Break in!

Near the close, the price of Yahoo! (YHOO) shares fell dramatically (by nearly eight percent) based on word that the IRS is considering changes in preferential taxation of spinoffs that could adversely impact the spinout of Yahoo's Alibaba (BABA) shares.

Thanks for reading my Diary. I hope it was helpful.

Enjoy your evening.

• The earnings report was a knife in the heart of Wal-Mart (WMT) shareholders. I would continue avoiding this mature retailer as it faces a more competitive business landscape and could be too large to manage and adapt.

• Not enough of a beat for Home Depot (HD), suggesting that the market might be getting a bit more demanding. (Famous last words -- we shall see.)

• On the positive side, the upward movement in bank stocks continues apace, cementing the buy-on-dips strategy in the months ahead.

• Interest rates remain volatile -- not likely a market constructive development.

• The U.S. dollar's reversal confuses the currency picture and portfolio decisions relating to U.S. multinationals. Again, not likely a market-constructive development.

• More questions from technically inclined readers who see the possibility of the market stalling at new highs.

• That said, the market bends but it certainly doesn't break.

FibroGen (FGEN) is down another $1.35 to new lows.

Glad I passed on it recently.

The BIg One!

It's the big one, the big game -- Germany vs, Greece in the EU.

Doesn't get better than Monty Python!

Real Money Pro's Gary Morrow reviews the technical moorings of Wells Fargo (WFC).

For what it is worth, the two most stalwart bears I know -- who have been bearish for some time -- threw in the towel this afternoon.

On Halftime, Carl Icahn just told Scott "Judge" Wapner that Wall Street has been massively wrong on Apple (AAPL).

Huh?

Of all the stocks on the NYSE and Nasdaq, Apple is the most heavily owned by the hedge fund community, with 185 separate holders:

Largest Hedge Fund Investors

Source: Lionshares via FactSet

View Chart »View in New Window »

• Midday musings from Sir Arthur Cashin:

The morning zigzag increased the activity. The run rate at 12:15 projects to an NYSE final volume of 730/810 million shares ahead of yesterday's sleepwalk.

Stocks helped by yields easing back off morning highs.

The beat goes on:

False alarm on permits and starts; a revision waiting to happen.

Once again, a flood of regionally condensed multi-family and some pulled-forward single-family (on historically low rates that don't exist any longer) drove all of the results in permits and starts.

Headline permits and starts looked good. But, upon examination of the internals, a huge red flag stands out.

Bottom line: Wild and crazy Multi-family gains in Northeast region drove ALL the y/y gains in permits and most of the gains in starts. Without this surge -- likely to be revised lower next month -- y/y permits and starts would have been very disappointing. This is a revision waiting to happen.

Permits: Multi-family Permits in the Northeast region alone accounted for 105% (+73k y/y) of the national 69k y/y gain to 1.143mm. If the Northeast alone was in-line with the y/y change in the rest of the nation, Permits would have been flat y/y.

Starts: Multi-family Starts in the Northeast region alone accounted for 60%, (+50k y/y) of the national 96k gain to 1.135mm. Add in an abnormally large increase in single-family, which are exclusively s product of much lower rates that plunged in Q4 causing a front-loaded Q1, and today's data are as good as it gets.

Against the backdrop of surging rates, this is a sell the news data release if I have ever seen one.

• From Sir Arthur Cashin:

Housing starts, and more importantly, building permits were strong enough to put a Fed hike back on the 2015 table. That spiked both the dollar and bond yields, which undercut stocks a bit. Walmart has been a key drag on indices.

The under the radar asset is oil, which is falling despite worsening geo-politics in the Middle East.

Germany's Angela Merkel and France's Francois Hollande gave Greece until the end of May to reach a deal on its aid program.

What, me worry?

Real estate maven Mark Hanson is a non-believer in the housing recovery:

View on the next week of top-tier housing data:

• Spring housing data and related earnings have been front-loaded due to Q4 rate plunge;
• This month's housing data (permits, starts, sales) is a reflection of several months ago when rates were meaningfully lower;
• "Mini boom" demand cycles -- driven purely by interest rate volatility -- have caused many a "durable recovery" call over the past four years;
• Getting excited over stale housing data and related earnings borne of rates 50bps lower is the epitome of being backward looking
• Non-speculative demand remains near historical lows; at some stage, end-user, owner-occupant fundamentals must reconnect with prices;
• Liquidity risks increasing with surge in rates; doesn't bode well for summer/fall.

Backward looking data + surge in rates = fade "good" news.

Bottom line: Like last month, the theme of this month's resale and new housing data, released on the 21st and 26th respectively, will be increased sales. This is wholly due to the rate plunge in Q4 2014 creating "some" incremental and "a lot" of pulled-forward demand into this spring and comping against depression-level demand a year ago when mortgage rates were a "nose-bleed" 4.5%. In other words, this year's data have been front-loaded by the rate plunge. We have seen this movie before. Like last month, the resale internals will show that non-speculator demand -- end-user, owner-occupant demand -- has improved only marginally since 2008; a "demandless house price recovery" cycle driven by "something other than" end-user, fundamentals and demand for houses, which presents significant liquidity risks. House prices will continue to show signs of pricing power pressure, especially in the more contemporary builder segment, as resale prices reported this week were derived from pending sales that occurred several months ago. Finally, the moon-shot in rates over the past month doesn't bode well for demand or prices this summer and fall. At some stage, end-user, owner-occupant fundamentals and house prices must reconnect...like they did following the loss of exotic loans in 2007/08. From where will demand come when the speculative fervor suddenly goes away as quickly as it arrived, which always happens?

1) Resales, 5/21: For resales on Thursday, consensus stands at 5.23mm SAAR, which is probably a bit high, but in the general neighborhood (I estimate flat at 5.18mm). The 5.18mm will look good relative to last year's average 4.92mm SAR and last April's 4.75mm, when rates were a "nose-bleed" 4.5%. Although 5.18mm is weak on an absolute basis -- especially after so much stimulus (6-years of ZIRP, a Fed balance sheet that grew by $4.5tt over the past few years, a doubling of muni debt) coupled with rates near historical low levels, unemployment back to cycle lows, and the household balance sheet supposedly healthy) ¿ up is up and "up is good" to those clinging to the "durable recovery with escape velocity" mantra for the past 4 years. Ex-out the contemporary, pervasive speculation and lending fraud, which rivals the 2003 to 2007 era, and the underlying data is far weaker than understood. The divergence between end-user, fundamental demand and prices has never been wider. Despite the underlying anemia in the internals creating a demand/price divergence of epic proportions, most any news headline with the word "up" in will trigger buy programs meaning the data should be supportive for the constituents of the XHB, even if only for a day.

2) New Home Sales, 5/26: On builder sales next Tuesday, the consensus estimate is for 500k on the nose, which I think is a bit heavy. Last month's number was 481, an 11% drop from Feb. I expect April to come in between 485k and 490k, which will look fantastic relative to the depression level of 413k last April. Note, on an absolute basis and relative to historical norms, 485k to 490k is depression level, especially, after so many years of ZIRP, QE, job growth, and debt creation stimulus. Following this release, builder name constituents of the ITB should be somewhat supported provided rates stay where they are today or lower. If 10s break 2.34% and start to ramp towards 2.50%all bets are off, and quickly.

3) Prices: On prices, reduced pricing power will be evident, especially in the builder space, which far more contemporary than resales, the latter which is a reflection of pending sales contracts two to three months prior. Builder house prices are unsustainable by most measures, especially if a couple of quarters of squeezed margins, they want to drive sustained demand.

Net-net for housing related names over the next week is mildly positive provided the broad market remains in a range and rates trend sideways to lower. Payback for all of this pull-forward activity will come in the summer and spring when comps are large and demand won't be.

You can't fight "some" incremental and "a lot" of pulled-forward housing and related demand following a historical plunge in rates...the bulls can dream their dream a while longer. But, you also can't fight the fact that pops in sales demand right after rates plunge have always been transitory due to weak, underlying, macro demand, which if the market really is still forward looking, means limited upside from better housing data borne of record low rates that don't exist any longer.

Excerpt from my 4-27 Note on depression-level, fundamental, end-user demand ...

End-user, owner-occupied housing demand has gone nowhere since 2008. The end-user "demandless" house-price recovery marches on.

See the NAR data below, which comes from my recent deep-dive into contemporary, pervasive housing speculation and lending fraud, an exact repeat of the 2003 to 2007 era.

Bottom line: End-user, owner-occupied demand has gone nowhere in 7 years. All, 100%, of the "growth" has come from speculative demand; "vacation" and "investment" home purchases, the difference between the two more de minimis each year just like from 2003 to 2007.

 "Other than end-user demand" now makes up 40% of all US resale and new house demand, the exact percentage of the bubble peak in 2006 and a menacing milestone.

This begs the question ..."where does demand come from when the speculative demand suddenly goes away as quickly as it arrived, which always happens?"

1) End-user demand for owner-occupied houses (blue line) has been more/less flat since 2008 and down sharply from years prior to the crash when ex-ing out the record-high speculative "vacation" and "investment" demand (orange) that in 2014 matched the Bubble 1.0 2006 highs of 40% of all US house sales.

2) "Other than" end-user demand for houses ¿ mostly spec ¿ back at bubble peak.

These and the other data I presented this week is menacing for sure.

I am still adding to my large closed-end municipal bond fund exposure today (on further price weakness) on the continued belief that interest rates (on the 10- year and 30-year Treasury notes and bonds) are approaching peak levels for the year.

Long BTT, ETX, BKN, NQS, NPM, NAD, NMO, NMA, VPV, VCV, NQU, NPI, VGM, NRK

I have added to Radian (RDN) today and I am bidding on a scale lower. I recently updated the stock's outlook. The stock is on my Best Ideas list and is my favorite housing-related security.

I got some pushback from technically inclined subscribers on gold recently, after I sold SPDR Gold Shares (GLD) about a week ago. I outlined my rationale in "Sold My Gold Position."

Rental-car stocks such as Hertz Global (HTZ) and Avis Budget (CAR) have been market losers over the past 12 to 18 months, despite attracting the interest of several activist hedge funds. This has led me to initiate an analysis over the last few weeks of the industry in the hope of finding value.

Unfortunately, my analysis led me to the investment conclusion that rental car equities are value traps because the industry's business model, competitive landscape and secular growth prospects are being upended by peer-based services Uber and Lyft.

I would avoid CAR and HTZ, despite their apparently cheap share prices.

I am adding to my SPY put positions now (June $212s at $2.84).

Housing starts in April totaled 1.135 million, well above expectations of 1.015 million and up from 944,000 in March -- and it's the highest reading since 2007.

Both housing components -- single-family homes and multifamily dwellings -- contributed to the jump. Single-family starts rose by 105,000 starts to 733,000, while multifamily starts rose by 86,000 to 402,000.

The permit side also saw a jump to 1.143 million from 1.038 million in March, but that was mostly for multifamily units. Single-family permits rose by 22,000 to 666,000 -- a touch above the 12-month average of 650,000 -- but multifamily permitting was up by 81,000 to its highest level since 2008.

Bottom line, we did see a weather rebound in the Northeast and Midwest for starts, but we're just back to pre-winter trends. Smoothing out the January-through-April starts figure in the Northeast puts the four-month average at 109,000 vs. 113,000 in December and 107,000 in November. For the Midwest, the four-month average is 138,000 vs. 168,000 in December and 172,000 in November. For the South, unrelated to weather, starts totaled 503,000 vs. 512,000 in March and 509,000 in February. In the West, starts jumped to 278,000 from 200,000 in March and 243,000 in February, but they were at 293,000 in January.

Looking at overall starts over the past four months (which smoothes out weather issues in the seasonal adjustments), those averaged 1.015 million vs. 1.08 million in December, 1.007 million in November and 1.079 million in October. The 12-month average is 1.019 million overall starts.

It was good to see a sharp snapback in starts after the sub-1 million readings in the prior two months, but if we smooth out the winter influence, starts are just back to pre-winter trends. For single-family permits, as stated, we're running about in line with the 12-month average, while multifamily permits remain the particular bright spot. The 477,000 level in April handily beats the 12-month average of 416,000.

Just prior to the release of the data, the 10-year Treasury yield was getting back all of what it lost in response to this morning's ECB QE-timing news. Combine that with an upside surprise to starts and the 10-year yield now stands at around 2.26% to 2.27%, up 12 basis points from Friday's close.

I make these "forecasts" infrequently because short-term forecasts are kind of silly. That said, today's "Ludacris Forecast" is for markets to drop by 0.5% to 1%.

What's your fantasy? 

Stated simply, I cannot see a better set up for bank stocks than there is right now. While I wouldn't aggressively chase the strength (after a nice near-term climb -- then again, I would not chase any longs at this time) I am a buyer on any weakness in what is my favored market sector.

I have five banks on my Best Ideas list. As to the market, the setup is, in theory, not great this morning, despite higher futures pin action. 

• 10-year Treasury yields have reversed higher by 8 basis points from the morning's lows.
• The U.S. dollar is getting stronger (111.14 against the euro).
• Crude is lower.
• Equities are overbought.
• Good news (housing) may be bad news.
• Everyone's favorite, Apple (AAPL), is faced with the reality of Apple TV (see Piper Jaffray's research).

While I continue to prefer being reactive (over-anticipatory), I did short (small) the SPY ($213.72) and QQQ ($110.38) in the premarket trading ramp.

European markets are excited this morning because ECB member Benoit Coeure said because many will be on vacation in July and August, thus reducing market liquidity, "the eurosystem is taking this into account in the implementation of its expanded asset purchase program by moderately frontloading its purchase activity in May and June, which will allow us to maintain our monthly average of 60b euros, while having to buy less in the holiday period. If need be, the frontloading may be complemented by some backloading in September when market liquidity is expected to improve again. The slightly higher purchase volume that market analysts may observe in the coming weeks is therefore unrelated to the recent episode of market volatility." Thus, the market excitement is not really on any absolute change in policy, it's just a front running exercise ahead of a very temporary alteration in the velocity of QE. German and French bonds are rallying past yesterday's decline with bonds in Italy, Spain and Portugal not getting back all of what they lost yesterday. The euro is down a full dollar and the US 10 yr yield is down by 5 bps after rising by 9 yesterday. Coeure did admit that the violent reversal higher in European yields over the past month was 'worrying' and he blamed 'reduced liquidity globally.' Liquidity is certainly an issue, but it will also be used as an excuse to explain why a position goes the opposite way that one wants. Mr. Coeure, meet Mr. Market.

The German ZEW measure of investor expectations of the German economy fell sharply in May to 41.9 from 53.3. The estimate was 49 and it's the weakest read since December. The ZEW said this was "due to unexpectedly poor growth figures in the first quarter of 2015 and turmoil on the stock and bond markets. However, only a small number of survey participants actually expect a deterioration of the economic situation." The current condition component fell to 65.7 from 70.2 but is still at a pretty high level. This data point hit the tape at 5am and the DAX did come off its intraday high in response.

Confirming the flash read of 3 weeks ago, EU CPI in April rose .2% m/o/m and was unchanged y/o/y, both in line with expectations. The core rate was up by .6% y/o/y, also in line. Because there was no surprise, the 5yr 5yr euro inflation breakeven is unchanged at 1.81%.

The pound is down sharply vs. the US$ but little changed vs. the euro (because of its sharp decline vs. the US$) after headline CPI fell .1% y/o/y vs. the estimate of no change. This is the first negative print since 1960 due to lower food and energy prices. Instead of worrying about this, the BoE should actually listen to George Osborne who said "instead we should welcome the positive effects that lower food and energy prices bring for households at a time when rates are rising strongly, unemployment is falling and the economy is growing." Also, consumer prices are still up 12% over the past 5 years and 28% over the past 10. For years, the UK wage earner saw negative real wage gains and only recently have begun to see a positive reversal. The core rate was higher by .8%, two tenths less than expected. Mark Carney doesn't like low prices as he wants 2% inflation. He was a buzz kill to the average UK citizen by saying consumers should "enjoy this period of very low energy prices, very low food prices, enjoy it while it lasts. We're going to bring inflation back to that 2% to keep this economy well functioning."

In the US, housing starts for April are released at 8:30am. For stocks, yesterday was the lowest consolidated NYSE volume day since January 2nd. Memorial Day has come earlier notwithstanding the 'breakout' above the previous intraday high in the S&P 500. There were 117 new NYSE 52 week highs yesterday which compares with 191 on March 2nd which was the date of the previous market high close before last week. On December 29th 2014 when the index at the time closed at a record high, there were 253 new 52 week highs.

Home Depot (HD) had a modest beat to expectations and raised full-year guidance to $5.27/share (toward my $5.30 expectation). However, as written yesterday in my pre-game highlights, the beat and raise were not enough and have been fully discounted in the share price (which is down by about $1.50/share in premarket trading).

Wal-Mart (WMT) missed and gave weak guidance. I have previously analyzed the company in "Wal-Mart's Glory Has Faded - Sell It!". In late February, at around $84.50 I said to sell/avoid -- now trading -$1.65 in premarket trading at $78.30, I would still avoid.

"We are also aware of seasonal patterns in fixed-income market activity with the traditional holiday period from mid-July to August characterized by notably lower market liquidity. ... If need be, the frontloading may be complemented by some backloading in September when market liquidity is expected to improve again. The slightly higher purchase volume that market analysts may observe in the coming weeks is therefore unrelated to the recent episode of market volatility."

-- Benoit Coeure, ECB executive board member

As noted above, the European Central Bank intends to increase its purchases of euro-area assets in May and June ahead of an expected low-liquidity period in the summer. In response to these dovish comments:

• The euro is down dramatically, by 1.13 (now at 1.187 to the U.S. dollar).
• Sentiment in Germany fell spectacularly, to 41.9 in May (49 was expected) from to 53.3 in April.
• European indices are soaring, with the exchanges in Germany and France each up 1.8% recently (in other words, "bad news is (still) good news").
• US S&P 500 futures are up by 6 handles.
• Bond markets are higher (and yields lower) around the world: German 10-year Bund yields are down by more than 8 basis points (to 0.56%) and U.S. yields by 3 basis points (to 2.195%).