June 30, 2016

Surprise prediction sees Donald Trump dropping out of presidential race ?

Trump is already about 5% to 7% behind Democrat Hillary Clinton in the major polls, and his campaign is arguably in disarray. He fired his campaign manager and his campaign's finances are low.

It's my view that Trump will fall much further behind Clinton as his campaign evolves and develops after the July 18-21 GOP convention in Cleveland.

Funding Issues

Let's assume that Trump continues to face a lack of support from many GOP leaders, Republican political operatives, large contributors and House and Senate members (who are worried about their own political fates).

In that case, it's easy to see Trump falling even further behind Clinton in the polls. Embarrassing defeats in the first two televised debates on Sept. 26 and Oct. 9 could then lead to a more than 10% polling deficit for The Donald.

If that happens, we could foresee Trump's war chest failing to attract funds and dwindling rapidly. 

He seems like an independent but tightly wound and impatient individual, given to making impetuous statements and policy pronouncements and unwilling to listen to even his own consultants.

The Surprise

In this scenario, Trump would have few endorsements from within his own party, and he'd find by mid-October that his campaign's many flaws had been exposed in the presidential debates and other venues.

Add in a dwindling war chest and dramatic drop in the polls that had him trailing Clinton by low double digits and I could see Trump announcing after the second debate that he'd "no longer actively campaign."

In effect, he'd quit the race, becoming the first major-party presidential candidate to not actively participate in his own campaign. While Trump would technically remain on the ballot, Clinton would essentially run unopposed.

In this scenario, I could see Trump winning electoral votes in just Mississippi. He'd wind up losing to Clinton by the largest popular- and electoral-vote deficit ever, trailing even George McGovern's 1972 landslide loss to Richard Nixon.

June 29, 2016

Bond Investors specially in Europe and Japan at risk to lose money

There's little that robs market valuations more than "stagflation," that 1970s-style combination of a stagnating economy and rising inflation.

I highlighted the ongoing threat of a stagnating economy last week, writing:

"The past few months have given us increasing indications that secular economic stagnation is the 'new normal' these days -- and could be a mainstay here and abroad for some time to come. ... Mature, developed countries like ours are likely stuck in a new era of sluggish growth."
-- Doug's Daily Diary

And I'd like to focus on the second part of stagflation -- rising inflation.

Our Federal Reserve has continually repeated that inflation "is below our target." But I believe that the central bank is wrong yet again.

It's true that U.S. investors have long been conditioned to see ridiculously low interest rates, while Europe and Japan's negative real rates represent mal-investment and the mother of all bubbles to me. (The only real question in my mind is when the bubble will burst.)

With more than $10 trillion of European and Japanese sovereign bonds now sporting negative interest rates, it seems likely that investors believe rates will never rise again. In fact, few investors (except for those burned by bad credit analysis) have suffered capital losses on bonds in more than 35 years.

As a result, few people probably even realize that it's possible to lose money on bonds. But at current prices, it's possible to lose a lot of money on bonds, especially when you consider the scant nominal interest that you'll receive if you hold debt to maturity.

But while bond-investor sentiment is skewed in a bullish direction, the latest economic figures suggest accelerating inflation -- including some price increases in areas that no one's thinking about. Consider the evidence:

U.S. Wage Pressures

The latest figures show that U.S. wages are rising at a 2.Even workers at Atlantic City's casinos (not exactly a growth industry) are planning to strike for higher pay.

The Economist's Take
The Economist computes two inflation indices: "food" and "all items." Food inflation has risen to 10% over the past year, including big gains in soybean meal used for feeding pigs. (There's been an amazing amount of speculation in soybean-meal prices in China.)

Meanwhile, The Economist's all-items inflation index turned positive last week for the first time in several years. The latest reading has inflation up 1.3% for the past year and running at a 3.3% rate over the past month.

Inflation in Unusual Places

Some long-quiet prices such as insurance premiums are suddenly bubbling up.

Low interest rates kill insurers' investment income, and insurance firms have run out of capital gains on their bond portfolios. They have to settle for coupons plus a high risk of capital loss. If underwriting ever moves to a loss, that would mean big trouble for the industry.

My auto insurer (USAA) recently took matters into its own hands, notifying me that my premiums will rise 11% over the next year. I'm sure I'm not alone.

The price of life-insurance policies should also skyrocket, and a lot of annuity income may come in well below the level forecast, putting more pricing pressure on insurers. Put simply, prices are likely going to rise -- possibly meaningfully -- for all insurance products.5% annual rate and look to be accelerating.

Fiscal-Policy Inflation

There's a lot of talk these days about the need for government to stimulate the U.S. economy with more fiscal policy, especially on infrastructure projects. (I touched on this subject in Tuesday's opener).

However, fiscal policy has three lags -- the recognition lag, the action lag and the impact lag. We're now into the second of the three lags, and government spending should pressure factor costs. In fact, one factor -- construction labor -- is already in short supply.

The Bottom Line

Many investors might be shocked to learn in the times ahead that there's actually risk in their perceived "risk-free" bond portfolios.

However, I believe that the times they are a changing, despite Thursday's still-low interest rates and inflation levels. For many who hold fixed-income investments, that could be a new -- and unprofitable -- experience.

Bond investors will lose a great deal of money if rates go up by even 1%. 

via thestreet

June 27, 2016

Reducing my Net-Short positions

We're already witnessing the vulnerability and volatility of worldwide markets. I believe that Wall Street had too much complacency and too many stocks arguably priced to perfection ahead of the Brexit vote. Many institutional portfolios are poorly positioned, long on financial assets and have massive derivatives and other leveraged positions.

Given the disproportionate role of the quants' volatility-trending and risk-parity strategies and the likely frequency of margin calls, almost anything could happen Friday and over the next few days and weeks. As I've continually suggested, higher-than-normal cash positions make a lot of sense, although you should base such a positioning on your time-frame and risk profile.

Most players don't short, but should nonetheless make it their highest priority worry about a return of capital rather than a return on capital. 

My Game Plan
Let me lay out my near- and intermediate-term investing and trading plans for you:

First, I realize that the Brexit decision will promote a lot of volatility -- which creates opportunity, but also unpredictability. As such, I believe smart players should rope in their portfolios' "value at risk" (or "VAR").

Given my own risk profile in managing money, I plan to opportunistically move from my previous net-short position back to market-neutral.

Even though an overshoot to the downside is a distinct possibility, I'll be taking off all of my recent index shorts for nice gains. These include shorts of:
-   The SPDR S&P 500 ETF (SPY) -- our Trade of the Week -- which we shorted at $209+ a share.
-   The PowerShares QQQ ETF (QQQ) .
-   The iShares Russell 2000 ETF (IWM) .

My other plans:

-    I'll be covering my short of the iShares MSCI United Kingdom ETF (EWU) .
-    I might also take off my small short of the Financial Select Sector SPDR ETF (XLF) , even though "lower-for-longer" interest rates could doom bank-industry earnings. That said, my XLF moves will depend on how much the financials drop.
-    I'm also taking SPY, QQQ, IWM and EWU off of my "Best Short Ideas" list, due to changes in those ETFs' risk-vs.-reward quotient.

Given the likely rise in volatility (not to mention the possible market chaos that we might see), I plan to use an opportunistic trading strategy. I'll place both my long and short investments on the back burner and won't increase my long-term commitments.

Instead, I plan to opportunistically trade on the long side (an area where I'm not currently well represented), but will be so only on a short-term trading basis for now. That said, it's conceivable that good longer-term long opportunities will arise over the next few weeks or so.

The Bottom Line

Uncertainty, risks and rewards will all, but I want to err on the side of conservatism. I'll harvest some of my short gains, then approach the market in an opportunistic manner on both the long and short sides. But over the next six months or so, I expect stocks to reset lower.

In fact, I'm sticking with my prediction that the S&P 500 will see a high-single-digit or low-double-digit percentage drop for 2016 as a whole.

June 23, 2016

Tesla Model X test drive and review

I continue to be short Tesla (TSLA) , but I recently test-drove the electric-car manufacturer's new $83,000 Model X.

Model S and Model X (on the right)

Here are my thoughts about the car:

- For all of the Elon Musk/Tesla hype, the Model X's design is awful. It looks like a glorified Toyota Prius.

- The rear doors lift up rather than out (think of Doc Brown's DeLorean in Back to the Future). However, they're problematic and buggy. A friend of mine got stuck in the car during a rain storm. The sensors kept misfiring and the doors wouldn't open.

- The Model X lacks the average SUV's capacity. The rear seats don't fold down; you can't lay them flat to get more cargo space.

- Two friends who bought Model Xs now have regrets.

- On the plus side, the car does drive well.

Position: Short TSLA

June 22, 2016

Netflix is looking like AOL from the 90s

I continue to regard Netflix as unattractive, and I remain short on the stock.

While the FANGs have propelled the market's growth segment higher, I think the fundamentals justify the "F," "A" and "G" components' gains (although valuations are another story).

But in my opinion, that's not the case with Netflix. Its only attraction in my view is the yet-unproven notion that the company has pricing flexibility. If it doesn't, then the stock will eventually hit troubled waters, given that it has:

-    A valuation of more than 100x 12-month-trailing EBITD.

-    Relatively unexciting sales growth (currently about +24%).

-    Little likelihood of margin expansion given Netflix's rising content costs.

AOL Redux?
Just as AOL did in the late 1990's and early 2000's, NFLX shares dance to the tune of subscriber count. And each quarter, the company consistently exceeds forecasts for that (which are probably managed). But also like AOL, Netflix has little free cash flow -- and to me, the stock appears to be enjoying its last hurrah.

Unlike fellow FANG components Facebook, Amazon and Alphabet/Google, NFLX is down some 30% from its highs. And its chart (lower highs, etc.) should terrify anyone who practices the dark art of charting.

Netflix has tried to energize its supporters with foreign growth, and has added new nations to its operating area at a sizzling pace. The company now services over 130 million customers, many of them recently added.

So, subscriptions will surely exceed forecasts ... but revenues and the cash flow might not follow.

Other potential problems that have recently surfaced:

-    Non-U.S. subscribers might want local content. This will escalate content-procurement costs (possibly geometrically). Even worse, foreign governments might require local content as a condition of Netflix operating within a given country.

-    While an $8 to $10 monthly subscription price is reasonable in America, it might not be in other countries. For example, India might be a less open-ended market for Netflix than NFLX bulls suspect.

-    In my view, the company needs capital that might not be so easy to obtain despite Friday's near-zero cost for it. I was surprised that Netflix didn't sell equity or convertible preferred shares when its stock was trading at around $130 a share (vs. some $94 Friday).

The bottom line: It should be interesting to see how this situation unfolds. But at best, I think it should be observed from the sidelines!

Position: Short NFLX

June 21, 2016

High-frequency trading is a major negative for stock markets

The quants and their algos chase price and exaggerate daily and weekly trends, confirming that "buyers live higher and sellers live lower." 

The lack of market memory and the quants' ever-changing positioning eats up traders who try to navigate the market over the short term, and frustrate even the most sophisticated hedge funds. 

Computers don't sleep, don't get tired, don't care about politics or fundamentals and don't vacation in late August in the Hamptons or on the Jersey Shore -- they just wreak havoc on our marketplace by amplifying moves on the downside and on the upside. The machines and algos have no knowledge of replacement or private market value and haven't even gazed at company income statements and balance sheets.

In theory, the distortions created by volatility-trending and risk-parity strategies should provide intermediate-term opportunities. But in reality, the distortions (and front-running) that the quants produce create artificial price action. So do our central bankers' massive liquidity injections.

The Tyranny of the Ph.Ds is leading to the absence of natural price discovery. This artificiality alienates many would-be market participants, keeping them away from Wall Street (retail outflows are ever continuing). It's also sowing the seeds for an unhappy market ending.

The bottom line
Kill the Quants Before They Kill Our Markets!

June 20, 2016

Deutsche Bank comparison to Lehman should be taken seriously

"It is important to note that the European banking system is much more leveraged than that of the United States. Oversight and regulation are weaker and EU banks play a greater role in their economies, as they are far larger relative to European GDP than in the United States."
- Doug's Daily Diary (July, 2014)

I believe that Deutsche Bank (DB) is a "canary in the coal mine" for Wall Street.

DB is Germany's largest bank, with more than 100,000 employees and $1.8 trillion of assets. But that includes one the world's largest (and most opaque) derivative books, and Deutsche Bank's market capitalization has shriveled to just $20.1 billion.

That's similar to the market cap of U.S. bank SunTrust (STI) , which has one-fifth of Deutsche Bank's workforce and one-tenth of its asset base. DB's market cap is also:

-    Roughly half the market cap of foundering Yahoo (YHOO) .

-    Twice as large as the market cap at struggling Twitter (TWTR) , which has just 3% of the workers that Deutsche Bank does.

-    Some $3 billion to $4 billion above the estimated market cap of privately held Snapchat (based on a latest funding round). But remember, Snapchat an unprofitable tech company so far, and produces just some $100 million in annual revenues.

Some say that Wall Street should ignore the massive drop in DB's share price -- but many said the same thing about Lehman Brothers, Fannie Mae, Countrywide and other U.S. financial institutions that crashed during the 2008-2009 market meltdown.

Personally, I say that ignoring Deutsche Bank's implosion and the associated risks (counterparty, etc.) is beyond the pale. It's also a poor analysis of the situation that European banks currently face, as well as how much the European economy depends on its banks (much more than the U.S. economy depends on American banks).

Also note that Deutsche Bank's price is tumbling at a time when banking's problems are multiple and unlikely to get resolved over the near or intermediate term. Issues include:

-Contracting Spreads

-Interest rates have seen an unprecedented decline into negative territory in many countries.

For example, the 10-year German bund's yield went negative yesterday for the first time in history:

Such moves are causing a steady erosion in banks' profits and net-interest margins.

Other concerns:

-    Brexit Fears. If U.K. voters decide next week to pull Britain out of the European Union, that will create a number of uncertainties.

-    Continuing Credit Losses. Credit-quality issues (read: "bad loans") are weighing on an already leveraged and undercapitalized banking industry's balance sheets. Asset-to-equity ratios are nearly 40x.

-    Slow economies. Global economic growth is weak.

-    Regulatory issues. Banks generally face increased and expensive regulatory pressures.

-    Money Laundering, Market Rigging and Fraudulent Trading. European banks are notoriously bad actors. Click here, here, here and here for examples.

The Bottom Line

Deutsche Bank's plummeted by some 2.5% to new recent lows. At the same time, credit-default spreads climbed.

To me, it's growing ever clear that Deutsche Bank's problems are almost insurmountable.

Last month, a Berenberg analyst downgraded DB to "Sell," writing:

"Too many problems still -- the biggest problem is that DBK has too much leverage. On our measures, we believe DBK is still over 40x levered. DBK can either reduce assets or increase capital to rectify this.

On the first path, the markets do not exist in the size nor pricing to enable it to follow this route. Going down the second path also seems impossible at the moment, as the profitability of the core business is under pressure. Seeking outside capital is also likely to be difficult as management would likely find it hard to offer any type of return on new capital invested."

The analyst then moved on to address the structural problems facing European banks in general, writing:

"The difficulty in analyzing investment banks from the outside is that it is hard to establish core profitability. In an industry in structural decline, investment-bank management teams are also likely to face similar challenges. Each weak quarter is seemingly greeted with an excuse that it could have been better if not for the wrong type of volatility, client uncertainty or central bank intervention.

First-quarter 2016 saw the absence of one-off profitable events that have protected revenues in the past. We have perhaps had the first glimpse of what core profitability in the investment banking industry really is (ROEs in the mid-single digits at best) and it could be even worse if the traditional seasonality occurs."

The Coal Mine Doesn't Look So Hot

My advice: Don't dismiss the problems facing Deutsche Bank and the rest of the European banks. Some suggest that drawing parallels between Deutsche Bank and Lehman is "laughable," but it's not. It's a serious, realistic comparison to make.

Many of the same people who failed to see the problems associated with U.S. banks prior to the 2008-2009 meltdown are now understating the economic and market risks that could result from European banks' woes. But the next shoe is likely about to drop for DB and its European brethren, and investors should fear an adverse outcome (and possible grim reaper).

Given this context, I'm short on the Financial Select Sector XLF etf, and I'd recommend that you continue to avoid U.S. banking stocks.

Position: Long TWTR, Short XLF.

via thestreet.com

June 16, 2016

Algorithm machine traders distorting stock charts

I agree with Goldman Sachs, which is sounding gloomy. As I've previously written, I believe that the schism between U.S. stock prices and the real economy is growing ever wider.

From my perch, the irrational is being rationalized, with the help of machines and algos that could reverse on a dime if momentum abruptly stalls. Moreover, several of my "thin-reed" indicators (like two investors I watch who rarely get it right) are going "all-in long" this week.

I'd emphasize that the dominance of machines and algos that follow price and price alone render charts less valuable than they used to be for predicting stocks' future. Ergo, I accept the fact that I have to be more anticipatory than reactionary these days.

June 15, 2016

Did Carl Icahn "pump and dump" Apple shares

Jim Cramer has a good piece on those who say the government should view Carl Icahn's well-publicized purchase and subsequent sale of Apple (AAPL) as a "pump-and-dump" scheme.

According to Cramer...
"Did Carl Icahn launch the biggest pump-and-dump scheme in history with lauding of Apple in the low $50s and his selling of it in the high $90s, two years later after saying it was a "no brainer" when he bought the stock? Should he be investigated for urging a buyback in multiple tweets and letters to Apple, and then selling the stock for a $2 billion profit after he got his wish? 

Now, you may not like what happened here. I am not crazy about it. But Icahn had no inside information. He did not say on air that he was buying when he was actually selling -- which is the definition of a pump and dump. He wasn't managing your money. You have to do that. And he didn't get you into a loser. He got you into a winner. If you had bought when he first said "buy" and sold when you learned he sold, you did fabulously.

Those are all good things.

I think the anger here comes from those who didn't do their own homework, thought he loved it all the way up to the $130's -- where I am sure he wished he had sold but he didn't -- and bought it well above where he first liked the stock." - Jim Cramer

I agree Jim -- caveat emptor, a major precept in the investment business.

Here are excerpts from two columns that I wrote recently in which I discussed Icahn's Apple moves:

"It is disturbing how so many who readily are given a media platform so quickly forget and discard discussions in the stocks or in the arguments that no longer conform to their point of view or outlook. They just seem to move on with a changing narrative. ...

Today, talking heads are cuckoo for Facebook (FB) , but they conveniently ignore or reference their 'yesterday's Facebooks.'

Facebook's shares have risen by nearly tenfold from a few years ago, and the sound of today's enthusiasm (as if you almost can't lose) is eerily reminiscent of the chorus that we heard regarding Apple in September 2012 and again 15 months ago in early 2015. ...

The reward vs. risk for Facebook is far worse than it was back in 2013, and investors should not forget The Law of Large Numbers and that success creates the largest headwind, and Schumpeter's gale of Creative Destruction as it relates to the last Facebook, Apple.

Post script: As I write this column, Carl Icahn has just announced that he has sold his entire Apple position. Which seems to prove my point. Sic transit Gloria ... and caveat emptor."

-- Doug's Daily Diary, Beware of Changing Narratives and 'No Brainers,' (Apr 28, 2016)


"The fact Carl Icahn states that China is a risk to Apple is not a new factor in evaluating Apple or any other company that does business in China.

I don't buy it, Carl.

And there are no 'No Brainers' either, Carl."

-- Doug's Daily Diary My Two Bits on Icahn's Sale of Apple Stock (April 28, 2016)

Position: Short AAPL

June 13, 2016

George Soros has taken bearish positions on the market

I outlined my negative market outlook in no uncertain terms earlier this week, writing:

"With the schism between rising U.S. stock prices and a weak real economy growing ever wider, profits are no longer growing and valuations have advanced to a nose-bleed 25x GAAP earnings.

Nonetheless, stocks stand near an all-time high this morning in a market that's dominated by machines and algorithms, which have little taste for assessing private-market value or the quality and/or size of balance sheets. Rather, they rely almost solely on price momentum.

You've all read for months about the rationale that underscores my ursine view. I remain steadfast in my bearish outlook, and my portfolio's skew is an expression of my concerns."

Admittedly, I measure my investment time-frame in months rather than days or weeks. My risk profile is conservative, but to achieve my objectives, I often trade around my core long and short positions.

However, I always remember that there's no certain truth over the near term in a market that's dominated by quants. And I never lose sight of the fact that despite the protestations of many "experts," the only certainty on Wall Street is the lack of certainty.

So, I've slowly added to my short exposure on the market's recent ramp-up. I've also diversified my short exposure by:

-    Adding Country Risk. I've shorted the iShares MSCI United Kingdom ETF (EWU) and the iShares China Large-Cap ETF (FXI) .

-    Expanding Sector Risk. I've added shorts of the Consumer Staples Select Sector SPDR ETF (XLP) and the Financial Select Sector SPDR ETF (XLF) .

-    Boosting Individual Shorts. I've recently expanded my list of individual-company shorts. I did this in part because the bulls' B.S. has risen proportionately with the market advance.

Stocks' recent advance has dissipated a lot of the bearish banter, drowned out by the chorus of Everything's Coming Up Roses by pajama traders and others who see nothing but today's prices ahead of them.

Shorts are becoming an endangered species -- in fact, the bulls have begun to ridicule the ursine crowd. Complacency, defined as little concern that the market has any meaningful market risk, is spreading quickly as the fear leaves Wall Street.

Several Wrong-Way Corrigans that I know have gone "all-in long" with confidence and even arrogance, in defiance of the idea that any substantial market draw-down is next to impossible. (Their constant refrain is: "The charts look good!")

But given my investment time-frame, I don't typically react to such short-term trends (with the exception of limited trading activity).

Instead, I evaluate risk vs. reward -- and I recognize that the investment mosaic is complicated and can't be simplified into a single chart or one or two independent factors. Rather, it's a distillation of sentiment, valuation and fundamentals (the economy, interest rates, inflation, etc.).

I understand financial history, so I pay attention to what the fixed-income markets are saying when the 10-year U.S. Treasury yield is at 1.66% and much of European and Japanese sovereign debt has negative yields.

And I can see today's artificiality of stock prices, spawned by machines, algos and an obtrusive Federal Reserve. I also get the secular economic shifts that are adversely impacting large swaths of America's "Old Economy" (e.g. retail).

Similarly, I know what the iPhone's completed product-cycle upgrades mean for its future growth at Apple. And I'm aware of the profitability pressures that banks face, along with the proliferation of non-GAAP accounting that's a negative for stocks.

Additionally, I recognize the poor forecasting records of the Fed and other organizations and economists. They've been way off in their projections for four consecutive years as central-bank policy has lost its effectiveness.

But lastly (and most importantly), I admit that I might be wrong -- even over an extended period of time.

The Bottom Line

My advice is that we all pay less attention to the "perma-bulls," who (like the "perma-bears") are attention getters rather than not money-makers.

Also ignore the odd-lotters and other business TV "talking heads" who worship at the altar of charts and price momentum. Those people often flip-flop on their views, but will rarely if ever admit when they were wrong or simply don't know what's going on.

Instead, I suggest paying attention to George Soros, whom I view as the second-greatest investor of all time (trailing only Warren Buffett). Soros recently adopted a negative market view.

In my view, downside risk substantially exceeds upside reward given the fact that stocks have been rallying despite slowing real economies and reduced profit expectations. To believe otherwise is to believe that valuations will continue to expand for here, which I fundamentally disagree with.

Personally, I'm staying the course with my net-short exposure. I expect to profit mightily from it over the balance of 2016.

via thestreet.com/story/13604486/1/apple-facebook-and-ishares-china-large-cap-etf-doug-kass-views.html

June 8, 2016

Holding a higher levels of Cash in portfolio could be wise

In the summer of 2016 we exist amid capital markets that have been inflated by hyperactive central bankers who have had the burden of catalyzing economic growth owing to inert and partisan fiscal authorities and an electorate that is unwilling to take the pain of addressing structural headwinds.

This is a toxic combination of policies and condition.

While, to date, these policies have resulted in the abandonment of natural price discovery and what I believe to be a Bull Market in Complacency, one day (or days) in the future there will be a loss of the markets' artificiality we face today. At that point, one will not to be heavily invested in equities.

With our interest rates near generational lows and much of the world's sovereign debt in negative territory the risks are accumulating. Central bankers, whose forecasting ability speaks for itself, are endorsing policy that, to me, is now indefensible because it is doing more harm than good.

If monetary policy was as easy as keeping rates at zero, we would have had the condition for seven decades and not just seven years.

We are in uncommon and untraveled territory in which sitting on a lot of cash is the most sensible and prudent approach for those who respect their capital.

June 6, 2016

Sell in May and Go Away could be profitable this time

Stock prices have risen back to the recent trading range's high end, driving the doubt from Wall Street. A deepening complacency has surfaced yet again despite ambiguous global economic and profit data.

Buyers are living higher, and sellers are living lower in an investment world that's starved for performance, with quant funds and other price-momentum strategies dominating the landscape. Despite more than seven years of monetary easing that's failed to sustain economic growth, investors' faith, confidence and dependence on the world's central bankers remain unaltered.

But to this observer, the data do matter. Like Indy 500 winner Alexander Rossi crossing the finish line this past weekend on an empty gas tank, the U.S. stock market looks to me like it's running on the fumes of rarefied valuation levels.

Let's look at the evidence:


The U.S. economy has failed to reach "escape velocity," and a sales-and-profits recession remains in place.

As Hedgeye Risk Management recently noted, U.S. manufacturing figures are also worsening. Yesterday's Chicago Purchasing Managers Index came in at 49.3 vs. 50.4 the previous month, while the Federal Reserve's regional manufacturing surveys have all fallen.

Our flat yield curve--where the spread between two-year and 10-year Treasury yields is down to just 95 basis points or so--is another significant warning sign, as this chart that Hedgeye put together shows:

Other Warning Signs

Additional worrisome indicators that I see include:

-   High Valuations. The S&P 500's valuation is at a lofty 25x GAAP earnings.

-   Overly Optimistic Sentiment. Although surveys show that outright bullish investor sentiment remains muted, few investors expect a correction of much consequence.

-   Political and Geopolitical Concerns. Risks abound. As citizens and investors we aren't as safe as the markets presume.

My Positioning

I've recently expanded my net-short exposure yet again. 

The S&P 500's close at 2,096.96 is about 13% above my 1,860 fair-market-value estimate for the index. As such, the market's risk-vs.-reward quotient looks substantially unfavorable to me. While I've generally emphasized individual-stock shorts over index shorts, I recently initiated shorts in the Materials Select Sector ETF (XLB) and the Consumer Staples Select Sector ETF (XLP) .

Geographically speaking, I've also shorted the iShares China Large-Cap ETF (FXI) and the iShares MSCI United Kingdom ETF (EWU) .

While I usually see the phrase "Sell in May and Go Away" as a silly, glittering investment generality, it might prove to be a profitable strategy in the months ahead.

Position: Long SPY puts, SH ; Short XLP, FXI, EWU, XLB, SPY

via www.thestreet.com/story/13592279/1/the-bull-market-in-complacency.html

June 1, 2016

Foot Locker stock may have peaked

I see another peak to add to the long list of The Many Peaks I See ... "Peak Sneakers"!
Foot Locker store
I've been spending several weeks researching shoe purchases and have concluded that the lure of high-priced sneakers might finally be fading.

I see multiple signs of this phenomenon, including:
- Rising Sneaker Costs. Like health-care costs, sneaker prices have risen to unfathomable levels. But with U.S. wages exhibiting only modest gains, buyers' price elasticity might finally be appearing as sales resistance. At least that's what I've heard in conversations with customers at Foot Locker (FL) and elsewhere.

- Fewer Multiple Purchases. My discussions with customers have indicated that purchases of multiple pairs of sneakers seem to be a thing of the past. Sneakers have simple become too costly, while alternative purchases like videogames and smart phones are gaining popularity.

- Kids Who Want 'Experiences,' Not Apparel. Kids and young adults seem to want "experiences" (video games, iTunes songs, etc.) more than they want apparel or footwear these days. Just ask Macy's or Target.

- Peak Sports Viewership. Also consider the "Peak Sports Viewership" that I wrote about a few months back. We're seeing declining ratings for sports championships, which could have a negative impact on sneaker sales.

- LeBron James' Huge Deal with Nike. Finally, consider reports that Nike might wind up paying basketball superstar LeBron James more than $1 billion for a lifetime endorsement deal on the firm's sneakers and other merchandise. Enough said!

So ... I'm Shorting Foot Locker
Given all of the above, it's little surprise that Foot Locker reported a far-slower pace of quarter-over-quarter comps this morning relative to consensus expectations. The chain cited weakness in basketball-sneaker sales, where Foot Locker has an outsized exposure relative to its peers.

Another disadvantage for Foot Locker is that the chain is mall-centric. My surveys of customers suggest that malls are no longer many consumers' desired destination -- something that recent retail figures have corroborated.

Add it all up and I shorted FL in both the premarket and regular sessions Friday, and I'm placing the stock on my "Best Short Ideas" list as well. (By contrast, TheStreet's Trifecta Stocks model portfolio is long on Foot Locker.)

As an aside, I should mention that more than 90% of Foot Locker shares are institutionally owned. So, a lot of supply might lie ahead. I'll also have a lengthier analysis of Foot Locker next week.

Position: Short FL