTBIF.

Meanwhile Mr. Market continues to suffer from bad breadth (closing figures will be posted at 4 PM).

Just look at -$4 drops in shorts MCD and HD, as an example.

My largest individual holding in the cannabis space is Trulieve TCNNF, which I reflected in my case for cannabis this afternoon.

Here is a FOX News poll for the state of Florida where Trulieve has substantially the largest industry presence.

As you can see, support for Amendment 3 (which would allow recreational use of cannabis in the state) has had a strong start with 66% of the respondents favoring legalization.

Please turn to question #19 on page 4.... 

Professor Galloway on "No Mercy No Malice," Hoarders.

* And this is from an industry skeptic!

* Time (towards a path of reform), a turn in fundamentals and (low) stock prices are the umbrellas to the future bull market in cannabis and a sustained flow of capital into the sector.

* Trulieve, TerrAscend and Green Thumb are my top industry picks.

* Will cannabis stocks be the next "compounders"?

* Read on...

I have had a love/hate affair with cannabis stocks over the last five years — consistently buying weakness and selling strength (most recently about a month ago).

But first let me remind you of my process.

I am a fundamental and dispassionate investor who selects securities based on the calculus of "intrinsic value" and probability distributions surrounding projected operating outcomes.

I also seek a "margin of safety," which, in theory and when employed properly, provides a buffer of protection against unreasonable and outsized losses.

Based on my (security) analysis and an evaluation of upside reward/downside risk, I have, in the aggregate profited from my cannabis positioning over the last two years. 

Bad Weed

Cannabis investors are an especially emotional, committed and overly enthusiastic group. More than any other sector they seem to be in a bubble chamber of bullishness and have an almost religious attachment to the sector. (My sometimes outspokenly skeptical view has led to numerous cannabis devotees blocking me on X, formerly Twitter.)

Despite their bullish protestations, cannabis investors, however, have been unrewarded. Indeed, with the largest cannabis ETF MSOS having fallen from over $40 to about $7 and with many second and third-tier cannabis stocks retreating into penny status, there has been carnage in the space.

To be direct, with the benefit of hindsight and based on disappointing operating results and burnt capital over the last half decade coupled with the pattern of historic share price movements (from the upper left to the lower right) — it can be concluded that cannabis investors have been unduly and obsessively enthusiastic/optimistic.

I have been consistently of the view that the multiple rallies (principally off of legislative catalysts) should be sold. My concerns (and the steady sources of disappointment to cannabis investors) were based on recognition of some of the following issues:

* That legislative inroads and path to reforms (rescheduling, safe banking, elimination of Section 280E, etc.) would be slower than consensus expected given the hollow promises of politicians and the schism (and extreme partisanship) in Washington, D.C.

* Custody and uplisting restrictions would not easily be remedied and, as a result, limited institutional involvement would plague the sector.

* As retail investors have been consistently disappointed/exhausted and lost such huge sums — it would be difficult, without the support of larger and plain vanilla institutions to sustain rallies in cannabis equities.

* The total addressable market (and potential sales, profits and cash flow) was also lower than the consensus forecast.

* Though heralded as a growth industry, growth would stall out, causing some to question the bullish industry thesis.

* The current state silo structure creates diseconomies of scale and could, in the fullness of time lead to misallocation of capital and writeoffs. 

* Certain state dispensary limitations (Maryland, New Jersey, Ohio, etc.) worked against the build of industry consumer brands.

* The trading dynamics of the cannabis sector in which one large, liquid ETF (MSOS) is the tail that wags cannabis' dog (of company illiquidity) is structurally sub optimal. (It is inherently unhealthy for MSOS to notionally trade $100 million/day while the basket of cannabis stocks trade under $25 million/day.) 

* Speaking of suboptimal, the cheapest cost of capital outlet was for many companies to essentially "borrow" from the U.S. government by deferring taxes. That speaks volumes to the limited access to capital that I predicted.

* As we moved out of a period of near zero interest rates to a higher level, the industry's cost of capital would plague a sector that was getting more and more leveraged. I was of the view that most second and third-tier cannabis companies would take on too much debt in planting flags in new states and would have no path to profitability. (The industry's management has been generally weak and some created their own self inflicted wounds.)

Why I Am Now Optimistic on Cannabis

To begin with, most of the above ongoing concerns I have had over the last several years have finally been acknowledged and, arguably, have been materially discounted by market participants.

Here are some additional reasons (and catalysts) for my short and intermediate-term optimism: 

Legislative Reform Lies Ahead

The ramifications of reform are multi-faceted and dynamic — and will, in the fullness of time, unlock the most cannabis industry value.

The likely rescheduling process from Schedule 1 to Schedule 3 (whether a 2024 or 2025 event) has major and positive implications for cannabis businesses, capital markets reform (AG memo at the minimum) and share prices.

There is little question that we are now closer than ever to the most important legislative reforms ever seen for the industry. That path, as I have mentioned in the past (see below), will no doubt be bumpy but the reform inroads are now inevitable and, for the first time, lie within a reasonable investing timeframe. This inevitability is not, in any way, being discounted in the market. In fact, MSOS is trading at a price below before the rescheduling announcement.

Rescheduling reform will also provide relief from overly indebted balance sheets. Moreover, a revision of Section 280E (which prevents cannabis companies from claiming tax credits and deductions for expenses they incur in operating their businesses) will be a cash flow, debt repayment and profit boon for the space — making the Tier One companies even more dominant operationally and financially.

Uplisting and Custody Issues Will Ultimately Be Resolved 

Uplisting is an important ingredient to a rerate in valuation. It is even more likely impactful than S3, but the two may go hand in hand because if S3 becomes passed both fixing uplisting and custody (though unpredictable) could come swiftly after the most significant change in federal policy in decades (particularly if an AG memo is forthcoming).

Green Thumb's GTBIF interest in merging with Boston Beer SAM might be a way around uplisting. More permutations and more creative uplisting techniques likely lie ahead.

Curaleaf CURLF and TerrAscend TCNNF have been listed on the Canadian Stock Exchange — both companies are already getting some custody relief because of their moves. Without custody, industry share prices rely on inflows into MSOS. Custody resolution changes that reliance.

Remember, with such a small company market capitalizations (the top-five companies have an aggregate market cap well under $10 billion) it will not take much of an embrace by potential institutional buyers to have a measurable impact on stock prices. 

November's Recreational Vote In Florida Will Be an Important Fundamental Industry Catalyst 

Only four months away, this will help the return of the industry's growth story. My baseline expectation is passage. (This is particularly positive for Trulieve).

Product Price Compression May Be Ending 

Industry fundamentals are stabilizing in some major markets. The aforementioned Florida opportunity and that of over large and populated states lie ahead.

Industry Bifurcation — The Rich Get Richer and the Poor Go to Prison 

The last five years have served as a period of natural selection and survival of the fittest as the industry has dramatically consolidated under the pressure of limited legislative reforms, weak operating results and overleveraged balance sheets. 

The top 5-10 Tier One cannabis companies are differentiated, have the scale/critical mass and path to profitability, are relatively healthy, have access to capital and will likely dominate cannabis' future.

Managements Slowly Have Gotten Religion 

Cannabis company managements have been forced to manage their businesses' operations and finances more rationally. Out of necessity managements are concentrating on profitable growth and are finally implementing best practices after years of poor execution. 

Managements' historically poorly thought out growth and expansion plans have been replaced with the objective of maximizing cash flow and the more efficient use of capital — all steps in the right direction. 

The Tier One Cannabis Companies Trade at Low Free Cash Flow and Sales Multiples (Without Even Layering on 280E Changes) 

The best run company in cannabis (which we own), Green Thumb, is now even buying back their own shares — that's testimony to the above observations. Should the industry's punitive tax rules be changed (our baseline expectation), more companies could follow with buybacks. 

The Tier One Cannabis Companies Will Likely Become Attractive Takeover Candidates 

The alcohol and tobacco business are stagnating (at best) and are being disrupted. Today there are more steady and daily cannabis users than steady drinkers.

I have spoken to numerous consumer product companies. The vast majority are quite interested in having ownership in the cannabis space as, among other reasons, the sales synergies are immense. To me it is only a matter of time. Indeed, several more aggressive consumer product companies might seek first-mover advantage and move even before they get an all clear legislative signal.

In theory, CPGs may even hold the key to pushing reform!

Finally, with such small market capitalizations (mentioned earlier) cannabis companies could be tempting takeover candidates for a large swath of companies. In theory and under the best of circumstances there could even be a buying frenzy and bidding wars for some of the major players who are morsels for the large consumer product companies! 

Cannabis as the Next Meme? 

There remains some possibility that if I am correct about the upcoming legislative reforms that cannabis stocks may be embraced in the same speculative way meme stocks have been. After all, if rescheduling and 280E reform is adopted, uplisting is resolved, institutions can buy and the state silo situation is resolved — this is an admittedly low probability but not entirely unrealistic scenario that cannabis becomes a meme.

Trump and Cannabis 

What if, as Hedgeye's Howard Penney mentioned yesterday on Twitter, former President Trump said on the campaign trail...."I will decriminalize cannabis?" Answer: The stocks would rip higher!

That said, I am increasing less concerned about resistance to rescheduling.

Bottom Line: Reward vs. Risk 

We are at a likely sentiment extreme as optimism has been thoroughly beaten out of the sector. With MSOS and many individual stock prices at or near all-time lows (in absolute terms and relative to current and prospective cash flows) and given the likely regulatory reforms, the share prices' upside dwarfs the downside (perhaps more so than any time in history).

Tactical Strategy

Most industry observers (and the consensus) expect cannabis stocks to be lackluster this summer as we are in the "comments period" for rescheduling. But those were the same industry observers (analysts, paid advisors, etc.) have been consistently bullish (and wrong) over the last several years. Now, with the share prices ar such lowly levels they have grown "objective" (tongue in cheek!).

It has paid not to listen to them in the last five years and it might not pay to listen to them now. Burned by their past opinions they have become consensus for the first time and I am not sure they will prove correct as markets tend to anticipate and discount the future.

I am using the current "comments" window (for rescheduling) to accumulate a large position in cannabis equities.

I am almost fearless at these levels — the lower the share prices fall, the more aggressive I will be.

The following compilation of recent columns tracks a lot of my recent views and trading/investing activity:

I'm Getting Close to Going Back Into the Cannabis Pool

Roaring Kitty Live Stream - June 7, 2024 (youtube.com)

From Peter Boockvar:

At least for now, a tweak/Some earnings comments and coffee prices going higher/Gold, China stays put in May

European bond yields are up for a 2nd day in response to what seems to be for now more of a tweak in interest rates rather than a commitment to a string of rate cuts by the ECB. A slew of ECB members are speaking today expressing that. I guess what else are they going to say after the day they raise inflation estimates but decide to cut rates. They even had a dissent from Robert Holzmann who doesn't believe the war on inflation has been won and he too used the term 'hawkish cut' by the committee.

The German contingency in particular expressed their views post rate cut. Executive Board member Isabel Schnabel said "As the future inflation outlook remains uncertain, we cannot pre-commit to a particular rate path." Bundesbank president Joachim Nagel said something similar, "We on the ECB Governing Council are not driving on auto-pilot when it comes to interest rate cuts."

The euro is holding its slight gain from yesterday while stocks in the region are down across the board.

This is something that I've talked about for a while as a possibility here when the Fed finally decides to start cutting rates. That maybe if the long end of the yield curve is not comfortable with the Fed's backing off from its inflation fight (even with moderating inflation being a reason because the sustainability of that still remains a question), long rates go up as short rates go down. At least early on, that is what is happening in European bonds as the German 10 yr yield for example is not far off from its highest level since last November just as the ECB has lowered rates by 25 bps.

Here are some earnings call comments of note:

From ABM Industries, a stock we own,

"we want to thank our team for their strong performance in a choppy macro environment."

On why Class B and C office buildings will continue to bleed, "if tenants are taking less space and they can afford to pay the same amount of rent, you can move to Class A. And that's why Class A has been so resilient, because Class B tenants can move to Class A now." ABM provides janitorial and cleaning services to commercial offices with Class A customers, among many of their businesses.

From JM Smucker,

They also used the word 'dynamic.' "Our results reaffirm that our strategy is working, as we continue to execute and deliver results in a dynamic consumer environment."

"just acknowledging that the consumer is behaving a bit more cautiously. There's been some trade around, if you will, up and down in the category. The cautiousness of the consumer seems to have activated a bit more competitive intensity in the category."

If you haven't noticed, the price of coffee futures have risen to the highest level since November 2021 recently and Smucker is raising prices as a result because of this higher input cost. "The coffee category continues to experience commodity volatility and overall meaningful inflation. In response to recent higher green coffee costs that we will begin to incur during the first quarter, we are taking a list price increase across parts of our portfolio in early June."

Coffee

Data wise overseas, China said its exports in May rose 7.6% y/o/y, above the estimate of 5.7%. What is organic growth, what is being front loaded because of upcoming tariff implementation, what is being 'dumped' as the accusations claims, is all difficult to say. Imports though were softer than anticipated, rising by 1.8% y/o/y vs the forecast of 4.3% growth.

Taiwan also reported its trade data for May. Exports rose 3.5% y/o/y, well below the estimate of a rise of 9.8%. Likely helped by Taiwan Semi shipments, thanks to Nvidia, exports to the US were up 36% y/o/y while falling by 5.3% to Hong Kong/Mainland China. Imports were almost flat, up by .6% vs the consensus gain of 4.5%.

Germany reported soft industrial production activity in April. Exports though were a bit better than expected, rising 1.6% m/o/m vs the estimate of 1.1%. The service side of the German economy has kept its economy afloat while its manufacturing sector continues to be challenged as we've known.

Finally, gold is taking a hit by almost 2% as it was reported that China did not add to its gold holdings in May after 18 straight months of doing so. Price was likely the factor with gold hitting record highs. We know its really been mostly central bank buying that has powered gold higher and they will continue to do so, even China. China now has the benefit of conducting some trade in its own currency. They are buying oil from the Russians and Saudi's in RMB. They are buying soybeans and corn from Brazil in RMB. Those countries in turn use RMB to buy goods from China. There is no dollars used and thus no need to recycle dollars in US Treasuries. Any excess instead has been used to buy gold.

What is continuing to be missed are western buyers in gold ETF's. Below is a chart of the price of gold in white and the amount of gold being held in ETFs in orange. I'm expecting at some point the orange line will move higher which will be the fuel for the next leg up in gold. We're still long and bullish.

Gold price in white/Gold ETF holdings in orange

I have moved to very large long OXY.

From Peter Boockvar:

Payroll rundown and always important to look under the hood

Payrolls grew by 272k, almost 100k above the estimate of 180k. The private sector contributed 229k of this vs the forecast of 165k. Revisions to the two prior months were down a combined 15k. In stark contrast, the household survey said 408k jobs were lost and joined with the 250k person drop in the labor force saw the unemployment rate rise by one tenth to 4.0%, matching the highest since November 2021 though historically very low as we know. That said, the trajectory is what matters here. The all in U6 rate held at 7.4%. The big thing though with the household survey is that about ALL of the jobs lost were in the 20 to 24 yr age cohort, totaling a fall of 474k. Those aged 25-54 saw job gains of 87k and the 55 and older crowd saw only a modest drop of 31k. So important to look under the hood here.

Average hourly earnings rose .4% m/o/m, one tenth more than consensus and the y/o/y pace is up 4.1%. For perspective, this averaged 2.5% per annum in the 20 years leading up to Covid. Hours worked were as expected at 34.3 which is where it was in February 2020. Combine this with the hourly earnings figure and weekly earnings grew by .4% m/o/m and 3.8% y/o/y.

The participation rate fell 2 tenths and back down to 62.5%. This was 63.3% in February 2020 because of retiring boomers, among other factors. On the flip side, the 25-54 yr old age group saw its participation rate rise to 83.6% from 83.5% and that is the highest in 22 years. There was another rise in those working part time because of ‘slack work’ to the most since October 2021. Those working part time because they can’t find full time fell by 92k but only after rising by 135k last month to the highest since November 2020.

The birth/death model was a big contributor to job gains, totaling 231k. This of course is an estimated plug number and where the greatest amount of potential revisions take place from. That figure though is similar to what was seen in the past few years.

In terms of jobs, gains continue to be led by private education/health, government (particularly local and state) and leisure/hospitality. Temp jobs were lost again and ‘information’ saw no job growth. After a drop of 1k, ‘professional/business services’ added back 33k. On the goods side, construction led the way, rising by 21k while manufacturing added 8k.

Bottom line, the BLS (while subject to many rounds of revisions) continues to be the outlier in terms of reflecting robust jobs growth and they did it again, especially relative to ADP. Smoothing out the noise puts the 3 month PRIVATE SECTOR average at 206k vs the 6 month average of 202k and the 12 month average at 178k. That compares with ADP at 184k for 3 months, 166k for 6 months and 194k for 12 months. Overtime, these measures converge and the beauty of ADP is that they have payroll slips in hand while the BLS has to do a lot of estimating with its initial print.

I’ll just add this, there is a tremendous amount of obsession with the monthly BLS payroll report but by the time it’s been fully revised, 3 more times over the course of a year, it many times looks quite different than the initial print. And why I like ADP instead more.

With regards to Treasuries, they are selling off sharply with the 2 yr going from 4.74% to 4.86% and the 10 yr at 4.42% vs 4.29% right before. The fed funds futures market still is pricing in one rate cut this year but the odds of a 2nd went from about 75% before to now at 40%.

If the Fed continues to look for reason to cut, they didn’t find one today, notwithstanding the rise in the unemployment rate, for reasons stated.

25-54 Participation Rate

Average Hourly Earnings y/o/y

Number of those working part time b/c of Slack Work

As of 8:32 AM:

At 8:31 AM:

Upside:

-BCDA +53% (receives US patent on Intramyocardial delivery of cell aggregates to heart including minimally invasive radial artery approach)

-GERN +24% (US FDA approves RYTELO (imetelstat), a First-in-Class Telomerase Inhibitor, for Treatment of Adult Patients with Lower-Risk MDS with Transfusion-Dependent Anemia)

-SILO +19% (announces successful production of SP-26 Ketamine Implant for Fibromyalgia)

-BRZE +15% (earnings, guidance)

-ODD +8.8% (raises Q2 guidance; announces $150M share buyback program)

-AVO +8.0% (earnings, outlook)

-CMCM +8.0% (earnings)

-JILL +6.7% (earnings, guidance)

-AGX +5.6% (earnings)

-LMNR +3.7% (earnings, guidance)

-LYFT +3.3% (guidance from Investor Day)

-CARG +3.1% (JMP Securities Raised CARG to Market Outperform from Market Perform, price target: $30)

Downside:

-BMEA -64% (BMF-219 in Diabetes placed on Clinical Hold due to deficiencies based on the level of possible drug-induced hepatotoxicity observed)

-XCUR -19% (earnings, cash guidance)

-GME -15% (earnings; files to sell 75M of common A shares ahead of ‘Roaring Kitty’ webcast event)

-IOT -9.6% (earnings, guidance)

-NGL -8.5% (earnings, guidance)

-MTN -7.3% (earnings, guidance)

-DOCU -7.1% (earnings, guidance)

-BBCP -6.9% (earnings, guidance)

-TLYS -6.9% (earnings, guidance)

-AMSWA -2.7% (earnings, guidance)

From my friends at Miller Tabak:

Thursday, June 6, 2024

Don’t Be Afraid of Slower Growth

We have long cautioned readers that U.S. growth would slow during the first half of 2024. Markets are finally wising up and growth concerns are behind the long overdue decline in bond yields with the ten-year back down to 4.28%.[1] Expects yields to continue to fall. Once the Fed’s tightening cycle gets going, 10-year yields should fall to around 360 bps.

Recent economic data have been mixed. Hard data, especially in interest rate sensitive sectors such as housing and manufacturing have been weak. Softer data, especially PMIs in the service sector have, however, been solid. This contrast is partly because growth is normalizing, not stagnating. We expect U.S. GDP growth to be slightly below average, around 1.5%, for the rest of 2024. The hard data reflect that this is much weaker than the unsustainable 3-5% growth rates of late 2023. The soft data, including surveys, capture that the economy nevertheless remains fundamentally solid. It would not surprise us to see some analysts soon revive their failed recession calls of 2023. Recession risk remains low, however, around 10% over the next year.

Figure 1: Contributions to GDP: Services (blue) vs. Goods (red)

Recent data also show that consumers continue to move from goods to services. This is partly benign. Consumers stocked up on goods during the recent consumption boom, and goods exhibit greater diminishing returns than services: a second meal out is more useful than a second oven. This has also caused service inflation to far exceed goods inflation which the Fed, wrongfully, remains concerned about. The Fed is also contributing to this trend, however, because goods (i.e. manufacturing) are more sensitive to interest rates.

Last week, we wrote that we now expect the Fed to first cut rates in September rather than July. For next week’s June meeting, we are looking to see whether the Fed takes slowing growth far more seriously than it did in May, when it largely dismissed the 1Q2024 GDP growth rate of 1.6% (later revised down to 1.3%). If so, this will pave the way for the FOMC to signal a rate cut at the July meeting and then enact one in September. A July rate cut is also still possible if the real economic data are significantly worse than we expect.

Wolf Street howls about the Fed's balance sheet.