• Sometimes Muppets know what's going on.

Speaking of Goldman Sachs (GS), I will remind you all that Muppets can have brains.

As an example, Ted Koppel brought in Kermit the Frog on Nightline  to explain the October 1987 stock market crash nearly 25 years ago.  

Thanks for readng my Diary, and enjoy your evening.

I will be on "Fast Money" at around 5:15 p.m., if you are still around!

• Back to the drawing board.

I have been working on an idea that I previously referred to as a possible ten-bagger. After several hours talking with management and about three days of research, I conclude that I had materially overestimated the company's potential ... and I have eliminated the position.

Alas ... and next!

• Citigroup lowers price target and rating on Apollo Group (APOL) now.

• Here's what I've been doing today.

Today I added to the following longs: Walter Energy (WLT), Pepsi (PEP), International Fragrances &Fragrances (IFF), CSX (CSX).

I covered my SPDR S&P 500 (SPY) short and put the money into more PowerShares QQQ Trust (QQQ) short.

And I've covered my short in Bank of America (BAC) from $9.92 and am no longer in the name.

• I see more short value in N's over S's.

Today I have replaced my SPDR S&P 500 (SPY) short with more PowerShares QQQ (QQQ) short -- which thus far seems incapable of going down ... which means it could go down hard.

From The Wall Street Journal: "Has Goldman Sachs Called the Market Top?"

• Consumer staples continue to brave the market drop -- most are in the green.

I own Pepsi (PEP) -- bought more today -- International Flavors & Fragrances (IFF) -- bought more today -- Procter & Gamble (PG), Colgate (CL) and Clorox (CLX).

• I should add the primary reason for covering my SPDR S&P 500 (SPY) short is risk control -- not a changing market view!

• I have added to CSX (CSX) and Walter Energy (WLT) longs today.

• Let's review today's economic releases.

This morning's economic data were consistent with a muddle-through recovery (with real GDP growth of 2% to 2.5%) and shouldn't impact stock prices.

• Leading indicators rose by +0.7% (a tad better than consensus of +0.6%). It was the best gain in 11 months, with eight of the 10 components advancing. Importantly, the six-month diffusion index is at a strong 70%.
• Home prices were unchanged -- a gain of 0.3% was expected -- as foreclosed real estate weighed on the markets. If one takes out foreclosed properties, non-foreclosed real estate experienced a gain in prices (as it has done for several months), consistent with my posts on a bifurcated residential real estate market.

• I have covered my SPDR S&P 500 (SPY) short at 139 (for a loss) and I am now market-neutral.

• Goldman touts IWM again.

Last week, the Muppet Master, Goldman Sachs (GS), recommended -- for the second time -- buying the iShares Russell 2000 Index (IWM).

 And for the second time, I suspect GS will be stopped out of the trade.

• I will be on "Fast Money" tonight at 5 p.m. EDT talking about industries and companies that might be exposed to a gradual and multiyear rise in interest rates.

• I am adding to iShares FTSE/Xinhua China 25 Fund (FXI) and International Flavors & Fragrances (IFF) now.

Doing nothing on the short side.

• Let's take apart the Goldman long-equities call.

It's time to play the music,

It's time to light the lights,

It's time to meet the muppets on the Muppet Show tonight!

It's time put on makeup,

It's time to dress up right,

It's time to raise the curtain on the Muppet Show tonight!

Why do we always come here?

I guess we'll never know;

It's like a kind of torture

To have to watch the show!

-- Theme from The Muppet Show

As I mentioned yesterday morning, Goldman Sachs wants to pump you up on stocks.

This week Goldman "discovered" that risk premiums are high in an upbeat "Birth of Equities" research piece ("The Long Good Buy; The Case for Equities") that implores investors to move aggressively into equities after the most munificent and coordinated global easing in history that fueled the S&P 500 to advance by 27% since early October and by 110% since the Generational Bottom (from 666 to over 1400).

After having moved into a net short position in my hedge fund and after just having reduced my market exposure in The Kass Model Portfolio, I am clearly in disagreement with Goldman's view. I see profit margins topping out, inflation and interest rates rising, a potentially disappointing upcoming EPS season, and, as I mentioned this morning, a slowdown in global growth.

I can't help but think that Goldman Sachs might have rung the bell that the market has topped in the near term!

Also apparently in disagreement is Goldman's head domestic strategist Dave Kostin who recently in a Bloomberg video confirmed his view that the S&P 500 will close 2012 at about 1250. And Jan Hatzius, Goldman's chief U.S. economist, two weeks ago reduced the firm's 1Q2012 real GDP forecast to an industry-low +1.7%.

Goldman Sachs' lengthy and well-documented report made the following conclusions -- my replies follow.

My majors criticism with the report is that the conditions mentioned in the body of the report have been in place for some time -- many of which (e.g., the high risk premium) I have used to support the notion that if certain conditions improve (technical, political, geopolitical), the S&P had the potential of approaching its 2007 high in this year's second half.

• "After more than a decade of derating, equities are implying unrealistically large declines in growth and returns in the future."
  
  
  
  I continue to see relatively weak worldwide economic growth and profit uncertainty, as I suggested in yesterday's opening missive, "What Goes Up Must Go Down."

• "While future growth may be lower than experienced over the past decade in many parts of the world, we believe this is more than reflected in current valuations."
  
  
  
  Mr. Market already trades at 14x, not far from the historic averages of 15x over the past five decades ... but, its different this time, as we face numerous secular headwinds.

• "Future returns in equities are heavily influenced by valuation. The prospects for moderating risk premium raise the probability that equities will embark on a steady upward trajectory over the next few years."
  
  
  
  But what happens if the interest rate rise exceeds the consensus and a spike ensues? Won't bonds once again provide refuge in a risk-averse world with a consumer pressed to make ends meet and disinterested in buying stocks after two market disasters since 2000? Remember, the retail investor, in 2007, was not a muppet -- he sold at the top! The individual investor might have learned a lesson over the past decade.

• "The ex-post equity premium has been strikingly poor in recent years."
  
  
  
  Agree, but so what -- is "cheap," given other cyclical and secular concerns, enough of a reason to buy stocks?

• "The prospects for future returns in equities relative to bonds are as good as they have been in a generation."
  
  
  
  While stocks might be "the best house in a bad neighborhood" and will be more attractive than bonds, any real estate agent would tell you, "Never buy the best house in a bad neighborhood!"

• Overnight data were pretty disappointing.

Yesterday's tape signaled economic slowing, counter to the optimism expressed by Mr. Market over the past few months and contrary to the Muppet Masters (Goldman Sachs' upbeat economic and equity assessments). Industrial shares were weak, consumer staple shares were strong and the yield on the 10-year U.S. note fell by about 10 basis points. Commodities, too, fell.

Overnight we saw more confirmation of slowing growth:

• Europe's manufacturing sector contracted in the most recent reporting month, and growth (or lack of growth) is beginning to miss relative to expectations. The composite of euro area manufacturing PMI declined from 49.3 to 48.7 in February (the consensus was 49.6)
• HSBC's preliminary Chinese PMI for March declined to 48.1 from 49.6, the fifth consecutive monthly decline and well below expectations. (Interestingly, the markets in China are down only a few basis points, outperforming most markets around the world.) Yesterday, I showed a chart that suggested that the iShares FTSE/Xinhua China 25 Fund (FXI) was washed out and very inexpensive relative to the S&P 500 index.

I continue to believe the market is about 5% overvalued. On Monday I reduced the recommended exposure in The Kass Model Portfolio (long only) from 50% to 40%.

I am net short in my hedge fund.