"And its just a box of rain, I dont know who put it there

Believe it if you need it or leave it if you dare

And its just a box of rain, or a ribbon for your hair

Such a long, long time to be gone and a short time to be there."

- Grateful Dead, Box of Rain

Rain fell from a heavy sky this morning.

I will be fine tomorrow  -- "the first days are the hardest days" -- but there will be no "Takeaways" today as my words are few and my heart is heavy.

Thanks so much for the nice words and support in emails and in our Comments Section.

Nite.

Late day weakness in the Russell Index as (IWM) moves to the day's low.

Remember, the Russell was conspicuous in its weakness on Monday, relative to the senior averages.

From the main man... RevShark:

Recommended Reading

Zero Hedge continues on my opening missive theme on the bond market. 

Midday musings from Sir Arthur Cashin:

Dow bid fades on speculation on VAT, etc. Another factor is trading desks exchanging tweets on whether Trump hinted things about Friday's payroll data.

Break in!

According to the New York Times, Richmond Fed President Lacker is resigning as he revealed confidential FOMC information to Medley Global Advisors in 2012!

"The Nasdaq is a beast. No doubt about it..."

- The Northman Trader (on Fast Money last night)

This week's "Trade of the Week" is shorting PowerShares QQQ Trust, Series 1 (ETF) (QQQ) (at $132.30) and buying ProShares Trust UltraPro Short QQQ ETF (SQQQ) (at $37.10).

I listened intently to "the mysterious" Northman Trader (Sven Hendrich) on Fast Money last night. Some of the points he made:

- Relative strength of the Nasdaq Index may be waning. Nasdaq futures made a lower high -- that's a red flag

- Negative divergences may be developing.

- In 2017 we have had only one down week in the Nasdaq. We are in the ninth year up for the Nasdaq.

- There is almost panic buying in the Nasdaq -- opening up the chance of a larger move lower.

- Many of the individual drivers to the Nasdaq (Apple (AAPL) , Facebook FB, Alphabet (GOOGL) ) may become problematic (and toppy) on the charts.

Lets go the tape. 

Now, more than ever, consider selling your fixed income positions. See related post.

Mid-morning musings from Sir Arthur Cashin:

Market remains on Washington watch. So far no surprises, so we churn sideways with the bulls getting some mild help from the bump in crude. Volume very light.

Reflecting my well-known fears and concerns, I am near my highest net short exposure in a while.

On the short side, I have added to ProShares UltraShort S&P 500 ETF (SDS) and ProShares UltraPro Short QQQ ETF (SQQQ) longs.

I have also added to already large Twitter (TWTR) and Campbell Soup (CPB) longs.

Bullish investors and strategists who envision a "hockey stick" to domestic economic and U.S. corporate profits growth in 2017-2018 are generally dismissive of the message of the extremely low 10-year U.S. note yield, which is 2.33% this morning..

But history shows that it is an accurate forecaster of future economic growth.

As I have demonstrated previously, over the last five to six decades the yield on the 10-year note has approximated nominal GDP (Real GDP plus inflation):

The 10-year U.S. Note Yield = 1.0x (Real GDP + Inflation)

But, over the last several years this correlation has broken down.

Many arguments are leveled in defense of these lower yields:

• There is a deflationary influence that has embraced global growth.
• The Federal Reserve and other central banks around the world have anchored interest rates lower.
• The market simply doesn't believe the Fed's anticipated "hiking cycle," which calls for a consistent rise in the fed funds rate through the next three years toward a 2% to 3% objective.
• Extremely low non-U.S. sovereign debt yields have pulled down U.S interest rates.
• Pro-growth initiatives (infrastructure build, reduced regulations and a reduction in tax rates) by the new Trump administration may be pushed back.

Though these influences are real, their influence might be overstated.

The concept of "anchoring," that there are a million George Soroses out there with a mandate to move cash in the rates arena all over the globe, is likely exaggerated for several reasons.

At the end of the day most investors are siloed in their indigenous markets and, besides, hedging costs are expensive (with good reason, considering the moves in the yen and euro). On the later score, there is no black-or-white answer to hedging costs, but my research indicates those who hedge do so on a six-month moving hedge that costs at least 90 basis points. That's nearly a 2% annual cost, if you can even get institutional execution.

Finally, foreign buying of U.S. Treasuries has not expanded -- it actually has collapsed -- so the idea of a tangible anchoring effect from lower non-U.S. yields on higher and more competitive U.S. bond yields may be misplaced.

The Calculus

Let's go back to our historical relationship of yields to growth described above:

The 10-year U.S. Note Yield = 1.0x (Real GDP + Inflation)

The 10-year U.S. note yields 2.33% today.

1. Most economists are forecasting 2% annual Real GDP growth in each of the next two years. Should the fiscal and tax initiatives be put in place, most are hopeful that this projection will be ratcheted higher.
2. Recent headline inflation figures have risen to the highest level in five years. at about 2.5% depending on the specific data base one is using.

So, if history is our guide, annual nominal GDP (Real GDP + Inflation) will be 4.5% (2% Real GDP plus 2.5% Inflation) in each of 2017/2018, which would produce a theoretical or intrinsic 10-year note yield of 1.0 x 4.5%, or 4.5% (or approximately 227 basis points higher than the current yield).

Let's assume, for modeling purposes some of the influences above -- deflation, a possible pushback of fiscal policy, the Fed's low level of fed funds and competition from extremely low global interest rates -- weigh on rates and reduce the relationship from 1.0x to a range of 0.70x to 0.80x.

This change in historic relationship would reduce the equilibrium or intrinsic interest rate for the 10-year U.S. note down to 3.375% -- 0.75 x Nominal GDP (Real GDP plus Inflation) -- or more than 100 basis points above today's 10-year yield of 2.33%.

Based on this calculation, you can clearly see why I am short bonds.

Let's now twist the equation around and solve the question of what level of Real GDP growth is the 10-year U.S. note yield discounting.

If our 0.70x to 0.80x multiplier holds, the equation to solve is:

10-Year U.S. Note Yield (2.33%) = 0.75x (Real GDP (X) + Inflation (2.5%))

Solving for X (Real GDP forecast) produces a growth projection of only 0.6% annually -- dramatically less than the Real GDP consensus forecast of 2% (or more) for 2017 and 2018.

So, given my 0.75x multiplier down from the historic 1.0x multiplier, either the 10-year U.S. note yield is materially too low or the consensus for domestic real growth -- and corporate profits -- is far too optimistic.

I think it's a little of both!

Bottom Line

Do not dismiss the slower-growth message -- in the economy and corporate profits -- of the 2.33% 10-year U.S. note yield and remain skeptical of the bullish and optimistic investors/strategists who see a "hockey stick" to economic and profit growth ahead.

At around 4 this morning I learned that my closest friend's son unexpectedly died in his sleep during the night. He was a healthy and determined young man I have known since birth. I admired him on a number of levels.

My pal, Pablo, was my classmate at Wharton 46 years ago. We met the second day of orientation in 1971 and we have been best buds since then.

He can't even talk to me or anyone else right now. We are all devastated.

Over the next few days I will try to hold it together and write to the best of my ability. I have no idea what the funeral plans are yet, but I will be traveling back to New York for it sometime this week.

This morning I have no lyrics, sports metaphors or puns as my heart is broken for Pablo, Claire, Linda and Adam.

I am bearish and believe the character of the market has changed, but I really don't even care if I will be right in view this week.

As a matter of practice I don't like injecting personal events of my life in my Diary, but this morning I simply had no choice.