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DAILY DIARY

Doug Kass

Wednesday's After-Hours Movers

 As of 4:21 p.m.:

11-6-24-AHM-Screenshot 2024-11-06 at 4.21.22 PM
Position: None

Wednesday's Closing Market Internals

Closing Breadth

11-6-24-CB-Screenshot 2024-11-06 at 4.18.40 PM

S&P 500 Sectors

11-6-24-CSP-Screenshot 2024-11-06 at 4.18.53 PM

% Movers

11-6-24-CM-Screenshot 2024-11-06 at 4.20.03 PM

Nasdaq 100 Heat Map

11-6-24-CH-Screenshot 2024-11-06 at 4.19.22 PM
Position: None

Tweet of the Day (Part Deux)

From Charlie:

Position: None

Things I Did Today

* Markets advanced dramatically from the opening bell.

* Equities diverged from bond prices which got schmeissed  with  (TLT)  -$2.70 and yields up by about 15 basis points on the 10-year Treasury.

Breadth was surprisingly narrow (3/1 on the NYSE, 2/1 on Nasdaq) while financials and technology soared, as multi-national companies and rate-sensitive housing-related stocks foundered:

11-6-24-Breadth-1730922506049blob

At 2:45 p.m. the S&P Index is +141 handles — at the day's highs..

Here are today's "Things":

* Shorted  (SPY)  at $590.14 and  (QQQ)  at $501.58.

* Sold out very small, tagends of positions in seven cannabis stocks — last night I sold the balance of my medium-sized  (MSOS)  at about $6.50.

* I covered all five of my homebuilder shorts right after the opening — when the equities were down by, on average -$10/share.

* Purchased more Boeing  (BA)  at $144.85.

* Shorted more Nvidia  (NVDA)  at $142.66.

* Shorted more Tesla  (TSLA)  at $286.11.

* Covered my  (YUM)  short at $131.77.

* Shorted  (JPM)  at $141.01.

* Shorted  (MS)  at $131.55.

* Covered  (POOL)  short at $362.36.

Position: Long BA (S); Short SPY common (S/M), QQQ (S/M), NVDA (S/M), TSLA (S), JPM (S/M), MS (S)

Programming Note

I have a research call from 1:30 p.m. to about 2:15 p.m.

Radio silence.

Position: None

Howling About Higher Interest Rates

Wolf Street howls about higher interest rates.

Position: None

AI Tweet of the Day

Position: None

Adding to Boeing on Weakness

I have added to Boeing  (BA)  throughout the morning's weakness ($144.89).

Position: Long BA (S)

Wednesday Morning Market Internals

Volume

- NYSE volume 124% above its one-month average.

- NASDAQ volume 37% above its one-month average.

- VIX: down 21.23% to 16.14.

Breadth

11-6-24-CB-Screenshot 2024-11-06 at 10.42.29 AM

S&P 500 Sectors

11-6-24-CSP-Screenshot 2024-11-06 at 10.42.39 AM

% Movers

11-6-24-SP-Screenshot 2024-11-06 at 10.43.35 AM

Nasdaq 100 Heat Map

11-6-24-Heat-Screenshot 2024-11-06 at 10.43.01 AM
Position: None

From LY on the Price Action

Position: None

Covering More of This Short

More housekeeping.

I am covering some more  (KO)  $63.37 (-$2) as there are more attractive shorts around — with a better risk/reward.

Position: Short KO (VS)

Out of the Pool!

Another housekeeping item.

I have covered the balance of my  (POOL)  short at about $360 (-$9.30 today).

Position: None

Housekeeping Item

I covered my  (YUM)  short at $131.76 (-$2.90 today) only because I see better shorts with superior downside risk relative to upside.

Position: None

Shorting More of These 2 Names

Shorted more  (JPM)  at $241.20 and  (NVDA)  at $144.43.

Position: Short JPM (M), NVDA (M)

Bond Market Update

Though ignored at this moment in time, bond prices are getting schmeissed (and yields are rising):

* The yield on the 1-year U.S. Treasury bill is +4 bps to 4.312%.

* The yield on the 10-year US Treasury note is +19 basis points to 4.473%.

* The yield on the long bond is +22 basis points to 4.666%.

Look for the homebuilders to get hit today.

Out of Pot

Sold my tagends in all seven individual cannabis names.

Position: None.

Covered Homebuilder Shorts

I have covered all my homebuilder shorts on the whoosh lower. 

Position: None

ETF Action in the Premarket

Charts from 8:29 a.m.:

etf2
etf1
Position: None.

Charting the Market Moves Before the Bell

Chart from 8:46 a.m. ET:

1
Position: None.

Wednesday's Premarket Movers

Upside:

-SONN +30% (announces Issuance of U.S. Patent covering a Variant IL-18 Incorporated into Two Novel Immunotherapeutic Drug Candidates, effective until June 2044)

-RVLV +21% (earnings, guidance)

-QLYS +19% (earnings, guidance)

-TMCI +16% (earnings, guidance)

-CRL +14% (earnings, guidance)

-GMED +14% (earnings, guidance)

-MRCY +13% (earnings)

-LDI +12% (earnings, guidance)

-MGNX +12% (earnings)

-CVS +9.0% (earnings, guidance)

-PGY +7.8% (raises $1B across two new personal loan and auto ABS deals)

-WSC +7.0% (reportedly activist Toms has built a stake and will push for a strategic review)

-PRGO +6.5% (earnings, guidance)

-RYAM +6.3% (earnings, guidance)

-VERX +5.7% (earnings, guidance)

-GO +5.6% (earnings, guidance)

-JLL +3.3% (earnings)

-PAYS +3.1% (earnings, guidance)

-PERI +3.0% (earnings, guidance)

-CTKB +2.9% (earnings, guidance)

-RPRX +2.8% (earnings, guidance)

-MASI +2.3% (earnings, guidance)

Downside:

-EXAS -22% (earnings, guidance)

-AVNW -18% (earnings, guidance)

-SMCI -17% (earnings, guidance)

-ODP -13% (earnings, guidance)

-EOSE -12% (earnings, guidance)

-SWIM -9.6% (earnings, guidance)

-BGS -7.7% (earnings, guidance)

-BCO -7.6% (earnings, guidance)

-IRBT -7.3% (earnings, guidance)

-CPNG -6.5% (earnings)

-BBAI -6.3% (earnings, guidance)

-WTTR -5.7% (earnings)

-TRVG -5.6% (earnings)

-NCMI -5.5% (earnings, guidance)

-RARE -5.4% (earnings, guidance)

-KTCC -4.5% (earnings, guidance)

-LUMN -4.2% (earnings, guidance)

-NVAX -3.2% (enters settlement with UK Health Security Agency over Covid vaccine supply agreement)

Position: None

Boockvar on Stocks, Rates, the Fed and Earnings

From Peter Boockvar:

Higher interest rates and stocks are about to battle it out and why is the Fed likely cutting rates tomorrow?/Earnings comments

We of course wait to see who will win the House as the outcome will determine the fate of the major legislative deadline of the expiring Trump tax cuts at the end of 2025. I'll say again, the high US budget deficit is because of the spending side which is about 23% of GDP vs the tax revenue component which typically hovers around 17% regardless of tax rates. Either way, at best, tax policy likely stays the same as the low hanging tax cut fruit in 2017 is no longer here.

On the potential for a ramp up in the tariff war, I worry very much about a scattershot approach.

M&A bankers are happy today as are all those companies who have been looking to do deals and those industries like financials who will see an easing of the regulatory pressure. For those CEOs that were blaming the election for hesitancy for capital investment and/or traffic trends, we'll now see to what extent that changes.

For stocks, the key from here is at what point does this rise in interest rates matter as the 10 yr yield is approaching 4.50% and the S&P 500 now trades at 24x 2024 earnings estimates. By the way, the 2 yr inflation breakeven is jumping by 14 bps this morning to 2.52%. The 5 yr breakeven is higher by 16 bps to 2.49%.

As for the Federal Reserve, we heard a lot before the first rate cut in September from Jay Powell & Co about needing 'confidence' that inflation was falling to target in a sustainable fashion in order to start cutting rates. While in the coming months the inflation stats could continue to disinflate, in light of all of the above can they really have 'confidence' that inflation will stay down in light of the potential economic and market reaction to the election, among other things? I wouldn't think it's even possible to have that level of confidence that should trigger a rate cut tomorrow, especially after going 50 bps in September. They always have December, and 6 weeks after that, and another 6 weeks after that, etc...to decide.

As we know rents are a big part of CPI, here is what AvalonBay Communities said yesterday and who does not have much sunbelt exposure where most of the rent pressure is taking place:

"during our mid year earnings call, I mentioned the possibility of a reaccleration in asking rent and rent change given softer comps from Q4 2023. We're now starting to see that trend come to fruition...asking rent growth during the year has followed traditional seasonal curves and outperformed our experience throughout 2023. Recently, the level of outperformance has widened, and as of November 1, the average asking rent for our same store portfolio was approximately 3% greater than the same date last year with the East Coast roughly 4% higher and the West Coast above 2%. The higher average asking rent will flow through to improved rent change, particulary for new move-ins as we look forward. Currently we're forecasting rent change in November to be stronger than October and increase further as we move through December."

I will reiterate my belief again that we are NOT magically going back to a 1-2% inflation rate and STAYING there. Inflation volatiity is the new normal.

With another jump in mortgage rates to 6.81% according to Freddie Mac for the average 30 yr term, purchase applications fell 5.1% w/o/w and refi's were down by 18.5%. The Federal Reserve needs a gut check.

Regardless of all of the above, here are the notable earnings call comments.

Selling semiconductor chips outside of the AI ecosystem is still tough. From Microchip Technology:

"we continue to navigate through an inventory correction that's occurring in the midst of significant macro weakness for many manufacturing businesses, especially those in the industrial end market."

"All regions of the world and most of our end markets exhibited varying degrees of weakness. The exceptions were aerospace and defense and the AI subset of data center. Our business in Europe, which is concentrated in the industrial and automotive markets, was particularly weak with revenue down almost 22% on a sequential basis. Our broad base of customers continue to manage their inventory tightly and adjust their purchasing plans in the face of a weak macro environment for manufacturing. High interest rates, inventory in their channels, very short lead times for our products and an uncertain business outlook."

"This combination of factors we believe is driving lower consumption and continued inventory destocking as well as reductions in target inventory levels at multiple levels, at our direct customers, at contract manufacturers and distributors who buy from us, at our indirect customers who buy through our distributors and in many cases at our customers' customers."

From Sensata Technologies, a maker of electronic components to the auto sector, among others, said:

"both automotive and heavy vehicle off-road markets decreased approximately 5% y/o/y with further erosion likely in the fourth quarter." They are also losing market share in China as the large multinational auto makers are losing share to the local OEMs.

"Mix in Europe was favorable as ICE vehicle production remains more robust than originally forecasted. Strong content per vehicle in North America, driven by positive platform mix contributed to solid market outgrowth and other Asian markets such as Korea continued to perform and outperform."

The guidance though was the issue, "Looking ahead to Q4, based on our fill rates, discussions with customers and current inventory levels on hand at OEMs and on dealer lots, we believe it to be highly likely that third party forecasters will make further in-quarter downward revisions to production forecasts."

These tech components follow similar ones from NXPI and Lattice.

To the consumer from Restaurant Brands, the owner of Burger King, Popeye's and Tim Horton's:

"Our teams and franchisees are doing a nice job navigating difficult macro and competitive environments in the US, Canada, and many of our international markets."

Overall comps were flat in the quarter but "We've been encouraged to see the business accelerate in October with consolidated comparable sales up low single digits, led by improvements in international, Burger King and Popeyes."

With Burger King US, comps fell .4% and "Sales were softer than we'd like this quarter, and were impacted by a tough consumer environment over the summer."

With Popeye's, comps fel 3.8%. "In a more value sensitive environment this quarter, Popeye's calendar was missing some of the offers consumers were looking for, and this resulted in softer comps."

From Hugo Boss:

"A quarter characterized by revenue improvements despite ongoing external challenges due to weak consumer sentiment." And they mentioned "persistent macroeconomic uncertainty."

They mentioned particular challenges in China, "where subdued consumer confidence had an even more adverse impact on domestic consumption as compared to Q2."

Position: None

Cannabis Is Uninvestable Over the Next 3-6 Months

* Last night's failure to pass Amendment 3 in Florida is a powerful blow to the near-term investment case for cannabis equities.

* As noted in our Comments Section, it became clear early on in the evening that the Florida voting that Amendment 3's passage (60% of the votes were required) was in jeopardy and I sold the balance of my  (MSOS)  long position at around $6.50/share during the evening trading session.

* Fortunately, as I grew skeptical of Amendment 3's passage, I had previously sold down most of my individual cannabis names and much of my MSOS long (moving from Very Long to Medium sized) in late October (on the "technical breakout to the upside") as retail (absent uplisting and custody resolutions) is not equipped to sustain an upside move).

* I am now left with very small company holdings (representing, in dollar terms, less than five percent of my original and large exposure to the sector).

* I will likely sell out of the tagends of my seven individual cannabis stock holdings today when the markets opens this morning.

* The singular positive catalyst is now the delayed DEA hearing (rescheduling)  and there is not enough retail interest to support maintaining the current level of the share prices of cannabis equities.

* Cannabis stocks have longer-term merit but a vicious cycle of difficult and uncertain industry operating conditions, bankruptcies, the absence of a new class of (institutional) buyers and a general disenchantment surrounding the sector likely lies ahead.

* The largest cannabis ETF (MSOS) is the "tail that wags the cannabis dog" — its large size relative to the illiquid trading of its cannabis constituents poses a current and imposing risk.

* The worst case is that an extended period of sizeable and steady redemptions (of the largest industry ETF, MSOS) could overwhelm the individual securities' prices (that lack liquidity)  this risk can now be described as "non trivial."

Two weeks ago I sold most of my individual cannabis investments and quite a lot of my MSOS exposure (moving from very large to medium sized as the exchange traded fund rose to $8/share). My rationale for selling at this time was that there was no change in industry fundamentals or evidence of improving legislative inroads.

I had concluded that the rally I sold into was "technically based" and was a chance to reduce exposure: 

The Prudent Thing to Do

It is unclear why cannabis is experiencing such strength today.

The next catalyst is a week from Tuesday — in which Amendment 3 (adult recreational use) in Florida is voted upon.

The polls suggest passage with about 65% in favor (60% is required for passage).

With gains of close to +10% and (MSOS) trading at the day's high of $7.78, the prudent thing is to take some profits, which is what I am doing.

I will add back on weakness.

By Doug Kass Oct 22, 2024 3:19 PM EDT

Last week I grew less optimistic about the passage of Amendment 3 in Florida  just as the DEA hearing was delayed (another potential blow to the cannabis industry): 

While It Is Likely That Amendment 3 Passes, It Is Now Less Than a Certainty

A combination of Florida Governor DeSantis' increasingly forceful objections to Florida's Amendment 3 (allowing adult recreational use of cannabis) and a flood of new contributions (aimed against passage) when combined with Florida Congressman Byron Donalds' call to reject the Amendment has likely reduced the chance of passage somewhat and lessened the positive impact of former President Trump's endorsement of Amendment 3.

As I noted in my Diary, most polls had a "yes" vote with about 65% of the vote (60% is necessary for passage of recreational cannabis in the State).

My guess is that it is now a few percent lower — making what was a "sure bet" a week or two ago less likely (but still favoring odds of passage).

Then there are the issues of timeline (a likely six months until implementation) and, if passed, how the legislation will be worded.

The next meaningful catalyst for cannabis will be the December DEA meetings and testimony. If rescheduling is approved, there is probably another six months before its implementation as well.

Finally, I have been skeptical with custody and institutional ownership issues still unresolved, whether the retail community can sustain much higher prices for cannabis equities even if Amendment 3 passes.

These are the likely messages and potential headwinds being told by the lackluster trading of (MSOS) over the last week or so.

Position: Long MSOS (M); Short MSOS calls (S)

By Doug Kass Oct 29, 2024 7:30 AM EDT

Finally, in yesterday's My Tactical Strategy For Cannabis I again reemphasized why I was concerned that the bullish consensus expectations that Amendment 3 (adult cannabis use in Florida) could be overly optimistic:

My Tactical Strategy for Cannabis Today

* I believe passage of a key Amendment in Florida is likely but less likely than consensus expectations.

* Should Amendment 3 pass, I expect a more muted response than most expect.

* Cannabis equities are investments and not trades.

After a poor start investing in cannabis a few years ago, we have done well investing and trading the space since 2022.

Today is a critical day for cannabis, as Amendment 3 (which will allow for adult recreational use in Florida - I just voted for it!) is on the ballot.

With a large population base and a substantially larger number of tourists who visit Florida annually, it is widely assumed that Amendment 3 will pass.

The various polls suggest between 63% to 65%. A minimum of 60% is needed for passage.

Gov. DeSantis' very vocal and ubiquitous TV advertising pitches against passage suggest to me that the consensus expectation of a 3 to 5 percentage point plurality (vs. the threshold of passage of 60% might be overstated).

I am less optimistic than the consensus and it is my view that odds favor passage of Amendment 3 but it could be a very close vote.

Importantly, even if the Amendment is passed, I believe expectations of a substantial gap higher in the space are too optimistic. There is simply not the "buying power" of retail to sustain a meaningful cannabis industry share price advance.

And, with the Drug Enforcement Administration meeting on rescheduling being delayed recently — the set up for the sector is sub-optimal.

After having sold the last blast higher (as (MSOS) traded at around $8/share) I recently began to repurchase MSOS in the $6.60 level following the DEA hearing delay. Here's what I wrote at the time:

Cannabis News: An Opportunity to Buy?

The delay in the DEA hearing was greeted negatively late yesterday:

DEA Marijuana Rescheduling Hearing Delayed Until 2025, Agency Judge Rules - Marijuana Moment

This should not be surprising considering the legislative and legal disappointments over the last few years that the cannabis industry has faced.

However, I don't view this as negatively as I see it simply as an administrative move to determine the standing of the parties that are appearing.

Basically the judge wants to be sure that the right witnesses for the meeting are approved and the wrong witnesses are not.

Accordingly, I will take advantage of the recent weakness to build back up my cannabis holdings.

Hopefully this is a golden opportunity right at attractive prices right before Tuesday's passage of Amendment 3 in Florida (adult recreational use).

Position: Long MSOS (M/L); Short MSOS calls (S)

By Doug Kass Nov 1, 2024 7:30 AM EDT

Bottom Line

Analysts and the Twittersphere are very excited that passage of Amendment 3 will launch cannabis stocks on a sustained move higher.

I am fearful that the vote will be far closer than optimistic consensus expectations.

I am also less sanguine for a number of reasons including a likely two-month delay in the rescheduling decision and the recent advance in cannabis share prices.

More importantly, until custodial issues make institutional ownership easier, the retail community of investors/traders (who have suffered monumental losses in the last several years) are not likely capable of a sustaining a durable move higher in cannabis stocks. They just don't have the fire power.

For these reasons (and others) I believe cannabis equities are investments and not trades.

By Doug Kass Nov 5, 2024 10:00 AM EST

Bottom Line 

At best, the outlook for cannabis stocks over the next six months is subpar.

At worst, I am now fearful that the (non trivial) possibility of a vicious cycle of MSOS redemptions (the tail that wags the industry's dog) may lead to new lows in cannabis securities.

I sold out the balance of my MSOS long (medium sized) at about $6.50/share last night when it became clear, in the early Florida polling results, that Amendment 3 would not likely pass.

Having sold more than 95% of my industry holdings, I am down to very, very small positions in seven individual cannabis equities, which will be sold this morning.

Position: Long GTBIF (VS), TSNDF (VS), GLASF (VS), CURLF (VS), VRNOF (VS), AYRWF (VS), TCNNF (VS)

My Last Comment About the Election

 * You can't be for democracy only if your side wins.

* It is time to honor the collective will of our democracy.

* And move back to analyzing the markets.

This week I authored a column entitled "The Judgement Day" which concluded:

"But when the voting is over we will honor the collective will of our democracy."

Former President Trump connected with the disenfranchised — who represented a more vocal and enthusiastic and a far different and larger subset of (disaffected) voters relative to Vice President Kamala Harris.

Stated simply, Harris never really connected with enough Americans — leading to the biggest red wave since President Reagan.

The Democratic party and its nominee failed to connect with the majority of Americans. To many, the Democrats were seen as too woke (veering ever more sharply to the left) — with issues raised (transgender, immigration and even abortion rights) that failed to resonate with the many. As a measure of this, even in Democratic strongholds like the boroughs of Queens and Brooklyn, nominee Harris received a reduced voting percentage relative to both Hillary Clinton and Joe Biden (in the previous two presidential elections).

The Democratic party's candidate, a mixed race woman married to a Jewish man, whose ascension to the Democratic party's nomination seemed to be not legitimate to many (including some Democrats), did not appeal to enough voters who saw Trump as "real" and someone who spoke his mind without any fear or concern of consequence or retribution.

But it wasn't only Kamala Harris' candidacy that was rejected by the majority. Democratic incumbents such as Senators Bob Casey Jr. (Pennsylvania) and Sherrod Brown (Ohio) also succumbed.

Pollsters, for the third consecutive presidential election missed Trump's continued rise in popularity by a wide margin and were fooled by, among many other ingredients, the fund-raising avalanche of the Vice President's campaign.

As a result of these factors and others, the scope and the size of Trump's victory was historic (especially relative to expectations).

Finally, it is important to remember that you can't be for democracy only if your side wins. 

Here was my complete article from Election Day morning:

The Judgement Day

* Take a load off Fanny, take a load for free

Go down, Miss Moses, there's nothin' you can say

It's just ol' Luke, and Luke's waitin' on the Judgement Day.

"Well, Luke, my friend, what about young Anna Lee?"

He said, "Do me a favor, son, woncha stay an' keep Anna Lee company?"

- The Band, The Weight and The Weight

Please vote today.

We are a divided country.

President John F. Kennedy called out the office of the presidency "as the vital center of action."

Half the country will be disappointed with the outcome of the presidential election.

But, when the voting is over we will honor the collective will of our democracy.

As Winston Churchill famously said:

"Democracy is the worst form of government, except for all the others."

Our country will survive and prosper regardless of who is elected as our system of democracy is stronger than who is installed as president and/or which party controls the Congress.

As President Ronald Reagan said in his farewell speech in 1989:

"Ours was the first revolution in the history of mankind that truly reversed the course of government, and with three little words: 'We the People.'..My friends: We did it. We weren't just marking time. We made a difference. We made the city stronger, we made the city freer, and we left her in good hands. All in all, not bad, not bad at all."

So, regardless of outcome today, we will forever remain the "shining city upon a hill."

By Doug Kass Nov 5, 2024 7:00 AM EST

Position: None

Premarket Trades

I came into last night's election very light in exposure.

These were my early morning trades (I am expanding my short exposure):

Shorted  (SPY)  at $590.14 and  (QQQ)  at $501.57.

Shorted Tesla  (TSLA)  at $286.12.

Shorted JPMorgan  (JPM)  at $236.29.

Shorted Nvidia  (NVDA)  at $142.10.

Position: Short SPY common (S), QQQ common (S), TSLA (S), JPM (S), NVDA (M)

My Comment From Last Night

Dougie Kass

Out of  (MSOS)  ($6.50).

Position: None

Tweet of the Day

Position: None
Doug Kass - Watchlist (Longs)
ContributorSymbolInitial DateReturn
Doug KassVKTX4/2/24-32.33%
Doug KassOXY12/6/23-15.70%
Doug KassCVX12/6/23+10.76%
Doug KassXOM12/6/23+12.79%
Doug KassMSOS11/1/23-23.74%
Doug KassJOE9/19/23-15.96%
Doug KassOXY9/19/23-26.99%
Doug KassELAN3/22/23+32.13%
Doug KassVTV10/20/20+63.51%
Doug KassVBR10/20/20+76.01%