February 7, 2023

‘Mr. Market is a drunken psycho.’ Why this hedge-fund manager is shorting some of the market’s biggest names.

Critical information for the U.S. trading day

Warner Bros/Courtesy Everett Collection

Stock futures are fluctuating as investors get ready for a few words from Fed Chair Jerome Powell, who will make his appearance just days after moonshot jobs data.

That’s as more big investors flag signs of mania, with the S&P 500’s (SPX) new year gains bringing the index to 4,111, above half of Wall Street’s year-end 2023 forecasts.

Our call of the day from the president of Seabreeze Partners Management’s Doug Kass is among them as he likens stock market activity in 2023 to that of a “drunken psycho.”

“The bottom line is that the optimism embraced since the beginning of 2023 and manifested in well above historic valuations now seems likely to be reversed – led by a reset lower in price [to] earnings multiples,” said Kass, adding that he is now proceeding cautiously.

He blames a wrong-way “chorus of optimism” that has seeped into markets over the past month. “That chorus is led by cheerleaders in the business media and by quant strategies and products – some/many of which worship at the altar of price momentum, knowing little about value but everything about price,” says Kass.

Kass ticks off a few things worrying him right now, starting with strong jobs numbers that to him spell stubborn wage inflation and mean faster Fed rate hikes that stay higher for longer. He’s also looking at a renewed yield curve inversion between the 2-year Treasury (BX:TMUBMUSD02Y)and 10 year (BX:TMUBMUSD10Y)Treasury note, along with disappointing big tech results. Lastly, he notes violent speculation in call options —
the right to buy an asset at a future time at a specific price, often viewed as bullish — that has coincided with topping action for stocks in the past.

@KeithMcCullough

He also noted that short sellers capitulated last week, resulting in the biggest amount of short covering in a decade:

In recent days, Kass curbed Seabreeze’s risk profile, adding new shorts on iShares Russell 2000 ETF (IWM), Microsoft (MSFT), Apple (AAPL), 3M (MMM), Lululemon (LULU), GE (GE)and Boeing (BA), and selling Alphabet (GOOGL), Amazon.com (AMZN) and Disney (DIS) .

“There are simply too many made up narratives on the markets — in an attempt to explain the daily moves,” says Kass. “They are a reaction to the notion that ‘price is truth,’ which ends up influencing sentiment and clouding the facts.

He says while January progressed bullishly, many became convinced of a new rally, but haven’t taken on board the changing market structure that has been influencing market direction — ETFSs and quant strategies and products. He also notes the newest speculation —zero days to options expiration (ODTEs) that are basically puts and calls on stocks and indexes with 24-hour expirations.

These have all “likely become the tail that wags the market dog,” as a fear of missing out has seen defensively positioned retail and hedge funds rush in to drive markets even higher, he says.

So buckle up, Kass advises. “Above all dismiss made up narratives that bend with the market’s wind and are designed to fit into and to be compatible with the last tick of stock prices.”

Read:
Look for stocks to lose 30% from here, says strategist David Rosenberg. And don’t even think about turning bullish until 2024.

The markets

Stock futures (ES00) (YM00) (NQ00) are on the fence, Treasury yields (BX:TMUBMUSD10Y) (BX:TMUBMUSD02Y) are easing, the dollar (DXY) is higher along with gold (GC00) and oil prices (CL.1) are up over 2%.

Read: A digital currency is likely to be needed, says U.K. Treasury and Bank of England

For more market updates plus actionable trade ideas for stocks, options and crypto, subscribe to MarketDiem by Investor’s Business Daily.

The buzz

Bed Bath & Beyond shares (BBBY) are sinking in premarket trading after executives late Monday announced plans to sell convertible shares to get out of a loan default and fight bankruptcy.

DuPont (DD) shares are off after the chemicals giant gave soft guidance. Still to come is Royal Caribbean (RCL), followed by Chipotle (CMG) after the bell.

Baidu stock (BIDU) (HK:9888) is up 14% following confirmation by the China internet group that it will launch an AI chatbot next month.

After reporting slightly disappointing results, BP (UK:BP) (BP) says it’s increasing investment in oil and gas, alongside renewable spending.

Fed Chair Powell will speak at the Economic Club of Washington at 12:40 p.m., with Fed Vice Chair for Supervision Michael Barr due at 2 p.m. International trade deficit numbers are at 8:30 a.m., followed by consumer credit at 3 p.m.

U.S. President Joe Biden will deliver his State of the Union speech later on Tuesday.

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The chart

Amid talk about a meme-stock redux, here’s a throwback chart from Julian Emanuel, strategist at Evercore, who touches on the current wave that has driven up shares like Carvana (CVNA) this year. The 2021 “Meme Peak left the S&P 500
volatile/lower over the following weeks while ending the year positive nonetheless,” he says.