• "One more thing." -- Lt. Columbo

I heard (with regularity today) comparisons being made between today and to when Russia defaulted in 1998 -- essentially that Russia is in better shape now.

Maybe so, but back when Russia defaulted, the Federal Reserve could ease and Fannie and Freddie could channel the money into the mortgage market and set off a housing boom and refinancing spree -- plus a dot-com bubble.

And then we could party when it was 1999.

Today, and over the last six years, the party might be over because we have feasted on borrowed money and we are living on borrowed time. The margin of error has been compressed (and options have been exhausted) with global rates at or near zero. 

Unfortunately, as I have previously written, monetary policy has put the cart of asset prices before the horse of enterprise, as policymakers have entertained the fantasy that high asset prices made for prosperity rather than the other way around.

• Break in!

Fitch downgrades European financial stability facility's debt; affirms European stability mechanism.

• Signing off.

Get some rest. I will because we will all need it.

Enjoy your evening, and thanks for reading my Diary.

• My favorite asset class.

Another nice (and quiet day) for my favorite asset class: closed-end municipal bond funds. Here was my rationale to purchase the group last year.

You see, there is an alternative to cash (TINA).

• The Spyders are down more than $4 from the afternon high.

• I just added to Citigroup at $51.25.

As of 3:47 p.m. EST there is $650 million to sell on the close.

• Should I have maintained my short hedges?

While I profited from my long rentals, it seems over the short term (based on the action), that I should have maintained my short hedges   that were put on in this afternoon's early rally.

I am currently in a market neutral mode with a low gross exposure.

• Putting my money where my pen is.

Today's trades were good ones, both my long index rentals and my short index hedges. But I have dialed down my gross exposure dramatically as I adjust my Value at Risk.

I will end the day with among my lowest gross exposures of the year as I place my money where my pen is.

• We are in a flat, networked and coupled world.

As I wrote in "Ruble Tuesday," we are in a flat, networked and coupled world.

General Electric (GE) lowers earnings guidance based on the challenges of Russia's economic woes and the decline in the price of oil.

S&P profit forecasts remain too high.

• Just look at the SPY.

Today we have had a near $3 rise in the SPY from the low and a near $3 drop in the SPY from the high.

It's Ruble Tuesday!

• Let's check at the charts.

This chart of GM (GM), Ford (F), Tesla (Tesla) and crude oil demonstrates that Tesla's shares may not be immune from lower oil prices.

GM, Ford, Tesla and OIl

View Chart »View in New Window »

• More troubles for Russia.

Speaking of "Ruble Tuesday," this afternoon Apple (AAPL) has decided shutter its online store in Russia due to currency concerns. Thus another problem: Russians may not even be able to buy iPhones to play The Rolling Stones' "Ruby Tuesday."

• Covering Berkshire short.

I have covered my Berkshire Hathaway (BRK.B) short for a loss (again).

I am taking the short off my Best Ideas list, but I will revisit it in the future.

• Just took off my index hedges.

The huge swings are providing me with opportunity, and I am embracing that opportunity.

To wit, I have just taken off my index hedges -- covering SPY (at $199.72) and QQQ (at $101.15) shorts (for some good gains) -- to bring me back to market neutral.

Wowza!

• Russia's destabilized and suffering economy won't change with every new day. 

"She would never say where she came from

Yesterday don't matter if it's gone

While the sun is bright

Or in the darkest night

No one knows, she comes and goes

Goodbye Ruby Tuesday

Who could hang a name on you?

When you change with every new day

Still I'm gonna miss you!"

--The Rolling Stones, "Ruby Tuesday"

The proximate cause for today's market volatility is the chaos in Russia. I don't see that chaos changing much in the months ahead and Russia is likely going to contribute to heighten market volatility.

The next likely move is the imposition of capital controls in Russia, but history generally shows that this is typically a desperate policy measure by countries where the currency is under attack. Capital controls have a mixed record of effectiveness as usually outflows of capital quickly resume after their imposition.

A larger question is whether non-Russian companies will be allowed to repatriate profits. If they are not (and rule of law is terminated), this could be even more destabilizing over time to the Russian economy.

Finally, over the past few weeks I have warned of contagion and its long tail.

In a flat and networked world, even a supposedly minor currency can set off a contagion that can rock markets and lead to a financial crisis.

Today markets are more coupled or networked than they were in 1998 when Russia collapsed for the first time.

So, as it relates to Russia, there will be no "Goodbye Ruby Tuesday," as Russia's destabilized and suffering economy won't change with every new day.

• Now about 5% net short.

My small short index hedges are starting to work. Again, I am at about 5% net short.

• Capital controls are coming.

It's a good guess that capital controls will be implemented in Russia over the next week. I don't believe it will stem the debasement of that country's currency, though.

• Midday musings from Sir Arthur Cashin.

Follow the leader ¿ as oil eases off highs so do stocks.

Run rate at 12:15 projects to an NYSE final volume of 970 to 1.05 billion shares.

• The emerging 'two-way market.'

Today we got a taste for what I described recently as an emerging "two-way market." In a more volatile "two-way market" we should adjust our weightings and size our positions differently.

When markets get increasingly volatile (like now), it's usually a good idea to reduce your gross exposure (on both the long and short side) because with the same-sized positions, your portfolio's "value at risk" rises with heightened volatility. As a result, smaller positions have a similar effect on your portfolio's daily profit and loss statement.

• Just the trading positions.

I am again taking off my recent play (and trading portion of my investment positions) in energy stocks.

Selling my trading positions (not investment) in Exxon Mobil (XOM) ($88.85), Chevron (CVX) ($104) and Devon (DVN) ($55.30).

An excellent backdrop for opportunistic traders, but this sort of rapid fire trading is not for all!

Trying to stay transparent in a hectic, frenetic -- and rapidly changing -- market.

Back to slightly net short.

• It's a wonderful setting for opportunistic traders

The S&P 500 futures have now rallied by nearly 40 handles. As I have repeatedly written, we are in a wonderful setting for opportunistic traders but not so much for the buy-and-hold crowd.

I am moving back to market neutral (from 10% long) by shorting some SPY ($202.25) and QQQ ($102.40).

As Grandma Koufax used to say to me, "Yell and roar and sell some more."

• Being with the crowd

I always find it amusing how few will buy weakness but how many will buy strength. Safety in numbers and being with the crowd, I suspect.

• Not "chasing."

I added small to Freeport-McMoRan (FCX) at $21.20 this morning.

• Real estate maven Mark Hanson on this morning's housing data: 

The single-family construction segment is contracting again. Or, perhaps it never really made it out of recession and was masked by the misallocation to multi-family when it's all bundled together for monthly high-frequency data releases.

Of course, those who follow single-family new and existing, end-user, sales demand closely won't find these data - permit & starts activity plunged back to historical lows relative to total and multi-family permits and starts -- very shocking.

Bottom line: There is a notable absence of end-user liquidity in the single-family builder segment. And I think the easiest path to increased liquidity is through lower prices.

If they haven't done it already, time to really get the knife to the residential construction GDP inputs for 15/16.

1) November-only Permits & Starts 2005 - 14, back in the soup.

I am still looking for a "durable recovery" with "escape velocity"

2) Past 50-years may indicated the last few years was nothing more than a dead house bounce.

3) Based on my chart below, builders seem to follow credit and stimulus cycles fairly closely.

If past is prologue, as the Fed goes more flat, builders will continue to pair back construction activity

4) Single-family remains in a long-term depression relative to total and multi-family Permits & Starts

5) Single-family contracting quickly, but for a long time was masked by malinvestment into multi-family

6) Clearly, multi-family developers have been busy beavers with all that liquidity sloshing around looking for something that beats a 2% 10-year.

Chart looks just like 2007-08 when they panicked out of single-family.

• I am a $52 buyer of Citigroup (C).

Here is my rationale.

• Back to 10% net long.

• A fast trade. 

I just sold the balance of my SPY ($200.50) and QQQ ($101.43) positions to ring register for a fast trade.

• For a profit.

With a near 20-handle turn in the S&P 500 futures over the last 45 minutes, I am taking off half of my SPY/QQQ long rentals for a profit.

• Trimming POT and CAT.

Selling some more Potash (POT) and covering some more Caterpillar (CAT), but retaining both on my Best Ideas list.

• Pressing MetLife (MET) and Lincoln Financial (LNC) shorts in here.

• I am adding to Twitter (TWTR) below $36.20 this morning. Here is my rationale.

• I am about 18% net long now.

• Buying (with a $21.20 limit) some Ocwen (OCN) now.

• I can see a rise in 10-year yields near term.

Based on the notion of a favorable intermediate-term reward vs. risk (in my short bond trade), I am now buying the ProShares UltraShort 20+ Treasury (TBT) (small) at $45.80. 

This means I can see a rise in 10-year yields (from current level of 2.05%) to a higher level over the near term.

To me, this is a hedge that, IF contagion doesn't spread, the 10-year yield can move back higher as a beneficiary of the pro growth ramifications of lower oil prices.

My short-term range (next month) expectation for the 10-year yield is 2-2.20%.

My intermediate-term range (next 3-6 months) expectation for the 10-year yield is 2-2.5%.

• Taking advantage of the current weakness.

I have taken a long rental in SPDR S&P 500 (SPY) at $198.80 and in PowerShares QQQ (QQQ) at $100.70.

As we move toward year-end, and potential seasonal strength, I am using the current weakness as a trading opportunity.

• The Lindsey Group's Peter Boockvar parses the purchasing managers index (PMI) report.

The Markit measure of US manufacturing in December continued to soften as its index fell to 53.7 from 54.8. It matches the lowest since October '13 when 53.7 was also seen in January. The peak in 2014 was 57.9 back in August. Both output and new orders slowed to the weakest pace since January. Employment "eased to its lowest since July." Export growth was up a touch m/o/m. Input cost pressures of course eased. Markit's chief economist said "softer output and employment numbers merely represent a cooling in the pace of expansion from unusually strong rates earlier in the year but...the fourth quarter is likely to see a weakening in the pace of economic growth, which is starting to hit hiring...We expect this weakening to become evident in the official data early in the new year...Exports remain a key area of weakness, although demand from domestic customers is also growing much more slowly than earlier in the year." Bottom line, the US economy can only decouple by so much from what is happening around the world.

• On Devon.

Howard Weill has added Devon (DVN) to its Focus List.

• This might start the beginning of their rebound.

Energy stocks are up modestly this morning in the face of a still-weak market in the price of crude oil -- which was recently down by $11.25 per barrel.

As I have written, I expect the energy stocks to begin performing better before the price of oil moves higher.

That process might have begun.

I am planning to expand my energy longs -- in Devon (DVN), Exxon Mobil (XOM) and Chevron (CVX) -- if this continues.

Stay tuned.

Long DVN, XOM, CVX.

• I'll be adding to my Ocwen position on any weakness from this news.

I don't think the Ocwen (OCN) news will be impactful, and I expect to use weakness to add to my long position.

From the company:

Ocwen Financial has been working closely with the Office of Mortgage Settlement Oversight, or OMSO, on two issues identified in the report covering the first six months of 2014, the National Mortgage Settlement Monitor said in a public filing, according to the company. OMSO's fourth report on mortgage servicers' compliance with the National Mortgage Settlement discloses two items that precluded the Monitor from reporting on Ocwen's progress for the first half of 2014. The first concerns the processes used by the company's NMS Internal Review Group and was flagged by a complaint from an IRG employee. The IRG is responsible for reporting on Ocwen's compliance with the NMS. The second issue concerns the letter dating issue raised by the New York Department of Financial Services in October. To the extent the Monitor determines that Ocwen did not meet the minimum compliance standards mandated by the NMS in any period, Ocwen will file a corrective action plan in accordance with the NMS protocols. :theflyonthewall

• Further thoughts from Peter Boockvar. 

Instead of attracting funds into the Russian ruble, the 650 bps spike to 17% by the Russian central bank in their benchmark rate instead repelled it. After plunging by 10% yesterday, the ruble is down by another 14% today. The ruble was at 35 to the US$ this summer. Today it takes 75 rubles to buy one dollar. In ruble terms, the Russian Micex is up by 2.7% but in dollar terms it's also sharply lower by double digits. The Russian 5 yr CDS is wider by 47 bps to 600 bps, the highest since '09. The ruble denominated 10 yr yield is higher by 258 bps to 15.55%. Other emerging market currencies are also down sharply vs the US$ but the yen is spiking higher as many carry trades get unwound here. Don't forget the short yen trade that has been used to finance a lot of other speculative higher yielding activities. The euro too has been a carry trade currency and its jumping higher also. 

Markit released a bunch of its manufacturing and services indices and will release its manufacturing index for the US at 9:45am. China's HSBC manufacturing PMI for December fell to 49.5 from 50. It's below the estimate of 49.8 and the weakest since May but the Shanghai index jumped another 2.3% on stimulus hopes (the typical pavlovian response). The same index in Japan was little changed at 52.1 from 52 last month. In Europe, their manufacturing and services composite index rose to 51.7, a touch better than the estimate of 51.5 and up from 51.1 in November which was the slowest since July '13. Both components were higher m/o/m. France was less bad with its combined index at 49.1 from 47.9 which Germany was down a touch m/o/m to 51.4 from 51.7. 

Also of note in Germany for this export heavy economy, the ZEW investor confidence measure of the German economy rose to 34.9 from 11.5. That was well above the estimate of 20 and the best since April. The current conditions component was 10 vs 3.3 in November and that was also above the forecast of 5.0. The ZEW said "this increase is related to favorable economic conditions such as the weak euro and the low crude oil price...However, we should be aware that the current optimism is fueled by factors that might change even over the short term." 

In the UK, November CPI fell by .3% m/o/m, well more than expectations of a flat read and this brings the y/o/y change to 1%. The core rate was up by 1.2% y/o/y. With still sluggish wage growth in the UK, the lower cost of living comes at an opportune time for the average wage earner. Even the UK housing market saw some moderation off its sharp asset price inflation. The ONS house price index rose 10.4% y/o/y in October vs the estimate of up 11.4% and it's the slowest pace of gain since June. Prices in London were still up 17.2% y/o/y but that is the slowest rate of gain since March. What has been slowing the pace of gains in London is the prospect for a mansion tax that has been discussed. 

Lastly, while eyes tomorrow will be on the Fed, they still remain very much on the ECB and how they respond in January. The ECB member Jens Weidmann from Germany is again expressing his firm opposition to sovereign QE. "There are indeed a whole row of economic reasons that speak for the rejection of government bond purchases, before you even consider the legal question of whether they're compatible with the ban of monetary financing, even if secondary market purchases are expressly forbidden." On the high expectations that markets have for QE, "markets at some point have to learn, that not every expectations, not every wish, will be fulfilled." On what the impact of sovereign QE would be, "the wealth effect, in contrast to the US, would scarcely play a role in the euro area. That's because euro area households invest much less in the capital market, and they'd profit much less from a rise in them. Simulations, based on models, show that QE in the euro area would be able to lift the inflation rate, but one should not expect miracles. Significant volumes would have to be deployed, even to achieve a modest and uncertain effect."  

• A sober view from Jim Cramer.

Run, don't walk, to read Jim "El Capitan" Cramer's sober view of the world this morning in "Three Big Bears." 

My favorite line from his opening missive is: "The producers are losing faster than the consumers are making hay." 

If you get a chance, read two of my recent columns, which modify Jimmy's piece today -- "The Lesson of Penn Square" and "Brokedown Palace."

Much of the world has dismissed the contagious impact of lower oil prices -- but some of us have not.

History rhymes. 

• Thanks, Captain Obvious.

Those famously rear-view indicators, the profit estimates and share-price targets from the brokerage industry, are starting to melt with regard to Caterpillar (CAT).

This morning, after Caterpillar sustained a near-$20 price drop, Macquarie Research has offered the notion that the company is exposed to the energy-price decline. It has lowered estimates, and has attached a $78 price target on the company.

• For a couple of hours.

I have a presentation at breakfast with the Palm Beach Business Group this morning -- and I will be back at around 9 a.m. EST.

• Peter writes a "Dear John" letter to the Federal Reserve.

Dear Federal Reserve:

As we approach your last get together of the year I first want to wish you all great holidays and a happy and healthy new year. I also want to extend my utmost respect for the time you have given to public service in your contribution of what is the Federal Reserve system with the best intentions. But, as they say with the best intentions, it leads to roads unforeseen to put it nice. As it is year end it's always a good time for reflection and let's look in the mirror together. 

The predominant investing rallying cry over the last 15+ years of the 'Greenspan (now Fed) put' and 'search for yield' without regard to risk is again showing its darker side, this time in the energy patch. We of course saw it first in technology land in the late 1990's, to be repeated in a different fashion in the mid 2000's via credit and housing and now in the US oil and gas industry. Thanks to those two sayings, the US economy has become the US 'boom and bust' economy. Your sole focus on consumer price inflation has again shifted your attention from the negative repercussions of excessive asset price inflation that inevitably always mean reverts. This time, an epic bond bubble is showing some big time cracks in corporate land. 

Without rehashing the two previous bubbles, let's talk about the new one and focus on the 'search for yield' without regard to risk syndrome that again created extreme asset price inflation and again got hold of parts of our economy. Via another one of your cycles of interest rates well below the rate of inflation, the manhandling of longer term interest rates with QE and amazing American ingenuity and technology, anyone with a drill bit and a land lease was able to get a loan as long as oil prices levitated north of $80. Bloomberg estimates that since early 2010, $550b loans and bonds were issued by the oil and gas industry. Give me yield or give me death was essentially the mantra for this and many other investments. And, the money kept flowing, the drilling kept coming and all of a sudden the spurt in supply bumped up against a slowing global economy and then poof. The bubble burst essentially in a crash with crude prices falling by 46% over the past 6 months, not coincidentally either just as QE was ending. 

Which brings us to another one of your meetings this week where the debate now and for 2015 is when and how do you normalize interest rates and whether your focus should be the better labor market and the improvement in wage gains in November or more so the sudden drop in commodity prices mostly driven by lower oil prices. The irony of this discussion though hopefully won't escape you. Cheap money that you created fueled a drilling boom that oversupplied a market that now has shrinking demand. Now with lower oil prices, headline inflation and inflation expectations as a result, you may actually use low inflation as an excuse to keep rates low for longer, the same policy that previously created the boom and now the bust. In your desire for higher inflation, cheap money instead lead to malinvestment and over capacity that inevitably lead to a downside and lower prices. 

Those fiber optic cables would have been laid anyway, those homes would have been built anyway and those shale wells would have been drilled anyway but the 'Fed put' and 'search for yield' rallying cries brought so much of this activity together at once in their respective time periods that the boom it created inevitably lead to the busts that followed. You know excessively easy monetary policy not only buys time, it steals economic activity from the future. Buy and invest today maybe what you would have done tomorrow but tomorrow always comes. Why isn't this lesson ever learned? 

I will sum up with this: history is replete with the bad economic consequences of trying to manipulate human behavior with government induced price controls. Over the last 15 years especially it's been control over the price of money and current policy is as if we have an economic five alarm fire. I'm not calling for you to quickly normalize policy immediately. I just believe that the process must begin, however slowly, as soon as possible and asset price inflation should no longer be ignored or only acknowledged with vague comments about overvaluation in select asset markets. Words and macro prudential regulation are not going to do it. The path ahead will be disruptive but that can no longer be avoided as 6 years of ZIRP and a 5 fold increase in your balance sheet has already way overstayed its welcome. The longer you wait, the worse the consequences will be when you do. Again, happy holidays and happy 2015.

Sincerely yours,

 Peter Boockvar