• They've gone from medium to large.

My oil longs have gone from medium to large with late afternoon adds. Though I might be wrong, I expect the stocks to perform better before the commodity stabilizes.

If I am correct in a trading opportunity (in addition to an investment opportunity), I will pare some of my trading stock on strength over the next few days and keep my core investment positions.

I am now slightly net long (in exposure terms).

Thanks for reading my Diary today. I have to hustle to get ready for a book signing in Palm Beach that has been organized by Baron Von Broker and my friends at UBS.

• As of 3:46 p.m. there is a large $2.2 billion to sell market on close.

• Attention day traders.

My Ludacris Forecast (always based on gut)  is that oil stocks open higher tomorrow morning.

To get real Ludacris, they could gap higher as the panic selling in the commodity might die down in the next 12-18 hours.

As I posted, I have used today's weakness to materially expand and accelerate my oil purchases.

• More housekeeping.

With some additional buying in oil stocks and Twitter I have taken my portfolio back to market neutral.

• Housekeeping items.

I am covering a portion of my SPY and QQQ shorts at $203.50 and $103.40 respectively, taking my net short exposure to under 5%.

• Time to defend that thesis.

A reminder, more than 90% of the talking heads over the last two weeks viewed the rapid and sizable oil price decline as constructive for the market and economy.

Not.

It is time for those interpreters to defend their positions.

• Zero Hedge examines the most leveraged energy companies.

• Housekeeping item.

I am covering the QQQs (at $103.45) I shorted late in the day yesterday for a  $1.40 a share gain.

I am staying in motion, locomotion. 

I am back under 10% net short now.

• BKN hits a new high.

Closed-end bond fund BlackRock Investment Quality Municipal Trust (BKN) has been on my Best Ideas List a week short of one year.

The fund's value has hit a new 2014 high and stands nearly 28% higher for the year.

This tortoise has beaten many of the hares. 

• The junk bond market is getting schmeissed today.

Recently, I have warned about malinvestment and the potential collateral damage and contagion caused by the rapid and large drop in the price of energy products.

I have also observed that we should pay attention to the forward-looking high-yield market.

Regarding the last point, the junk bond market is getting schmeissed today. And that is why it is called junk.

I remain concerned with the contagion (from high-yield and bank oil-related credits) and tomorrow's opening missive will deal with The Tale of Penn Square Bank.

• On Twitter.

I established a Twitter (TWTR) long yesterday.

Here is the analysis, "How Tweet It Is," that I published on my Diary during the week of the IPO pricing:

He rocks in the tree tops all day long

Hoppin' and a-boppin' and singing his song

All the little birdies on Jaybird Street

Love to hear the robin go tweet tweet tweet!

-- Leon René under the pseudonym of Jimmie Thomas (popularized by Bobby Day andMichael Jackson), "Rockin' Robin"

In less than 140 characters: I am manifestly bullish on theTwitterIPO.

It is my view that Twitter's shares will likely double in the first month of trading -- or maybe sooner.

Twitter is the largest source of public conversation in the world.

With over 230 million active monthly users and more than 500 million tweets daily, the unique structure of the Twitter experience brings the company smack in the middle of both the mobile delivery of content and advertising. In the most recent three months, 76% of the company's monthly active users accessed Twitter from a mobile device. Over 70% of Twitter's ad sales are generated from these mobile devices, and the company expects that the proportion of active users on advertising revenue generated from mobile phones and tablets will grow in the future.

Looking forward, the larger the user base becomes the greater the value proposition will be for advertisers -- and the greater the worth of Twitter's shares.

Given the lack of competition in its space, Twitter's current monopolistic market position suggests a likely quick acceptance as an "anointed stock," replicating the action of Internet service providerAmerica Online(AOL) in the early 1990s and Internet goods sellerAmazon(AMZN) in the mid to late 1990s. As such, Twitter's share price may not be required, as most stocks are, to achieve visibility of early profits. Indeed, pegging the company's share price (similar to AOL and Amazon back in the day) to the traditional metrics of profits and cash flows will not likely be a headwind to appreciation over the next few years, as its dominant market share and top-line growth will be conspicuous.

Just When I Thought I Was Out of Twitter, It Pulled Me Back In

"Just when I thought I was out, they pull me back in."

-- Michael Corleone (Al Pacino),The Godfather: Part III

The irony is not lost on me that while I am a bull on Twitter's IPO, over 100 days ago (with more than 65,000 followers), I decided to discontinue tweeting for personal reasons. At that time, I found it too cumbersome to navigate the Twittersphere of sharks in order to find the good fish. (Note: I furtherdiscussedmy rationale for leaving Twitter with Joe Nocera ofThe New York Times.)

That said, Ireturnedto Twitter on Oct. 8 after a four-month summer vacation, which speaks volumes of the potential utility I see in Twitter.

I have beenoff Twitterforalmost four months.

It should be obvious after a couple of tweets I posted yesterday that I have decided toreturn to Twitteron a limited basis.

While I don't plan to post as frequently as I have in the past, I recognize (when conducted in a civil manner) that Twitter can be legitimate and value-added platform for instantaneously communicating to others.

Frankly, if it is good enough for Warren Buffett, Carl Icahn and a number of other investment professionals that I respect -- it is good enough for me.

So, I amback, and I am giving Twitter another whirl.

In doing so, I plan to ignore (and block) the haters becausehaters are gonna hate.

-- Doug Kass, "Life Is Tweet Again" (Oct. 9)

The Twitter IPO

I have readTwitter's 231-page offering document.

Over the weekend,The Wall Street Journalpublished a column that describes some ofthe company's most recent financings.

In its latest valuation, Twitter valued the shares at $20.62 based on the secondary market transactions.

For discussion purposes, I am presuming that Twitter sells 80 million shares (including 10 million over allotment) at $22 a share -- the midpoint of the range is $18.50 a share. The pro forma equity capitalization will be about $12.25 billion at the IPO offering price, and approximately $1.75 billion of primary stock will be sold to investors. (Note: This is above the underwriters' initial estimates of $11.0 billion and $1.44 billion, respectively.) Officers, directors and 5% holders will own about 51.5% of the outstanding shares.

Twitter recorded only about $28 million in revenue in 2010. The company's top-line growth since then has been astonishing. Through the first nine months of 2013, Twitter's sales were $422 million (compared to $205 million a year earlier). Twitter will likely achieve sales in excess of $600 million for full year 2013.

Monthly active users rose by 39% (to 231 million) throughout the first nine months of the year.

Net losses totaled $133 million for the nine-month period ended Sept. 30, 2013, up from $70 million of losses a year earlier.

The company's accumulated deficit from inception is about $483 million, and losses are expected for the next few years.

Background

As described in the company's prospectus:

Twitter is a global platform for public self-expression and conversation in real time. By developing a fundamentally new way for people to create, distribute and discover content, we have democratized content creation and distribution, enabling any voice to echo around the world instantly and unfiltered. Our platform is unique in its simplicity: Tweets are limited to 140 characters of text. This constraint makes it easy for anyone to quickly create, distribute and discover content that is consistent across our platform and optimized for mobile devices. As a result, Tweets drive a high velocity of information exchange that makes Twitter uniquely "live." We aim to become an indispensable daily companion to live human experiences.

People are at the heart of Twitter. We have already achieved significant global scale, and we continue to grow. We have more than 230 million monthly active users, or MAUs, and more than 100 million daily active users, spanning nearly every country. Our users include millions of people from around the world, as well as influential individuals and organizations, such as world leaders, government officials, celebrities, athletes, journalists, sports teams, media outlets and brands. Our users create approximately 500 million Tweets every day.

Twitter is a public, real-time platform where any user can create a Tweet and any user can follow other users. We do not impose restrictions on whom a user can follow, which greatly enhances the breadth and depth of available content and allows users to discover the content they care about most. Additionally, users can be followed by thousands or millions of other users without requiring a reciprocal relationship, enhancing the ability of our users to reach a broad audience. The public nature of our platform allows us and others to extend the reach of Twitter content beyond our properties.

Media outlets distribute Tweets beyond our properties to complement their content by making it more timely, relevant and comprehensive. Tweets have appeared on over one million third-party websites, and in the third quarter of 2013 there were approximately 48 billion online impressions of Tweets off of our properties.

Twitter provides a compelling and efficient way for people to stay informed about their interests, discover what is happening in their world right now and interact directly with each other. We enable the timely creation and distribution of ideas and information among people and organizations at a local and global scale. Our platform allows users to browse through Tweets quickly and explore content more deeply through links, photos, media and other applications that can be attached to each Tweet. As a result, when events happen in the world, whether planned, like sporting events and television shows, or unplanned, like natural disasters and political revolutions, the digital experience of those events happens in real time on Twitter. People can communicate with each other during these events as they occur, creating powerful shared experiences.

Establishing Street Cred

Before discussing Twitter's merits, I feel I must emphasis that it is not in my DNA to normally be excited about the share price prospects of a company that is operating at a loss, that will be in the red for several more years and that has a share price that is not valued on fundamentals.

From the early going, I have been a consistent skeptic of the Internet (when it was proven to be appropriate back in the last tech/Internet bubble during the late 1990s).

Importantly, the company I was most bearish on was AOL (not in the beginning of its life but rather during its maturation and within an increased competitive landscape).

Let me summarize my street cred of Internet skepticism.

• America Online and the Internet stock bubble. I was among the most vociferous bears extant on technology in the late 1990s. In 1997,I wrote a cautious editorial, "Kids Today" inBarron's, skeptically voicing that the boom in technology/Internet stocks would end in disaster for most traders and investors. AOL's shares eventually fell by 85% -- to this day, it was one of my greatest shorts. AOL had company, for as many recall, theNasdaqultimately fell by 75% from the 2000-2001 high. In the second half of 1999 and into the early 2000s, I participated in a number of interviews withBarron'sAlan Abelson in which Iexpressedanegativeviewdirectedtoward the shares of AOL (later turning more positive). I predicted a steady decline in subscribers as the ISP space became more crowded and competitive --I was correct-- and for the Internet sector in general. After the merger withTime Warner(TWX) in 2000, the shares fell from the $70s to $10 share. Finally, I invented a "Stock Market Super Bowl Indicator," and my first one (published by Alan Abelson)cautionedthat danger was ahead for the Internet sector based on mushrooming in ad spending back in 2000-2001.
• The Facebook IPO fiasco. Additionally, last year I wrote an out-of-consensus negative analysis ofFacebook(FB) well before the company went public. Months before the Facebook IPO, Iopinedthat it would be a grand failure (beginning on the first day of its public offering).

Buy Twitter's Shares

Twitter is uniquely positioned in for the mobile delivery of content and advertising. Twitter reminds me of Web portal America Online during its formative growth period of the early 1990s. Back then, AOL andCompuServeformed a strong duopoly in the Internet service provider and email spaces. Eventually, CompuServe, which served the technical community and was a wholly owned subsidiary ofH&R Block(HRB), lost market share, and by providing Internet access to the consumer and aggregating information for those who were not very familiar with navigating the Internet, AOL had a dominating position as it exited the decade. AOL's shares rose spectacularly during the period. Today, Twitter is much like America Online was from 1992 to 1995, practically all alone in its monopoly market position.

Twitter holds a first adopter and monopolistic position. Twitter has a long runway ahead of it, where it faces limited direct competition. Whereas in the early 1990s AOL and CompuServe held a duopoly, Twitter has the market to itself. There are two obvious potential competitors to Twitter: Facebook andGoogle(GOOG). Facebook is trying but just can't get there as of yet for real-time. On Google, I don't think the company has any interest in competing against Twitter. According to an exchange I had withBTIG'sRich Greenfield, it feels more like Google wants to be the back-end connectivity of your identity online with Google Plus compared to Twitter as a real-time news source.

Twitter stands in the middle of the evolution of content creation, distribution and discovery. Twitter is the natural service that follows the 25-year-old tradition of a changing delivery of content creation, distribution and discovery that were previously the property of Web browsers such asNetscapein the early 1990s, Web portals such as AOL andYahoo!(YHOO) in the mid to late 1990s, search engines such as Google in the early 2000s and social networks such as Facebook in the late 2000s.

Twitter is gaining broad acceptance. A 2013 study conducted byArbitronandEdison Researchfound that 44% of Americans hear about tweets through media channels other than Twitter almost every day. As the company expands, so will the breadth of content and Twitter's reach.

America Online's dominant market position led investors toward being forgiving with regard to normal metrics, which might also be the case with Twitter. Twitter's market presence and outstanding growth opportunities will likely yield a pass on traditional metrics (as relationship to operating results, tangible book value etc. will be thrust aside).

Twitter has a large opportunity to expand its user base. Similar to America Online in the early 1990s, the key to Twitter's growth will be the opportunity to expand its consumer base. In turn, platform partners will expand their offerings, and advertisers will eye greater opportunities and engagements. According to industry sources, there are 2.4 billion Internet users and 1.2 billion smartphone users vs. only 230 million monthly active users on Twitter.

Twitter's offering is only a sliver. This is important: Twitter's projected offering of $1.6 billion (unlike Facebook's much larger offering) is simply not enough to go around. Dedicated technology funds will (out of necessity) need to have a foot in the door of Twitter. So will all sorts of growth investors. Moreover (again, unlike Facebook), Twitter's insiders are not selling any stock and have a lockup into early next year. To me, Facebook made a fundamental mistake is selling such a sizeable stake in its IPO. By contrast, selling a sliver guarantees the success of the Twitter offering.

The shares have a reasonable valuation vs. peers. The offering price will represent about 11x estimated enterprise value to sales for 2014 and 7x estimated enterprise value/sales for 2015. This compares to about an 18x multiple if we use auniverse of peerssuch asLinkedIn(LNKD),Zillow(Z) and Facebook, but the three- to five-year sales growth rate at Twitter is expected to be about 70% annually (down from 106% growth in 2013), which is approximately twice the rate of revenue growth of the four peers mentioned above. Twitter's ratio to its peers based on enterprise value per monthly active users is low (at only $55 compared to an average of $114 for the three peers) and provides an upside monetization opportunity. The company's average revenue per user is $2.20 -- Facebook's ratio is $4.32.

Bottom line: I would pay up to $32.50 a share for Twitter's common shares.

• I am sticking with these.

The closed-end municipal-bond asset class is again providing an "anchor" to a deteriorating U.S. stock market.

I am staying the course with this favored sector. 

• See: Caterpillar.

Playing the contrarians sometimes pays off.

When I put Caterpillar (CAT) on my Best Ideas list as a short in late November, at $106, the move was greeted unfavorably. It was in direct opposition to the exuberance of many on the sell side of the Street.

Caterpillar shares are down another $2 today, and have hit a recent low -- and are trading nearly $12 below my cost-basis.

This is the second time in a short period that I have shorted this name and made at least $10 in this name. In other words, to quote Saturday Night Live's Garrett Morris, Caterpillar has been berry, berry good to me (video).

I feel the same way about my energy now -- though from a long vantage point. Again, I am long Devon (DVN), Exxon Mobil (XOM) and Chevron (CVX).

• Owing to the nice reward-to-risk.

Given the favorable upside-to-downside scenario, I am putting Twitter (TWTR) on my Best Ideas List at last sale.

• At nearly full investment positions in large-cap energy.

In keeping with my prior post, I am moving to a near full investment position in large-cap energy now.

These are not trades. I expect to hold them for some time.

I substantially added to my positions at these prices this morning: Exxon Mobil (XOM) at $88.75; Chevron (CVX) at $103.20 and Devon (DVN) at $54.70.

While the conservative among you might want to wait for some stability in the commodity's price, I tend to be anticipatory in my long-term investments, and I feel comfortable investing at the current price levels.  

Buy at the sound of cannons; sell at the sound of trumpets.

• I've added to my position.

Twitter (TWTR), a purchase I made Tuesday, continues to do well both absolutely and relative to the market.

I have added to this long.

• On capital-markets activity.

JPMorgan Chase (JPM) joins the chorus of large banks looking for weak capital-market-activity results in the fourth quarter.

I am net short banks and short JPMorgan.

• I wouldn't be surprised if a bottom were approaching.

Crude is down another $2 to $62 per barrel this morning.

I would not be surprised if oil were approaching a bottom.

I also would not be surprised if an intraday reversal were close at hand.

It appears the magnitude of the drop in the last few days might be influenced by some forced liquidation.

• Here's a quick peek.

My "Surprise" list is now being prepared for delivery in three weeks.

Hint: 2015 will be the year of reckoning and mean reversion, and will be characterized by much more volatility.

On both sides of the coin.

Largest collective long -- Closed-end municipal bond funds, as follows:

• BlackRock Municipal Target Term Trust (BTT),
• Eaton Vance Municipal Income (ETX),
• BlackRock Investment Quality Municipal Trust (BKN),
• Nuveen Select Quality Municipal (NQS),
• Nuveen Premium Income Municipal (NPM),
• Nuveen Dividend Advantage Municipal Fund (NAD),
• NuveenMunicipal Market Opportunity Fund (NMO),
• Nuveen Municipal Advantage Fund (NMA),
• Invesco Pennsylvania Value Muni (VPV),
• Invesco California Value Municipal (VCV),
• Nuveen Quality Income Municipal Fund (NQU),
• Nuveen Premium Income Municipal (NPI),
• Invesco Trust for Investment (VGM), and
• Nuveen New York AMT-Free Municipal (NRK)

Largestshort -- The Nasdaq, via PowerShares QQQ (QQQ)

• From BofA.

Around €400bn of Eurozone government debt and bills in our bond indices currently have negative yields. . . . In the topsy-turvy world of negative rates in Europe, it will seem as if credit is becoming the new government debt in places.

-- Bank of America

• More potential ripple effects as oil prices continue their slide.

The decline in the price of energy products continues apace this morning: Crude oil is now down by $1.32 per barrel to $62.47.

I have an out-of-consensus view that this drop will be far less beneficial -- in aggregate terms -- than the analyst consensus expects it will be.

Indeed, the high-yield-bond market and other energy credits and loans could be the next Penn Square and have a contagious effect and impact.

Lower oil production means a reversal of the substantive job growth in the energy patch; lower oil profit (with a big weighting on the S&P 500); and a marked reduction in capital spending for energy-related products, which represent near 30% of all capital expenditure.

As to the later point, Oasis Petroleum (OAS) just announced that its 2015 capital spending should drop from the prior estimates of $1.4 billion to between $750 million and $800 million.

You are forewarned.

Note: Jim "El Capitan" Cramer has an excellent and thorough analysis of his view of the ramifications of the oil-price decline in his opening missive today.

• Here it is.

European stock markets are modestly rebounding from yesterday's sell off but Greece again is the problem due to its political concerns. After jumping by 93 bps yesterday, the Greek 5 yr CDS is spiking by another 115 bps to 950 bps, the highest since October '13 (though remains a fraction below the default concerns in 2012). The 3 yr Greek yield was up by 182 bps yesterday and is higher by 108 bps today to 9.38%. It was 6.44% one week ago. The 10 yr yield is up by 33 bps to 8.51% after the 94 bps jump Tuesday. The Athens stock market is down another 1.7% after plunging by almost 13% yesterday. Greece in itself should be a non event for the rest of us but there is a 2nd day of selling in the peripheral debt of Italy, Spain and Portugal. Spain's 10 yr yield is up 8 bps over the past two days while Italy's up by 13 bps and Portugal's 10 yr is higher by almost 20 bps. 

You still need a microscope though to see the yields that these bonds ex Greece bring the buyer. Mario Draghi wants to buy a lot of sovereign bonds soon but we have to ask if European banks will sell their holdings to them. The Bank of Italy today said Italian banks own the most amount of Italian sovereign debt in 6 years. The question then is what will these banks do with the money that they collect on a sale to the ECB. Will they lend it out? Hopefully but only if there is demand and good credit borrowers. If not, Italian banks will have to settle for a negative interest rate if they park the money at the ECB. To avoid this penalty and if lending is not attractive, these banks may choose to hold on to their bonds. We'll see and while Draghi will likely have plenty of support for sovereign QE, we can add ECB governing council member Ardo Hansson from Estonia who is "quite skeptical about the idea of long term, large scale purchases of sovereign assets." He said he's "much more comfortable with the idea of looking into the universe of corporate bonds." 

Lastly in Europe, French industrial production in October fell .8% m/o/m, well worse than expectations of up .2% as manufacturing production went negative. On a y/o/y basis, French IP is negative for 8 out of the last 9 months. The overall level of production is 17% below its '08 peak. Sovereign QE from the ECB is not going to fix this when the French 10 yr yield is already trading at .97%. 

China reported the 33rd month in a row of y/o/y declines in PPI and the lowest CPI print since November '09 at 1.4% vs expectations of 1.6%. This of course brought out the pavlovian response from markets of 'the PBOC needs to do more!' and the Shanghai index bounced by 2.9% after yesterday's policy induced 5% drop. With a country that has per capita disposable income of about $3000, lower prices is what is simulative to economic growth, not more easing in attempt to generate higher inflation. Chinese officials are expected to cut its 2015 GDP target to 7% from 7.5% in 2014. Also of note, Chinese car sales growth moderated to 4.7% y/o/y, the slowest since February '13. 

In the US, the MBA said refi applications rose by 13.2% w/o/w but comes after a 13.4% drop in the week prior. Purchase applications were little changed, rising by 1.3%. The Toll Brothers CEO today said in its earnings release, "the housing market progresses through the early stages of what we believe will be an extended and uneven recovery..." His customer focus is on the higher end of the market. 

Investors Intelligence said Bulls fell to 51.5 from 53.4 with Bears up by .9 pts to 14.8 (13.3 was the low of the year in September which was last seen in 1987). Those expecting a correction was up by 1 pt to 33.7. The bull/bear spread of 36.7 compares with 39.5 and above 40 in the week prior.

• But I don't expect to be too active today.

I am starting the day at about a 10% net short exposure -- but I have added to my short positions on the modest market-futures rise in premarket trading. 

My strategy is still shorting strength, as I did in Tuesday afternoon's reversal and rip higher, when I aggressively shorted PowerSharesQQQ (QQQ) -- some of which I had covered in the morning's schemissing.

Yesterday's action was confusing and unexpected to many. 

Correlations, as I noted in "Market Setup," are falling down.

We are going "Back to the Future," and that journey is filled with risks and high valuations -- that I am planning to exploit.

Invest with your head -- not over it. 

I will be out of the office most of tomorrow afternoon and all day Friday on research meetings. 

As a result, I don't expect to be too active today. Though I am ably assisted, the daily volatility is too extreme for me to be an absentee shorter! 

• Where it began.

"The average correlation for each of the 10 industry sectors in the S&P 500 is down to 58.4% over the last month...This is by far the lowest observation we've seen in the last five-plus years."...

Research from S&P Dow Jones Indices that compares individual stocks shows a similar trend. The firm found that in November, correlations among S&P 500 components was less than 10%, the lowest since January 2001."

-- The Wall Street Journal

The rundown:

• U.S. futures are modestly lower: S&P 500 futures are down 1 point, and Nasdaq futures are up 1 handle.
• European bourses are doing well with average gains of about 0.5%.
• Japan's Nikkei 225 is down 2.25% following a rally in the Japanese yen. There wasn't much economic news. Within the Nikkei, every group was lower, and materials, financials and healthcare underperformed. 
• The China market is up 2.90%, and is now flat on the week. Light inflation numbers were released, sparking the anticipation of more intervention and monetary easing by the People's Bank of China. The gains were broad, unlike the Nikkei, with all groups in the green.
• Gold is down $2 per ounce, and crude oil is down again with another decline of $1.25 per barrel. Natural gas is down 0.73% to $3.63. Copper is off 0.63%.
• The U.S. dollar is down 0.03%, and the euro is up 0.06% .   
• The yield on the 10-year U.S. Treasury bond is flat at 2.21%. Sovereign debt yields are up 4 basis points or so in Europe's peripheral countries.

Tuesday's market action was as strange as anything else I can remember. Correlations are falling apart. (See the WSJ quote at the top of this post.)

Global stocks are mixed overnight. 

The narrative in the U.S. seems to be changing a bit as the tone of the tape grows more cautious, and momentum is tough to sustain -- in either direction. 

Nothing on the Fed head or economic front today.

Sell-side conferences scheduled at Barclays (technology), Goldman Sachs (financials) and UBS (media).

Costco (COST) and Toll Brothers (TOL) earnings are already out, and Hovnanian (HOV), Titan Machinery (TITN), Vera Bradley (VRA) and Francesca's (FRAN) are also out in the premarket. Men's Wearhouse (MW) numbers are due out after the close. 

I was pleased with the way I traded the markets yesterday.

Short SPY (small) and QQQ (large).