Tag Archives: Autos

Kass: The Bullish Bias Resounds

This morning the futures (S&P and Nasdaq) are, as is the custom, higher.

The markets continue to ignore a number of cautionary signposts/macroeconomic events/concerns and are benefiting from the float shrink of 5-7 years of corporate share buybacks, the dirty water of liquidity (contributed by the world’s central bankers), the heightened role of price momentum based and other (risk parity) quant strategies and the rising popularity of passive, index funds.

Adding significantly to the demand for stocks are central banks (most notably BOJ and the Swiss National Bank) who, through their active equity investing, make them the sovereign equivalent of Fidelity Management as they have become one of the dominant investors of our time.

Moreover, in a backdrop of reduced retail activity (in individual stocks, save whatever is the speculative play du jour), materially reduced mutual fund turnover and the lower role of active hedge funds (they too have mostly become quants) the demand v. supply equation for equities continues to favor buying over selling.

Bouts of selling are quick – and when stocks trade lower the buy on the dip crowd makes its rescue and arrests the drop.

Finally, probably 4-8 very large (long biased) macro funds are likely dominating what little activity/volume there is, buoying stocks as the water sloshes around in the bathtub of equities.

The sort of cautionary technical signs – like a lagging Russell Index (yesterday) – no longer provide the historical predictive role that has been the case in the past. Iomega-like speculation in stocks like NIO and TLRY are viewed as normal. And the breakdown in selected, market leading technology stocks and the lackluster performance of financials are dismissed as “one offs” by the bullish cabal.

Reactionary technicians find the markets to be titillating (scoffing at the anticipation of untoward fundamentals) and unconcerned about reward v. risk or, arguably rising economic ambiguities (low interest rates and a narrowing yield curve), the unprecedented lack of cooperation between world powers (in a flat and interconnected world), large public and private debtloads, the unstable political setting, the failure of fiscal policy to trickle down, the divergence between the S&P Index and other world (emerging) markets, orange and black swans and the global pivot of monetary policy.

In particular, the fact that the rising wave of debt and central bankers’ liquidity injections have failed to produce steady wage growth and productive investments in the real economy go unnoticed by those that worship at the altar of stock price momentum.

And I will remind everyone, what caused the ten percent correction in late January/early February was the rise in interest rates. Well, today, we are right back a fresh ten year high in the yield on the two year note and the ten year Treasury yield is back to 2.99%.

How long this investment bliss and consistent buying continues is anyone’s guess but the degree of complacency (and the absence of fear and doubt) are off the charts.

Signs Of A Problem

In “The Bear in the Market Is Roving Right Now,” Jim “El Capitan” Cramer zeroes in on the developing carnage in selected groups.

“We’ve got roving bear and bull markets all over the place and they have come to define what happens every day including today.

That’s a big change from my previous view of this market where I had held that there are roving bull markets and when stocks weren’t in bull mode, they rested.

No, I am not saying that the market’s become too treacherous for most people to handle.

I am saying that there are some incredible declines that must be addressed because they are so glaring and, at times, so nasty, particularly when they occur intraday.”

The bear market not only can be seen in Intel (INTC) , Micron (MU) and Facebook (FB); it can be seen, as I have cautioned, in other regions in the world. Indeed, the divergence between the S&P 500 Index and the MSCI Emerging Markets Index hit a 15-year high this week. As meaningful and looking out over the last seven years, the S&P Index is up by nearly 180% while the emerging markets are only up 14%:

Source: Pension Partners

Again, from Jim:

“If you want to see what a textbook bear market looks like, consider the emerging markets with the Hang Seng from Hong Kong, down 21%, Russian, down 20%, Greece, off 29%, the Shanghai index of mostly larger capitalization stocks is off 26%, and the Shenzhen, with smaller cap stocks is off 31%.”

As I wrote late yesterday, Wednesday’s strength in consumer staples (such as Kraft Heinz (KHC) , PepsiCo (PEP) , Unilever (UN) and Procter & Gamble (PG) ) and a drop of two basis points in bond yields may be construed as a risky backdrop and indicative of concerns regarding a slowdown in the rate of domestic economic growth. Also, weakness in regional bank stocks (I issued a cautious warning yesterday on bank third-quarter earnings) and the foundering FANG are not healthy signposts.

While the constant flow of corporate buybacks and the stronghold of fearless investors in ETFs continue to provide a tailwind to our markets, it remains my belief that the large stock declines Jim mentions above may broaden out and that we already may have experienced the highs in the Nasdaq and the S&P indices for the year.

Both the bull market and the economic recovery are long in the tooth and face the challenges of a pivot in global monetary policy, competition from ever-higher risk-free rates of return (the one-month Treasury bill yields more than 2.00% compared to the S&P 500 dividend yield of about 1.80%) and a number of other possible adverse outcomes in the economic, political and policy spheres.

Bottom line

Regardless of one’s market view, if you left early please make sure to read El Capitan’s late Wednesday synopsis of the market. It has a lot of merit, it’s a great read and provides pithy food for thought.

Market tops are processes and, from my perch, I believe that since late January 2018 we have been making an important one

Kass: Fallen Angels & Lessons Learned

“Hello I Mr. Ed.

A horse is a horse, of course, of course,
And no one can talk to a horse of course
That is, of course, unless the horse is the famous Mr. Ed.

Go right to the source and ask the horse
He’ll give you the answer that you’ll endorse.
He’s always on a steady course.
Talk to Mr. Ed.”  – Theme Song to Mr. Ed

The rapid decline in Tesla’s (TSLA) shares over the last month and the continued fall of two prior market darlings, Intel (INTC) and Micron (MU) , should remind us of the poisoned cocktail of “ Group Stink.”

Should the market fall, as I expect, there will be many more fallen angels.

I wanted, therefore, to reposte a recent column, “A Horse Is A Horse Of Course, Of Course” – which “bears” repeating because of the lesson communicated:

Rising stock prices have a way of changing sentiment (h/t Divine Ms M) 

Eleven years ago, as The Great Recession was bubbling up, market commentators were nearly unanimous in the view that the proliferation of those weapons of mass financial destruction (mortgage derivatives) would not produce a contagion.

Those commentators were famously wrong. Indeed, were it not for swift monetary and fiscal relief, the deep contagion that engulfed the global financial system would have bankrupted the entire worldwide banking community and companies like General Motors (GM)  , Bank of America (BAC)  , Citigroup (C)  and many others would no longer exist.

“Contrary to the view of some, a possible change in Washington D.C. leadership and policy may have broad investment ramifications on numerous market sectors (e.g. drug, defense and financial industries)”– Kass Diary, All the President’s Men (and Mess)

Today, though the body of the Administration has been diseased (in multiple ethical, moral lapses and in other ways), many of those same commentators who dismissed the mortgage derivative problem (a decade ago) suggest ignoring the indictments and guilty pleadings of multiple campaign members of the Trump team and the general culture of corruption that currently exists in Washington, D.C. — that these considerations will have little impact on policy, the balance of power, the economy and our markets.

Many of the same “talking heads” also possess the same view that bearish market analysis rationale may sound superior to the bullish case – but, they too, in the main, are wrong. Instead, many of them quickly point to a chart or some other independent variable in support of their (non-rigorous) case.

As Ben Hunt wrote in this week’s Epsilon Theory ( Death in the Afternoon):

“Where there’s shame, for both investing and beekeeping, is not sticking with your process. And if your process is only for getting into an investment or starting a new colony … sorry, but that’s not a process. Investments and animals have a life cycle. Your JOB as an investor and a beekeeper is to be there for the entire life cycle, even for the really hard parts like culling a weak queen or getting out of a weak investment. Even if it’s raining outside.”

I remain an investor (and the author of my Diary) because I have profited over numerous stock market cycles over the last four decades.

I have consistently resisted (when appropriate) the notion of “Group Stink” and the commonly held view by many that superior investment performance can be achieved by a simplistic view or by a quick glance at “activity” or at a chart.

The investment mosaic is complicated.

Back in 1980 I entered the harness racing business – over time I raced, bred and drove trotters and pacers.

My first trainer was Pittsburgh’s Delvin Miller. Delvin was a legendary horseman but he was much more than that, for those were the days when harness racing was a popular sport.

Delvin was the single most accomplished and popular trainer and owner in the world. He was a close friend of three presidents and Arnie Palmer’s closest pal. (And for the first five years of my involvement in the sport, Arnie was one of my three partners).

One word of advice from Delvin that I have held on to over the last 30 years was something that he said to me while we were attending the annual and largest Standardbred auction at the Farm Arena in Harrisburg, Pennsylvania back in the early 1980s:

“Dougie, look carefully at the crowd bidding on the yearlings this morning. There is a reason why, every year, there are the same sellers, but the buyers seem to routinely change every few years.”

Think about Delvin’s pearl of wisdom – it holds investment weight.

Back to Mr. Ed:

“Go right to the source and ask the horse
He’ll give you the answer that you’ll endorse.
He’s always on a steady course.
Talk to Mr. Ed.”


IF….

The investment mosaic is complicated and, at least to this observer, cannot be solved easily through a simplistic and linear process like gazing at a chart or by a casual glance of “unusual activity” – or by utilizing any other one single independent determinant.

Chasing benchmarks and worshipping at the altar of price momentum may be a recipe for occasionally achieving some short term gains but is not, in my view, a recipe for long term (measured in years/decades) investment gains.

To me, a serious investor (not trader) who searches for the holy grail of alpha, must comb through a maze of fundamentals, technicals, valuations, sentiment and other (changing) factors in an objective and calculating way.

***

With the benefit of hindsight, the past 10 years has been skewed by several positive influences which have resulted in an uncommonly resilient Bull Market:

  • The influence of passive investing – ETFs and quant strategies that are virtually agnostic to balance sheets and income statements. Rather, price momentum is their investing altar.
  • The monetary largesse of the central bankers who have inhibited natural price discovery by inundating liquidity into the system and lower interest rates to generation lows.
  • Fiscal policy that has widened the gap between “the haves (with large balance sheets of real estate and stocks) and the have-nots (with stagnating wages and rising costs of living).”
  • Both monetary and fiscal policy which have resulted in aggressive corporate share buybacks which has reduced the float of the outstanding shares of publicly traded companies (by about one fifth) – thus improving and tipping over the demand v. supply equation.

Each cycle brings new variables and challenges.

Value is subjective and its definition is liable to change. (see Valeant Pharmaceuticals and more recently the decline in the popularity of Micron (MU) and Intel (INTC) shares!)

History undoubtedly teaches lessons about investment but it does not say which lesson to apply when.

Investors are challenged by orthodoxy and consensus… or as I like to describe, as “group stink.” Many of the business media are complicit in that it delivers predominantly bullish views (optimism “sells”) – sometimes provided by rigorous participants, but most often by those that deliver a simplistic view of Mr. Market (and usually have their own service to sell).

Let’s not forget that pride goeth before fall – also publicity handshakes and celebrity. Nor shall we forget Theranos and maybe even Tesla (TSLA) .

Many perma bullish “talking heads” possess a silly (and much quoted) view that bearish market analysis rationale always sounds superior to the bullish case. This is a common and much repeated argument that holds little weight.

Always stick to your process and do not deviate from your risk appetite and profile.

As Ben Hunt wrote in Epsilon Theory ( Death in the Afternoon):

“Where there’s shame, for both investing and beekeeping, is not sticking with your process. And if your process is only for getting into an investment or starting a new colony … sorry, but that’s not a process. Investments and animals have a life cycle. Your JOB as an investor and a beekeeper is to be there for the entire life cycle, even for the really hard parts like culling a weak queen or getting out of a weak investment. Even if it’s raining outside.”

We live in an interconnected, networked and flat world – denying the risks of poorly thought out trade policy, the weakness in the Chinese and EU stock markets and the potential contagion from Turkey, Argentina or any emerging market are dangerous based on history and its consequences. Indeed, given global flatness, the odds favor that contagion is less ring fenced today than at any other time in history.

And so is ignoring hastily crafted policy (conflated with politics) by the White House a dangerous leap of faith – it shouldn’t be ignored. Though the body of the Administration seems to have been diseased (in multiple ethical, moral lapses and in other ways), many of those same commentators who dismissed the mortgage derivative problem (a decade ago) suggest ignoring the indictments and guilty pleadings of multiple campaign members of the Trump team and the general culture of corruption that currently exists in Washington, D.C. — that these considerations will have little impact on policy, the balance of power, the economy and our markets.

This may, too, be a dangerous investment route.

Kass: Trump & The Cons Of 6-Month Corporate Reporting

Trump’s call on regulators to consider changing how often companies must report earnings is foolish and poorly thought out. 

“Good afternoon and welcome to Hurlingham Park. You join us just as the competitors are running out onto the field on this lovely winter’s afternoon here, with the going firm underfoot and very little sign of rain. Well it certainly looks as though we’re in for a splendid afternoon’s sport in this the 127th Upperclass Twit of the Year Show.

Well the competitors will be off in a moment so let me just identify for you. (camera zooms in on the competitors) Vivian Smith-Smythe-Smith has an O-level in chemo-hygiene. Simon-Zinc-Trumpet-Harris, married to a very attractive table lamp. Nigel Incubator-Jones, his best friend is a tree, and in his spare time he’s a stockbroker. Gervaise Brook-Hampster is in the Guards, and his father uses him as a wastepaper basket. And finally Oliver St John-Mollusc, Harrow and the Guards, thought by many to be this year’s outstanding twit.”   Commentator (John Cheese), Monty Python’s Flying Circus (Upper Class Twit of the Year) 

Among the most foolish and thoughtless recommendations made recently by the President was his recent idea to reduce from four to two the reporting earnings periods for publicly traded companies.

Let me briefly explain my view:

  • Less Corporate Transparency Would Increase Corporations’ Cost of Capital: With a greater amount of earnings “surprises” and less transparency consistent with a more infrequent reporting schedule — the cost of capital would rise as investors would demand a larger premium than when four reports a year are delivered. This is the most important negative and it materially overwhelms whatever lower costs would follow from the reporting change. (My experience as a Board member on several public companies is that the amount of money that would be saved would be negligible. Moreover, most medium sized to larger sized companies can readily absorb the expenses of four reports per year).
  • Less Information Flow Is Unhealthy: For decades companies and their investor relations departments already managed earnings expectations – I call this “The Twit Olympics” (similar to Monty Python’s Olympic event of jumping over matchboxes). And, already companies hide behind Non GAAP vs GAAP accounting convention. (Note: The gap between Non GAAP and GAAP has never been wider!).
  • More Information, More Often, Is Essential To Understanding Business Economics and the Quality of Management: Up to date financials and operating results are critical to spotting both incipient problems, the direction of a business, and/or the honesty or quality of management.
  • Less Frequency of Reporting Periods Could Lead to Lower Valuations: After all, European companies report semi annually and sell at lower valuations than US companies.
  • (As my pal Lee Cooperman pointed out to me)It’s hypocritical that CFO and pension plan heads focus on monthly and quarterly performance yet they complain about investor short term focus!’
  • There Is Already Too Much Lag Time Between Reporting Periods: Less frequent reporting gives management way too much time for “Monkey Business.” I also believe it would impair management discipline – as there might be better ways to deal with short termism
  • Less Transparency Doesn’t Necessarily Impact Short Term Decision Making and Doesn’t Preclude
  • Manipulation of Results: Bad actors will be bad actors, regardless of frequency of reporting periods.
  • Quarterly Reporting Doesn’t Create Short Term Thinking: Smart managements, like at Berkshire Hathaway (BRK.A)   (BRK.B) , report quarterly but think long term. And so do smart investors.
  • Wise Long Term, Fundamental Investors Worry About ‘Earnings Power’ and Not Short Term Earnings Momentum

Here are some second order consequences:

  1. It would likely materially reduce the trading volume on all of the Exchanges – this would be quite bad for the brokerage community.
  2. Such a change in reporting, if enacted, would reduce overall market liquidity – which has already been materially reduced owing to large corporate share buybacks over the last decade.
  3. It will dramatically reduce the viewership of CNBC, Bloomberg and Fox Business as well as at related information sources (like Reuters, etc.)
  4. It would hurt the activist community (which might be a good thing!).

Bottom Line

The President’s “recommendation” is dead at birth and will never be implemented.

That said, it’s a foolish idea on many grounds and not particularly well thought out.

Kass: Global Potholes Threaten Decade-Long Bull Market

  • Peak Housing, Peak Autos, a Pivot in Monetary Policy Spell Peak Global GDP and an Economic Slowdown in late 2018 and in 2019
  • Watch the Fixed-Income Markets (and the flattening yield curve) That Are Providing the “Tell” that Slower Growth Lies Ahead
  • The Buzz of Synchronized Global Growth Has Faded
  • What Makes Equities Even More Vulnerable is that the Leading Component of the Markets, ‘FANG,’ Has Become Diminished and Is Now ‘GA’
  • Tops Are Processes, and We May Be in That Process Now

“In one corner, U.S. Treasury Secretary Mnuchin in a truly out-of-character gaudy, shiny white satin robe brandishing a big 3%. Opposite the optimist is the old guard Federal Reserve representing nearly 800 of the country’s PhDs. They’ve donned black as night robes with a difficult-to-make-out 2% on the back. In the case you get out more than we do, you’ve arrived at the battle royal for potential gross domestic product (GDP) growth! Mnuchin contends the U.S. economy is “well on the path” to sustained annual growth of 3% for “several years.” The Fed’s army of economists foresees a much lower speed limit of 1.8%.” Danielle Dimartino Booth, The Daily Feather

While the global markets have generally ignored terrorist attacks, a series of currency crises, trade concerns, an arguably untethered President Trump (who has conflated hastily crafted policy with politics) as well as other adverse political, geopolitical and market-unfriendly “big picture” events over the last several years, it is my view that the growing ambiguity seen in the high-frequency economic data around the world forms the principal risk to equities.

Peak Housing

In case you missed this from last Friday, Redfin (RDFN) , the residential real estate brokerage firm, fell 22%.

On the conference call Redfin CEO Glenn Kelman said this: “For the first time in years, we are getting reports from managers of some markets that homebuyer demand is waning, especially in some of Redfin’s largest markets.” He specifically cited Seattle, Portland and San Jose, but also said “The trend is continuing in July and reports are now coming in from Washington, D.C., Boston, VIrginia and parts of Chicago as well that the homes there are getting harder to sell.”

We know the reasons and it’s been stated in my Diary for weeks:

  • Mortgage applications are turning negative on a year-over-year basis
  • Mortgage rate resets and higher mortgage rates are a headwind to new home sales and refinancings (at an 18-year low)

As reported by my pal Peter Boockvar, the U.S. housing market outlook is moderating:

With mortgage rates at a 7 year high and the average price of a home at a record high, mortgage applications to buy a home fell 2% w/o/w and down for the 4th straight week. It is now down by 1.6% y/o/y and the index is at the lowest level since mid-February. Refi’s fell by 4.5% w/o/w and 35% y/o/y. This index stands at the weakest level since December 2000. This follows new home sales, existing home sales, and housing starts reflecting a plateauing in the pace of transactions.

PURCHASE APPLICATIONS

From my perch, a combination of sky-high home prices (which in many areas of the country are back above mid-2000s cyclical highs) and rising mortgage rates are squeezing home affordability, and a Peak Housing moment is upon us.

In the recently reported robust second-quarter GDP print of 4.1%, residential construction was the only category that turned negative. That follows a contraction also seen in the year’s first quarter.

Peak Autos

“(Auto) sales in the last month will underscore investor fears that auto sales have peaked and that, without ever-higher incentives to keep consumers interested, demand will continue to soften.” –Bloomberg

Ward’s Automotive reported a 16.7 million U.S. SAAR (seasonally adjusted annual rate) of sales for the month of July; that is the weakest July sales month in four years:

Source: Zero Hedge

Auto industry sales are likely to get much worse in the year ahead.

As I mentioned in a recent Bloomberg interview, the recent consumer confidence report was noteworthy for the depressed spending intentions. According to my economist pal David “Rosie” Rosenberg: 

“Plans to buy an automobile (over the last two readings) exhibited the weakest back-to-back showing in over five years.”

“Peak Autos” has been a theme of mine over the last 12 months; General Motors GM is on my Best Ideas List as a short, placed on that list at $43.43 in October 2017.

Remember: Cyclical stocks always look cheap at the top of a cycle.

Despite the hedge fund community’s endorsements by Ed Wachenheim and others, and the business media’s almost universal optimism on these name, it remains my view that GM and Ford F are “value traps.” (Note: Both companies recently guided lower in sales and profits).

Despite stagnating real personal incomes and large household debt loads, the proliferation and the popular extension of subprime auto debt (“a dollar down and off to the races” and the perpetual extension of loan maturities) and large auto price incentives have served to lift car sales over the last few years well above replacement needs. For several reasons, the favorable gap previously seen between auto sales and replacement needs is likely to reverse over the next few years.

Most importantly, with interest rates rising and likely to rise further, it is getting prohibitively expensive for manufacturers to offer incentives and deals tied to loans, so the consumer will be faced with fewer discounts on new cars. Indeed, J.D. Power reports that for the first time in almost five years the auto industry recently has cut back spending on incentives.

What makes things worse is the large number of cars coming off lease and ending up for sale in the used car lots of dealers. The “lease bubble” (below) is providing auto buyers with lower-priced alternatives to the new models.

Here are 10 troublesome charts on auto loans from Zero Hedge. If you are long the auto stocks, read the material closely.

Perhaps the most significant is the record level of average vehicle new and used car loans, at $31,100 and $19,500, respectively. But, with rates rising, so do dollar payments per month — on average, at more than $515 per month on new vehicles, which is stretching affordability for most borrowers. Meanwhile the average loan terms of 69 months for new cars and 64 months for used cars are also likely stretching limits.

Banks and other financial institutions are seeing the risks to the above loans and aggressively are slashing their auto loan origination activity, leaving captive original equipment manufacturer (OEM) finance companies to fill the void.

Look out below, and brace for a sharp fall in auto industry sales over the next year.

A Monetary Pivot

From Rosie this morning:

“All of the monetary aggregates have slowed substantially, and real M1 growth is flagging a 1% stall-speed growth economy once we get passed all the pre-tariff buying activity and fiscal sugar-high that skewed Q2.”

The monetary pivot is not a concession to the U.S.; global central bankers are also reversing course.

Peak GDP

  • A services slowdown may already be occurring as a July economic pivot may be in place
  • Peak auto sales is not a sector outlier
  • Look for consensus estimates of GDP to be revised lowered in the months ahead

Investment and economic wisdom is always 20/20 when viewed in the rear-view mirror.

The recent weak growth in nonfarm payrolls points to the issue of slowing domestic economic growth, already seen in a weakening auto sector.

But, to me, there are other more powerful July signposts that indicate that economic growth is becoming more ambiguous:

  • According to National Association of Credit Management data, which measure both manufacturing and services, July’s GDP proxy slowed by almost 1% to 3% from June’s strong rate of nearly 4%.
  • The July ISM Manufacturing/Services growth proxy has halved to 2%.
  • The July ISM Manufacturing survey for new orders fell to the lowest pace in 14 months.
  • ISM Services, reported on Friday morning, missed big, falling to the lowest level in nearly a year.
  • ISM Services backlogs dropped to a two-year low in July (51.5). We are in a services economy — 80% of the population resides there — and in our evolving economy a services downturn, rather than manufacturing, can presage an economic slowdown.
  • In the Friday jobs report, July services job creation was the slowest month in 2018.
  • July business activity, a dependable indicator, fell by 7.4 points from June; that’s the sharpest drop since late 2008.
  • The spread between business activity and employment has narrowed to 0.4 points; when it turns negative, companies are overstaffed.

Not only do we face Peak GDP, we are seeing Peak Global GDP growth, as witnessed by a two-year low in Citigroup’s European economic surprise index. It was only seven months ago that synchronized global growth was the buzz.

Bottom Line

While bulls are anticipating acceleration in the rates of U.S. and non-U.S. economic growth and an extension in the expansion in corporate profits, the reality, based on recent high-frequency economic data, is that the global economy is slowing in its trajectory and that growth in corporate profits will tail off shortly.

This is a nonconsensus view and forms the basis for my ursine market view.

Tops are processes and it is my continued view that a 2018 high in the S&P 500 Index was made in late January.

What makes equities even more vulnerable is that FANG has become GA. (Note the narrowing markets: Microsoft (MSFT) , Netflix (NFLX) and Amazon (AMZN) have accounted for more than 70% of the rise in the S&P Index year to date).

I remain at my largest net short exposure in quite a long time.