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DAILY DIARY

Doug Kass

Break In!

I am on the Microsoft  (MSFT)  conference call.

Management just guided Azure growth to below expectations and the share price has moved more than $23 lower from the post EPS price.

I have had a consistently critical view of the business media in the past and again today:

Some think I have been to critical.

I listened to the business media's "talking heads" who, without really spending much time reviewing the EPS release and with no knowledge of forward guidance, waxed enthusiastically as the share price rose right after the company's EPS release.

With the benefit of hindsight I was too nice in my last post and tweet (above) and with regard to these actors.

Position: None

My Tweet of the Day (Part Deux)

"Just one more thing."

- Lt. Columbo

Position: None

After-Hours Movers

As of 4:26 p.m.:

10-30-24-AHM-Screenshot 2024-10-30 at 4.26.35 PM
Position: None

Wednesday's Closing Market Internals

Closing Breadth

10-30-24-CB-Screenshot 2024-10-30 at 4.20.35 PM

S&P 500 Sectors

10-30-24-CSP-Screenshot 2024-10-30 at 4.21.20 PM

Nasdaq 100 Heat Map

10-30-24-CH-Screenshot 2024-10-30 at 4.21.01 PM

Nasdaq Advance-Decline Chart

10-30-24-CAD-Screenshot 2024-10-30 at 4.22.24 PM
Position: None

A Lot to Digest

There is too much to digest (EPS releases and conference calls) so I will have to wait until tomorrow!

Position: None

Board Meeting

I will be in my board meeting until 4:30 p.m.

Radio silence since then.

Position: None

From the GOAT of Quants (Jim Simons)

Position: None

Things I Did Today

* Another active trading sardine today, not an eating sardine day.

* Great for opportunistic traders, not so great for the buy-and-hold crowd.

* I added to my net short exposure.

At 2:15 p.m. the S&P Index is +10 4 handles in a day that has been volatile — providing more trading opportunities.

I continue to short rallies and cover a portion into dips.

Over the last four days I featured the deteriorating breadth — and called upon that statistic in justifying an expansion of my short profile.

Here is today's breadth: 

10-30-24-Breadth-1730312055922blob

Today's "things":

* Last night I shorted a number of large cap tech stocks on the gap following Google's  (GOOGL)  good results (highlighted by an acceleration in cloud).

* With S&P cash +14 handles I added to my short Index calls.

* Added to my  (JPM)  short at $225.17,  (BAC)  at $42.84 and  (XLF)  at $47.40.

* I pressed some more individual shorts in the rally.

Position: Long SPY common (S), QQQ common (S); Short JPM (M), BAC (M), XLF (M)

Pressing My Shorts

I pressed my shorts throughout the afternoon rally.

Position: None

More Tales From Nvidia: Questions to Ask

This is interesting. Nobody will care as long as Nvidia  (NVDA)  keeps beating and raising.

However, when the music stops, the questions will be asked.

I think it is counterintuitive as to why the music keeps playing.

It does not work, but these guys are so out over their skis, they all keep spending more money on the new part, thinking it will solve the problem. It can’t. It does the exact same thing, with more transistors. The approach does not work. Eventually they will collectively realize that and fatigue will set in and the rat race will stop. We are probably close as the new stuff gets into production and nothing changes, then the frenzy will back off.

From MacroStrategy Partnership:

Q3; Have you read the Apple research paper on LLM’s ability in logical reasoning?

A3. Yes, and it is devastating. LLMs have been improving at answering 8000 high school equivalent maths questions, from ChatGPT3 getting 35% right, to 4.o getting 95.3% right. But the Apple researchers thought this might be because the LLMs were trained on the test. So, they changed names and numbers in the questions, without altering the mathematical logic. The LLMs were 0.3-14.6% worse at answering. Then they added non-relevant clauses to questions, which didn’t change the logic of the questions either, and the LLMs were 17.5-65.7% worse at answering. The researchers concluded ‘Overall, we found no evidence of logical reasoning in LLMs’. 

Q1; Why are rising receivables at Nvidia a problem, if sales are rising?

A1. That is a fair question, but also one that could have been applied to Cisco going through 2000. Cisco’s accounts receivable were at 44% of quarterly revenue in October 2000, vs Nvidia at 47% for July 2024. But the key this for me today is that it is a huge increase in credit into an AI ecosystem, where no one apart from Nvidia is making any money. That’s just what happened to Cisco in 2000. Nvidia’s receivables have risen US$10.3bn in 18 months, while Ed Zitron estimates that the total revenue from all LLM AI applications today is around US$10bn. Open AI is set to lose US$5bn this year on US$3.7bn of revenue. In mid-2023, Datacentre managers were making exceptional returns renting out Nvidia H100 GPUs at US$8/hr. But now H100s rent for less than US$2/hr following an overbuild of capacity, and lower usage from crypto and from smaller LLM developers, who are now using open-source models and tweaking them rather than training from scratch. At sub US$2/hr it does not make economic sense to buy an H100 GPU and VC funding has dried up. If the ecosystem was healthy, Nvidia’s rising receivables would be sustainable. But in a deteriorating ecosystem for developers and data centres, Nvidia’s rising receivables are a red flag.

Position: Short NVDA (S)

Charting Breadth, Percent Movers, S&P 500 Sectors and Nasdaq 100

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Position: None.

Join Carley Garner, Stephen 'Sarge' Guilfoyle and Me at Noon!

Join me for the next live quarterly meeting at noon ET today.

I will talk with Carley Garner and Stephen Guilfoyle in a chat moderated by Jason Meshnick about the best ideas and strategies for year-end 2024.

Please leave questions and comments below for us to incorporate into our commentary. For the link and more:

https://pro.thestreet.com/market-commentary/thestreet-pros-live-quarterly-meeting-finding-the-post-election-winners-and-losers

Position: None.

Programming Note

I have a Street Pro event an noon and a board meeting between 3 p.m. to 4:15 p.m. today.

Position: None.

It Ain't Over 'Til It's Over

* Trading sardines not eating sardines...

In only 70 minutes the S&P Index has had more moves than a shortstop batting .110!

I made some small covers into the whoosh lower, but now (with S&P futures +14 handles) I am more aggressively expanding my short book.

This is a market for opportunistic traders and not for the buy and hold crowd.

Position: Long SPY common S; Short SPY calls M

Today's Trades

* Added to  (JPM)  short at $225.17,  (BAC) at $42.84 and  (XLF)  $47.40.

Position: Long SPY common S QQQ common S Short SPY calls M QQQ calls M

Shorting More Index Calls

With S&P cash +14 handles, I am shorting more Index calls.

Position: Long SPY common S QQQ common S; Short SPY calls M QQQ calls M

Boockvar on Jobs, GDP

From Peter Boockvar:

ADP jobs rundown/Slicing and dicing Q3 GDP

ADP said the US private sector added a net 233k jobs in October, about double the estimate of 111k and vs 159k in September which was revised up by 16k. There was almost no job growth for small businesses with employees under 50 but jumps for medium and large companies.

The service sector added 211k with education/health services again leading the way with a rise of 53k. The trade/transportation/utilities sector added 51k, well above the 14k seen last month and considering the sluggish pace of trade and transport, maybe it was mostly in the utility side related to data center electricity needs, just a guess. Leisure/hospitality added 37k, a similar amount seen in September. The professional/business services category contributed 31k jobs and information added 7k. Financial services hired a net 11k.

On the goods side, construction continues to be the area of hiring strength and being helped by the Chips Act and IRA as these manufacturing facilities are getting built. Also, data center buildouts are in need of construction workers. The hiring is certainly not coming from the commercial real estate sector relatively speaking. Manufacturing, the area of the economy still in recession, shed 19k jobs.

On the pay side, wages for ‘job stayers’ rose by 4.6% y/o/y vs 4.7% in the month before. For ‘job changers’, pay was up 6.2% y/o/y vs 6.6% in September. All face tougher comps vs last year and still running well above pre Covid trends.

Bottom line, the hurricanes and strikes did not negatively impact the ADP jobs data because they are still on payrolls and that is what ADP is measuring. The BLS will have a different calculation take on Friday. Either way, I cannot reconcile the strong payroll growth as seen here with all the company anecdotes I’m hearing, especially TriNet last week and the 3 yr high in continuing claims. Also, in last week’s US PMI, the employment component of the services index was below 50 “and often linked to the non-replacement of leavers rather than layoffs.”

But, it doesn’t matter what I think, the bond market is taking the headline figure at face value and yields are at the highs of the morning with the 10 yr at 4.25% and the 2 yr yield now at 4.13%, one bp from the highest in 3 months.

With regards to Q3 GDP, it was about as expected at 2.8% and driven by a 3.7% rise in consumption which added 246 bps to that figure. Within spending was a jump in durable goods spending which added 60 bps to GDP, with almost half being motor vehicles. With spending on goods sluggish elsewhere, particularly with the home, I can’t explain this overall strength. Spending on services added 120 bps which is easier to understand. The other area of GDP growth was from government spending, contributing 85 bps to GDP with national defense making up 50 bps of that.

Elsewhere, there was no growth. Trade was a detraction of 56 bps, inventories subtracted just under 20 bps and gross private domestic investment was flat. The only bright spot in this last category was 56 bps added by spending on equipment which I’d guess is related to AI data center buildouts. There was no contribution from spending on intellectual property as AI spend is stealing from other CapEx. Residential construction took off 20 bps from GDP.

The price deflator of 1.8% was one tenth less than expected but core PCE at 2.2% was one tenth above.

Bottom line, I’ve argued that the US economy is being held on its shoulders by higher income spending, AI CapEx and government spending and incentivized manufacturing facility spend. And this GDP report follows that with little growth othewise, though it still feels like a 1.5% type economy when I read through/listen to all the earnings reports and calls.

Position: None.

My Tweet of the Day

Position: None.

Sickest Chart of the Day

Position: Short DJT calls (VS)

Boockvar on Growth, Germany, Mixed Earnings and Rental Rates

From Peter Boockvar:

Slight but still growth/Earnings comments still a mixed bag/Rental rates

Ahead of the US Q3 GDP figure at 8:30am est, the Eurozone saw a better than expected Q3 performance with a q/o/q gain of .4%, twice the estimate and higher by .9% y/o/y. Part of the increase was a better than expected print from Germany but only after their Q2 figure was revised down. It really was a slightly above estimate number from France and Spain that helped while Italy saw no growth vs the estimate of a .2%.

Germany also said that in October the number of unemployed jumped by 27k which was about double the forecast of up 15k. The move in German bunds first responded up in yield on the GDP print but fell back down on the details and with this soft jobs data. Their unemployment rate was 6.1%, holding to match the highest since October 2020.

Also out was the October Eurozone Economic Confidence index which fell to 95.6 from 96.3 which is below the estimate of no change and continues to flat line. Manufacturing weakened further while consumer confidence and those in retail and construction were less negative. Services continue to be the standout, though unchanged m/o/m in positive territory. Absorbing all the European data has the euro up vs the dollar but stocks are down across the region due to some disappointing earnings like from BASF.

Intraday German Bund move

boock10301

German Unemployment Rate

boock10302

Shifting to another slew of earnings.

From Alphabet/Google:

Sundar Pichai wasted no time talking about AI going right at it after saying "Q3 was another great quarter." Cloud growth was strong at 35% y/o/y with operating margins at 17%. Search saw sales rise by 12% y/o/y "led by growth in the financial services vertical due to strength in insurance followed by retail." I'm guessing with the hurricanes and the ever rising cost of insurance, that helps to explain this particular strength. YouTube ad revenue grew by 12% y/o/y. They also got a lift from election ad spending "which was a little bit more pronounced in YouTube ads."

Their CapEx in the quarter was $13b, "reflecting investment in our technical infrastructure with the largest component being investment in servers, followed by data centers and networking equipment. Looking ahead, we expect quarterly CapEx in the 4th quarter to be at similar levels to Q3." Keep in mind too that the company is mostly capitalizing these expenses rather than immediately expensing them so that is helping the earnings line item. On the other hand, an elevated level of depreciation expense will be with them as they amortize this cost over many years.

From McDonald's:

"On our last call, we shared the QSR sector had meaningfully slowed in many of our markets with industry traffic declining in several major markets and that consumers, especially those in the low-income category were choosing to eat at home more often. This trend continued in the third quarter. QSR traffic has remained under pressure reflecting industry wide challenges. And while we anticipated a challenging environment in 2024, our performance so far this year has fallen short of our expectations."

From Chipotle, which is seeing faster sales growth than its QSR peers, in part because of its bigger portion sizes I believe where a $1 goes further:

Their 6% comp growth saw half from transaction comp growth and likely the rest via price. "The momentum in the business has continued into the fourth quarter, with accelerating transaction trends and we are maintaining our full year guidance of mid to high single digit comps."

On their consumer, "We're still seeing strength across all income cohorts, even in this competitive environment, which gives us the belief that we are still delivering extraordinary value for the consumer...Again, all income cohorts, even low income, are showing positive signs of strength." I think it's because of the value they provide.

On their costs, "we're seeing low single digit inflation on cost of sales" and they are seeing "mid single digit on labor" which includes the 20% rise in wages in California.

Sticking with the restaurant business, from Cheesecake Factory whose comps grew by 1.6% y/o/y:

"restaurant comp sales and traffic again meaningfully outperformed the industry, underscoring the strength and consistency of consumer demand for our brand and our ability to capture market share."

On the comp contribution it was all price, "Pricing in the quarter was 4.5%, mix was a negative 2.1%...And then traffic was a negative .8%, but really that was, I would say, related to July. I think what everybody saw, we were improving throughout the quarter, flattish in August and then positive traffic in September."

They believe their strong execution, "all time high net promotor scores" and food quality is why they are hanging in there better than many of their restaurant peers.

More on the consumer from Visa, that is benefiting from the secular shift to digital/mobile/card payments and away from cash:

"US payments volume grew 5% and international payments volume grew 10%." Also, "cross border volume excluding intra-Europe was up 13% y/o/y. Process transactions grew 10% y/o/y."

On the US consumer, "Consumer spend across all segments from low to high spend has remained relatively stable to Q3. Our data does not indicate any meaningful behavior change across consumer segments from last quarter."

Overseas, Asia-Pacific lagged "primarily due to the macroeconomic environment, most notably in Mainland China."

From SoFi:

"We continue to improve credit performance in Q3 and are firmly within the life of loan guidance we've previously provided. As we've shared in our last call, delinquencies peaked in March of 2024. Since then, we've continued to see improvements q/o/q."

In terms of who their customer is, "Our personal loan borrowers' weighted average income is $164,000 with a weighted average FICO score of 746" so obviously pretty good.

From Stanley Black & Decker:

"As we look at our markets in aggregate today, they remain relatively stable on the surface. That said, some continue to be pressured by the continuation of mixed consumer trends, especially related to housing, as well as weak automotive production backdrop."

From CDW's press release today, the major distributor of everything tech:

"Persistent economic uncertainty and growing complexity in the technology landscape resulted in elongated customer decision making and delays in projects."

Apartment List released its October rent report and new lease rates fell by .7% m/o/m "as we get further into the slow season for the rental market." Rental rates are also down .7% y/o/y. Also, "On the supply side of the rental market, our national vacancy index ticked up to 6.8%, the highest reading since the onset of the pandemic...The third quarter of 2024 saw the most new apartment completions for a single quarter in 50 years, and with more than 800k units still in the construction pipeline, the supply boom has runway to continue into 2025."

Still, the sunbelt is where most of the supply is coming from and where the rental weakness is most pronounced, such as in Austin, Raleigh and Jacksonville. The Northeast and Midwest are still seeing positive rent growth. This data does not include renewal rates which are running at around 3% growth, give or take.

This all said by them, once the construction is complete of those already in process, we've seen a sharp slowdown in the pace of brand new builds and that vacancy rate sometime late next year and into 2026 should start falling again.

Finally, the MBA said the average 30 yr mortgage rate jumped by 21 bps w/o/w to 6.73% coincident with the rise in the 10 yr yield. Purchases though did rebound by 5% after 3 weeks of declines but refi's fell again, by 6.3% w/o/w. We know affordability remains the big challenge when it comes to buying a home and DR Horton reminded us again of that on the new build side.

Average 30 yr Mortgage Rate

boock10303
Position: None.

From the Street of Dreams: Not Turning 'BAC' My Short

* Always pay attention to Warren Buffett...

I remain short Bank of America  (BAC) .

JPMorgan has removed BAC from its Focust list due to regulatory concerns.

JPMorgan analyst Vivek Juneja says Bank of America's quarterly filing revealed two new regulatory matters -- an anti-money laundering investigation and the possibility of regulatory actions related to this, and a Consumer Financial Protection Bureau inquiry into Zelle fraud, which may result in an enforcement action or the bank pursuing litigation. 

The former is more significant and follows a recent formal agreement between the Office of the Comptroller of the Currency and Wells Fargo  (WFC)  for anti-money laundering deficiencies, the firm contends. JPMorgan believes the two key issues are how much this will add to Bank of America's expenses and whether there will be any limitations imposed. Until regulators file formal actions, this issue will remain an overhang and likely to add a little pressure to the stock, in addition to the issue of potential further stock sales by Warren Buffett, adds JPMorgan. As such, it removed Bank of America from its Analyst Focus List while keeping an Overweight rating on the name.

Position: Short BAC (M)

Upside/Downside Moves in the Premarket

Upside:

-NRDS +28% (earnings, guidance; approves new $25M share buyback program)

-RDDT +21% (earnings, guidance)

-OMCL +9.9% (earnings, guidance)

-ENVX +9.2% (earnings, guidance)

-SHAK +8.1% (earnings, guidance)

-UIS +7.8% (earnings, guidance)

-EXEL +6.7% (earnings, guidance)

-GOOGL +6.6% (earnings)

-CAKE +6.2% (earnings, guidance)

-EAT +6.1% (earnings, guidance)

-JKS +6.0% (earnings, guidance)

-XPO +5.6% (earnings)

-ATOM +5.1% (earnings)

-TTI +5.1% (earnings)

-ITW +4.4% (earnings, guidance)

-PRTS +4.4% (earnings, guidance)

-UDMY +4.0% (earnings, guidance)

-PSN +3.5% (earnings, guidance)

-PTCT +2.6% (US FDA accepts Translarna NDA Resubmission for treatment of nonsense mutation Duchenne muscular dystrophy (nmDMD))

-VFS +2.6% (signs MoU to receive at least $1B in funding from group led by Emirates driving company)

-V +2.4% (earnings, guidance)

-EXC +2.3% (earnings, guidance)

-GTES +2.2% (earnings, guidance)

-VRSK +2.2% (earnings, guidance)

-VMC +1.9% (earnings, guidance)

Downside:

-QRVO -20% (earnings, guidance)

-SPRO -20% (Phase 2a proof-of-concept study of SPR720 for the treatment of Nontuberculous Mycobacterial Pulmonary Disease (NTM-PD) did not meet its primary endpoint, based on planned interim analysis of 16 patients)

-THRY -17% (earnings, guidance; prices upsized 5.715M shares at $14.00/shr for gross proceeds ~$80M)

-WING -15% (earnings, guidance)

-OI -14% (earnings, guidance)

-LLY -11% (earnings, guidance)

-AMD -8.5% (earnings, guidance)

-CRTO -8.4% (earnings, guidance)

-TXG -7.6% (earnings, guidance)

-SAGE -7.0% (earnings)

-GO -6.7% (prelim Q3 earnings, guidance)

-FSLR -6.6% (earnings, guidance)

-DVA -5.9% (earnings, guidance)

-BGFV -4.8% (earnings, guidance)

-VRNS -4.8% (earnings, guidance)

-CMG -3.8% (earnings, guidance)

-CZR -3.8% (earnings)

-WERN -3.4% (earnings, guidance)

-KHC -3.1% (earnings, guidance)

-OSK -2.9% (earnings, guidance)

-CAT -2.2% (reports earnings and dealer statistics, guidance)

Position: None.

Exchange-Traded Fund Action Before the Bell

Charts from 8:14 a.m.:

kassetf1
kassetf2
Position: None.

Charting the Big Percentage Moves in the A.M.

Chart from 8:26 a.m.:

kassprechart1030
Position: None.

Lighting Cannabis' 'God Candle'

From value-added "The Dales Report: Stock Market Coverage For Today's Investor":

Yesterday, the cannabis world felt the shockwave as Trulieve’s stock ($TCNNF) took a “god candle” dive in the final hour, ending down nearly 12%. This sudden plunge left many scratching their heads, especially since Trulieve had shown relative strength among its peers, with Amendment 3 seemingly coasting toward a victory. Governor Ron DeSantis has thrown taxpayer dollars into the anti-cannabis campaign, despite polls showing the people’s support. As Hirsh Jain wisely noted in a space last night, the polls that actually matter haven’t budged, no matter how loud the opposition gets. All eyes are on today’s trading session—this could get interesting.

We march.

Position: None.

I Will Buy Viking in the Mid-Sixties This Week*

* If it falls in sympathy with Lilly 

Following this morning's Eli Lilly  (LLY)  miss and poor guidance I would expect Viking Pharmaceuticals'  (VKTX)  shares to get hit - as VKTX is seen as a possible buyout candidate for the company.

If the stock moves toward $65 I think it can be purchased as it reports progress on its drug on Sunday.

I expect that report to be positive.

Position: None.

Recommended Reading

Knowledge@Wharton... "What Lies Ahead for the Federal Debt, Interest Rates and the U.S. Economy."

Position: None

My Financial Shorts

Financials, banks in particular, were red in yesterday's sea of green.

I have recently shorted  (JPM) (BAC)  and  (XLF) .

I plan to expand these shorts on any strength.

Position: Short JPM (M), BAC (M), XLF (S)

Good Stuff From Q!

Position: None

Ludacris Forecast

* Yeah, yeah, yeah, yeah...

My Ludacris Forecast is that St. Joe Co.  (JOE)  is acquired by private equity.

That said, on a fundamental basis, JOE is approaching a very attractive reward vs. risk opportunity now.

What's your fantasy?

Position: Long JOE (M)

Charting the Technicals

“The stock market is the story of cycles and of the human behavior that is responsible for overreactions in both directions.”

- Seth Klarman

Bonus — Here are some great links:

7 Reasons Why the Bull Market Is Alive and Well

Amazon, Apple and Bitcoin

Chart of the Day

The Casino Market

Technical Tuesdays

Position: None

Tweet of the Day

Position: None

My Tweet of the Day

Position: None

Last Night's Trading

Last night, as big tech rallied bigly following Google's  (GOOGL)  beat, I selectively shorted some large-cap tech names (not naming names to protect the innocent).

I also reduced my long  (QQQ)  common position somewhat.

Position: Long QQQ common (S); Short QQQ calls (S)
Doug Kass - Watchlist (Longs)
ContributorSymbolInitial DateReturn
Doug KassVKTX4/2/24-31.72%
Doug KassOXY12/6/23-14.53%
Doug KassCVX12/6/23+10.81%
Doug KassXOM12/6/23+13.02%
Doug KassMSOS11/1/23-22.80%
Doug KassJOE9/19/23-14.64%
Doug KassOXY9/19/23-25.97%
Doug KassELAN3/22/23+37.02%
Doug KassVTV10/20/20+64.63%
Doug KassVBR10/20/20+77.10%