• Continuity to current policy.

The Yellen nomination as Fed head has been largely discounted and was the base case consensus expectation.

All else equal, Yellen should bring knee jerk of weaker $, weaker bonds, better stocks. It could also bring a bid to yen.

In response, Goldman Sachs just put out a piece on why they expect a late Fed exit, which is equity market friendly:

"We continue to expect a late Fed exit with the first federal funds rate hike in early 2016. One reason for this view, which we recently discussed in some detail, is "optimal control" considerations.

In a series of speeches in 2012 Fed Vice Chair Yellen presented simulations that pointed to an even longer period of zero short-term interest rates than the FOMC's current threshold guidance imply. Our update of her optimal control path points to the first funds rate hike in 2016Q1.

The key characteristic of the optimal control approach is that unemployment and inflation are allowed to overshoot their goals. In these simulations, the unemployment rate has fallen below its structural rate and inflation has somewhat overshot its goal at the time of the first funds rate hike."

Yellen's appointment, above any other candidate for the position, should be viewed as providing continuity to current policy.

Yellen has been a principal designer of the current Bernanke monetary policy and without question is against any tightening, even if the unemployment rate drops somewhat. This is consistent with Bernanke's latest speech, which indicated that other labor market measures might need to be utilized in setting policy. 

So far, the market reaction has been modest. There is likely to be a modest reduction in uncertainty and volatility. The yield curve should steepen a bit as there may be more reliance on dovish forward guidance vs. purchases of longer-term securities. but the curve is already quite steep, so this effect may be small.

The 10-year note's yield is down by about one basis point and S&P futures are +4.

• "One last thing." (Part Deux)

In after-hours trading weakness (down to $165.19) I am adding further to my long SPDR (SPY) rental.

I am up to 25% net long now.

For an explanation, see my later posts.

• "One last thing," -- Lt. Columbo

"All Things Digital" reports that Apple (AAPL) is having an iPad event on Oct. 22.

Shares are up $2 in after-hours trading.

• If this continues, I have room to be opportunistic.

The complacency I described in yesterday's opening missive is less so today, as the S&P futures have folded by about 35 handles since I wrote it.

While I am still only about 20% net long, I have a lot of room to be opportunistic if this continues.  

My baseline expectation (two-thirds likelihood) is that a Oct. 16-17 compromise will be made.

If I am correct, stocks will stage a swift rally toward the 1700 level.

But, as I mentioned in early August, I still beelive that the market top is in for the year.

Thanks for reading my Diary, and enjoy your evening.

NONE 

• How much to sell?

My mavens on the floor see about $600 million to sell on the close.

Consumer staples has $110 million and health care has $90 million to sell.

Boeing (BA), Mastercard (MA) and IBM (IBM) each have about $15 million to buy. Dow Chemical (DOW), JPMorgan Chase (JPM) and Walgreen (WAG) each have about $25 million to sell.

• It could be this.

UBS interest rate strategists Mike Schumacher and Boris Rjavinski say issuance of "super premium Treasuries" is "the most attractive stopgap solution to the debt ceiling crisis" in Washington, D.C.

That is what is likely roiling the markets in last hour or so. 

• A funny one.

From The Onion on the debt-ceiling debate. 

• And I may have it right this time (fingers crossed!).

The negative reaction to my short covers and long buys is such (within my hedge-hogging community) that I might even have the timing right this time!

• They are SPY, Apple, JPMorgan and Citi.

Here are my largest buys today (in order of size, largest being first): SPDR S&P 500 ETF Trust (SPY), Apple (AAPL), JPMorgan Chase (JPM) and Citigroup (C).

• Byron's quotation puts into perspective the prospects of a technical default.

While I listen to Obama's and Boehner's press conferences, I am reminded of something that my friend/buddy/pal Byron Wien has said, "Disaster has a way of not happening."

• I continue to pick selectively into this weakness.

As stocks fall and value increases, I am always shocked how many worship at the altar of price momentum and do an about-face in their previously strong belief that the U.S. stock market is attractive.

Maybe I should pay more attention to price and technicals, but I prefer to entertain market "discounts."

That is not to say that we are there yet, but we may be soon.

I continue to pick selectively into this weakness with the recognition that I will not be able to time a Washington, D.C., compromise or the bottom in stock prices.

Again, I am buying stocks gingerly (and taking off shorts) for a trade, not as an investment.

• Look for long-term values to emerge in the next few days.

Mr. Market is now entering the "not complacent" mode.

Look for long-term values to emerge in the next few days.

• They are seeing buy signals.

From my pals at BTIG just now:

Katie Stockton just got an intraday buy signal on the hourly charts.

Also, we are sitting on the 100-day, which has also has been a great entry spot over the past six months.

• Taking what we can get.

The October Investors Business Daily Index of Economic Optimism is not typically market-impactful, but considering the economic data vacuum by the government and that this survey of investors is one of the month's earliest releases, it's worth a look.

The index, which included the first part of the government shutdown, came in at 38.4 compared to 46 in the prior month. In terms of components, the economic outlook declined to 36 from September's 46. The personal financial outlook moved from 54 in September to 48 in October and the assessment of federal policies declined from 38 to 31.

Clearly, the dysfunction in Washington is adversely impacting consumer confidence, and, as I wrote yesterday, the longer it lasts the greater the impact on business and consumer confidence.

Assuming as much as another two weeks of impasse, the shutdown will take off as much as 0.5% from growth and will likely result in another sub-2% real GDP in fourth quarter. Though earnings will also take a hit, most of the loss should be recovered in first quarter 2014.

• Namely, Apple, Northwest Bancshares, Citi, JPMorgan, Altisource Residential and SPY.

I am bidding for Apple (AAPL, $481.60), Northwest Bancshares (NWBI, $13.15), Citigroup (C, $47.95), JPMorgan Chase (JPM, $51.10), Altisource Residential (RESI, $22.05) and SPDR S&P 500 ETF Trust (SPY, $166.00).

• Namely, JPMorgan Chase and Apple.

I am putting both JPMorgan Chase (JPM, $51.09) and Apple (AAPL, $482.70) on the Best Ideas list now as the reward vs. risk in both stocks has moved into favorable territory/ratio.

• I am positioning myself more net long -- for the moment.

I am (temporarily!) lifting my iShares Russell 2000 Index Fund (IWM, $104.75) short and my Direxion Daily Small Cap Bear 3x Shares (TZA, $23.85) and ProShares UltraShort Russell2000 (TWM, $14.99) longs now, as I position myself more net long (20%).

• I bought more shares at $483.99.

I added to Apple (AAPL) at $483.99 just now.

• My net long exposure has expanded to about 15% today.

Mr. Market has more moves that a shortstop batting .110 or Carrie Mathison from "Homeland."

My net long exposure has expanded to about 15% today, as I increase my SPDR S&P 500 ETF Trust (SPY) long rentals, reduce my Direxion Daily Small Cap Bear 3x Shares (TZA) and ProShares UltraShort Russell2000 (TWM) longs and cover my PowerShares QQQ (QQQ) short.

• I am out of this trade.

I am taking off my PowerShares QQQ (QQQ) short in today's whoosh lower.

And I am taking the name off the Best Ideas list.

A budget resolution (my baseline expectation) could cause a sudden reversal in Nasdaq.

• Here we go.

Overall "natural" flows are still about 3:2 on the buy side.

"Program" flows are approximately 2:1 on the sell side.

On the buy side is interest in banks, insurers, utilities, oil and gas, autos retail and defense.

On the sell side is interest in media, biotech and pharma.

• Run, don't walk, to read Business Insider's recap of confidence.

From Business Insider:

U.S. economic confidence plunged more in the past week than in any week since the collapse of Lehman Brothers on September 15, 2008 ¿ the catalyst for the financial crisis and U.S. recession.

Gallup's Economic Confidence Index fell 12 points to -34 last week thanks to the government shutdown.

• The somewhat high odds of a technical default and the general complacency are keeping me from being too aggressive.

Tiptoe through the window

By the window, that is where I'll be

Come tiptoe through the tulips with me.

-- Tiny Tim, "Tiptoe Through the Tulips"

I continue to actively trade -- opportunistically.

Subject to prices, I am (tentatively) planning to add to my net long exposure as we move toward the Oct. 17 cutoff date. My baseline expectation is that there will be a resolution to the current impasse.

Keeping me from being aggressive (and not going "over my skiis") during the next few days is the general complacency I have chronicled recently and that the odds of a technical default are as high as 33%.

I guess you can say I am tiptoeing through the tulips with Mr. Market.

• I have taken in some short plays and added to the long side.

I have added to my Citigroup (C) long at $48.17, my JPMorgan Chase (JPM) long at $51.75 and my SPDR S&P 500 ETF Trust (SPY) long at $167.18.

I have taken down my Direxion Daily Small Cap Bear 3x Shares (TZA) and ProShares UltraShort Russell2000 (TWM) longs, which have recently rallied.

I have obviously gotten a bit longer.

• For instance, I have taken a long rental in JPMorgan Chase.

I am staying flexible.

As an example, I have taken a long rental in JPMorgan Chase (JPM) at $51.79 this morning based on my belief that the markets have absorbed, accepted and discounted the outsized legal penalty incurred in The London Whale fiasco.

Sam Zell is the guest host on CNBC's "Squawk Box" this morning.

Back in 2006, I wrote "Sam Zell Sells" for TheStreet and the following editorial ("Look Who's Selling") in Barron's about Sam Zell after he announced his intention to sell one of his principal companies and crown jewels, Equity Office Properties -- this was at a time when "cheap money" (and junk bonds) were causing an avalanche of buying, not selling:

THERE ARE SOME PEOPLE you just shouldn't trade against. Among them: George Soros, Stanley Druckenmiller, Steve Cohen, Ed Lampert and Sam Zell -- yes, the Sam Zell who recently agreed to sell his Equity Office Properties Trust to the private equity firm Blackstone Group. Shares of EOP, the largest real-estate investment trust specializing in commercial properties, have nearly doubled from the mid-20s in the fall of 2002 and now, at almost 50 a share, the value of one of Zell's jewels is relatively full. Zell accepted cash and the associated tax bill, which supports the view that he thought the price was rich.

Announcement of the deal fueled a huge collateral move in REIT shares-which already were making a very large advance, both absolutely and relative to the market. The sector now sells at 19.5 times cash flow (they call it "funds from operations" in REIT-land) and at almost 120% of net asset value, which is ridiculously high by any historic standard. Over the past 15 years, the dividend yield on the REITs has averaged about 1.1 percentage points above the yield on the 10-year Treasury note -- but today the average REIT dividend yield is 1.25 percentage points below the 10-year yield.

Bulls see pension funds and other institutions having a continued interest in diversifying into real estate, and they mark the role of private equity in a series of acquisitions in the sector. They also expect that rental rates for commercial properties will continue to rise and that nationwide vacancy rates (now the lowest in seven years) will keep falling. These trends thus justify lofty acquisition prices and high cash-flow multiples. REIT optimists believe that the industry is relatively immune to an economic downturn and that institutional funds will forever flow into real estate's coffers and drive share prices ever higher.

If Sam Zell is selling, why is Blackstone buying? Why did Aesop's scorpion sting the frog? It's what they do.

If Blackstone does what it did in its acquisition of CarrAmerica in July, it will borrow against EOP's properties. That will boost its cash returns and raise its vulnerability to an economic downturn.

Leverage is the major weapon of most private equity outfits. Private equity fund managers don't goose the cash flows better than the previous owners could -- it's unlikely they know the businesses better than the owners who operated them for years.

They simply rely on the kindness of strangers. Institutional investors, such as pension funds and university endowments, supply them with the initial capital and bankers lend to them afterward.

Bubbles always have similar ingredients. They are founded on the belief in a new paradigm, a long uninterrupted term of prosperity in which more and more funds are plowed into the prosperous sector. If capital is cheap and plentiful, leverage will be abused, and a new class of marginal buyer will be encouraged to take asset values to ludicrous levels.

In the 1980s, the leveraged-buyout machine built by Drexel Burnham Lambert and its club of insurance companies and savings and loans prospered, then crumbled. In the 1990s, day traders of stocks believed their own temporary results indicated a new paradigm of market valuations, and the Nasdaq subsequently plunged by 70%. In the early 2000s, speculators and day traders of homes and condos stretched prices to levels well beyond reason and affordability.

TODAY'S BOOM IN private equity capital most resembles the junk-bond bubble of 20 years ago. Back then, a third-tier brokerage, Drexel Burnham, put on the mantle of investment-banking leadership by being far more aggressive in its business practices than the other brokerages. It popularized and dominated the high-yield debt market and created a bubble in the availability of credit. Equities in general were buoyed by the seemingly unlimited Drexel financing machine, which financed a plethora of high-profile takeovers.

By the latter part of the decade the economy began to cool off and public confidence in leveraged buyouts waned. Default rates on high-yield debt rose to over 10%, further eroding confidence. Drexel was forced to buy the bonds of failing clients, which depleted its capital and eventually forced it into bankruptcy. Without Drexel and its leading cheerleader, Michael Milken, the liquidity of the junk-bond market ultimately dried up, and a host of companies such as Financial Corp of America, Imperial Savings, Gibraltar Savings, Integrated Resources, Reliance Group and First Executive Life followed Drexel into bankruptcy.

The now famous stock-market bubble of the late 1990s was much the same, only simpler. Margin debt was widely available, and day traders could take very large positions for a couple of hours without being called upon to back their positions with much capital. Individual investors began to expect uncommon investment returns regularly basis, and their expectations further inflated the stock market bubble -- until it popped nearly seven years ago.

After the stock-market bubble was pierced, the Federal Reserve loosened dramatically. Generational lows in interest rates spurred record low mortgage rates and an unprecedented housing construction boom. Home prices became the new source of speculative profits, supported by such innovations as interest-only amortization schedules and mortgages issued without credit checks (for hefty fees up front). The enabling mortgage lending community lifted home prices well beyond buyers' ideas of affordability.

SPECULATORS TOOK OVER and began to take a disproportionate role in the residential-real-estate market. Home prices kept on rising until they were elevated to levels that were out of reach for most buyers. Eighteen months after demand evaporated we still don't know where the bottom will be.

Today's boom in commercial real estate, like the bubbles that preceded it, has been fueled by the belief in a long, uninterrupted economic boom and a continued stream of equity and debt capital. Both could come to an end.

How? Let us count the ways:

(1) A more serious housing decline leads to a broader consumer-led global economic downturn than is generally expected.

(2) A continued fall in the U.S. dollar lowers purchasing power while the defense of the dollar raises interest rates.

(3) Foreign trade initiatives like protectionism and tariffs reduce confidence in the capital markets.

(4) A geopolitical event adversely affects confidence in the capital markets.

(5) A domestic event precipitates a loss of confidence and the figurative or literal closing of the capital markets.

(6) Failure of a deal or some other event precipitates a loss of confidence and the closing of the bridge-financing window.

We don't know what to expect, but that should be no comfort. The unexpected is what usually puts needles in bubbles.

Sam is an independent and contrarian thinker and stands among the smartest managers in the country.

He is beyond brilliant, and I worship at his altar of corporate management -- frankly, I watch his every move.

You should, too.

• Monitise (MONI.L) has another alliance.

The good news is that Monitise has announced another important alliance, this time with U.S. Bank. 

The less-than-good news (note I don't call it bad news) is that the shares of Monitise will likely back and fill and base for a while as a lot of good news has been discounted.

But as an investment, Monitise's disruptive role in the mobile payments business still suggests that the share price has the potential for a very long runway of growth ahead of it.

• Around the market and in the news.

"Manic depression is touching my soul

I know what I want but I just don't know

How to, go about gettin' it

Feeling sweet feeling,

Drops from my fingers, fingers

Manic depression is catchin' my soul."

Jimi Hendrix, Manic Depression 

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

S&P futures flat, Nazzies +2, Nikkei -0.35% (Japan's current account deficit in August hit a low, Sony and Yahoo Japan slumped on downgrades and rising costs/weaker EPS guidance), China Shanghai +1.1% (reopened for the  first time since Sept. 30, better retail and housing data in the region), European Markets  - , euro - (opened higher, now lower), crude + $0.75, gold - $3 and the 10-year note yields 2.645% (+1.5  basis points day over day).

Worth Mentioning:

• Monday's Market Action -- Yesterday's S&P futures closed down 17, which is a total reversal of Friday's strength. In the market without memory from day to day,  indices ended at the day's low with a sharp selloff in the last 30 minutes.
• My Market Moves -- I added to my Apple (AAPL) long rental, raised my bond short (TBT), day traded SPDR S&P (SPY) for a nice gain and increased my Citigroup (C) long investment. Last night I reestablished my SPY long rental hedge at $167.28, which puts me back into a slightly net long aggregate exposure.
• Pre Market Trading -- I haven't done anything so far in premarket trading.
• Stock Market View -- I remain flexible and opportunistic and slightly net long as the markets are dominated by Washington. I am wary of both top- and bottom-line corporate sales and profits for 3-4Q 2013   and my general view is that the markets are complacent relative to a quick and healthy resolution of the budget and debt ceiling. I was interviewed in the New York Times this morning on the subject of complacency. In related news, the president appears open to a short-term debt solution.  But this might just be a trial balloon by the Dems - and the Republicans don't appear to be biting.
• Three Little Indians Redux ¿ I cautioned about this particular technical configuration a few weeks ago.  Here is an updated chart (Hat Tip Bill King of "The King Report") which suggests the fear I expressed might have been justified.
  
  

  View Chart »View in New Window »

• Bond Market View ¿ As I mentioned yesterday, I am wading back into my bond short (I paid $75.22 for more TBT).
• Third Quarter Earnings Seasons Starts
• The World According to Peter Boockvar -- Japan joined China in telling the US government that they better be careful with the handling of US debt where both countries hold about $2.5T worth. While both will be fully repaid, we have to wonder how tolerant in the future the two will be with not only holding their existing stock of US Treasuries but what their appetite will be in buying more at their historic pace. At some point QE will end (who knows when now) and the US Treasury will need some big buyers to step in to the fill the breach. My message again to the Fed is that it's all about the flow, not the stock. Asian markets were unperturbed by the US stock market selloff yesterday as China's reopening after vacation was followed by a 1.1% rally in the Shanghai index and helped drive a rally in most of the region. After a rise in the state sector weighted services PMI, the HSBC private sector services index fell .4 pts to 52.4 but off the highest since March. Indonesia left interest rates unchanged as expected and the Jakarta index rose 1.3% to a two week on the calm led by the recent drop in US interest rates.In Europe, the soon to be released statement from the G20 meeting of Finance Ministers this week may call on the Fed to "exit from expansive monetary policy" according to a German Finance Ministry official. The Germans certainly do have some historical experience with expansive monetary policy. In August, German factory orders were unexpectedly weak but exports were in line, up 1%.I've never been so excited to see the NFIB small business optimism index but that's what you get when I am starved of government economic data. The index for September fell a touch to 93.9 from 94.1 which is a 3 month low. Again, the components were mixed as Plans to Hire fell 1 pt but those looking to Increase Cap Spending rose 1 pt. Those that Expect a Better Economy fell 8 pts to -10%, a 5 month low but those that Expect Higher Sales rose 3 pts to a 4 month high. Those that said it's a Good Time to Expand rose 2 pts after falling 3 in August.

In the News:

• Financial Times: A potential financial panic looms.
• New York Times (Nocera): Why the debt ceiling matters.
• New York Times: The crisis in the Republican party.
• National Journal:  Harry Reid likes this fight.
• Wall Street Journal: Apple's tax issues. Some possible economic and earnings catalysts that could impact the  market.
• BOJ Sept. 4-5 meeting minutes
• U.S. trade balance for Aug (8:30 a.m. ET) and Sept. JOLTs (10 a.m. ET). BOTH THESE NUMBERS HAVE BEEN CANCELLED.
• NFIB Small Businesss Optmism (94.3E)
• IBD/TIPP Economic Optimism (44E)
• IMF to publish Q4 update at 9amET.
• ECB's Costa and Weidmann speak
• Fed's Pianalto and Plosser speak
• BOJ minutes from Sept 4-5 meeting (out Tues night)
• BOJ's Nakaso speaks (Tues night)
• AA kicks off the CQ3 earnings season.
• Analyst meetings: ACN, AGU, Bayer, HAIN, SFE, SIG
• Earnings before the open: WWW
• Earnings after the close: AA, ADTN, MG, YUM 

• The Today Show.

Stay tuned for Jim "El Capitan" Cramer and his appearance at 7:03 a.m. ET on The Today Show!