• "One More Thing" -- Lt. Columbo

While I have an overall cautious view of the market there is nothing definitive to say about yesterday's schmeissing and today's vigorous rally.

Was Tuesday a "one-day wonder?"

Or was today a "one-day wonder?"

Hard to say, though Jim "El Capitan" Cramer ends his blog today with some observations on the subject.

As I have continually written ... the only certainty is the lack of certainty.

Those that are certain of view (in either direction) and don't qualify those views, should be avoided like the plague.

The market is acting more volatile than the underlying fundamentaIs and it is starting to overreact to news (like today's not unexpected FOMC minutes). I remain of the view that this sort of volatility and uncertainty -- in a market that has no memory from day to day -- is not a particularly healthy backdrop to invest in.

And, as a friend (who is a lot smarter and richer than I am) remarked near the close: Historically, slowing global economic growth and rising equity markets are not a positive combination.

Stated simply.

• Thanks so much for reading my Diary today.

I got much more short toward the end of the session (especially of a Nasdaq-kind) in a market without a day-to-day memory. I'll recap today's activity in tomorrow morning's Market Setup.

Enjoy your evening.

• As of 3:49 p.m. EDT threre was $1.05 billion to buy market on close.

• I have been scaling up on my QQQ short throughout this rally.

My cost basis today is about $98.36.

• Until morning.

I am too busy trading to do today's recap, so I will deliver it in the morning.

• This is not a healthy cocktail! 

Global growth is slowing and the equity markets rally.

• Good synopsis and color on the FOMC minutes from Peter Boockvar (and Bugs Bunny).

While nothing new, according to the just released FOMC minutes from the meeting 3 weeks ago, a majority of the committee remains deathly afraid of raising rates off zero. They still have very little faith right now in the ability of the US economy to handle a short rate at a range of anything above zero to 25bps. As seen 3 weeks ago, the Fed lowered its 2014 GDP forecast to a range of 2-2.2% from 2.1-2.3% and they said in the minutes that this was due to a "somewhat weaker near term outlook for consumer spending." They also lowered their 2015 estimate 3 weeks ago and the minutes said this "little" revision reflected "a higher projected path for the foreign exchange value of the dollar along with slightly smaller projected gains for home prices."

The line that got markets excited however, a market that doesn't want any policy accommodation removal whatsoever, was this: "a number of participants noted that economic growth over the medium term might be slower than they expected if foreign economic growth came in weaker than anticipated, structural productivity continued to increase only slowly, or the recovery in residential construction continued to lag." They did NOT focus on this: "information from business contacts in most parts of the country indicated improvements in business conditions, rising confidence about the economic outlook, and increasing willingness to undertake new investment projects..Several participants noted positive signs of further increases in investment spending going forward, including elevated levels of new orders and shipments of capital goods, strong interest in the tech sector, and the need to replace aging capital."

The Fed went over the semantics of whether to leave in "considerable time" and "significant underutilization" but said either way, they were still 'data dependent.' We know however that 'data dependent' is very subjective and whose targets keep moving.

Bottom line, there are a lot of differing opinions in the minutes and we can all take out what suits us but markets love any hint that the doves are in control and they certainly got that continued sense within the minutes. But, the unemployment data continues to work against those who want to keep rates at zero as since these minutes, the unemployment rate fell again to 5.9% (now at their year end target), the participation rate fell again (decline not cyclical but structural) and there was another big increase in the amount of job openings.

Lastly and in one of the more interesting sentences of the minutes, the Fed is implicitly acknowledging that with rates already at zero and a $4.5T balance sheet almost 6x bigger than in 2007, they said "the risks to the forecast for real GDP growth were still seen as tilted a little to the downside, as neither monetary policy nor fiscal policy was viewed as well positioned to help the economy withstand adverse shocks." The underline is mine. Another way of saying this is the Fed is out of bullets to deal with any lean downward in economic growth from here.

• I'll raise my short exposure.

Markets have responded vigorously to a slightly-more-dovish-leaning FOMC minutes.

* the global economic slowdown is a risk to forecasts/outlook

* a rate increase remains data dependent 

* patience is needed in changing forward guidance

The U.S. dollar has weakened, Treasuries have strengthened, gold has advanced and stocks are much higher.

But the FOMC minutes don't change the policy outlook and the first rise in the federal funds rates still seems likely to occur in mid-2015.

I am taking this as an opportunity to raise my short exposure.

• I am adding to my QQQ short at $98.01.

• I added more aggressively to my SPY short at $195.21.

• I added to my SPY short just now at $194.63.

• Stock move looks like an overreaction.

Bon-Ton Stores (BONT) shares are trading lower on the announcement of the closure of two older stores.

The two stores were part of the Elder-Beerman acquisition about a decade ago and part of a real estate initiative to close under-earning stores.  

Prima facie this is an overreaction, but the company is in a quiet period (as mentioned this week) and won't respond to questions.

The financial impact, according to the release, is said to be immaterial.

I just added small to this name at under $8.30.

• And I'll take off the rest of my TBT long.

Remember the decay from rebalancing of leveraged ETFs?

I do and I am taking the rest of my TBT gain now.

Stil l long TBF (which is unlevered).

And here is Peter Boockvar's quick look at the auction:

It seemed that the lowest yield since June '13 in the 10 yr note was enough to look unattractive to those participating in today's auction. The yield of 2.381%, about 1 bp above the when issued. The bid to cover of 2.52 was the weakest since August '13 and below the previous 12 month average of 2.70. Lastly, direct and indirect bidders only took 51% of the auction, leaving dealers with a very high 49% of the auction, the most since May '13 and well above the recent average of 37%. Bottom line, this auction was not good and is why the long end is giving back some of yesterday's rally. Whether this is a sign that the market has pushed the envelope a bit too far on the downside in yield in the short term remains to be seen and will likely depend on the stock market action in coming weeks. We'll see tomorrow's 30 yr bond auction to see if there is any follow thru.

• TBT is ripping off of a weak treasury auction.

Off of the weak auction, I am taking off some of my TBT for a nice $0.70 gain.

• No jokes, please.

Occasionally, I publish a column that replicates the theme of "The Chris Matthews Show" segment, "Tell Me Something I Don't Know."

So, Dougie, tell me something I don't know!

By this weekend Jay Leno will have inked a deal to participate in and produce a new show on CNBC.

No jokes, please.

• A pair of Insurance names.

Longstanding investment shorts MetLife (MET) and Lincoln National (LNC) are beginning to break down technically from longstanding bullish charts and are moving well into the black for me.

Both life insurers, loved by The Street of Dreams, are on my Best Ideas list (short side). 

• This morning in TBT.

I pressed my ProShares UltraShort 20+ Year Treasury (TBT) long this morning at $53.10.

• We agree.

Steve Cortes likes a tactical bond short as much as I do.

Treasuries vs. S&P 500

View Chart »View in New Window »

• Real estate maven Mark Hanson discusses the lack of sustainability to higher home prices.

Bottom line:  With rates near historical lows, unlikely to move meaningfully lower in the mid-term., it suggests the next move in builder prices is a 20% decline / reversion to the mean, rather than stability or further increases.  This is in-line with my two year forecast of a 10% to 20% decline in resale houses over the next two years.

Persistently lower and lower rates have been required in order to keep house prices moving higher with the annual income required for a mortgage loan remaining relatively stable for over 20 years.  It's an amazing feat of financial engineering that from 1988 to 2013 the annual gross income needed to buy the average priced house remained relatively flat, despite house prices rising 125% during this time period.  

But, unlike previous era's when rates had room under them to fall in order to prevent house prices from declining -- or in 2003 when they created exotic loans to prevent it -- rates likely won't drop to the level needed to support present or allow for further increases in builder prices.  

Nor, despite how much they wish, the exotic stated income and interest only loans needed for multiple expansion in the absence of lower rates won't reappear due to post-crash laws passed to prevent it.

1)  1975 to present:  Annual income req'd to buy the avg priced builder housing using the popular loan programs and going rates of each era

A simple reversion to the 25 year mean here would imply that builder prices have 21% air under them. 

2)  Leverage ratios:  It takes 5.3 years of gross income to buy the average priced house, an unsustainable number

Again, with rates likely at or near their lows, this factor has more a chance of reverting to it's mid 3's mean than to rise further over the next few years.

3)  Builder house prices almost exclusively depending on declining mortgage rates increasing the leverage in finance.

• Mid-morning musings from Sir Arthur Cashin.

Russell clearly takes out last Thursday's lows.  That weighed on S&P and Dow who made marginal new lows.  When that produced no "trapdoor" effect, buyers started nibbling in hopes of a retest bounce.  No momentum so far.

• I am bidding $40 for Yahoo! (YHOO) and $11.95 for Northwest Bancshares (NWBI).

First bids of the day.

• Stock halted twice today.

I have long warned and been of the view that Sears Holdings (SHLD) would file bankruptcy.

Sears shares have been halted twice today because of financial problems that seem to be developing.  

• *SEARS VENDOR SAID TO HALT SHIPMENTS AS INSURERS REDUCE COVERAGE
• *SEARS VENDOR WITHHOLDING SHIPMENTS IS MEDIUM-SIZED SUPPLIER

• Wait for the right pitch.

During this volatile and uncertain investment setting, we don't have to move at every opportunity.

As Warren Buffett wrote, "The stock market is a no-called-strike game. You don't have to swing at everything -- you can wait for your pitch. The problem when you're a money manager is that your fans keep yelling, 'Swing, you bum!'"

The hardest thing is to sit on one's hands.

It is now time to wait for our right pitch.

And to be patient.

• I am back short General Motors (GM) and Ford (F).

Peak autos.

• I am adding to TBF at $26.92 now.

• I have no bids out today.

• Still net short.

On my last post on SPY, the disclosure should have been (still) net short SPY.

I am maintaining my core SPY short and trading around it.

That said, I have taken the rest of my SPY long off just now for a quick profit.

• I sold one-third of my SPY long rental at $193.90 for a small profit.

• Will buy lower.

After yesterday's gain of 10%, I am not bidding for more Monitise (MONIF) today.

I am a buyer lower.

• I initiated a long ProShares UltraShort 20+ Treasury (TBT) position at $53.03 this morning.

• I'll sell any meaningful upward move.

We are now oversold after the schmeissing of the last two days.

I expect a trading rally shortly, but (tactically) I suspect it will be only for the swift of foot (or pen)!

But, I plan to sell on any meaningful move higher.

I took a small trading long rental in SPY at $193.35  with a tight stop $0.50 under my entry price.

• IPad Air.

IPad Air pix leaked. Same source that accurately leaked iPhone6 pix.   

• Where it began.

Greece is collapsing, the Iranians are getting aggressive and Rome is in disarray. Welcome back to 430 B.C. -- John Cleese 

The rundown:

• U.S. futures are bouncing a bit (but off their highs) after yesterday's schmeissing. (S&P 500 futures are +1 and Nasdaq futures are +1 handles).
• Europe is lower, led by a fall in the DAX. This morning Goldman Sachs has reduced its European stock view. I would note that the German market is correlated with S&P 500 despite being an ocean away.

• Japan is -1.10% as the yen continues its rally. The selling was broad with every major sub-group closed in the red, but industrials, consumer discretionary, tech, materials and telecoms all lagged.
• China is +0.80% after being closed for the Golden Week holiday. The mortgage-easing steps unveiled last week in China may account for the rally today. Also, it looks like retail sales trends over the Golden Week holiday weren't as bad as some were fearing. Major subgroups closed higher, but healthcare, industrials, materials, discretionary, and staples all outperformed.
• Foreign exchange action reversing a bit from recent trends with the U.S. dollar +0.05% and the euro  -0.07%. As I mentioned recently, look for some multinationals to disappoint in 3Q in the face of exchange headwinds and weakening exports.
• Gold is +$5/oz, near a multi-year low. I weighed in negatively on gold over a month ago. Crude is -$0.75. Copper is -0.18%.
• The yield on the 10-year U.S. note is up modestly to  2.35%. Sovereign debt yields are mixed to higher. I added considerably to my short bond position yesterday.                                            

Global stocks, in response to a weak U.S. stock market are lower. Very little news overnight as markets spent the night on reflection. Possible German fiscal action in response to weak growth was an important issue that some hedgehoggers are discussing. Sentiment is deteriorating and fear is rising. Sluggish EU growth, Ebola fears and the end of Fed asset purchases seem to weighing on the markets. Dudley's talk about structural (vs. cyclical) headwinds -- also one of my themes -- idn't help markets. But the markets technicals have steadily eroded since early August, something  I have been definitive about.

On the earnings front, Alcoa (AA) will hit after the close. Yum! (YUM) technically kicked off the Q3 season Tuesday night. The numbers weren't great and guidance was cut, but it looks like the release was no worse than feared. Costco (COST) reported this morning and Monsanto (MON) was slightly dissaappointing. J.C. Penney (JCP) has its analyst day and Gartner and IDC will release their third-quarter PC numbers after the close.

• Morning commentary from Peter Boockvar.

After the damage done in the US stock market over the past month, one would think it would bring out some bears (different than those of us that have been, myself including due to the end of QE that I've been worried about all year). But, the most its brought out is an increase in those that expect a correction, a correction that they want to buy. Investors Intelligence said Bulls fell 2 pts to 45.5 while those expecting a correction rose 3 pts to 40.4, the most since early February. Bears actually fell 1 pt to 14.1, not far from the multi decade low of 13.3 that we saw recently. I can only explain the dearth of bears still to the faith in the cult of central bankers.

With a 4 week low in mortgage rates, the MBA said refi applications rose 5% w/o/w (while remaining down 32% y/o/y) and purchase applications to buy rose 2.4% (down 8% y/o/y) to the best level since July. Hopefully the purchase component gains some traction, especially now that price gains are slowing and job creation is improving but the recent gain so far is just a bounce along a multi year bottom.

I mentioned yesterday the comments coming from Japanese officials discussing the negative aspects of a weak yen which is the main basis of Abenomics and BoJ policy. Today, Dow Jones is reporting from Japan that "the latest bankruptcy data show that for many small businesses, the impact has been more than just negative...a closer look at the data shows that the number of corporate bankruptcies caused by factors related to the yen's weakness is rapidly rising... Bankrupt firms citing the weaker yen surged to 214 during the first nine months of the year, compared with just 89 during the corresponding period last year...The failed businesses, many of them small, were struck by the higher costs of imported materials such as fuel, minerals and food...hit hardest was the transportation industry, including trucking companies." Currency debasement, as said before, is not just a zero sum game with other countries but is as well internally.

With respect to the ECB, we know that Mario Draghi's goal is to get his balance sheet back to 3T euros, an increase of 1T. Today ECB VP Vitor Constancio said that there are 1T euros of ABS and covered bonds outstanding that can get them there but even he acknowledged that "the amounts that we will be able to buy will be lower than the theoretical amount." Again, the extent of government guarantees for the mezzanine slice of ABS may be the key factor in whether this program works. Also, the TLTRO should also help in getting the ECB balance sheet back to 3T IF the demand for loans from bank clients starts to improve.

And a Sorcerer's Song from Sir Mark J Grant:

"As surely as Water will wet us, as surely as Fire will burn,

The Gods of the Copybook Headings with terror and slaughter return!"

                      -Rudyard Kipling

I assumed the position. I assumed it at the end of last year when I predicted lower interest rates. I have not uncoiled. There will come a time, there will certainly be a moment, when I will turn and head in a different direction, when the Masters of Fate will decree another twist in the never ending road, but we are nowhere near that bend in our long highway yet.

I continue to roll down the center-line.

"We keep an extremely small prophet, a prophet

Who brings us unbounded returns

For he can prophesy with a wink of his eye

Peep with security into futurity

Sum up your history, clear up a mystery

Humor proclivity for a nativity

He has answers oracular, bogies spectacular

Tetrapods tragical, mirrors so magical

Facts astronomical, solemn or comical

And, if you want it, he

Makes a reduction on taking a quantity

Oh, if any one anything lacks

He'll find it all ready in stacks..."

       -Gilbert & Sullivan, the Sorcerer's Song

Out on the horizon lurk some dark shadows. Germany's economic prowess which has allowed it to virtually control, in one fashion or another, the EU, by threat, manipulation or political sleight of hand is shrinking rapidly. Berlin is losing its grip as its own economy shudders and creaks under the economic slowdown and the lack of inflation in the rest of Europe.

The willing subjects are becoming not so willing and the strain is beginning to show. France and Italy, to be quite provocative, are close to a revolt. It is not only austerity but Quantitative Easing and Mr. Draghi seems to be edging closer to the revolutionaries as the Bundesbank screeches and howls in protest.

Now, however, Spain, Portugal, Greece, Cyprus are coming in out of the shadows and seemingly forming an alliance with France and Italy and it may be the undoing of the Germanic dream. I predict a ripping at the seams and while I do not think it will end the grand alliance I do think there will be quite public resurrections and battle scars. France has already raised the Tricolor and it is waving in the breeze in Paris.

Bloomberg reports this morning that European central bank Vice-President, Vitor Constancio, said one trillion Euros ($1.26 trillion) of asset-backed securities and covered bonds are eligible for purchase by the institution. They do not label this Quantitative Easing as they are buying securitizations from the banks and not in the open markets. This will free up cash at the European banks of course and help their balance sheets but I fear the valuations of what is bought will be diminished by political motivations as each country struggles to unload its own brand of manure while stamping "The Gold Standard" on each box and crate of the stuff.

The elitists in Europe will not believe my predictions this morning. They will decry my observations and damn the author no doubt but I will just smile. I have been here before.

People do not believe what they do not wish to believe and the "wish of it" is what causes the problems.

"I believed in immaculate conception and spontaneous combustion. I believed in aliens from outer space and vampires, prophecy, and the resurrection of the dead. I had Deja Vu many times each day. I was thirteen."

               -Kate Braverman

Europe is old and established no doubt but the European Union is still in its teenage years and often suffers from a lack of maturity. They extend, they pretend and the bully screams harshly in Frankfurt. Much of the infighting has been closeted behind the scenes but I predict an outbreak and some very public scenes of rancor. With interest rates near zero and European sovereign yields a fraction of U.S. yields the ECB is getting near the end of what it can accomplish alone. A battle is forthcoming and there will be casualties.

There are always casualties.

"Call it a prophecy, call it a prediction, call it fate - call it what you will. I fought against it hard enough, God knows. But the evidence of my own eyes, my own ears, my own senses, is too much for me. And the time's too short now."

              -Cornell Woolrich

• Break in!

Goldman Sachs lowered its profit forecast for Europe and reduced its view on EU equities.

The developing economic weakness in the EU region has been a core reason for my bearish market view.

• Fifty-four years of inflated energy prices may be coming to an end.

We all know that I'm bearish. 

To me (at the current time), this is a stock market with no memory, no momentum and no motivation. It is a foundering market that appears to be waiting for trouble to arrive on a Black Swan landing strip.

But, as always, it's important to recognize that I don't have a concession on the truth. I can be -- and have been -- (very) wrong in the past!

This morning and in the day's ahead I will discuss some  potential Golden Swans that could be viewed as an important and incremental positive for the markets and for the global economies.

The first  Golden Swan that I will discuss this morning is the possible dissolution of OPEC.

OPEC (Organization of the Petroleum Exporting Countries) is an intergovernmental organization that was created at the Baghdad Conference in September 1960 by Iraq, Kuwait, Iran, Saudi Arabia and Venezuela. Later Libya, United Arab Emirates, Qatar, Indonesia, Algeria, Nigeria, Ecuador, Angola and Gabon joined.

OPEC's mission was to coordinate the policies of the oil producing countries. Its goal is to secure a steady stream of oil income to the member states and to collude in influencing the world oil prices through economic means. Because OPEC is an organization of countries (not oil companies), individual members have sovereign immunity for their actions, meaning that OPEC is not regarded as being subject to competition law in the normal way.

While OPEC was established in 1960 it did not become an impactful force in the market until 1973 when its policies caused a four-fold increase in the price of oil (from about $2.63 a barrel to $11 a barrel, helping to cause a serious global recession and a devastating bear market in stocks.

OPEC operated as a classic cartel, utilizing artificial means to raise the price of its product. While economic theory teaches that cartels are transitory, OPEC has had staying power. Virtually every investment professional managing money today has done so under the influence of OPEC on the oil market.

Indeed, it is hard, if not impossible, to imagine a world without OPEC. But just as we are constantly trying to find Black Swans before they appear, if OPEC ceases to function or its influence wanes, it could be a possible "Golden Swan" that no one sees coming. The ramifications of this would be profoundly positive for global economies  and markets.

Powerful forces are now forming to suggest OPEC's days are numbered and that, at the very least, its impact will wane.

1. The Growing Influence of the U.S. on Energy Production -- The U.S., through hydraulic fracking, has become a major oil producer and our imports have fallen, helped by secular efficiency in consuming energy.
2. Subpar Global Economic Growth -- A global slowdown (influenced by structural headwinds) has served to reduce oil demand, particularly in Europe and China. Oil is priced in U.S. dollars and the dollar rise has made oil more expensive and has moderated consumption.
3. Leading Suppliers Are Raising Production -- A few major producers are motivated to increase production and steal share rather than cut production (the usual OPEC strategy in times of slack demand). Saudi Arabia did so last week.  Stability of its budget requires maintaining oil revenue (at about $90 a barrel on previous production) rather than cutting it. If prices fall below $90 a barrel, the Saudis indicated last week they will cut price to maintain revenue, worsening any supply glut.
4. Russia's Economic Woes -- Russia (not a member of OPEC) has deepening financial troubles. Oil is its principal export. Its currency is falling and its oil is priced in U.S. dollars. Logic suggests Russia will desperately raise production.
5. Others Have Issues -- Three producers with excess capacity have issues. Iran and Iraq are Shiite entities. If the Saudis surrender share to them, it will help their cause. This seems unlikely. The Arab Spring has left Libya in shambles and it is producing to rebuild.
6. Venezuela Is a Wild Card -- Venezuela could usually be counted on to withhold production. Due to its inflation and recession that is unlikely to happen.

It looks increasingly possible that OPEC has wandered into a perfect storm. 

For one reason or another (some discussed above), members are unlikely to cooperate in withholding production to maintain price. Over the next 1-2 years the price of oil may move  below the marginal cost of production. This could translate into sharply lower energy prices and consequently higher consumer real incomes (and spending) than anyone is forecasting. IF this happens, the overall market should be ignited to the upside, with particular strength in the consumer and transportation sectors and with weakness seen in energy production and exploration issues. The relatively positive action of the retailers over the last week or two might be an early signpost that the role of OPEC is diminishing and that the price of energy products might continue to decline.

The bottom line is that a lengthy period (54 years) of the pain of inflated energy prices may now be coming to an end in what might be called a Golden Swan of Lower Oil Prices. 

To say the least, the OPEC meeting late this month should be interesting.