• Teradyne lands with a thud.

"One last thing."

 - Lt. Columbo

While there has been a small sample of third-quarter earnings released to date, those that have released results have disappointed.

Case in point, Teradata (TDC) just now. 

• Break in!

Another tweet from Politico's Jake Sherman:

Several high-ranking House GOP aides are saying that they think their members would want them to to amend deal that comes out of Sen.

• The bulls win again.

Another win for the bulls.

Thanks for reading my Diary today.

Enjoy your evening!

• The view from the floor.

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

There is $165 million to sell in the financials.

On the buy side are MRK, $55 million, DIS, $22.5 million.

On the sell side are V $35 million, BMY $25 million.

• Break in!

Politico's Jake Sherman tweets the following:

BREAKING: White House meeting with congressional leaders POSTPONED. @BresPolitico and I am reporting.

• Northwest Bancshares is in, and Berkshire Hathaway is out.

Favorite individual long: Northwest Bancshares (NWBI).

Favorite individual short: Berkshire Hathaway (BRK.B) B shares.

Not surprisingly, the market has stabilized on talks of a deal in Washington.

I have been asked often in the last few days, how can I be bearish in the face of such a deal?

From my perch, market participants are being somewhat naive as it is growing clear that the agreement will not incorporate any tax or entitlement reform as part of the package to a debt ceiling extension and a clean continuing resolution. 

With our government officials simply kicking the can down the road and failing to address our growing debt problem, a normalization in interest rates coupled with U.S. demographics (the aging of our population will lift entitlement spending dramatically) will likely bring the problem  back into investors' focus sooner than later.

• Midday musings from Sir Arthur Cashin.

As I said on TV pre-opening ¿ set up was for a cat and mouse day.  Buy the dippers held back to avoid canceling the dip.  When no follow-on selling showed up, buyers started to nibble and took Dow back to -30 level.

Rumors of White House meeting at 3:00 brought another round of mild buying, which faded quickly.

Markets extra thin.  Run rate at 12:30 projects to 480/560 million final.  Buyers will watch both clock and headlines of meeting.

• "Fast Money Halftime" just debated the merits of Citigroup (C).

Here is my Kass Katch write up of the bank.

• What El Capitan has to say.

Jim "El Capitan" Cramer's "The President's Cavalier Bet" is a wonderful and focused read this morning.

A must read, in fact.

• Marc Faber weighs in.

"Yes, idiocies by governments. That is exactly the word. It's basically a dysfunctional government that we have that is far too large that is essentially wasting money left, right and center. The Republicans are wasting money on the military complex and the Democrats are basically buying votes with transfer payments, with entitlement programs, it goes on. It is a huge waste. The problem is that I don't see a solution. I think the current debate about the debt ceiling and the budget is more a symptom of a problem than a problem itself. The problem is really that the government, not just in the US but other countries as well, has grown disproportionally large and that retards economic growth."

-- Gloom, Boom and Doom Report's Marc Faber on Bloomberg

Marc Faber talks gold, Washington and safe havens.

Marc is a creative, outside-the-box thinker who always provides us with thoughts worth listening to. 

•  Turning green.

Nazzies turn green and it appears the S&P wants to join in to the plus side.

A true bull market in complacency, from my perch.

The rally is likely based on reports that Obama and Biden are to meet with Boehner, Reid, McConnell and Pelosi.

• They are just not correlated.

Several months ago, I did regressions that demonstrated that the direction of the dollar doesn't meaningfully influence the stock market, a relationship that a small research boutique made the case for.

Indeed, the dollar and the S&P are simply not the same trade over the longer term.

The 20-year correlation of monthly returns between the Dollar Index and SPX is -0.25.

While there has been a meaningful correlation recently over short periods of time when system risk rises (such as when there was budget discord, the 2008/2011 debacles when the yen became a safe haven and the long euro somewhat risk-on so euro/yen behaves like the U.S. stock market).

There are multiple macro scenarios when one works and the other doesn't.

As an example, there are scenarios with rising interest rates that hurt S&P's valuation, but  are very good for the dollar, especially for the dollar vs. yen if yen rates stay low.

Also, suppose Japan and the rest of Asia have a growth shock or a deflationary spiral. This hurts the global economy and U.S. stock market, but helps the dollar.

Throw away the notion that the dollar and the stock market is correlated in any meaingful way.

• Getting away from the dysfunction in Washington.

Here is a good chart from Barclays that demonstrates that the percentage of companies exceeding estimates is declining to the lowest level since 1Q 2009.

Disappointing current earnings results and weak forward guidance of profit remain a core element of my bearish market view.

View Chart »View in New Window »

• I expect a deal in Washington sometime within the next two days.

In terms of substance, I anticipate the Senate and House will pass most of the following:

• A six-month extension of both the debt ceiling and Continuing Resolution (keeping the government open for a half a year).
• Repeal of the medical device tax.
• There will be no specific entitlement/tax policy language (kicking the can down the road of our debt problem).
• For fiscal 2014, the sequester will remain in place

Bottom line, the Republicans in the House will have totally caved in to the Administration's demands.

• Growing lukewarm on JPMorgan Chase (JPM).

After going through JP Morgan's report in a more intensive manner this weekend, I am growing lukewarm on the name.

Last week, I took the stock off of my Best Ideas list and today I am eliminating the small add-on I made on Friday.

I am sticking with Citi (C) (a former Kass Katch) as my financial holding of import.

• What I'm trading this morning.

I have sold the balance of my Imperva (IMPV) for a great gain in three trading days.

I have added to the Direxion Daily Small Cap 3x Bear (TZA) long.

• 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 12;
• Nasdaq futures are down 15;
• The Nikkei is closed;
• The China Shanghai is up 0.4%;
• The European markets are flat;
• The euro is up;
• Crude oil is down $0.75 per barrel;
• Gold is up $15 per ounce (erasing some of Friday's big loss, which seemed to have been sell stops triggered);
• The 10-year U.S. note yields 2.69% (bond markets closed).

Worth mentioning:

• Friday's Market Action -- Thursday's dramatic ramp was followed through with another 10-handle rally in the S&P as the Washington narrative dominates trading.
• My Market Moves -- While I covered nearly all my shorts early last week (into the market's schmeissing), I spent Thursday afternoon and Friday re-shorting the indices and individual stocks. On Friday I added to Citigroup (C) and JPMorgan Chase (JPM), and I sold most of my Imperva (IMPV) position for over a 10% gain since I initiated the buy on Wednesday! I moved to about 25% to 30% net short -- shorting more SPDR S&P 500 (SPY) and iShares Russell 2000 Index (IWM) and buying more Direxion Daily Small Cap Bear 3X Shares (TZA). That compared with a net long into the rally on Monday and Tuesday. I've also added to my PowerShares QQQ (QQQ) short. So far, I am pleased with the way I am trading the volatility.
• Premarket Trading -- I haven't done anything thus far in premarket trading.  
• Market View -- The conventional view is that the market should be bought on weakness, since a compromise out of Washington is inevitable. I take issue with the notion that the market should be bought -- not that the impasse will lead to default -- as I outlined in my market view in today's opening missive.
• Bond Market View -- I sold out of my ProShares UltraShort 20+ Year Treasury (TBT) position late last week for a nice gain. I am agnostic on bond yields now, with the thinking that yields will be range-bound for the time being.
• Weakness in China Exports -- Though overshadowed by the impasse in Washington, this, to my thinking, was an important gauge of weakening global growth.
• The World According to (Peter) Boockvar -- The decline in the S&P futures this morning says it all regarding what we heard from politicians over the weekend. Most finance ministers at this weekend's G20 meeting assumed that some deal will occur, though, and they reaffirmed their desire to hold U.S. Treasuries. But it's likely the only deal we'll get will just be on adding some time and space to another negotiation. Past these discussions -- as we will get past this -- we must watch for the longer-term implications on the U.S. bond market from the perspective of foreigners who own half our debt. It's unlikely we'll see the same level of appetite for them, and we've already seen early evidence of that in both the weak action in the U.S. dollar and in the amount of bonds foreigners have purchased this year
• The Shanghai index rallied 0.4% overnight, even as exports in September unexpectedly fell 0.3% vs. the consensus estimate for a gain of 5.5%. Import growth, though, held in, rising 7.4% -- about in line with the estimate. The consumer price index rose 3.1% year over year to the highest rate of gain since February, vs. 2.6% in August. It was mostly food, though, as prices excluding food rose a much more moderate 1.6% year over year vs. 1.5% in August. In order to curb inflation, the yuan did rise to a record high against the U.S. dollar. After the market closed, Total Social Financing totaled 1.4 trillion yuan, down from 1.57 trillion yuan last month -- but also above the consensus estimate of 1.35 trillion -- as bank loan growth rose at the fastest pace in three months. After closing at a record high on Friday, the German DAX and other European markets are little changed, seemingly unperturbed by the political drama in D.C. After all, the European region has certainly had their share over the past few years: "Been there, done that" is sort of the attitude, I guess. European Union industrial production rose 1% in August vs. the estimate of up 0.8%, and July numbers were revised upward.

In the news:

• The Wall Street Journal: Don't abandon the sequester.
• WSJ: From one budget crisis to the next.
• Financial Times (Larry Summers op-ed): Spur economic growth.

Some possible economic and earnings catalysts that could be market impactful:

• It's Columbus Day in U.S. The equities market is open but bond markets are closed.
• Eurozone August industrial-production numbers out at 5 a.m. EDT.
• Eurozone finance ministers meeting is set for Oct. 14 and Oct. 15.
• Earnings after the close: Brown & Brown (BRO), Packaging Corp Of America (PKG)

• But the markets will ultimately survive.

"I went down to the crossroads,

Fell down on my knees.

I went down to the crossroads,

Fell down on my knees.

Asked the Lord above for mercy,

"Save me if you please."

-- Robert Johnson, "Crossroads," as performed by Cream

The proximate cause of Friday's market rally was likely short-covering -- many traders and investors didn't want to go home short in fear of a weekend agreement in Washington.

There was no agreement over the weekend.

At Friday's close, the S&P 500 stood within 2% of the old high, and the 30-day Treasury bill yield has spiked to 0.21% -- which compares with its recent zero-interest-rate-policy (ZIRP) range of between zero and 6 basis points. This is something of a contradiction in terms and in markets. (I typically favor the predictive value of the fixed income markets over that of equity markets.)

One can only conclude that Mr. Market is not meaningfully worried about the dysfunction in Washington.

However, this weekend's impasse suggests that the odds of missing the Oct. 17 deadline have grown somewhat larger. How much, I don't know, nor does anyone else. It also should be emphasized that the Oct. 17 date is a political issue and largely symbolic, as the Treasury will have $50 billion in payment capacity on that date.

While a technical default is still possible, a debt default is as close to zero possibility as one can get without it actually being zero.

Though the Treasury's payment capacity will not run out of cash until the end of October, the Treasury does have a $67 billion payment to make on Social Security, defense and Medicare due Nov. 1.   

My base-case expectation of a late compromise -- that is, sometime on Wednesday or Thursday -- remains odds on.

"Profits are the "mother's milk" of stock prices."-- Larry Kudlow, The Kudlow Report

The economic damage to business, and to consumer confidence, grows with every passing day. That's a dangerous state, considering the domestic economy has not reached escape velocity and is not yet self-sustaining after four years of ZIRP and quantitative easing.

Profit forecasts for the fourth quarter and for the first half of 2014 are too optimistic -- again -- and revisions are heading lower in the months ahead.

Source: Gallup (H/T Zero Hedge)

Confidence is falling at the fastest rate since the Lehman Brothers collapse (see above -- as well as here and here. Domestic economic growth faltering, as well, and top-line sales nothing to write home about. Outside the financial sector, earnings were lower in the second quarter and not much better in the third quarter. Profit margins are near a 58-year high and 70% above the five-decade mean. The S&P price-to-earnings ratio is up 2 points from 2012's year-end, and we still have questions about the global economic growth trajectory, particularly after China's big exports miss, reported Saturday. Given all that, I believe the rally late last week should be sold and, absent a reasonable sized correction, dips should not be aggressively purchased.  

 "Price is what you pay, value is what you get." -- Warren Buffett

A heavier-than-typical invested position is justified when stock prices are inexpensive, when pessimism abounds and/or when there is clarity of fiscal and monetary policy.

Right now, few of these conditions exist.

Volatility and uncertainty will be with us for a while. While that's candy for the opportunistic short-term trader, it's a bogeyman for the long-term investor.

In sum, the current debt/ceiling/budget impasse too shall pass, and the markets will survive (and Eric Clapton will sing and even Ginger Baker will continue to play). But the damage and toll on a fragile global economic recovery will accumulate, too.

Under the aforementioned conditions, it is difficult for me to envision an expansion in multiple -- i.e., valuation. It is far easier, at least for me, to expect a multiple contraction.

I continue to subscribe to the view that the year's high was put in place in August, and the range for the S&P 500 over the balance of this year will be roughly between 1630 and 1700. Friday's close, if you'll recall, was 1703.

We are at the crossroads.

"You can run, you can run,

Tell my friend-boy Willie Brown.

You can run, you can run,

Tell my friend-boy Willie Brown.

And I'm standing at the crossroads,

Believe I'm sinking down."

-- "Crossroads"