• This is too newsy of a backdrop for most traders and investors.

"One last thing."

-- Lt. Columbo

The more I think about it, continuing the theme of a few of my columns today, only those who are fleet-of-foot traders or those who have no respect for money should be heavily involved in stocks over the next week or so.

This is too newsy of a backdrop for most traders and investors.

We are all edgeless and dependent on the sanity (or lack thereof) of our leaders in Washington, D.C.

While the odds favor resolution of the budget issues, I don't (and no one should) put a lot of money on the pass line.

• Thanks for reading my diary and enjoy your evening.

I have a two-hour research call coming up, so I will say goodbye for the day.

Thanks for reading my diary and enjoy your evening.

• Takes the sector with it.

Potash (POT) and the fertilizer stocks are rising intraday following a Wall Street Journalreport that the stake in Uralkali, Russia, could go to a local investor.

• Run, don't walk, to watch David Einhorn on Bloomberg.

Here is a great Bloomberg interview with Greenlight's David Einhorn.

• Nice move.

ProShares UltraShort 20+ Year Treasury (TBT) has mad a nice move up from its morning lows today.

• Here are his musings at midday.

Midday musings from Sir Arthur Cashin:

Markets are stuck in indecisive territory.  S&P fails to take out Monday's lows or Tuesday's highs.  Bounce this morning came on President's comment that he would invite Congressional leaders to the White House.  (Hope that face to face would inhibit name calling.)

Should they meet; the markets will hang on comments and tone when they adjourn.  High volatility possible, but it looks like early evening right now.

The run rate at 12:30 projects to 660/740 million NYSE volume.

• This should cap the market's upside.

Defensive, consumer staples stocks continue to be weighed down by Unilever's (UN, UL) weak sales guidance this week.

This is a large segment of the market that is not likely to be going anywhere in the near term and should, to some degree, cap the market's upside.

• The real estate maven dismisses the notion of a gap between home production and household formation.

More good data/observations from real estate maven Mark Hanson which refutes something that Legg Mason's Bill Miller and others have been saying on housing demand and dismisses the notion of a gap between home production and household formation:

"This note isn't "actionable" per se.But it does a great job in refuting a primary bull thesis that is actionable. In short, the ancient, hollow adage "we need 1.4mm new houses every year just to keep pace with formation" doesn't hold water in the new-era housing market. This is due to a new category of supply I have coined, "Shadow Construction", which has kept a lid on builder demand -- and absorbed much of what little organic "total potential demand" exists -- for the past several years.  Mh

Bill Miller -- the latest to publicly display "fallacious euphoria" over housing (again) reciting ancient, hollow adages and cliché's -- front-running a year straight of weak data, fear, and uncertainty ahead

My data, herein, refute the idea of a housing "shortage" created by "formation" and indicate up to "2-MILLION" excess units have been created for sale or rent

2-MILLION "excess" housing units that mimic "new construction" -- SHADOW CONSTRUCTION -- were created over the past 4-years, which have obviously diluted demand

There is no housing shortage of houses "in which to live", rather a misallocation favoring legacy owners turned renters of their own house and new-era investors

Think about it...millions of houses taken from the "owner occupied" or "vacant distressed" pool and turned into rentals doesn't decrease "supply"...it simply reallocates it.  The same with when an investor buys a house for the purpose of a "flip"

Builder sales remain near multi-decade lows, still down trending in the context of "post-crash" / the notable divergence between New and Existing Sales demand

Summary..."Shadow Construction"

Since the crash in 2008/09, a primary bull thesis -- rather, an age-old, yesteryear, hollow housing economy adage / cliché' -- is that "due to good 'ole 'household formation' we need 1 million new houses each year just to keep up with demand". Then, it changed to 1.2 million about a year ago.  Today in an interview, Bill Miller pressed it to 1.3 to 1.4mm.  This of course relates to the misperception about how "undersupplied" this market is.

Throughout most of the time from 2008 builder demand has fallen, reaching a low of just under 300k annual sold units.  However, in the last year and a half demand has risen to 400k...in direct response to the Fed pushing mortgage rates down 45% in late 2011;  anti-foreclosure laws;  millions of new mortgage mods;  and the misallocation of MILLIONS of houses favoring legacy loan holders turned renters of their house vis a' vi mortgage mods and "new-era investors" for flip and bond replacement "trades".  Obviously, on a percentage basis this move is huge.  It becomes a raging bull move when the sell side takes the 2012 gains and assumes the same will happen for the next 5 years straight.  But, on an absolute basis the gains are volume are anemic;  still down 60%+ from historic "norms" and severely underperforming Existing Sales demand (to be totally fair Existing Sales have been buoyed for years by the double-counting of "distressed" and "flips").

The reason for builder underperformance is fairly straightforward:  New Home demand is far more "organic" in nature (attracts owner occupant buyers relying on mortgage loans) while the Existing Home demand has been far more influenced by "distressed" and investors.  And because the nation's organic "Total Potential Demand" for houses has been gutted "post-crash" (up to 50% of all mortgage'd homeowners locked in); and millions of rehabbed "distressed" supply that "looks and acts like" newly built supply has been created, builders are suffering and will continue to suffer.

Existing Sales don't get a perma hall pass, however.  That's because throughout housing market history "investors" have been known to jump into and out of the housing market over very short periods of time. And when new-era investor demand does normalize on something as simple as rising prices or lack of "distressed" supply, then Existing Sales will reset much lower...like New Sales, Existing will reset to the anemic, organic "Total Potential Demand".

The Real "Supply" and "Demand" Numbers..."2-Million Excess Units" Created for sale or rent since 2008

Scratching just a little beneath the new-era housing market surface, I have found there are plenty of houses "in which to live".  In fact, there has been over 2-MILLION excess units "created" since 2008 for sales or rent.  These units can't be found simply by looking at traditional Government or builder construction data.  But they were created and put into the supply chain none the less.  In addition to this, there is a significant supply misallocation of houses caused by the ill-effects of mortgage mods, which turn homeowners into renters of their own house from the banks and Government; and caused by QE a la the investor "trade", evidenced by the high, double-digit vacancy rates in the popular new-era investor regions around the country.

The "2-million" Shadow Construction units I discovered that have hit the market over the past 4-years -- and that have kept an obvious lid on builder demand -- are a bi-product of new-era housing market dynamics most analysts have not picked-up on yet.  They come from 3-million "vacant" abandoned houses, foreclosures, and short sales, which were rehabbed and brought to market as essentially "new" primary residences, resales, or rentals.   These are broken out in item 2 below.

This "Shadow Construction" -- that "acts like" new supply -- is something never before seen in housing market history.

Lastly, I don't quite buy the popular "household formation estimates".  Although I too use popular formation estimates in all my models in order to be conservative, I believe far more millennial's are living with parents and grandparents than commonly thought.  Moreover, it takes full-time jobs and good pay to buy a house.  Millions of part time and temp workers are great for the auto sector all pumped up on Subprime loans so easy they make 2006 look punitively tight.  But part-time workers don't necessarily do anything for housing. Even after somebody unemployed for a while gets a job, they need to be full-time and probably have at least a full years work under their belts before they qualify for a mortgage.

Again, in the examples below I use popular "formation" figures even though they are probably wildly aggressive.

Item 1)  The Bull 50k foot, old-school thesis...supply / demand with consensus "formation" figure shows about a 1.3mm housing unit "deficit"

Item 2)  My Numbers -- how the 'real' post-crash housing market really works -- reflect "SHADOW CONSTRUCTION" and supply that "acts like" new construction derived from "vacant" demolition that never occurred, foreclosures, and short sales rehabbed and brought to market as "new" primary residences, resales, or rentals.

My Numbers

Source: Mark Hanson

View Chart »View in New Window »

Bottom line:  Supply that "acts like" new construction -- "Shadow Construction" -- added 3-million additional primary residences or resale / rental supply over the past 4 years and has kept a lid on builder demand. In fact, the average "shadow construction" volume over the past 4-years of 750k is about exactly what the average "formation" has been.  As such, "household formation" demand really has never existed as "incremental" since the crash.

Organic house sales volume -- ex-new era investor -- is so weak one can argue that what little activity is happening is largely caused by QE, the pull-forward effect, unintentional landlords, and other "transitory" or stimulus-induced factors.  This is also confirmed by the two most notable post-crash "demand waves" that came exclusively on the 2009/10 Homebuyer Tax Credit and following Twist in Q4 2011.

Thus, if the market was oversupplied in 2008 and since then "Shadow Construction" has cancelled out "formation" then one can make an argument we sit in the exact same position now as then.  A primary and important difference being that Shadow Construction is not occurring at the levels it once did due to millions of mods, anti-foreclosure laws, and foreclosure can-kicking.  Net-net, this is a positive to the supply side of the market right now.  But a negative for prices, as "distressed" rehabs and flips are largely responsible for the price out performance in most all the regions in which new-era investors have swarmed.

I don't disagree that 'this' housing market has gone through a period of "inadequate supply" for people to "buy".  And once again, that's primarily because of millions of mods;  foreclosure can kicking;  anti-FC laws;  pulled-forward demand from Twist/QE3, 4;  incremental demand for the buy-and-rent "trade" etc. But I don't think there is a lack of total US housing unit supply "in which to live".

I argue that based on the total supply out there -- and certain PE firms sitting at a 50% occupancy rate in Phoenix and Vegas for example -- millions of houses are simply in the wrong disposition bucket...i.e., houses targeted for rentals or taken off the market for a long period of time awaiting rehab and flip.

So, if any part of the US financial markets are still free thinking and opportunistic then housing "supply" should shift from rental to "for sale" -- especially given the surge in rates -- to meet the transitory supply miscategorization. The problem is, that the supply is coming as demand is falling sharply."

• And adding to my long.

I am stepping up my Northwest Bancshares (NWBI) buy level to $13.25 now and adding to my long.

• Here are the headlines.

See below:

• "Obama Invites Congressional Leaders to White House, WSJ Says."
• "Obama to Discuss Shutdown, Debt Ceiling With Leaders, WSJ Says."

• I am just further reduicing my gross exposure.

As I reduced my Direxion Daily Small Cap Bear 3x Shares (TZA) and ProShares UltraShort Russell2000 (TWM) longs earlier, I am now taking off my long SPDR S&P 500 ETF Trust (SPY) hedge at $168.32 (very small gain) in order to reduce further my gross exposure as I wrote in an earlier post.

• I bought more shares at $74.77.

I added to my ProShares UltraShort 20+ Year Treasury (TBT) long at $74.77.

• Since we don't control our investment destiny during this period, it is time to sit on our hands.

The market will be very influenced by news over the next two weeks, especially of a government kind.

Since we don't control our investment destiny during this period, it is time to sit on our proverbial hands.

Or at least it is time for me to be less exposed.

As well, I will be out on Friday, as I travel back to my home in South Florida.

For these reasons, I am reducing my gross exposure. I am taking off some Direxion Daily Small Cap Bear 3x Shares (TZA) and ProShares UltraShort Russell2000 (TWM) longs and reducing some other positions.

Neither fundamentals nor charts are particularly relevant in a newsy setting.

Why risk hard-earned investment capital in a market that has no memory from day to day and that is so dependent on outcomes that we can only guess and can have little conviction about?

• There will probably be no tapering in 2013, there will be a budget compromise, and the market will be range-bound.

Below are a few forecasts:

• There will be probably be no tapering in 2013, as the economic data is simply too soft and a week to two-week government shutdown will further hurt the domestic economy. (See previous parsing of the economic data.)
• There will be a budget compromise.
• If I am correct, the market's downside will likely be limited to under 5% from here. I am not saying there is no downside, but I am not saying there is much upside either. If I were forced to make a forecast, I suspect we are in a trading range for the SPDR S&P 500 ETF Trust (SPY) of between $163.50 and $171.00 for the balance of the year. In other words, no extreme moves, barring the unexpected.

• The jobs and housing data were weaker than expected.

This morning's economic data for both jobs and housing were weaker than expected.

The labor data, in particular, contradict the second-half reacceleration that most investors expect. (I am not in that camp.)

The good news is that the decision to taper by the Fed will be delayed out further and that interest rates will be benign. The bad news is that QE is losing its effectiveness and a light liquidity trap could become apparent to investors. The domestic recovery still is not at "escape velocity" and, from my perch, not self-sustaining.

The September ADP survey came in with a private-sector payroll gain of 166,000, below expectations of 180,000 and 159,000 in August, revised down from 176,000. Within the ADP report, the service sector added 147,000 jobs in September, the goods-producing sector 19,000, both in line with prior month's breakdown. On the soft side, manufacturing added just 1,000 jobs. In terms of ObamaCare's impact on hiring by small companies, less than 50 workers -- the ADP survey is not helpful because it doesn't break down full-time vs. part-time workers.

It is clear that the labor market has softened over the past few months -- ADP monthly gains in August and September were 159,000 and 166,000, respectively, vs. an average of 194,000 in the prior two months and a year-to-date average of 172,000.  Likewise, the government's nonfarm payrolls advanced by an average of 136,000 for the months of July and August vs. a year-to-date monthly average of 185,000.

Mortgage applications were down last week. Refi applications were up 3% as mortgage rates moved lower.  However, year over year, these applications are down 67%, and refi cash flow to households has evaporated, constraining consumption growth. Applications for new mortgages dropped 6% last week and are down 3% year over year.  Mortgage rates have dropped of late, but there is no question that housing has hit a stall as employment and income growth have slowed and affordability has come down. 

While I am of the view that housing will experience a long-lasting recovery (a thesis I presented 18 months ago), as mortgage rates normalize, housing has begun to hit a temporary pause that will likely interrupt the longer-term trend.  This in turn should raise concerns about the domestic economy and the Fed's response to the housing stall. 

Bottom line: Higher interest rates, ObamaCare, Washington dysfunction and increased volatility in Fed policy all have dented business confidence and payroll growth. In turn, real income is up just 2% year over year, and refi cash flow to households has evaporated, suggesting that real consumption growth should remain lethargic at 2%.

• I am back to a market-neutral position now.

The lack of a market trend (a market with no memory) keeps me in an opportunistic and flexible trading mode.

Toward that end, I am back to a market-neutral position now. I hedged my portfolio by establishing a long SPDR S&P 500 ETF Trust (SPY) position in premarket trading at $168.20. So, essentially, I have a pair trade on long SPY/short iShares Russell 2000 Index Fund (IWM) -- check out Helene's chart.

This is a market in which many should just sit on their hands.

• I am raising my earnings, dividend and share price expectations Altisource Residential.

This morning, I am raising my earnings, dividend and share price expectations for Altisource Residential (RESI).

Several factors are positively influencing the direction of the company and are contributing to a more optimistic (and more "growthy") outlook than I previously anticipated. (Hat tip to subscriber H for pushing me in this analytical direction!)

Most importantly, the company's ability to access the public markets at a higher price-to-book value and in greater dollar raises is the catalyst for this morning's outlook upgrade.

Last week, RESI raised money through a secondary offering that was increased from 10 million to 15 million shares. It was done at a greater premium to tangible book of $18.34 a share than I had previously forecast. Since the deal was done at a higher price, the EPS impact is more accretive).

Given its greater capital base, Altisource Residential has been able (and will be able in the future) to more aggressively purchase and board nonperforming loans and properties. The company has recently or will soon close on $470 million of unpaid principal balance in nonperforming loans with 2,700 properties (1,854 properties in third quarter and the balance in the fourth quarter). And as reported in a recent 8-K, RESI signed an agreement in principle to acquire nearly 3,000 nonperforming loans with $922 million unpaid principal balance. These assets have approximately $800 million of market value for which RESI is paying only about $540 million (or 67% of ultimate value). Upon full closing of the deal, RESI will have $1.7 billion in unpaid principal balance, (roughly $250,000 per property) or about 7,000 loans, representing approximately $1.4 billion in market value ($200,000 per property) and having paid about $950 million for the properties ($135,000 per property).

The bottom line is that I am raising my expectations for earnings available for cash dividends by $0.15 in 2014, to $1.50 a share (or $162.5 million net income), and by $0.25 in 2014,to $1.75 a share (or $215 million net income).

More aggressive and more successful property acquisition results than I am modeling for could raise these profit forecasts further.

My share price target by year-end 2014 is now $28 a share, and RESI remains on my Best Ideas list.

• My price was $48.20 in premarket trading.

I paid $48.20 for more Citigroup (C) in premarket trading.

• Let's take a look at the overnight and early-morning price action in the major asset classes.

I said upside down

You're turning me

You're giving love instinctively

Around and round you're turning me

Upside down

Boy, you turn me

Inside out

And round and round

Upside down.

-- Diana Ross, "Upside Down"

Let's take a look at the overnight and early-morning price action in the major asset classes.

The rundown:

• S&P futures are down 9 -- upside down, Mr. Market, you're turning me!;
• Nasdaq futures are down 10;
• Nikkei is down 2.2% -- hit by Abe's decision to go ahead with the consumption tax increase that I have been warning about, I will have more on the Nikkei today, see The Wall Street Journal column below;
• China Shanghai is closed -- the most important economic meeting of the year (or perhaps the most important economic meeting of the decade), the third Plenary Session of the 18th CPC Central Committee, will be held in November, and the communiqué of the November meeting, the "dissertation paper" of the new leadership, is expected to be a road map of China's economic reform in the next five to 10 years;
• European markets are down (but Italy is up 1% on Letta survival);
• the euro is down;
• crude is flat;
• gold is up $10; and
• the 10 year U.S. note yields 2.63% (down 2 basis point day over day).

Worth mentioning:

• The first day of the month brought in buyers despite growing signs that the Republicans and Democrats remain deeply divided amid the dysfunction in Washington, D.C. This is the eighteenth shutdown in U.S. history (why and how they ended). As MSNBC's Chris Matthews said on "Squawk Box," we are in "for a real war" in Washington.  This has been what my D.C. connections have told me privately throughout the last three weeks. The House came up short yesterday evening to do some piecemeal funding, which has hurt futures. The main event (i.e., debt ceilng) is coming up! Again, financials lagged, and the anointed ones, including Tesla (TSLA), Netflix (NFLX), Priceline (PCLN) and the like, remained anointed.
• I took of my Apple long rental and my JPMorgan Chase (JPM) short yesterday, while I added to my ProShares UltraShort Russell2000 (TWM) and Direxion Daily Small Cap Bear 3x Shares (TZA) longs and PowerShares QQQ (QQQ) short.
• Is today a turnaround Wednesday? Stocks are weaker globally in premarket trading.
• I am slightly net short.  I am wary of both top- and bottom-line corporate sales and profits for third quarter 2013 -- more so than an extended government shtudown.
• As I mentioned on Monday, I am wading back into my bond short -- I paid $75.30 for ProShares UltraShort 20+ Year Treasury (TBT). The odds of an October or December tapering are now diminished.
• The government shutdown looks longer, but combined settlement could contain a debt-ceiling resolution.
• Italy remains a mess.
• The world according to Peter Boockvar --While nothing has changed in DC since midnight September 30th, the US stock market is clearly manic depressive. While I found myself singing 'Celebration' yesterday morning (actually lip synching because I have a terrible voice), right now I'm singing 'Land of Confusion' by Genesis, "Now did you read the news today (on the market). They say the danger's gone away. But I can see the fire's still alight. There burning into the night." What's becoming more clear is that DC will take this impasse right up to the October 17th debt ceiling deadline leaving markets twisting in the wind but still under the assumption that some deal will be struck. "There's too many men, too many people making too many problems and not much love to go round. Can't you see, this is a land of confusion."
  
  With another 13 bp drop in the average 30 yr mortgage rate according to the MBA, refi apps for the week ended Friday rose for a 3rd week by 3.1% but purchase apps fell 5.6% after the previous two weeks of gains. Even as markets gave back the euphoric FOMC rally in the following three days, the bears went into hibernation according to the weekly II data. Bears fell 2 pts to 18.6, the 2nd lowest reading since March while Bulls rose 2.1 pts to 46.4, a 7 week high.
  
  The ECB will leave interest rates unchanged as expected and Draghi in his press conference will continue to use his words to keep short term rates as muted as possible with his forward guidance and repeating the possibility of another LTRO if needed. Italian stocks are the lone bright spot in Europe today, getting back all of what it lost over the past week as Letta is expected to win today's confidence vote. Italian bonds are rallying too. Spain reported the first increase in unemployment in September since February but the rise of 25.6k was less than the estimate of +35k.

It appears that there will be no jobs report on Friday.

In the news:

• The New York Times -- "Our Democracy Is at Stake" (Friedman).
• The Wall Street Journal -- "Fred Barnes: The President's Shutdown"; "A GOP Shutdown Strategy"; "Abenomics Is Undermined by a Consumption Tax."
• Financial Times -- "Obama Must Bring a Swift End to the U.S. Shutdown."

Some possible economic and earnings catalysts that could impact the markets:

• China stock trading closed between Oct. 1 and Oct. 7.
• ADP employment change for September takes center stage as Friday's release is canceled  (8:15 a.m. EDT, 175,000 estimate).
• ECB rate decision (press release 7:45 a.m. EDT; press conference 8:30 a.m. EDT).
• Bernanke scheduled to speak on community banks in St. Louis -- the title of the speech is "Community Banking in the 21st Century" (3:30 p.m. EDT).
• Italy confidence vote.
• Obama will meet with Wall Street CEOs on Wednesday.
• Obama CNBC interview (4:00 p.m. EDT).
• Splunk Worldwide Users Conference (Sept. 30-Oct. 3).
• Wells Fargo Retail & Restaurant Summit (Oct. 1-Oct. 2, Boston).
• Sainsbury PLC second-quarter 2013 trading statement.
• China non-manufacturing PMI for September (Wednesday night).
• Analyst meetings -- ADSK, PLL, CXW.
• Earnings before the open -- MON.
• Earnings after the close -- TXI.