• My money is on Lindzi Cox.

The adverse technical indicators and divergences -- namely, low volume, poor breadth, lower new highs and disinterest in puts vs. calls -- that have formed the basis of some of my market concerns continued apace today.

But now (to the dismay of Danny our editor), my mind moves from the markets to who will "The Bachelor" Ben Flajnik pick tonight.

While the tabloids have displayed pictures of Ben kissing Courtney Robertson, my money is on Lindzi Cox (but my heart is still with Kacie B!).

Stated simply, it is good (Lindzi) vs. bad (Courtney).

Moreover, I have never met a girl who spells her name Lindzi.

Thanks for reading my Diary and the nice response to my short bond opening missive.

Enjoy your evening, and keep the television and your eyes on ABC!

• I will lose my longs in MetLife, Prudential and T. Rowe Price at Friday's expiration by virtue of my short call postions.

Upon expiration on Friday, I will be losing the following longs (by virtue of my short call postions): MetLife (MET), Prudential (PRU) and T. Rowe Price (TROW).

• Morgan Stanley comes to Freeport's defense.

Morgan Stanley is defending Freeport-McMoRan Copper & Gold (FCX) now.

• The CBOE put/call ratio has dropped to a level that is a plus for the contrarians (and bears).

The CBOE put/call ratio has been dropping (now at 0.63 down from 0.70 on March 6, 2012), a plus for the contrarians (and bears).

Here is the chart.

CBOE Put/Call Ratio -- Daily

Source: Bloomberg

View Chart »View in New Window »

(Note: The yellow line is 50-day moving average, the orange line is the 200-day moving average, and the jagged white line is the actual ratio.)

• The shares are getting jiggy.

PepsiCo (PEP) is getting jiggy.

In an unrelated note, I am off to the dentist.



See you near the close.

• Some volume perspective (a snoozefest!) from Sir Arthur Cashin:

Run rates (in millions of shares):

• 10 a.m. EDT: 685
• Noon: 590
• 1 p.m.: 520

• And they say it was a capital offense.

"What would I do? I'd shut it down and give the money back to the shareholders."

 - Michael Dell, October 1997, when asked what he would do if he was in charge of Apple (AAPL)

In the tradition of our running "The Chris Matthews Show," Dougie, tell me something I don't know?

• In early 2006, Apple's cap eclipsed that of Dell (DELL).
• In early  2009, Apple's cap exceeded Dell's by 5x.
• By the fall of 2010, Apple's cap rose to over 10x that of Dell.
• Today, Apple's market capitalization of $512 billion is more than 17x Dell's market capitalization of $30 billion.

• Run, don't walk, to read Berkshire Hathaway for Dummies!     

I recently purchased shares of Berkshire Hathaway (BRK.B).

Here, courtesy of Wedgewood Partners' Sir David Rolfe, is Berkshire Hathaway for Dummies!

• Run, don't walk to read FreeRepublic.com's Abbott-and-Costello parody on the jobs market.

After Gallup came out with a U.S. unemployment rise to 9.1% in February (up from 8.6% in January), the good folks at FreeRepublic.com added their two bits on the jobs market in a Abbott and Costello parody! 

Unemployment Definition -- Abbott and Costello

COSTELLO: I want to talk about the unemployment rate in America.

ABBOTT: Good subject. Terrible times. It's 9%.

COSTELLO: That many people are out of work?

ABBOTT: No, that's 16%.

COSTELLO: You just said 9%.

ABBOTT: 9% unemployed.

COSTELLO: Right 9% out of work.

ABBOTT: No, that's 16%.

COSTELLO: OK so it's 16% unemployed.

ABBOTT: No, that's 9%.

COSTELLO: Wait a minute. Is it 9% or 16%?

ABBOTT: 9% are unemployed. 16% are out of work.

COSTELLO: If you are out of work, you are unemployed.

ABBOTT: No, you can't count the "out of work" as the unemployed. You have to look for work to be unemployed.

COSTELLO: BUT THEY ARE OUT OF WORK!

ABBOTT: No, you miss my point.

COSTELLO: What point?

ABBOTT: Someone who doesn't look for work, can't be counted with those who look for work. It wouldn't be fair.

COSTELLO: To whom?

ABBOTT: The unemployed.

COSTELLO: But they are ALL out of work.

ABBOTT: No, the unemployed are actively looking for work. Those who are out of work stopped looking. They gave up. And, if you give up, you are no longer in the ranks of the unemployed.

COSTELLO: So if you're off the unemployment roles, that would count as less unemployment?

ABBOTT: Unemployment would go down. Absolutely!

COSTELLO: The unemployment just goes down because you don't look for work?

ABBOTT: Absolutely it goes down. That's how you get to 9%. Otherwise it would be 16%. You don't want to read about 16% unemployment do ya?

COSTELLO: That would be frightening.

ABBOTT: Absolutely.

COSTELLO: Wait, I got a question for you. That means there are two ways to bring down the unemployment number?

ABBOTT: Two ways is correct.

COSTELLO: Unemployment can go down if someone gets a job?

ABBOTT: Correct.

COSTELLO: And unemployment can also go down if you stop looking for a job?

ABBOTT: Bingo.

COSTELLO: So there are two ways to bring unemployment down, and the easier of the two is to just stop looking for work.

ABBOTT: Now you're thinking like an economist.

• Many of my portfolio holdings are presenting at conferences/reporting earnings this week.

Here are this week's events and earnings reports dates for portfolio positions I own (or are short):

Monday, March 12

• SunTrust (STI) will appear at the Third Annual Bank and Financial Institutions Conference.

Tuesday, March 13

• Disney (DIS) has its annual general meeting.
• Groupon (GRPN) presents at Barclays Capital Internet Connect Conference.

Wednesday, March 14

• General Motors (GM) will appear at the World Biofuels Markets Conference.
• Prudential (PRU) and Pepsico (PEP) appear at Globe 2012.

Thursday, March 15

• Regal Entertainment (RGC) will be at the Gabellio & Co. Movie and Television Broadcasting Conference.
• Ford (F) presents at Globe 2012.

Friday, March 16

• magicJack VocalTec (CALL) reports earnings.

• Keeping tabs on this market.

1. Nice out on the Caterpillar (CAT) long rental!
2. If there is an inverse head-and-shoulders technical patter in utilities, interest rates are moving lower and consumer staple shares are trading higher, are these an indication that economic growth is already slowing?
3. No. 2 is keeping me from adding to my ProShares UltraShort 20+ Year Treasury (TBT) long.
4. I have no clue why PepsiCo (PEP) traded lower after the opening, but I added to my position.
5. The NBA (nothing but Apple (AAPL)) continues.

• Pepsi's July 70 calls could pop.

A cheap call idea, which I own, is the PepsiCo (PEP) July 70 calls at $0.18. (I also own the April 60 calls.)

I will probably rip up the paper, but my risk is defined and lightning might strike.

• Utilities will likely outperform the S&P 500 in the near term.

Below is a chart of the Utilities Select Sector SPDR (XLU).

Notice the inverted head-and-shoulders configuration, which suggests that interest rates might be going lower over the near term and that utilities will likely outperform the S&P (which is contrary to my short bond trade).

One possible long idea if you believe in this voodoo is to buy SPDR S&P Dividend ETF (SDY).

What do our technically inclined contributors think of the XLU chart?

• Run, don't walk, to watch an explanation of high gasoline prices.

Here is a good explanation of why gasoline prices have risen! 

• Run, don't walk, to read Paul Price's comments on Columnist Conversation.

On CC, Paul "The" Price "Is Right" observes the low rates that Coca-Cola (KO) paid last week for three separate note offerings, and he warns that this is an example of the "present-day bubble in investment-grade debt."

I agree, as I discuss in today's opening missive, "The Case for Shorting U.S. Bonds."

• Buying JPMorgan Chase shares at $41 is something of a Johnny-Come-Lately move.

I could not disagree more on the media's sudden fascination with owning JPMorgan Chase's (JPM) shares, especially after a 40% run.

Everyone from the "Fast Money" crew to Jim Cramer to "Downtown" Josh Brown is singing the bank's praises these days.

From my perch, there is nothing new in the story, little in the way of short-term catalysts and, as The Divine Ms. M. writes in her opener, the Bank Index's chart looks vulnerable and resembles the Russell 2000 in February, right before the that index broke down.

Stated simply, in my opinion, buying JPMorgan shares at $41 is something of a Johnny-Come-Lately move.

Stay tuned to see if I am correct or if the bulls prevail.

• The hardest trades often are the most profitable going forward.

She comes on like a rose but everybody knows

She'll get you in Dutch

You can look but you better not touch...

Measles make you bumpy

And mumps'll make you lumpy

And chicken pox'll make you jump and twitch

A common cold'll fool ya

And whooping cough can cool ya

But poison ivy, Lord'll make you itch!

-- Jerry Lieber and Mike Stoller, "PoisonIvy"

Bonds have achieved a near 50% total return since year-end 2009. With those outsized returns, shorting bonds, similar to being exposed to poison ivy, has been a toxic strategy.

Over the last half century, bonds have historically been considered a risk-free asset class.

Nevertheless, I believe bonds should now be seen as a return-free asset class that is very risky, and long-dated fixed income should require a warning label for all potential buyers.

Historical Returns

The great bull market in bonds has persisted during most of the last four decades.

Over the last 38 years (since 1974), the total return on the long bond registered negative returns in excess of 5% in only four years: 1987 (-6.3%), 1994 (-12.0%), 1999 (-14.8%) and 2009 (-25.5%).

Below is the table of the annual returns on bonds since 1974 (Source: Ron Griess, TheChartStore.com):

The market landscape is littered with investors and traders who have unsuccessfully shorted U.S. bonds over the last two years.

It has been a painful experience, but often the hardest trades (and those that have been most unsuccessful) are the most profitable going forward.

So, before I outline the rationale behind the five key reasons to short bonds, given that the burden of proof lies squarely on the shoulders of the bond naysayers, I wanted to start with the five reasons not to short bonds.

Five Reasons Not to Short Bonds

Above all, the U.S. economy faces powerful secular headwinds that weigh as an albatross around the neck of a trajectory of self-sustaining growth.

1. The forecast? Muddle-through growth: At best, muddle through remains the baseline expectation for domestic economic growth for 2012.
2. A feel-bad environment: Deleveraging and caution associated with the pronounced economic downturn of 2008-2009, coupled with structural unemployment, represent a confidence deflator and act as a governor to personal consumption over the near term.
3. The Bernanke put: The Fed will likely anchor short-term interest rates as far as the eye can see. More quantitative easing will be on deck if the domestic economic recovery falters.
4. A large manufacturing output gap: Capacity utilization rates are nowhere nearlevels that are typically associated with demand-pull inflation.
5. A negative demographic shift: Aging baby boomers are ignoring stocks, preferring to buy risk-free fixed income products. After two massive drops in the U.S. stock market since 2000 and a lost decade for equity investors, this rapidly growing demographic seems to continue to have an almost insatiable appetite for bonds.

In summary, the positive case for U.S. government (and corporate) debt is that there are numerous cyclical and secular factors that will weigh on domestic growth serving as a significant hurdle against the short bond thesis.

Five Reasons to Short Bonds

It is my contention that even if domestic economic growth is constrained, a bond short can prosper, even under the baseline expectation of a muddle-through growth backdrop.

1. The flight to safety will likely have a diminishing half-life. With some progress being made in Europe (reflected in lower sovereign debt yields and sharp rises in European stock markets) and with confidence in the world's financial system improving, it is only a matter of time before the flight-to-safety premium in bonds dissipates.

Bond yields are unusually low, and I would note that the current 10-year U.S. note (2.0%) is approximately one-half the yield of the recession of the early 2000s. Gold prices already suggest that the safety premium could disappear sooner than later. (I view gold as a fear trade, and the recent drop in gold prices should be seen as a forward indicator of less fear.)

While U.S. economic growth remains subpar, a reacceleration is inevitable in the fullness of time. Demand for durables (housing and auto) is pent-up, not spent-up, and continued population and household formation growth will serve to unleash latent demand at some point in time.

In an attempt to put the flight-to-safety premium in bond prices into perspective, the chart below (courtesy of BTIG Chief Global Strategist Dan Greenhaus) compares the yield on 10-year and 30-year notes and bonds to nominal U.S. GDP (nominal GDP = current real GDP + current inflation). Over the last five decades, long-dated bond yields have tracked (and averaged only slightly under) the nominal growth rate in the U.S. -- 4.4% (2% real GDP estimate + 2.4% current inflation) compared to the yield on the 10-year U.S. note of 2.0% and the 30-year U.S. note of 3.1% -- in fact, long-dated yields often exceed nominal GDP.

(Note: 10-year yield is black; 30-year yield is green; nominal GDP (year-over-year) is red.)

2. Flows out of stock funds and into bond funds seem to be at a tipping point. Since 2007, nearly $450 billion has been redeemed from U.S. equity funds, and $850 billion has been placed into U.S bond funds. This swing, of $1.3 trillion, is unprecedented in history. In early 2012, the hemorrhaging of stock funds has stopped. It is my contention that, at some point, a massive reallocation from fixed income into equities is inevitable.

3. Confidence is recovering as economic growth reemerges and risk markets improve. As seen in the chart below, the real yield on the 10-year U.S. note correlates well with consumer confidence, which is now recovering.

4. Inflation remains an issue. A steady increase in inflation and inflationary expectations has occurred as most inflationary gauges (TIPS, etc.) are at six-month highs. I would not entirely eliminate the concern on demand-pull inflation as emerging markets grow more industrialized. Moreover, cost-push inflation is a growing possibility -- particularly in light of geopolitical pressures that could create a black swan in the price of crude oil.

5. The failure to address our fiscal imbalances could come back and bite the bond market. As I suggested in Friday's opening missive, the November elections might result in more gridlock. A Democratic president, and a Republican House and Senate imply that little positive progress should be expected in meaningfully resolving our burgeoning deficit in a still-divided Washington, D.C. This could encourage the bond vigilantes and further alienate foreign central bankers in their appetite for our bonds and notes. (Many are already diversifying away from the U.S. bond market.)

Strategy in Shorting Bonds

I readily admit that, in all likelihood, with U.S. GDP growth of less than 2% in first quarter 2012, bond prices will be relatively range-bound in the weeks ahead.

But any evidence of a resumption of growth will have a dual impact: It will likely reduce the flight to safety (reflected in bond premiums) and, at the same time, produce the historically normal and natural upward pressure on interest rates associated with an improving economy.

When this happens, bonds will, once again, become certificates of confiscation.

• I am in a slightly net short position beginning the week.

I remain cautious on the U.S stock market, and I am in a slightly net short position beginning the week.

• Lower productivity means lower corporate profit margins.

There was just a great conversation, led by Steve "Deadhead" Liesman on CNBC, regarding the lower labor productivity readings recently.

It follows (from that conversation), as I wrote on Thursday, that lower productivity means lower corporate profit margins:

Profit Margins Are Now Vulnerable

With regard to corporate profits, though the markets paid little attention, Wednesday's unit-labor cost report was an important variable that could dent corporate profitability in the months ahead.

Remember that corporate profit margins are among the most mean-reverting economic series extant. (Already, profit margins have slipped from over 9% in third quarter 2011 to 8.7% in fourth quarter 2011.)

Wage Inflation Is Accelerating

The rate of increase in unit labor costs for the fourth quarter of 2011 accelerated from +1.2% to +2.8% quarter over quarter.

Reflecting a large revision in second-half 2011 incomes to +3.7% from +1.7%, unit labor costs year over year rose by more than +3% in the fourth quarter of 2011, by +2% in the third quarter of 2011, and by +1% in the second quarter of 2011. (CNBC's Kelly Evans discussed the vulnerability of corporate profit margins in a segment yesterday.)

The Fed's Dilemma

Currently, core inflation is rising at about a +1.8% to +1.9%. The year-over-year change of more than 3% in unit-labor costs will likely put pressure on core inflation in the first half of 2012. As such, rising inflation spurred by rising wages poses a dilemma for the Federal Reserve to maintain its continued monetary easing (more and more cowbell).

At the minimum, Wednesday's unit labor release substantially reduces the odds of another round of quantitative easing.

-- Doug Kass, "Signs of Declining Corporate Profit Margins Emerge" (March 8, 2012)

• A week ago I purchased more PepsiCo.

On that day I wrote about a possible change at the top:

Nice mush on PepsiCo (PEP) from The Divine Ms. M.

I added to the common today -- it's now my third-largest individual equity position -- and I purchased April and July out-of-the-money calls.  Besides the historically low valuation, my feeling is that investors (and maybe even the board) are growing impatient about the share price and company performance.

Indra Nooyi became President in May 2001 and Chairman in May 2007. Here is how the shares have performed since 2001.

In my view, a change at the top would be welcomed by the investment community.

Today the Wall Street Journal reports that, following investor frustration with the company's returns, succession plans are being  drawn up.

The WSJ article suggests that former senior Wal-Mart Stores (WMT) executive Brian Cornell will head PepsiCo's largest and most profitable unit. As well, longtime executive John Compton will be elevated to the new position of president, with responsibility for integrating snack and beverages operations and brands.

I view this morning's news as a positive move and I anticipate a slighty upbeat reaction in the shares.