I have to leave for a meeting outside of my office at 3 p.m.

So, early departure today.

Housekeeping item.

I covered half of my  (CHWY)  short at $29.95.

I am short Chewy  (CHWY)  between $36-$38.

The shares were halted to the upside after Roaring Kitty tweeted out a dog!

From my old and dear pal Richard Bernstein: 

I have exchanged my short  (SPY)  and  (QQQ)  common into (in-the-money) short calls for August.

Marijuana 'Not As Dangerous' As Previously Thought, Biden Campaign Says As It Promotes Pardons And Rescheduling In New Ads - Marijuana Moment

More positive legislative news on cannabis.

* At 10:50 a.m....

Volume

- NYSE volume 118M shares, 13% below its one-month average;

- NASDAQ volume 1.66B shares, 3% below its one-month average

Breadth

S&P 500 Sectors

Nasdaq 100 Heat Map

Coca-Cola  (KO) .

More in the next day or so.

Machines and algos are overwhelming active management and, arguably, logic and analysis.

The moves are growing more unpredictable and extreme - almost on a minute by minute basis.

Considering the above, most, except the most facile, should stay away from short term trading.  

I suspect the volatility and randomness gets worse.

I will warn again - market structure changes have been favorable in abetting the market rally. 

They could have (adverse) consequences when the movie goes in reverse.

Bret Jensen, STAFF

23 minutes ago

Nothing to worry about, move along dept.

2000

Market Cap to GDP: 143% Price/Sales: 2.2X Price/Book Value: 5X NF Cap to Gross Value Added: 2.7X

2024

Market Cap to GDP: 193% Price/Sales: 2.9X Price/Book Value: 5X NF Cap to Gross Value Added: 3.1X

From Peter Boockvar:

Quick review of cap ex spending and the jobs market

Core durable goods orders were softer than expected in May as they fell .6% m/o/m vs the estimate of up .1%. April was tweaked to a .3% gain from the first print of up .2%. On a y/o/y basis core capital spending is flat, down .2%. The only sectors up m/o/m were autos by .7%, computers/electronics by .1% and fabricated metal by .3%. Declines were seen in machinery, electrical equipment and primary metals. 

Bottom line, core capital spending as measured here has flat lined over the past two years. You’ve heard me say now many times this feels much more like a 1.5% type economic growth environment, not 3%.

Core Durable Goods

Initial jobless claims totaled 233k, 2k less than expected but last week was revised up by 1k to 239k. The 4 week average rose to 236k from 233k, the highest since last September. Also of note, continuing claims rose by another 18k to 1.839mm and that is the most since November 2021.

Bottom line, more evidence of a softening labor market.

4 Week Avg in Initial Claims

Continuing Claims

From Peter Boockvar:

What's the AI payoff?/Shipping rates continue up/'Choiceful', 'We're always certain about that uncertainty'

I thought Daniel Newman of Futurum said it very well about all the AI investment spend in an interview on CNBC yesterday and asking where/what the returns will be from here from it. "I have this one concern and this one concern is that consumption layer. Who is buying and using and getting productivity and value out of all this AI. Where are these enterprise use cases that Jensen talked about and can we start to talk about them at scale and how they are delivering value to pharmaceutical companies to retailers, homebuilders. Because I think we're seeing the sell-in to the hyperscalers and there is not a lot of risk there but the sell-out into the market, the consumption layer is where I'm watching very closely."

I did by the way go check to see what the peak Cisco price to sales ratio was in 2000 and it was 24x. Nvidia's price to sales ratio on the expected January '25 fiscal year end revenue estimate of about $120b (double 2024 fiscal year) is currently 26x. Cisco's gross profit margin peaked at around 65% while Nvidia is currently around 76%.

Before I get to some earnings calls, let's check on the weekly container shipping prices that were updated today. The Shanghai to Rotterdam route saw the box price rise another $455 w/o/w to $7,322, higher for a 10th straight week, up 144% over this time frame and compares with $1,667 entering the year. It was about $2,000 in early 2020. The trip from Shanghai to LA saw the price rise by $232 w/o/w to $6,673, up for an 8th straight week and about doubling over the past two months. It began 2024 at $2,100. This is an inflationary big deal for the goods sector, especially since we are only a few months away from stores stocking up for the holidays. Air cargo rates have jumped too in response.

WCI Shanghai to Rotterdam

WCI Shanghai to LA

I found what Walmart said at the BoA conference a few days ago. From the CFO: "No surprise, consumer or health of the consumer is the first question. We keep wanting to be able to say something different, but it's just been very consistent and we've talked about this for several quarters now. The consumer is being choiceful. There, we see a shift from general merchandise to food as wallets have become more stretched. The price levels obviously have some impact on that, but just focusing on y/o/y price changes, general merchandise is still deflationary, a couple percentage points deflationary; consumables, call it roughly flat; and food is up modestly."

From General Mills: "First, we expect ongoing macroeconomic uncertainty to result in continued value-seeking behaviors by consumers, affecting both the products they buy and the channels they shop...Second, the rate of inflation in goods and services in the US and many countries around the world remains higher than historical levels, even if it has moderated from recent highs. We continue to see inflation impacting our input cost basket in fiscal 2025, with labor being the primary underlying driver of inflation in our sourcing, manufacturing, and logistics costs."

"And the fact is that inflation has been higher for longer, higher for longer than many people assumed it would be, not in food necessarily. Actually, food inflation is coming down. But if you look at the broader macroeconomic environment, we're still seeing inflation of 3% to 4% in the broader environment. And so the job to do is create more value for our consumers."

While Levi Strauss stock is trading down pre market, they expressed a lot of optimism about their business in the quarter but revenue was trimmed a bit by FX, particularly the weakness in the euro and peso.

"We are confident that the acceleration in sales and profitability from Q1 to Q2 vs prior year will continue into the 2nd half of the year. Our confidence is rooted in several factors. First, we are seeing a strong response to our new product assortment and more exciting launches set for the 2nd half...Second, we continue to see momentum in our DTC business...Third, we are confident in the continued strength of our US business and Europe overall is poised to return to growth in H2...Fourth, as we become a more DTC focused retailer, we are confident in our plans for back to school and our holiday product and marketing campaign."

Specifically the comments on the consumer, "we're feeling good. I mean, our consumer is proving to be resilient. They're coming into our stores, they're shopping online. So our indications, I mean, we control what we control. And certainly there's some level of uncertainty as we look into the back half of the year and beyond. We're always certain about that uncertainty. But we control what we can control."

Paychex stock was down 6% yesterday and also dragged down ADP. They said this on their call, "Our activity and pipelines remained strong and in fact increased y/o/y in the 4th quarter, but close rates were softer than historical norms and our expectations. Sales results in some market segments faced headwinds in the quarter...In the mid-market, we have seen some of the same pressure our competitors have mentioned with delays in decision making and increased focus on cost."

"Small and mid-sized businesses continue to face a challenging operating environment due to complex regulations, a historically tight labor market, and persistent inflationary pressures. Our small business employment watch has shown stabilization in job growth and continued downward pressure in hourly wages in the recent months. In fact, our May index hosted the biggest one month increase in job growth this year. We also saw improvements in hiring within our client base with both better checks per client and worksite employee growth in the quarter after a few quarters of declines."

"As we mentioned last quarter, our data and conversations with clients reveal they are having a tough time finding qualified candidates." Something we've now heard for a while.

Overseas, the Swedish Riksbank kept rates unchanged at 3.75% as expected after cutting them at the prior meeting. But, more cuts could come in the 2nd half. Said the Governor, "We have entered a new phase for monetary policy as inflation has subsided and the economy is weak. If inflation prospects remain intact, the rate could be cut two or three times during the 2nd half."

We also heard from a hawkish ECB Governing Council member Peter Kazimir who expects only one more interest rate cut this year. He said "I still see a significant risk of rising inflation, which may not fully align with our expectations. I expect this pressure of possible price increases mainly from wage growth." Bottom line from him, "I think we could expect one more interest rate cut this year."

The euro is up as are bond yields in response in Europe but also followed a jump in JGB and Australian bonds yields.

Shifting to stock market sentiment, Investors Intelligence yesterday said Bulls rose to 61.5 from 61.2, the most since March but Bears ticked up too to 18.5 from 17.9. The spread is still extreme. AAII today said Bulls were little changed at 44.5 but Bears popped by 5.8 pts to 28.3. The CNN Fear/Greed index remained in 'Fear' at 41. My only guess for the very wide discrepancy between II, AAII and Citi Panic/Euphoria on one side and CNN on the other is that the former are focused on the major index of the heavy tech weight S&P 500 and the latter is more broadly measuring things.

Finally, in Europe the June Eurozone Economic Confidence index fell a touch to 95.9 from 96.1 and where no change was expected. Manufacturing and services softened a bit as did retail and construction m/o/m. The only uptick was seen in consumer confidence.

Bottom line, as seen in the chart below, this index has basically flat lined over the past 2 years.

Eurozone Economic Confidence

Here are the most active pre-market exchange-traded funds as of 8:39 a.m.:

These are the U.S. select Premarket movers as of 8:53 a.m. EST

Upside:

-CASI +44% (plans to submit IND Application For CID-103, an Anti-CD 38 Antibody in Antibody-Mediated Rejection; Received $40M Non-Binding Proposal to Acquire Entire China Business; Announces $15M private placement financing by Venrock Healthcare Capital Partners, Foresite Capital, Panacea Venture and Dr. Wei-Wu He)

-XYLO +15% (Charging Robotics (held 67% by Xylo) secures first commercial order for EV Wireless Charging Systems in automatic car parks)

-TH +9.5% (revises 2024 outlook; received unsolicited non-binding proposal from Arrow Holdings for $10/80/shr)

-APOG +5.5% (earnings, guidance)

-SMPL +4.5% (earnings, guidance)

-FUL +4.2% (earnings, guidance)

-MKC +3.8% (earnings, guidance)

-KD +2.9% (Oppenheimer Initiates KD with Outperform, price target: $33)

Downside:

-TNXP -45% (prices $4.0M Public Offering of common shares)

-LEVI -16% (earnings, guidance)

-WBA -16% (earnings, guidance)

-HIMS -11% (notable weakness being attributed to Hunterbrook investigation and Hunterbrook Capital announces short position)

-IP -11% (Suzano (Brazil) says will not pursue transaction with International Paper)

-ADUS -7.3% (prices 1.5M common shares at $108.00/shr)

-ELAN -6.8% (expects US label on Zenrelia to include boxed warning on safety and initially limit the number of expected treatment days by ~25% with anticipated launch in 4Q24)

-AVAV -6.3% (earnings, guidance)

-ARAY -5.6% (Heidelberg University Hospital in Germany invests in fourth Accuray Radiotherapy Device, the Radixact System)

-MU -5.6% (earnings, guidance)

-SM -4.5% (confirms to acquire XCL Resources for $2.55B)

-CVS -3.1% (lower in sympathy with WBA)

-JRSH -3.0% (earnings, guidance)

-RIVN -2.3% (affirms guidance)

From Morgan Stanley on Viking Therapeutics:

Multiple De-risked Assets in Metabolic Disease; Initiate at Overweight 

We believe Ph2 data for VK2735 and VK2809 suggest a potential best-in-class profile in obesity and NASH/MASH, respectively, supporting two separate blockbuster market opportunities, and we expect near-term updates to drive further upside. 

We initiate at Overweight with a $105 PT. Obesity represents a large and rapidly growing market with opportunity for differentiated agents.

First generation GLP-1 agonists have revolutionized the treatment of obesity, leading to meaningful weight loss and importantly, broader health benefits (ex. reduced cardiovascular risk). Indeed, the market is expected to grow to >$100B by 2030 (MS Obesity Ripple Effects) and we expect Lilly (covered by Terence Flynn) and Novo (covered by Mark Purcell) to remain the market leaders. That said, given the large market, we see opportunity for next generation agents with differentiated profiles. 

Potential best-in-class profile for VK2735 (SC/oral) supports meaningful opportunity in obesity. VK2735 is a next generation GLP-1/GIP agonist in development for obesity that has demonstrated a favorable profile (pbo adj. weight loss: 13% @ 13wk vs. 5-8% 2 @16wk approved GLP-1s), and has the added advantage of an oral, tablet formulation with a notably clean tolerability profile (favorable GI tolerability). We believe early data suggest a potential best-in-class profile with opportunity for even further improvements in weight loss (longer treatment and higher doses for the oral) and more convenient dosing (monthly vs. weekly currently). 

While obesity is a highly competitive market, we believe VK2735 is well positioned and we conservatively (peak US market share of 3%) model peak WW sales of ~$4B (~$5B unadjusted). Pipeline provides additional drivers including VK2809 in NASH/MASH. While obesity, and more specifically VK2735, has driven significant investor enthusiasm, we believe VK2809 provides another meaningful opportunity in NASH/MASH. Indeed, we believe recent data for VK2809 highlights another potential best-in-class asset with a favorable efficacy (52 wk pbo adj. fibrosis benefit: 23% vs. 12% for approved competitor) and safety profile. 

Of note, the NASH/MASH market is in the early stages of development, but represents another potentially large market opportunity and we model peak WW sales of ~$1.0B (~$1.7B unadjusted). 

Valuation: Overweight with $105PT. Our price target is based on a DCF and includes risk adjusted peak sales of ~$4B for VK2735 (probability of success or PoS: 75%) and ~$1B for VK2809 (PoS: 65%). Risks include clinical, regulatory and commercial challenges.

Here are the pre-market movers at 8:59 a.m.:

Biden Vs. Trump On Marijuana: Where The Candidates Stand Heading Into The 2024 Election - Marijuana Moment

(WBA)  materially lowers guidance.

Here is the press release. 

From the Comments Section:

Dougie Kass

Theft and secular business threats.

To me the Walgreens problem is analogous to the disruption of linear TV by streaming.

If I was a betting man... oh, never mind:

* Republican Bob Good, the leader of The Freedom Caucus, lost his reelection bid in Virginia (not good on cannabis policy).

* Democrat John Curtis, a safe banking advocate, won the nomination for Utah Senator (to replace Senator Mitt Romney). 

* I remain short of  (XLF)

Goldman Sachs  (GS)  on bank stress tests and capital requirements:

Americas Banks: 2024 CCAR: SCBs move higher, underscoring uncertainty around steady state capital requirements

26 June 2024 | 10:23PM EDT

The Fed's 2024 CCAR stress test results from 6/26 were broadly worse than expected for the banks. We estimate Stress Capital Buffers (SCBs) of 3.3% on average across the group, up 30bps YoY, with SCBs now 10bps and 20bps above the 3 and 5-year averages. The YoY change in results was in large part driven by banks generating much lower pre-provision net revenue (PPNR) over the course of the test (PPNR for the largest banks fell by 9% YoY), as well as higher credit losses and provisions on both C&I and card, in particular. For the large banks, we believe the market will view the results as disappointing, although the lack of visibility into how test results are generated, and the volatility of the results from year to year, makes it difficult to determine if this year represents a permanent increase in capital requirements (especially after SCBs fell 50bps for the largest banks last year). Although most large banks saw a YoY increase in SCB, they still have excess capital today above their minimum requirements, and hence we expect most banks will keep capital return plans intact. These new stress capital buffers will replace the buffers from the 2023 CCAR test for the period of 4Q24-3Q25.

Shadd Dales and Anthony Varrell with The Dales Report. 

Let's go to the videotape:

Live Don Murphy Washington DC + Marijuana Stock Update (youtube.com)

Shadd and Anthony's videos are invaluable for those involved in cannabis equities.

I watch religiously.

* MSOS was yesterday morning's Trade of the Week

From yesterday:

Trade of the Week (Buy MSOS $7.49)

For the reasons below, my Trade of the Week is long (MSOS) :

Let's Get Chai!

On any weakness I plan to move to a very large position in cannabis.

The likely sequence of key catalysts that I see include:

* S3 rescheduling passage by October

* The Florida adult use referendum passes in November

* Custody and uplisting issues are resolved in the first half of 2025

As each of these events occur, the shares of cannabis companies should move progressively higher.

And, as mentioned in my industry position piece earlier this week on TheStreet Pro, the small market capitalizations and limited floats could create a buying frenzy in the space.

I don't want to sound hyperbolic, but a possible tripling in the share prices over the next few years seems a reasonable expectation as the industry becomes much more profitable, faces new geographies (of growth) and institutional buying/ownership finally becomes a reality.

Position: Long MSOS common (L) and calls (S), GTBIF (S), TSNDF (S), TCNNF (S), CURLF (S), VRNOF (S)

BY DOUG KASS JUN 21, 2024 3:16 PM EDT

Position: Long MSOS common (L) and calls (S)

BY DOUG KASS JUN 24, 2024 11:52 AM EDT

"Chart patterns are not the cause; they're the effect. Human behavior hasn't changed and isn't likely to change much in the future."

- Mark Minervini

Bonus - Here are some great links:

The Summer Rally Isn't Over Yet

What Does The Low VIX Mean For Stocks?

China Struggles

Gold May Continue to Climb

The S&P Heavyweight

AI Work Assistants Need a Lot of Handholding

The S&P Short Range Oscillator stands at 0.3% vs. -0.15%.

Morgan Stanley  (MS)  initiates Viking Therapeutics  (VKTX)  with an overweight and $105 price target.

Wolf Street howls about the Dollar/Yen.

From my friends at Miller Tabak:

"We are, however, raising our odds of a U.S. recession beginning within the next year from 10% to 15%. While still low, this is our first upgrade since 2022."

Wednesday, June 26, 2024

Housing is Sending a Warning to the Fed

It is time to worry about ongoing weakness in U.S. housing. Although prices continue to rise, the Case-Shiller index is now up 19.0% y/y, new construction is poor with starts (blue in Figure 1) averaging just 1.31 million between March and May, and May’s new housing sales disappointing by falling from 698,000 to 619,000. Prior to the pandemic, we wrote that there are only three leading economic indicators with a good record predicting where the U.S. economy is headed six to twelve months from now: the yield curve, new housing, and measures of investors’ taste for risk (which remain around average). Since 2022, we have warned readers that the yield curve, for now, is useless as an indicator because it cannot distinguish between a soft landing and a looming recession. This remains the case. Housing’s slump, however, should not be ignored.

Figure 1: Plummeting Housing Starts (blue) and 30-year Mortgage Rates (red)

Until now, it has been reasonable to dismiss housing’s weakness as a predictable response to higher interest rates. Nevertheless, housing had exhibited a modest recovery prior to March. We attribute housing’s previous resiliency to the excellent state of households’ balance sheets. These, however, while still solid, are starting to weaken and it is concerning that the slump has occurred while mortgage rates (red in Figure 1) have been largely stable. Households are showing signs of pulling back and the Fed’s restrictive policy stance is having a larger effect than it did a few years ago.

The key takeaway is that the Fed has less time to start cutting than we previously believed and, were it to keep rates above 5% well into 2025, it would risk a U.S. recession. The Fed still has ample time to reverse housing’s decline and the most likely scenario remains that it will start cutting this fall and that housing will quickly recover. We are, however, raising our odds of a U.S. recession beginning within the next year from 10% to 15%. While still low, this is our first upgrade since 2022.

* Early, today... 3:35 a.m.

Back shorting  (SPY)  $544.86 and  (QQQ)  $479.35 common (Trade of the Week).

I also added small to  (VKTX)  long at $48.55.