• I am back to net short (albeit, in a small way).

I am pressing my iShares Russell 2000 ETF (IWM) and PowerShares QQQ (QQQ) shorts now.

I am back to net short (small).

• The real estate maven does not see any cause for optimism.

Real estate maven Mark Hanson disagrees with the optimistic housing consensus expectations in this thoughtful commentary:

The Hard Data:  Surging Supply, Demand Destruction in full effect, and "new-era investors" are selling contrary to popular statements in the media

Three common housing market bull themes -- that if wrong change everything -- are:

• "lack of supply", which they say is responsible for the past couple of quarters of increasing demand destruction
• "new-era, insti investors are long term in nature", which they say doesn't pose a threat to the supply / demand equation
• "rising inventory is great for the housing market";  of course, without any mention of the demand side of the equation, simply assuming it's a 'supply problem' and not a 'demand problem'

I think enough data have now come out to prove these are likely wrong, at least in the leading indicating, heavily weighted western region.

In fact, increasingly, analysts and media are turning away from the above rationalizations and including statements in notes and stories such as " buyers faced credit and affordability challenges" because without them they know their voodoo economic statements sound crazy.

The fantastic chart in Item 1 below -- from a recent CR blog post -- has been sent to me several times over the past few days with notes on how positive this is for housing.  I ask, 'when did people become so brainwashed that they really believe a surge in supply -- without demand data showing -- is great for this asset class???

All that I see here is supply surging.  And because I track demand closely and know for a fact that in most of these regions it has plunged, I see big house price trouble dead ahead.   (Yes, I am well aware that being forward looking in the post-crisis, perpetual bailout and stimulus era, can be hazardous to your P&L.)

Bottom line:Supply is surging and demand is collapsing.  I am not sure from what netherworld most present day, die-hard "full blown housing market recovery with escape velocity" housing bulls originate.  But, based on the data the "lack of supply" meme is now dead.

More concerning, however, is that based on the supply and demand divergence shown in Item 2, "new-era buy to rent, flip, flop and frollic investors" are selling.

Item 1)  Supply surging in key Western region markets

A key metric here is missing...demand, which I include in Item 2 below and which clearly signals investor selling.

Red annotations below are mine...note, that stimulus and supply are inversely related.  That is, inventory is drawn down in times of stimulus and rebounds during stimulus hangovers, which we are in now.  And house prices are inversely related to the draw down or rebound in supply.

Item 2)  Demand plunging while supply is surging.  Completely inconsistent with "lack of supply" mantra.

Clear sign of investor selling

This supply / demand divergence means that the demand destruction can't be from "lack of supply".

In other words, because most resales are by homeowners buying another house these conditions simply can't occur unless everybody is moving back in with their parents, renting, or moving out of town.

Item 3)  Investor Selling

This cycle's exotic loan user was the "all-cash" cohort.  In other words, the massive Fed-inspried "bond replacement trade" by all-cash investors without a "mortgage loan house price governor" created the exact same effect on house demand and prices as did exotic loans in the 2003 to 2007 period.

Instutitional investors may like to think and tell everybody that they only account for a small percentage of demand "nationally". Ok.  But, they didn't buy nationally. They -- and their insitutional, individual, and ma and pa peers -- targeted regions and bid on massive amounts of supply within those regions. Add in the mini-Blackstone's (ma and pa small time investor) and foreigners and the "investor cohort" accounted for more than half of all demand in many of the "hot" markets in CA, AZ, NV, FL, etc.

And if they acquired 'half', they would have had to bid on a lot more than half, which is what really drives prices.

Bottom line:  When all-cash incremental buyers (who became the majority in many markets), many of whom had to deploy capital in order to get paid, were bidding against each other for every house on the market -- with no concern over qualifying for a mortgage -- conditions were perfect for house prices to become detached from end-user fundametals. This happened in 2003 to 2007, but due to the incremental buyer always earning $200k when it came to qualifying for a mortgage vis a vi exotic loans.  And again to a much lesser degree with the 2009/10 tax-credit, that in 38 states could be monetized for the purposes of a downpayment making for easy tro obtain, Gov't sponsored zero down purchases. Then, when the hand-off from the incremental speculator to the end-user occurs, all hell breaks lose.  It's the age-old greater fool, bag-holder syndrome replaying itself in housing every few years.

This housing market needs 100bps lower rates, yesterday.  And if history is any gauge, housing some way, some how, will get what it needs.

• Baby steps.

First trades of the day: I shorted iShares Russelll 2000 ETF (IWM) at $116.50 and PowerShares QQQ (QQQ) at $87.92 (both small).

• It's $30.30.

I am a $30.30 buyer of more ProShares Short 20+ Year Treasury (TBF).

• Here are his musings at midday.

Midday market musings from Sir Arthur Cashin:

Opening rally got morale help from off-shore.  Quiet Ukraine, Tokyo pop, ECB being pushed toward ease, all helped get Dow +100.  A very dovish Yellen adds in 50+ points.

Late morning fade ends around 11:30, when Nasdaq (the weak link this month along with Russell) holds and starts a bounce.

Next bear opportunity likely between 1:30 and 2:30.

Run rate only so-so.  At 12:30 projects to an NYSE final volume of 565/645 million shares.

• The good = Bon-Ton, Baxter and Potash; the bad = GM.

Bon-Ton Stores (BONT), Baxter (BAX), Potash (POT) and bonds are making me smile.

General Motors (GM) not so much.

• So you know....

I am sticking with my Procter & Gamble (PG) investment position in response to some emails this morning.

• Just in case early April brings equity inflows.

I am at the airport now en route to Florida, so from 2:00 p.m. EDT on, I will be in radio silence.

My tentative plan is to move back into a net short position (baby steps) near the market's close as markups are likely to prevail.

I will save firepower, though, in the event early April brings equity inflows.

• Oldies but goodies.

"Fast Money: Halftime Report" is having an excellent discussion about high-frequency trading.

This is a subject I have written about for years.

Here are two columns on the subject that I had previously written.

• The data say a lot about the leverage that is in the market that has helped to get us here.

NYSE margin debt rose to another record high in February to $465.7 billion, up from $451.3 billion in January.

The absolute level, though, doesn't provide perspective, and it's why I believe measuring it against GDP is more relevant. It is now at 2.7% of nominal GDP, up from 2.6% in January, which exceeds the level of 2.6% seen in July 2007 and is just below the record high of 2.8% in March 2000.

At least in the S&P 500, to use one index, the $21 billion increase in margin debt from Dec. 31, 2013 to Feb. 28, 2014 brought just a 0.6% rise in the index vs. the $36 billion increase in margin debt in January/February 2013, which coincided with a 6.2% gain over those two months last year.

The data don't tell us where markets go in the very short term but do say a lot about the leverage that is in the market that has helped to get us here.

• Omega's slice of the Monitise pie.

Omega went from 10.06% to 10.87% by taking 25% of Monitise's (MONI.L/MONIF) recent placing.

• It resonates.

Sir Mark Grant writes about history resonating:

"It is the last territorial claim which I have to make in Europe, but it is a claim from which I will not recede and which, God willing, I will make good."

-Adolph Hitler, 1938

The Ukraine marches in and out of focus these days. What is happening there has either traumatized the markets or has been ignored by them. We hear that Putin has called Obama only to find out later that Putin has railed against the fascists, the anti-Semites and those who are trying to subvert the Russian minority. To be precise one could substitute the tactics of Hitler for Putin and find almost no differences in either style or substance. One learns from history and obviously Mr. Putin has been an apt student.

"Germany has concluded a Non-Aggression Pact with Poland. We shall adhere to it unconditionally. We recognize Poland as the home of a great and nationally conscious people."

-Adolph Hitler, 1935

The Crimea belonged to the Ukraine. It was a part of the country but then Slovakia was a part of Czechoslovakia prior to 1939. The Crimea has now been annexed by Russia and the national boundaries of Europe have been changed. Mr. Putin says that he will do no more and that he was forced into this position by the atrocities that were taking place in this region of the Ukraine. He has also said, on March 27, according to the Rianovosti newspaper in Moscow, "In regard to an analysis of all of the color revolutions, including the latest events in Ukraine, obviously we should analyze them in order to protect our citizens from the tyranny of various fanatics, from the tyranny of terrorist elements, and individuals with extreme views."

The Russian Foreign Minister, Sergei Lavrov, said at the same meeting on March 27 that Russia was collecting "all of the facts that show the lawlessness of neo-nationalists and extremists" as well as on the violence that has taken place in the Ukraine. Both gentlemen have made it quite clear; they will protect the ethnic Russian citizens wherever they live if they are being oppressed by their country, any country. Russia, in fact, has now declared itself a power above national boundaries which was exactly what Hitler did prior to World War II where the ploy was the protection of German citizens.

Time has warped. The word "Russian" has been substituted for "German." The rest of the sentences are virtually the same.

"Moscow reserves the right to use its military to protect Russians."

-Vladimir Putin, March 4, 2014 (AP)

Now it is interesting to note what happened to the Dow Jones Industrial Average prior to the declaration of World War II. On the date of the Polish invasion, October 6, 1939 the index was only down 14% from October 6, 1936. THE Dow Jones Average waivered very little that week in fact, and it was up 35% from its low in 1938 according to data supplied by Bloomberg. In fact it was not until May 1940 that the market realized the gravity of what was happening in Europe and fell 22% in one month. Then it wasn't until the United States was attacked at Pearl Harbor on December 7, 1941 that the markets really reacted again dropping by 21% in four months.

We too can learn from history. The psychology of the market takes time to readjust. I would call it, "If it is good it is great and if it is bad then no one wants to believe it." This, in my opinion, is driven by those on Wall Street and then those in the media that have a very real economic interest in not seeing the markets go down. When they do trading dries up in all of the markets and the economics of the financial institutions involved in the markets and subsequently those of the media gets hammered. The truth is that no one wants this and hence the lapse in the timeline. The further truth, in my viewpoint, is that eventually reality always enters the markets and that political events take their toll and can cause a massive amount of pain.

Now none of us know exactly what Putin might do. We know he annexed the Crimea and it is reasonable to assume, without running too far afield, that he has further ambitions. I do not believe that World War III is forthcoming but neither do I believe that Mr. Putin has fulfilled all of his ambitions. I think he will hand out money and stir up both the Eastern and Southern Ukraine and make further incursions. I would not be surprised if he attempts the same sort of things in Georgia, Latvia and Moldova. He is empire building and it is immensely popular at home. The same tactics were also immensely popular in Germany prior to the Second World War. It is a kind of nationalist fervor.

"From Stettin in the Baltic to Trieste in the Atlantic, an iron curtain has descended across the Continent. Behind the line lie all the capitals of the ancient states of Central and Eastern Europe...All these famous cities...lie in what I must call the Soviet sphere, and all are subject in one form or another, not only to Soviet influence but to a very high and, in many cases, increasing measure of control from Moscow."

-- Winston Churchill

History resonates!

• Here is his morning commentary.

From The Lindsey Group's Peter Boockvar on Yellen and the Chicago PMI:

Following mixed reads so far in the regional manufacturing surveys for March which can't use weather as an excuse, the Chicago PMI fell to 55.9 a 7 month low from 59.8 last month. New orders and Backlogs were lower and the Employment component reversed almost all of the February sharp rise. The Chicago ISM said the "volatility seen in Employment for the past four months likely reflects increased reliance on temporary workers." Inventories fell back below 50 to the lowest since July 2013. Prices Paid was down to the lowest since April 2013. The Chief Economist of MNI did acknowledge the "significant weakening in activity following a five month spell of firm growth" but also said it's too early to say if it's the "start of a sustained slowdown or just a blip." The comments on the outlook for the next 3 months however were more upbeat as "the majority of businesses said they expected to see a pick up." Bottom line, ISM manufacturing comes out tomorrow and is expected to rise m/o/m on a weather rebound and let's hope it does.

Yellen was extremely dovish in her speech today but said nothing new in terms of its translation into their exit from their current policy. She highlighted the "considerable slack" that still remains in the economy and that they are still "considerably" short of both of their mandates (job market "not back to normal health," "takes its 2% inflation goal very seriously"). With respect to "slack" she assumes though that the drop in the participation rate will reverse higher if the economy accelerates and that those out of the work force will rush to come back in. That's the $64k question in measuring how much slack is out there. She also emphasized that even though QE will continue to shrink, short term rates will remain extremely low for a very long time which the Fed also said in their FOMC statement that rates will remain well below normal for many years to come. Yellen is likely trying to better frame her 6 month comment 2 weeks ago but raising rates 25 bps in the Spring and maybe by 1% at the end of 2015 that was alluded to then is still extraordinarily dovish. We'd still be in monetary fantasyland. Today's speech should be interpreted no differently.

• Bond yields are ripping higher after Whirlybird Janet's remarks.

• What a difference five years makes!

"I've been a bear for three years," said Mr. Kass, general partner of Seabreeze Partners Management in Palm Beach, Fla. "This is a big change for me."

Mr. Kass said the March lows would not just represent the lowest points of the year, but "possibly a generational low."

Last week, he wrote a note, "Why the Bears Are Wrong," that tallied a host of hopeful conditions in the economy and the financial system.

He saw potential in the Obama administration's plan to buy $500 billion to $1 trillion in troubled assets from banks using a blend of public and private money. If it works, the move could take the strain off the banks' struggling balance sheets and loosen credit markets, Mr. Kass said.

Many analysts have said that financial companies, which plunged the markets into crisis, will be the ones to lead the way to higher ground, and Mr. Kass said he was cheered to see big banks leading the March rally. The S.& P. Financials Index rose 33 percent from March 9 through Monday, while the broader S.& P. 500 gained 16 percent.

Commodity prices for metals and oil began to rise, signaling a hint of inflation and a chance that economic growth could find a foothold, he said. And he said he was encouraged by a bouquet of better-than-expected reports from the housing and retail sectors.

Given the speed of the rally, however, Mr. Kass wrote a note on Friday saying that investors might seize the opportunity to raise cash and take profits. But he said he was still convinced that "the U.S. stock market will rise to levels higher than most anticipate," by as much as 25 percent by summer.

Mr. Kass said he liked companies like Home Depot, Lowe's, the Walt Disney Company and real estate investment trusts.

Even optimistic investors warn that a recovery in stocks will not look like a steady climb, and they say that economic growth may be slow for some time. But as stocks have picked back up, Mr. Kass said, he has noticed a new concern among investors.

"The fear of being out has begun to replace the fear of being in," he said.

-- Jack Healy, "A Pitched Battle for Turf Between the Bears and the Bulls," The New York Times (March 30, 2009)

"There are definitely speculative excesses in the market right now," said Doug Kass, president of Seabreeze Partners Management. "I don't think the whole market is in a bubble. But in biotech and some of the Internet stocks, there's no question -- we've certainly got bubblelike symptoms. And the I.P.O. market looks like a bubble, and that's serious, because that's where the first signs of the bear market that started in 2000 began."

-- Jeff Sommer, "In Some Ways, It's Looking Like 1999 in the Stock Market," The New York Times (March 29, 2014)

What a difference five years make.

Back in March 2009, I opined on "The Kudlow Report" that a generational bottom was being made during the first week of that month.

Five years later we stand nearly 200% higher in the S&P 500.

As illustrated in the chart below, Warren Buffett's favorite valuation measure -- namely, market capitalization as a percentage of nominal GDP -- has risen in the last five years from approximately 70% to over 140% today.

One of the great technical analysts (now retired) in modern stock market history sent me an email over the weekend and referenced the warning that this ratio is communicating:

There is no magic level for this relationship because what is extreme has changed over the years, particularly since the late 1990s. From the mid-1920s to the end of the 20th century, low undervalued levels were in the 20%-30% range and high levels were 70%-80% (1929 even went to 88%). Since 1998, however, the relationship of stock capitalization to GDP has changed. The huge increase in share issuance and valuations that accompanied the information technology boom in 2000 took the extreme to 174% or almost twice the previous peak made in 1929. Since then there was a low of 92% in 2002, a high of 140% in 2007 and a low of 70% in 2008. Now, five years later the ratio is back up to 144% as of mid-March 2014. We know it could go higher but presuming we have a new range since 2000 and the extreme in that year (174%) is similar to the extreme in 1929 that was not reached for the next 70 years, we have to assume that any ratio extreme currently in the 140%-160% range is a seriously high potential peak overvaluation area. It is noteworthy, that even at a lesser extreme of 125% reached in 2011, a 21% market correction ensued. Or to put it another way, if the 1930-1998 danger signal was a ratio of 70% or over and the new post-2000 range is about double the prior 70 year range, then over 140% maybe the new normal for overvaluation. The current level of 144% should at least tell us to be on guard. Risk is in the air and maybe in portfolios as well.

Is History Rhyming?

Four successive years of strong first-quarter stock market returns has been broken this year. And the quarter has ended with a breakdown in previous high-octane, high-beta leadership and with the Russell 2000's relative performance waning. (Note: The same technical analyst mentioned earlier has taught me throughout the years that major market leadership changes often occur late in a bull market cycle.)

Meanwhile, a rotation into previously poorly performing conservative technology, telecom, big pharma, utilities and oil stocks (remember how badly these sectors performed in 1997-1999) remind this observer of the rotation back into value stocks in early 2000, right before the decimation of tech/Internet stocks began to occur.

Over the weekend I questioned, in Saturday's New York Times business section, whether the undervalued conditions that existed five years ago have been reversed and whether the U.S. stock market is overvalued now.

Let's compare the Marches of 2009 and 2014.

In the past I have outlined how we can identify the characteristics of bubblelike conditions.

In the main I see three bubbles that exist today:

1. the IPO market;
2. the social media sector; and
3. the belief that the Fed's quantitative-easing policy is sufficient by itself to generate a self-sustaining domestic economic recovery.

Away from identifying these three bubbles, most other asset classes (e.g., the U.S. stock and bond markets) have not entered bubblelike territory, but they are, arguably, entering levels of excessive speculation.

Comparing March 2009 to March 2014

There are several clear examples of why the markets of March 2009 and March 2014 are almost diametrically opposed, posing risks today just as they posed opportunities five years ago.

In valuation and investor sentiment today we seem to be at the polar opposite of 2009.

Earnings. As a generalization, I would say that the one mistake that the bears made in 2009 was to look at stated or nominal S&P earnings and to attach a P/E ratio to it in an attempt to determine where we are in the market cycle. Back five years ago at the bottom of the market, the S&P 12-month trailing earnings approximated $45 a share. At 666 on the S&P, the near-15x P/E ratio was nothing to write home about.

But back then I made the argument that rather than looking at stated corporate profits we should be looking at normalized profits -- that is, earnings power adjusted for a normalized economy. I was using normalized profits of about $70-$75 a share for the S&P 500 at that time, making the P/E at only about 9x exceptionally attractive.

Let's contrast that with today's estimated 2014 S&P profits of approximately $120 a share. I have argued and I continue to argue that nominal profits are overstating the health of corporations (just as the health was understated in 2009). Profit margins, in particular, at nearly 70% above the average over the past six decades and at the highest level since 1955 overstate normalized profitability.

So, are we making the same mistake in attaching P/E ratios to stated/nominal earning s today as we did back in 2009?

Investor sentiment. On the issue of speculation, there is little question that there are now pockets of speculative excesses in the IPO market, biotech and elsewhere (e.g. social media and in certain disruptors such as Tesla (TSLA)).

There is also little question that we are in a bubble in the belief that the Fed and monetary policy can by itself lead to a self-sustaining domestic economic expansion.

But it is the area of investor sentiment in which we seem to be at opposites.

In 2009, hedge funds were at their lowest net long exposures in several years. Investor sentiment, as expressed in AAII and Investors Intelligence, was similarly distraught.

Consider the comments in the March 2009 New York Times column, in which I debated legendary (and then bearish investor) Robert Rodriguez at First Pacific Advisors (who embraced the negativity of the period). His concerns were illustrative of the bearish meme back then:

What optimists do not understand, says Mr. Rodriguez, chief executive of First Pacific Advisors, is that the United States is being profoundly reshaped by this recession.

"We've crossed over into a new financial era," he said. "You don't know what the ground rules are. You don't even know what the shape of the playing field is."

Economic growth may be stagnant for years, even after the economy hits bottom. Corporate profits may not bounce back. And the high hopes for recovery that have helped drive stocks higher this month may yet crumble.

Stock markets rose 10 percent or more several times during the Depression, the early 1970s and other downturns, only to lose their momentum and give back months of gains. As bearish experts warn, market bottoms come only when investors give up hope of ever seeing a bottom.

"This rally that's going on may prove ephemeral," Mr. Rodriguez said. "I still think we have a very long, arduous journey ahead of us...."

"The stock market will be very volatile, and corporate profitability will be very volatile," Mr. Rodriguez said. "There are large segments of the United States economy that will never come back."

-- Jack Healy, "A Pitched Battle for Turf Between the Bears and the Bulls," The New York Times (March 30, 2009)

The Bottom Line

I continue to hold to the view that the S&P 500 is fairly valued at approximately 1650 (or about 10% below current levels) and that the expected range in the S&P for the balance of the year should be between 1700 and 1925. With the S&P now at 1850, the risk (150 S&P points) exceeds the reward (75 S&P points) by a factor of 2 to 1.

While I expect equities to be down by 5% to 15% in 2014, I am uncertain as to the timing of a potential downturn.

At best I view 2014 as a year of subpar returns.

At worst, a cyclical bear could lie around the corner.

For now I am positioned market-neutral, and I prefer being reactionary (rather than anticipatory), looking for Mr. Market's price action to give me some direction.

The major market risks include a downgrade in valuations (and P/E ratios), disappointing corporate profits (and profit margins), less vigorous global economic growth (which might be the message of the recent flattening in the yield curve) and the likely emergence of natural price discovery in the capital markets as the Fed begins to taper and ultimately raise interest rates.

The first quarter of 2014 is the first opening three-month period of a year since 2009 that the market has made no progress.

Market leadership is changing, often a worrisome signal.

Previously poorly performing large-cap conservative market sectors are strengthening just as the market leaders have slumped, which is reminiscent of the weakness in large-cap value in 1997-1999 and the firming up in early 2000 right before the market's schmeissing.

The upcoming reporting period might prove to be a market catalyst to the downside.

In terms of comparing the Marches (2009 and 2014), obviously generational bottoms occur only once a generation, but cyclical tops (and bottoms) are entirely other things -- they happen with frequency.

I conclude that stocks, which with the benefit of hindsight were at the generational bottom five years ago, might very well be mapping out a cyclical top in early 2014.

History doesn't repeat itself, but it sure as hell rhymes.

• The latest press release details another new product release.

Here's another new product offering at Monitise (MONI.L/MONIF).

• I couldn't find any reason for the share price advance.

As I mentioned in the comments section after the close of trading on Friday, shares of Baxter (BAX), a new long, rose by $0.80 in the after hours. I couldn't find any reason for the share price advance. The only thing I saw in drug approval land was this, but Baxter has nothing to do with it.

• My posts today will be brief but to the point.

I have a day of research meetings and travel (back to Florida), so after my lengthy (and hopefully interesting) opening missive, my posts today will be brief but to the point.