Brook Reef

Before we get to Chinese tensions, let's start at home with the explosion of racial tensions in Minnesota after a white cop kneeled on a black man's neck, George Floyd - causing him to have trouble breathing and ultimately, die. It appears in the video that Floyd was complying with the cop's orders. There have now been multiple nights in a row of rioting and looting in Minneapolis. The cop has been fired and charged with 3rd degree murder. The riots have spread to the other large cities across the country. Watching the news is like watching reports from war-torn 3rd world countries. It's surreal. On Friday, there was a video of a black reporter on the scene being arrested on a live broadcast while clearly complying with orders from the police. He's since been released, but still. Only a few weeks ago we got video of a Georgia jogger, Ahmaud Arbery, who was shot by a man in the back of a pickup truck. Ahmaud Arbery was a black man. The shooter(s) are white. ...

Buying TAP @ $37.41 2% position We had a few great round trips on BUD over the last few weeks. While BUD keep going up, we'll move to another beer company - Molson Coors (TAP). It's the same story, only better. Americans tend to drink at home vs. the rest of the world that tends to drink out and about. TAP isn't far from its panic-driven lows. We'll take it as an opportunity to buy. Beer isn't going away - whether there's a second wave or not. And buying stocks at their lows is almost always a good idea.

Covering IWM @ $138.15 Reducing by 5% - Holding 15% Realized gain of $1.51 (1.08%) In our morning note today , we talked about reducing short exposure ahead of the weekend. We mentioned covering ITB and/or adding GDX. We overlooked the 5% we added to our IWM short earlier this week . So we'll take a small profit on that trade and keep working to get short exposure from 20% (at the start of today) to 10% ahead of the close. Tensions are brewing. Stocks are stretched. China and geo-political tensions. Racial tensions here at home. Not to mention the ongoing pandemic. Staying short is easy, but don't get over-extended.

China has made two huge global security moves of aggression we need to talk about: Hong Kong: Basically ending their quasi-independence. India: Skirmish/dispute at the border. Each one of these would be major news in normal times. Together, it's totally something we need to watch. This is major news. And very troublesome. Throw in Trump's trade war with them and it's got the makings of some serious global instability. Trump plans to hold a press conference today to discuss China - so we'll see what the US thinks. We fear he'll be too focused on punishment and not enough on diplomacy. China is making some aggressive geo-political moves right now - and tariffs will only embolden them, in our opinion. The market seemed steady all day yesterday until there were 45 minutes left in the trading day. That's when news broke of the aforementioned Trump presser on China - and the market started to dump. The S&P 500 finished down 0.21% after being up over 1% ...

Buying STX @ $51.53 2% position Seagate is a digital storage company. Think hard drives. So, a technology hardware company. They trade at 10x P/E with a 5% dividend yield. As with most tech companies, debt is modest at 2-3x EBITDA. We like the story. Critical hardware, compelling valuation, and minimal debt. 

Covering PHM @ $36.57 Realized loss of $7.12 (24.18%). Ouch. Sometimes you get burned on shorts. That's part of the game. We're covering our Pulte short today because Toll Brothers had great results last night and recent home data has been strong. After this all blows over and the celebration ends, we see homebuilders as in trouble. We'll short again when opportunity knocks. So we'll take our lumps this time and be around to try again.

Buying TLT @ $162.04 Adding 5% 10% total position size We'll take the rising rates this week as an opportunity to add more U.S. Treasuries exposure. Adding 5% to TLT bring our total U.S. Treasury exposure to 20% over EDV, TLT, ZROZ. The U.S. has a LOT of money to print, create, and borrow to fund the "stimulus" and bailouts. That means we won't see higher rates for a very, very long time. We think negative rates will come before a 5% yield on the 10-year bond. Push your favorite ideas.

Markets rallied again yesterday with the S&P 500 closing up 1.48%. It seems they rally was driven by hopes of  <random positive news> and more stimulus. But really, we're at a loss. This is the most disconnected we've ever seen economic data and stock markets. It happens for brief periods of time, sort of, but not for this long and this wide of a divergence. A lot of the charts and data we share makes sense. We literally shut down the economy on purpose, so of course there will be carnage in data. But the damage we've done isn't easily repairable. And a lot of it just needed a catalyst to burst. And either way, the data doesn't translate into all-time highs for the stock market. That's our problem. Stocks shouldn't be this high. It's nuts. 1) Bubbles - last time was households. This time is corporations. Bubbles pop. We need to de-lever! And yet, corporations have added nearly a year's worth of debt in just 5 months! 2) We found a...

Buying AWK @ $118.05 *Adding 0.25%* *Total Position 0.75%* When we  initiated the position in AWK , we told you we'd be making smaller than normal weekly purchases. Today's price isn't "cheap", but it's down big on an up day - and below last week's purchase price. But we'll stick to the plan and buy a chunk each week. Below is the write-up from the initial purchase: A question was posed on Twitter on 5/9/20 asking if you could only make 1 investment from here on out, what would it be? Many of the answers were various index funds, Amazon, or gold. After thinking about it for a long time, the answer became clear: U.S. regulated water utilities. And there is really only one of them that is worth considering: American Water (AWK). Before getting into AWK, this is a different kind of purchase. It's not a "cheap" stock. As such, we aren't buying it in a "normal" 2% position size. It's going to be one we add to each week i...

Selling AVGO @ $281.90 Realize gain of $14.90 (5.58%) A stop loss got hit when AVGO fell below yesterday's low. We don't believe this latest leg to the rally and have been pushing our short bets. Part of that strategy is selling long positions at gains. Don't worry, we'll buy them back lower! Watch the cracks form in the markets. Amazon is down 3% today.

The Novavax vaccine rally caused futures to rise, but stocks traded flat from the open all day before fading and closing at the lows (and below the open) - but finishing up 1.23% on the S&P 500. It wasn't a "healthy" rally day with the rally's leader, Tech (XLK), closing lower. Futures are up big again this morning. There isn't much out in the markets to get us excited or bulled up. Data is horrible. Underlying economic conditions are bad. People are behaving like idiots - and could lead to a spike in confirmed coronavirus cases (and deaths). We're doing our best to stay neutral, but this market is begging for shorts. Something might be afoot - Fed buying stocks/futures or something. 1) Another example of our bread & butter charts: Chicago Fed National Activity Index. Off a cliff. Nearly every data series looks either off of a cliff or straight up. 2) Germany issued 2-year bonds yesterday at a negative  -0.66% yield. It was bid-to-covered (...

Shorting KBE @ $31.05 5% position We had an Unequal Pair Trade last week when we didn't want to push our shorts too, too much. That was last week. We see a fat pitch to get pretty aggressively short today. So we're shorting some KBE straight up. We shorted IWM this morning and sold some BUD . We're pretty short. We might cover some of the aggressive positioning tomorrow or the next day on weakness.

Selling BUD @ $43.09 Realized gain of $1.94 (4.71%) We've done a GREAT job of trading BUD. We made 3.57% on the first round-trip and 4.71% this time. Even with just 2% of our capital, that's 0.16% of gains for the whole book. If we traded BUD like this each week, we'd make about 4% in a year on our entire portfolio using just 2% of our money! It's a company we like in a market we think will give us another bite to buy at a lower price. Take profits when they're given.

Shorting (more) IWM @ $139.66 Adding 5% to position 20% position size There's a lot to short right now, but why use a scalpel when a sledgehammer will suffice? IWM is the sledgehammer and we're pushing this one hard today. We've been dead wrong with IWM since we covered part of the position back at $125. We should have covered the whole position, but that's ok. We'll short more here at a gift of a price.

We hope you enjoyed your Memorial Day weekend. It turned out to be wonderful weather here in Northern Illinois. Yesterday, a coronavirus vaccine from Novavax hit the newswires and stock futures opened up almost 1%. As of this morning, futures are up nearly 2%. We think we saw this movie last week with Moderna, but that's how Hollywood works - change a character's name and it's a new movie. We think stocks need to go lower, vaccine or not, so the news gives us reason to put back on our shorts - and shows why we covered our shorts last week before the weekend. 1) Citi puts out a few really neat sentiment indicators. This one is the panic/euphoria model. As you can see, we hit the lows of panic in March and are now back above the euphoria highs. 2) A constant reminder that valuation isn't a catalyst. Valuation provides a backstop to investing ideas, but can overshoot on both sides and stay cheap/expensive for a long time. The current market is super expensive by h...

Happy Memorial Day weekend. Thanks to those who paid the ultimate price for our freedom. We spent the long weekend doing a random assortment of small home projects - capped off by a socially distanced meal with family. The Hong Kong vs. China tensions are something that needs more attention paid to it. Coupled with the US vs. China relations going downhill, the China problem isn't getting smaller.  Staying with China, they withdrew their GDP guidance for the first time ever. We never trusted the actual number, but it was presumably directionally correct. Now, China can't even make up a believable GDP growth number. That's messed up! Staying in Asia, Japanese CPI dipped below zero. Shinzo Abe has been trying to fight deflation in Japan using a whole host of tools and hasn't been able to stoke the inflation fire. Japan is the best example of a central bank trying to fight economic gravity and paying the price for a long, long time. We fear that this th...

Buying GDX @ $35.65 5% position After our great decision to sell GDX at $37.37 , we'll buy it back here lower than our original purchase price ! We've been saying we don't want to go into the weekend 20% short of equities, so have been making moves all day to reduce that short exposure. We like gold as a trade here still and bought more yesterday in GLD . So while the set-up for GDX (gold miners) isn't perfect because we think equities broadly will go lower, it's a fairly low-risk way to add equity exposure for the long weekend.

Closing out our Unequal Pair Trade of PNC vs. KBE : PNC sold 2% @ $104.27 for $1.11 (1.08%) gain. KBE covered 5% @ $28.86 for $0.08 (0.28%) gain. It's not a huge gain, but making money on both sides of a pair trade is awesome! Especially in a week! We'll cover the trade ahead of the long weekend to reduce our net short exposure - per the plan laid out in today's Daily Note . It remains a good trade to put back on in the future.

Buying AWK @ $119.85 *Adding 0.25%* *Total position 0.50%* When we initiated the position in AWK , we told you we'd be making smaller than normal weekly purchases. Today's price is about the best we've seen all week - but it's not a great/cheap price. But we'll stick to the plan and buy a chunk each week. Below is the write-up from the initial purchase: A question was posed on Twitter on 5/9/20 asking if you could only make 1 investment from here on out, what would it be? Many of the answers were various index funds, Amazon, or gold. After thinking about it for a long time, the answer became clear: U.S. regulated water utilities. And there is really only one of them that is worth considering: American Water (AWK). Before getting into AWK, this is a different kind of purchase. It's not a "cheap" stock. As such, we aren't buying it in a "normal" 2% position size. It's going to be one we add to each week in small amounts until a ...

Covering LEN @ $58.90 Realized loss of $2.65 (4.71%) As we prepare the portfolio for the weekend, we're taking off part of our housing short. Lennar was the last part we added and was supposed to be the "juice" of the trade. But as we said in the Daily Note , we don't want to be 20% short heading into a long weekend. Even if it's the correct fundamental decision to be that short, the risks outweigh the benefits. Don't worry, we'll still be plenty short to profit from any weakness next week. And there are no rules that we can't re-short Lennar (and anything else) again next week!

Selling CCI @ $155.95 Realized gain of $7.89 (5.33%) CCI has performed admirably. It managed to be positive in a negative tape. So we'll book gains today and be ready to re-buy at a lower price. Cell towers are an amazing business, to be sure. But we like booking gains and buying shares lower.

Jobless claims yesterday came in right in-line with consensus expectations. However, there was a huge spike in Pandemic Unemployment Assistance (PUA) claims to 2.2 million. PUA claims are basically "gig economy" workers who couldn't file claims under the classic system but can under the enhanced/expanded system of the CARES Act. Despite the continuing weakness in the employment picture, the stock market finished down just 0.78% on the S&P 500 with the Russell 2000 up just slightly. But volume was weak and we finished into weakness, not strength. 1) PUA claim history. Each bar is a week. News must have gotten out about filing for PUA. 2) An interesting way to look at the stock market. If you assume it is mean-reverting and provides the average return, it's well above trend. 3) We can't resist posting these various charts. The ones that show data series that have strong historical relationships compared to the stock market.This particular one is t...

Buying BUD @ $41.15 2% position We sold BUD yesterday over $42/share - so basically saved ourselves (and you) a dollar/share buy actively managing our position. We see weakness building in the broader markets, but can't pass up the opportunity to add back a good position at a better price than we sold. We'll be happy to add more closer to $40 and sell again closer to $43, if you're trying to front-run us. (And assuming nothing major changes in our market outlook.)

Buying GLD @ $161.79 Adding 5% 10% position size After selling our gold miners (GDX) yesterday to reduce equity exposure, this is a good time to add back the gold exposure we like without the equity risk. So we'll add 5% to our GLD position.

It's Thursday, so that means another round of Initial Jobless Claims. A green close last Thursday keeps the streak of Jobless Claims over 2 million leading to an up day in the stock market pretty intact. In fact, only ONE TIME have Jobless Claims exceeded 2 million and stocks closed lower. In history. So we'll see what happens if we get another historically high number an hour before the open. Stocks finished up 1.67% yesterday, as measured by the S&P 500. We took the up day as an opportunity to cut our net and gross exposure by 9%. We're sitting at 21% net short of equities and 57% gross exposed, overall. To say we need some weakness is an understatement. We're pushing our bet a little hard right now. But the fragility that showed Tuesday afternoon gives us confidence that the market is skating on thin ice. Moving to our charts: 1) We're pretty short of housing stocks (9%) and shared a chart yesterday showing housing starts being weak. That's not tra...