"Just one more thing."

- Lt Columbo

For some time Jim "El Capitan" Cramer has been insistent that we bypass the multiple concerns (I have expressed) about the Trump Administration and its ability to forge policy (given the split Republican party and a hostile Democratic party).

Rather, Jim has argued, that investors and traders should be concentrating on the prospects for individual companies and market sectors.

Late today, in "We Must Redefine the Trump Trade,"  Jim has made something of an about face -- no doubt impacted by our Supreme Tweeter's constant barrage of tweets. 

"But here's my take: It's time to redefine the Trump trade. At this pace we've got the direction all wrong. The Trump trade involves taking down a lot of puts and a lot of gold. Hey, as long as there is volatility, money can be made. Until, however, Trump gets a handle on what the House of Representatives is doing to derail his agenda and until he's banned from Twitter by his family, you might want to get some protection even as so many U.S. companies are doing so well."

- Jim Cramer, We Must Redefine the Trump Trade

Most notably, Jim is concerned, as I am, that foreign policy is being delivered on Twitter -- and that is an unconventional and slippery slope for any government official to take.

In today's trading, investors have apparently taken heed of Jim's new concerns -- as a clear "flight to safety" took place with bond prices advancing smartly and with the price of gold headed almost $22/oz higher.

I am glad to have Jim on board because, in the final analysis (and consistent with my constant theme over the last few months), more than ever I am convinced that Donald Trump will make uncertainty and volatility great again!

While maintaining all of my investment longs and shorts -- I am ending the day quite light in terms of net and gross exposure.

I am at market neutral (net zero) with a relatively small gross exposure as well.

Thanks for reading my Diary today and enjoy your evening.

Here is an update from my pal Tony "Dwyerama" Dwyer's market views:

It is hard to focus on the music when there is so much noise in the background. There continue to be a few topics keeping increased market enthusiasm at bay:
· The "soft data" not translating to the "hard data";
· The lack of progress in the "Trump agenda";
· A more "hawkish" sounding Fed;
· Increased geopolitical tension following the bombing of a Syrian airbase.

Although any of these topics can generate a period of correction, the only thing that should cause investors to become truly negative and defensively positioned is the high probability of a recession. Since the 1950s, recessions were always led by an inversion of the yield curve, and the mean inversion is 15 months. If we assume the 10-year U.S. Treasury (UST) yield remains at roughly 2.50%, and the Fed median forecast is correct, the 6-month/10-year UST curve won't even invert until late 2018. If you combine the time until an inversion with how long the inversion typically lasts, you shouldn't expect a recession until early 2020.

Increased volatility likely creating increased opportunity. These recent debates are finally beginning to cause a pickup in volatility as evidenced by the recent uptick in the CBOE Volatility Index (VIX). The oft-quoted measure of fear and one of our four key indicators to become more offensive closed yesterday at the highest level since December and closed above the 200-day moving average for the first time in over 100 days. Rather than fear the volatility these above items create, we look to take advantage of the weakness it creates given our still very positive fundamental core thesis.
· The market correlates most directly to the direction of EPS, which are positive and showing double-digit growth.
· EPS moves with the direction of the economy, and both the domestic and global economy continue to recover.
· Economy moves with the availability of money driven by the slope of yield curve, which should remain positive through most of 2018.
· The positive slope of the yield curve is driven by historically accommodative Fed policy as measured by the Real Fed Funds Rate.
· Fed policy is driven by core inflation, which remains low and in the middle of the 20-year range.

Summary -- looking to buy any fear-based weakness as it develops. We would look to become more aggressive as the market works off its overbought condition because: (1) our positive fundamental core thesis remains in place, (2) economic data and EPS continue to improve, and (3) nothing in our credit-based indicators suggests any significant and sustainable deterioration that would warrant a more defensive position. Although we are now market and sector neutral, we want to be positioned to capitalize on any fear-based weakness and believe our SPX 2017 target of 2,470 may prove to be conservative.

Deere (DE) shows an improvement in March 2017 retail sales as it laps weak results from a year ago. 

"It's not a joke, it's a rope, Tuco. Now I want you to get up there and put your head in that noose."

-- Blondie, " The Good, the Bad and the Ugly"

No "Takeaways" today as I want to spend some time with my family right after the close.

So let's move to the abbreviated Monarch Notes form of "Takeaways," with "The Good, The Bad and The Ugly."

The Good

* Thus far, the "flight to safety" trades worked today - bonds, bond equivalent stocks, yen/dollar, gold.

* The market brought in dip buyers -- though I am not sure it will last today.

* Lumber +$10 - an outsized move.

* Thus far, though down modestly, (T)FANG remains the place to be.

* Seagate Technology (STX) and Western Digital (WDC) +.

The Bad

* The opposite of "flight to safety" trades didn't work today - financials, industrials.

* Despite better fixed income, high yield was offered.

* Apple (AAPL) and its suppliers.

* New lows in "value trap" auto OEMs.

* Biotech not so hot with Celgene (CELG) , Gilead (GILD) , Allergan (AGN) lower. But speculative biotech was worse -- SAGE Therapeutics (SAGE) , Intrexon (XON) , and Valeant Pharmaceuticals (VRX) weaker.

* Optical space lower on China and Apple fears. If you own the smaller ones for takeover -- I would reconsider for now.

The Ugly

* Alliance Data SystemsADS , Mallinckrodt (MNK) , Royal Caribbean Cruises (RCL) , United Continental (UAL) ,  Micron Technology (MU) and Franklin Resources (BEN) all weak.

Sir Mark J Grant is traveling on a paddle wheeler, American Empress, cruising on the Snake and Black Rivers in Washington and Oregon with his mom -- but he sent me this email in the morning: 

FOR THE THIRD TIME WE ARE VERGING ON THIS VERY IMPORTANT SUPPORT/RESISTANCE LINE. IF WE BREAK IT, TO THE DOWNSIDE, THERE IS A HUGE GAP TILL WE GET TO THE NEXT ONE. LOTS OF INSTITUTIONS WILL TRY TO HOLD THE LINE AND IF IT BREAKS---BE PREPARED FOR A MAJOR MOVE....MY OPINION

I respectfully disagree with Mark and I am of the view that we might be achieving a triple yield bottom at 2.31-2.32% on the 10-year US note. (The yield is now 2.325%)

At least that is the way I am "playing it."

As you all know I believe an opportunistic trading strategy will likely be the ticket to delivering good investment returns this year.

I normally would be inclined to short the near 14 handle ramp in the S&P Index (SPY) (from the lows) -- but after making some nice covers (and given the poorly populated markets, increasingly governed by machines and algos) I am going to hold off for now.

But I do want to short rallies -- as expressed earlier -- because the character of the market may be changing.

Downside, to me, remains roughly three times that of the upside.

Break in!

A weak 10-year note auction (tail at 2.332% compared to when-issued of 2.322%) is helping my bond short (iShares Barclays 20+ Yr Treas.Bond (ETF) (TLT) )!

It's a short week so lets do "comments" from my pal Mitch and the lynx-eyed Kim G:

Mitchell Fitzhenry

Doug : RE no fear
If ETFs and other passive investors are now the largest pools of OPM, why would the people running the money have any care, their job is just to blindly buy the market daily, isn't it ? Bogle said Vanguard gets a BILLION DOLLARS A DAY. If machines have replaced money managers, then there also is no fear in a machine. Finally, do HFTs really hold anything or just churn stocks ?

I suspect that the machinations of the algos, ETFs, and index funds are so outsized relative to actual traders and investors, it has changed the tone of the market. However, when the tide changes, it may be extreme. First, that billion a day will stop, then the HFTs do not have natural buyers, then 401k owners move money to cash, and suddenly index funds are sellers not buyers. I do not think it will be pretty . Maybe I am totally wrong, but time will tell.

Kim G

We don't have a classic bubble with the concomitant excitement, but we do have the kind of overvaluation that's typically seen only during bubbles. I agree that the fundamental backdrop is punk, but that's part of what makes the overvaluation so egregious. I agree that this is eventually going to blow up spectacularly, and frankly, this is my number one worry, just ahead of more pointless wars. But unless we start to get a raft of good fundamental news, it's hard to see how this market could go to a blow-off top. If anything, we've already seen it in the action post-election. Right? GDP kept slowing, yet the market advanced 15% before peaking in early March.

Break in!

Crude oil is ticking higher following report that Saudi Arabia wants OPEC production cuts extended -- now +$0.25/barrel after being lower most of the day.

Get Hartford. It might pay! 

Hartford Financial Services (HIG) is the first financial to turn green today.

Reflecting a "newsy" market, my pragmatism (and respect for Mr. Market) and my opportunistic trading posture expressed earlier today -- I am now back to market neutral.

I have covered a portion of my SPDR S&P 500 ETF Trust (SPY) and PowerShares QQQ Trust, Series 1 (ETF) (QQQ) short and I have eliminated my  iShares Russell 2000 Index (ETF) (IWM) short. (All profitable!)

I plan to short rallies, however!

My largest position put on today has been short iShares Barclays 20+ Yr Treas.Bond (ETF) (TLT) . 

Midday musings from Sir Arthur Cashin: 

Spent much of the morning at the doctor's (ravages of old age).

Returned to floor to see Dow down 119.

Sherlock Holmes review favors geo-political trigger. Clear flight to safety: gold up $20; 10-year yield threatens to break 2.30 and VIX VIX.X above 15.

Think it's collective weight of geo-politics -- two Trump tweets. Some Congress comment on Syria; civil but very stern visit by Tillerson [to Moscow], etc. etc.

Several weeks ago, in "Dont Dismiss the Message of the Bond Market," I suggested the 10-year US note yield (when it was at 2.33%) was discounting only about +0.6% annual Real GDP in 2017-18.

Here was my calculus:

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!

***

Today the yield on the 10-year touched 2.30% and is currently at 2.31% (a five basis point decline in yield).

By my calculus, the markets are implying only about +0.5% Real GDP growth in the U.S. That's far too pessimistic -- even for this economic bear.

While I recognize that short bonds is a crowded trade, the above helps to explain why I am continuing to short bonds today!

I have moved from medium to small net short in exposure this morning with the sale of my inverse and levered ETFs, as noted in posts below.

Though I remain of the view that the character of the market is changing, I am respectful of the past and I am giving the dip buyers a chance to do what they have done for all of 2017.

Bottom line is that I remain bearish, though practical, on the markets.

I have eliminated my trading positions in rentals ProShares UltraShort S&P 500 ETF (SDS) and ProShares UltraPro Short QQQ ETF (SQQQ) on the whoosh lower.
As noted in the previous post, these were just rentals.

With the Spyders down by nearly $2, I am taking off -- for a profit -- about three-quarters of the ProShares UltraPro Short QQQ ETF (SQQQ) ($38.55) and ProShares UltraShort S&P 500 ETF (SDS) ($13.721) I purchased this week and will move back to small in those trading rentals.

Remember, levered ETFs are short-term rentals and not long-term leases. And that is how I use them.

Last week's Trade of the Week -- long ProShares UltraPro Short QQQ ETF (SQQQ) and short PowerShares QQQ Trust (QQQ) -- is doing famously today.

This week's Trade of the Week, long Allergan (AGN) , not so much.

I continue to press shorts all morning.

Regular readers of my diary know I sometimes post things that replicate the theme of the "Tell Me Something I Don't Know" segment on MSNBC's " Hardball With Chris Matthews."

So ... "Tell me something I don't know, Dougie."

OK, here goes:

The yield on the 10-year U.S. note is now at the level reached on April 3 -- at 2.32%, which was the lowest closing yield of 2017. As I've said previously:

"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."
--Kass Diary, "Don't Dismiss the Message of the 10-Year's Low Yield"

These two tweets this morning from our Supreme Tweeter likely caused concerns in the equity market and bolstered gold and bond prices:

From my perch, conducting foreign policy via Twitter is a slippery slope, and for that reason and others I believe Donald Trump will make volatility and uncertainty great again.

Thus far I have added to my iShares 20+ Year Treasury Bond ETF (TLT) short at $121.78 and to my Campbell Soup (CPB) long at $56.40 and ProShares UltraShort S&P 500 (SDS) long at $13.54.

Not only doesn't the fixed-income market signal a growth message, as noted in the opener below, but the price of gold -- up $9 an ounce this morning -- continues to signal that we should not be fearless in our investing.

"I know you're an emotional girl
It took a lot for you to not lose your faith in this world
I can't offer you proof
But you're going to face a moment of truth
It's hard when you're always afraid
You just recover when another belief is betrayed
So break my heart if you must
It's a matter of trust."

--Billy Joel, "A Matter of Trust" 

Yesterday morning I feared the absence of fear of loss.

While sentiment and valuations are important reagents to examining the markets, it is the fundamental backdrop that nearly always dominates my thinking.

The thing that makes the current period so murky and hard to strategize is that the domination of price-trending strategies -- risk parity, volatility trending, etc. -- and the popularity of ETFs are upstaging the fundamental background and are suppressing volatility. This helps to explain why buyers buy higher and sellers sell lower.

This phenomenon of a continuingGroundhog Dayhas emboldened the bulls and dip buyers and discouraged the ursine crowd.

There is no better example of a near-panic in investment strategy (and top sign) as Morgan Stanley's pronouncement yesterday morning that stocks may advance another quick 30% before dropping.

The condition whereby machines and algos ignore the hard data as well as company balance sheets, income statements and private market and replacement values is not likely to continue ad infinitum despite the increased roles of quants and computers.

It never does. So, I stay braced for some evidence of a directional change in the short-term trend. And I stand ready to act.

Keeping a Short Toehold

To use Rev Shark's words, I am stalking and keeping my motor idling, taking small shots when the upward momentum wanes, being disciplined and maintaining a modest net short exposure.

At the same time, to use Divine Ms M's term, I am beginning to see shifting sands underneathand a changing market character, in which for the first time in many moons Mr. Market has been unable to maintain a sustainable advance.

And that's a start for the increasingly impatient community we call Da Bears!

Back to the Divergence Between Hard and Soft Data

I continue to make the case that it is faith-based "animal spirits" and not hard economic data seen in the real economy that are encouraging the markets.

Source: Zero Hedge

With a 2.345% yield on the 10-year U.S. note and real bond yields at 2017 lows and the 2s/10s curve (of 108 basis points) flattening ever more over the last three months, that is the message of the fixed-income markets. 

Source: Zero Hedge

Peak Animal Spirits?

Unfortunately, both the soft data and the hard data appear to have peaked and are now starting to turn down -- conditions we saw in both 2012 and 2013, when we witnessed large market drawdowns. Notice the "hooks" in the green and blue lines in the two charts below. 

Source: Zero Hedge

It may be time to be looking, not at the skies, but below.

My economic, profit and market concerns remain unchanged:

• Consensus domestic and global economic growth expectations for 2017-2018 are inflated.
• The consensus forecast of a "hockey stick" to U.S. corporate profits growth over the next 12 to 24 months likely will disappoint.
• Valuations are stretched relative to sales and earnings prospects as animal spirits and price-trending quant strategies have taken over our markets.
• Their influences have created not only a wide valley between hard and soft data, but also the existence of a series of traditional valuation metrics that are as stretched (95% decile or higher) as those that have existed at important inflection points and market tops in history, such as 1987, 2000 and 2007.
• The message of the U.S. bond market is that growth will not meet expectations.
• A highly partisan Washington, D.C. -- both within the parties and between the parties -- will stall tax and regulatory reforms and infrastructure endeavors.
• Geopolitical risks are multiplying; we as citizens and investors are not as safe as the markets presume.
• The new administration's policies and behavior likely will make volatility and uncertainty great again.
• Interest rates are likely to advance in a modest but steady manner over the next two years, but the yield curve may flatten further as the Federal Reserve raises rates. This will not be friendly to industries such as banking and insurance.
• Over the last month Mr. Market may be in the process of forming a top for the full year, which would be very consistent with my S&P 500 high of 2375 discussed in my "15 Surprises for 2017."
• The risk in the S&P index, by my measures, is roughly three times greater than the reward. That 3-1 downside/upside makes stocks most unattractive.
• For 2017, be more concerned with return of capital than return on capital.

My good buddy Peter Boockvar, chief market analyst with The Lindsey Group, says Fed Chairwoman Janet Yellen feels good, but challenges lie ahead: 

In her speech and Q&A (including twitter) late yesterday, Janet Yellen said nothing new but seems to feel pretty comfortable with where the Fed is positioned in terms of proceeding with their exit and "allowing the economy to kind of coast and remain on an even keel." She continued to defend the stance that "we want to be ahead of the curve and not behind it." Our readers know how we feel about this. She also said "I think we have a healthy economy now."

Herein though lies the challenge of the Fed: looking purely at the statistics defining unemployment and inflation, the Fed is essentially at their stated goals and should already have normalized interest rates and their balance sheet, aka, going to where the pass is being thrown. Instead of course they are only 1/3 of the way there on rates (assuming the 3% eventual fed funds target they envision) and their balance sheet is essentially still at peak size. On the so called "healthy economy," I sure wish it was but after a 1.6% growth performance in 2016, Q1 growth may be below 1%. The auto sector is rolling over, new home sales are still below where they were in 1980 when interest rates were double digits, capital spending as measured by core durable goods orders is back to where it was 11 years ago, productivity is barely rising, student debt is negatively impacting the spending habits of Millennial's with overall consumer spending running at a still mediocre pace, corporate America is loaded up with debt, commercial real estate is topping out with loan growth in 2016 3% below 2015 according to the MBA in today's WSJ and savers are still suffering for their thrift which then forces the need for more saving. The US economy is just ok and is far from healthy which means that its highly vulnerable to this reduction in monetary accommodation. Right now all we have is hope that the right fiscal initiatives on tax and regulation will light the fire under the economy which I so we get and hope it does as a result.

This then begs the question I get asked: if you think the US economy is still challenged, why should the Fed be raising rates and reducing their balance sheet and my only response is there will never be a good time to exit from their extraordinary policy considering how extreme it was. The distorted level of interest rates is why the US economy is growing slowly and there is almost no chance a recession can be avoided no matter when they decide to reduce the easing. Thus, they might as well get it over with sooner rather than later.

The NFIB small business optimism index in March fell to 104.7 from 105.3 in February. It's down for a 2nd month but is still holding near the multi year peak of 105.9 in January and is well above the 94.9 print in October. Plans to Hire rose 1 pt to 16 after falling by 3 pts in February. It was 10 in October. Those planning to Increase Capital Spending was up by 3 pts to 29, matching the December level and is up 2 pts since October. Plans to Increase Inventory fell 1 pt to 2 and that is the same level pre election. There was some cooling in the big picture expectations components. Those that Expect a Better Economy fell 1 pt to 46 but that is still well above the print of -7 in October and +12 in November. Those that Expect Higher Sales fell 8 pts to 18. It recently peaked at 31 in December and was 11 in November and 1 in October. Earnings trends were still negative but 4 pts less so to match the best level since '06. Those that said it was a Good Time to Expand held at 22. Inflation trends remained steady with Higher Selling Prices down 1 pt but remaining in a tight range post election. Compensation plans, both current and future rose after a decline in February. Positions Not Able To Fill fell 2 pts but at 30 is still in line with its recent average.

Bottom line, it's great to see small business confidence hold up so well BUT "most of the March data were collected before Congress failed to pass a bill repealing and replacing Obamacare" and hopes for its change was "a big reason for the soaring optimism." Thus, the April read will be key. The NFIB CEO said "We are encouraged by signs that optimism is translating into economic activity, such as capital investment and job creation." The fly here though and realized by healthcare was "a significant increase in the Uncertainty Index, a subset of data on how small business owners see the near term future" and "could indicate trouble on the horizon" said Bill Dunkelberg. He went on to say, "The Uncertainty Index hit 93 in March, which is the second highest reading in the survey's history," he said. "More small business owners are having a difficult time anticipating the factors that affect their businesses, especially government policy." This also gets to the importance of getting tax reform done in 2017 but who knows now what can get done.

Noteworthy in Europe was the March inflation stats out of the UK. PPI input prices were up by 17.9% y/o/y vs the estimate of up 17% but that at least is some moderation from the 19.4% spike seen in February as the pound has stopped weakening. Output prices were higher by 3.6%, two tenths more than the forecast and vs 3.7% in the month prior. As for the consumer, headline CPI was up by 2.3% y/o/y, the same pace from February and holding at a 3 ½ yr high while the core rate moderated to a rise of 1.8% from 2%. As all the data was around expectations, give or take, the 5 yr and 10 yr inflation breakevens are little changed but both still well above 3% vs the BoE benchmark rate of .25%. Also compare these inflation stats with the February wage data out tomorrow that is forecasted to rise 2.2% y/o/y. Running to stand still. The pound is little changed but gilt yields are higher by almost 2 bps across its curve in sympathy with bond selling throughout the continent.

Investor expectations for the German economy in April as measured by the ZEW index rose to 19.5 from 12.8 last month. It's the best level since August 2015 and above the estimate of 14.8. The Current Situation component was higher by almost 4 pts to 80.1, the best in almost 6 years. Bottom line, confidence in the German economy is high but not surprisingly. As for markets, the IFO index is more relevant as its asking actual businesses instead of ZEW which is polling investors. The euro is back above $1.06 and sovereign bond yields are rising. We are seeing more spread widening between German bund yields and with France and Italy on political worries. The German bund 10 yr yield/Italian BTP 10 yr yield spread is now at the widest level since February 2014. The Bund/Oat spread is at a 2 month high. The Euro STOXX bank stock index is near a one month low.