I spent a lot of time on the (respectful) Rosenberg/Kass debate on economic growth and interest rates today:

* And Now A Word From Dennis Rosenberg

* And Now A Word From Dennis Rosenberg (Part Deux)

* And the Rosenberg Empire Strikes Again

* Junk Bonds Hanging In

But there was a lot more...

I proposed another concerning question - that's #8. 

The Bull will not likely die easily. 

Ultra long U.S. bond offerings probably lie ahead. 

Lordy, lordy -- another Twitter bull!

While I am basking in Radiant's (RDN) glow  I also did a mea culpa on the ProShares UltraShort Lehman 20+ Yr(ETF) (TBT) Trade of the Week  (Sold TBT for a small loss and expanded my iShares Barclays 20+ Yr Treas.Bond (ETF) (TLT) short investment.)

I cant "see" buying the optical stocks. 

My pal "Dwyerama" chimes in. 

Stocks did little today -- at least as of 3PM.

S&P 500 spent the day higher and is now about three handles lower -- and at the day's lows.

To me, there was no market message in today's trading session.

* The US Dollar strengthened as Mnuchin commented on what the President meant to say with regard to our currency.

* The price of crude oil got schmeissed - down by over $2 to $50.40/barrel.

* Gold fell by -$10 (as I mentioned probably time for a correction after a great run for the yellow metal).

* Ag commodities: wheat -4, corn flat, soybeans +5 and oats unchanged.

* Lumber +2.70.

* Bonds got hit small with yields up by three basis points -- but that was after an eight basis point decline yesterday. Let's see, in the next few days, whether my supposition that we saw a buying climax was correct. Perhaps, the French election over the weekend will influence our markets and provide the answer.

* The 2s/10s curve added two basis points after hitting a multi month low yesterday. But only at 103 bps.

* Municipals were sold but junk bonds held on.

* Banks continue to labor despite a + EPS report from Morgan Stanley (MS) . In brokerage space, Goldman Sachs (GS) continues to founder. I am looking for an opportunity to re-short financials on a rally - but so far nuthin.

* Insurance was mixed to higher Hartford Financial Services (HIG) lower.

* Retail caught a small bid led by Nordstrom (JWN) and Macy's (M) -- but it still doesn't look an all clear sign just yet.

* Autos up small but continuing underperformance from an intermediate term viewpoint.

* Biotech +1% as Allergan (AGN) led to the upside with a two beaner gain. Speculative biotech showed little price change.

* Big pharma continues to digest its recent losses at Lilly (LLY) and Johnson & Johnson (JNJ) .

* Optical weak -- as in my Diary and in comments.

* Energy fell with declining commodity prices. Schlumberger (SLB) a standout to the downside.

* Consumer staples were mixed, though Campbell Soup (CPB) managing a small gain after yesterday's nice boost (albeit from low levels).

* Old media weighed down by IBM (IBM) . Microsoft (MSFT) lower.

* Media mixed - Disney (DIS) lower after trading higher in the morning.

* Ag equipment lower.

* (T)FANG mixed - with Tesla (TSLA) and FacebookFB higher and Amazon (AMZN) and Netflix (NFLX) each down by -$4.

* Fastenal (FAST) up on an brokerage upgrade. Apple (AAPL) small loss, with no fundamental news.

Here are some value added contributions on our site today:

1. Jim "El Capitan" after his fun Pacific Northwest swing - gives his two bits on IBM.

2. And do Ken Goldberg  and Mark "Nashville Cats" Sebastian chime in on IBM.

3. "Meet" Bret Jensen avoids retail (I am on the same page with my pal, Bret).

4. Mike Norman explains his theory on interest rates. 

5. RevShark is home on the range.

Today, as it has recently -- the junk bond market continues to hold in with a good bid.

To me this is an important gauge and harbinger of some re-acceleration in domestic economic growth in the quarter(s) ahead -- an area where I dispute Rosie and a source of my optimism with regard to the short bond position.

From my pal Tony Dwyer -- an update:

Given the positive fundamental backdrop highlighted in our April Strategy Picture Book, we have patiently been waiting for an opportunity to identify a more attractive entry point for the next sustainable leg higher. Although our key tactical indicators are still not quite where they need to be for a more offensive posture, the sector rotation and key macro indicators make clear that the defensive trade may already be overdone.

In our view, the time to neutralize was in December when it looked like the Administration and Congress were aligned, and expectations were for significant regulatory reduction along with rapid pro-business healthcare and tax legislation. In early December, the "Trump trade" was fully engaged as (1) the relative performance of Info Tech was at a low, (2) the Financial, Industrial, Energy, and Materials sectors were experiencing a relative performance peak, and (3) the 10-year U.S. Treasury Yield was at 2.6%.

In plain English, since December (when we moved), investors have totally shunned the "Trump trade" in favor of Info Tech and the more defensive sectors.

The equity market "Trump Trade" has been underperforming since December. The perceived positive Trump sectors are the Financials, Industrials, Energy and Material, while the negatives are Information Technology and Health Care. Since early December 2016, there has been a huge underperformance of the positive Trump sectors relative to the negative ones.

Again, this shows that now is NOT the time to fade the Trump Trade.

I sold the balance of my (short term rental and Trade of the Week)  ProShares UltraShort Lehman 20+ Yr(ETF) (TBT) on today's lift (for a small loss) and I have added further to my investment short in iShares Barclays 20+ Yr Treas.Bond (ETF) (TLT) .

"What makes this night different from all other nights?"

- The traditional question asked at the Passover service

As you aIl know by now I have seven questions that keep me up at night and form an important basis of my negative market outlook:

• In a paperless and cloudy world, are investors and citizens as safe as the markets assume we are?
• In a flat, networked and interconnected world, is it even possible for America to be an "oasis of prosperity" and a driver or engine of global economic growth?
• With the G-8's geopolitical coordination at an all-time low, how slow and inept will the reaction be if the wheels do come off?
• Remember when the big argument in favor of President Trump was that he was a dealmaker who knew how to get things done? That was when he was doing real estate deals. Now he has to deal with 535 other politically partisan legislators in Congress -- on their own real estate turf.
• Does the administration have the depth of experience, understand the extent of the legwork and organization required for passing legislation or have a coherent idea or shared vision of what it wants to achieve and what problems it means to solve?
• If President Trump can't easily put through a health care package,- what does that mean for more difficult regulatory reforms and his tax- and fiscal-policy agenda?
• President Trump took credit for the stock market's advance since his election victory. Will he take responsibility for a correction? And is it a slippery slope for an administration to use the S&P 500 as a barometer of success? And is a pro-business and anti-domestic programs (in education, the arts, etc.) agenda going to benefit those in the lower and middle class (largely his base) who have suffered the most over the last decade?

I am now officially adding an eighth question to my previous list of questions:

As most now recognize, I believe the mushrooming of growth (in size and popularity) of the overall population of exchange traded funds is clearly, in the fullness of time - Portfolio Insurance Act II.

I hope I am six feet under when it happens -- as there is little doubt in my mind that it will happen.

My eighth question is:

• With the specialist system now extinct, when ETFs sell, who will buy?

Shalom.

In case you missed it, I had some positive comments on Radian Group (RDN) on Tuesday in "PMI Friendly Policies From Trump Will Likely Be Tailwind For Radian."

As well, there was some modestly positive news on the company late in the afternoon. 

Yesterday the shares traded higher in a rough tape and today the stock has gained nearly $0.30 to $19.15.

Radian was placed on our Best Ideas List less than a year ago (in July 2016) at $10.00 a share; it is now 92% higher.

Despite that rise, Radian remains one of my favorite longs -- still.

My pal Peter Boockvar, chief market analyst with The Lindsey Group, writes that long/short works again: 

Bullish sentiment cooled a bit w/o/w as II said Bulls fell to 51.9 from 56.3 last week with the Correction side again getting most of the shift as they rose to 29.8 from 26.2. Bears were up by .8 pt to 18.3 and continues to sit at the 17-18 level and at this range still below 20 they might as well live on another planet. Me included on US stocks (but I remain bullish overseas). Bottom line, ever since the Bull side reached its highest level in 30 yrs on March 1st, the day after the Trump speech to Congress and which happened to be the all time high close in the S&P 500, all we've done is essentially chop around as the bull boat got overloaded. Thus, from purely a sentiment standpoint, I believe we would need a further draining of the bulls in order to create a contrarian set up for another rally. Until then, we either continue to churn or trade lower until we get that sentiment shift.

Also, while we're in the midst of earnings releases for the next few weeks and digesting weak economic data, I'll say again that the stock market overall is mostly trading on hopes for tax reform at the same time monetary policy is now a headwind (remember that stocks rose about 10% last year while earnings were flat and ended the year no different than how they finished in 2013). The monetary factor and questions on tax reform have made this market a two way street again which is clearly apparent in the dispersion between industry groups and stocks within. Long/short works again. Thus, earnings do matter but on a stock specific basis right now rather than on an overall index level if that makes sense. Lastly, we know valuations don't matter until they do and now with monetary policy globally going the other way from what investors have been medicated on for the past 10 years, I argue they now matter, big time.

After touching the highest level since June last week, mortgage applications to buy a home fell 3.4% w/o/w and are now down 1.1% y/o/y as we are deep into the important spring time period where about half of all the years transactions take place. I'll wait a few weeks of more data before I start drawing any conclusions. Refi's were basically flat for the 2ndstraight week but are still down 42% y/o/y. Coincident with the decline in Treasury yields, the average 30 yr mortgage rate fell 6 bps to 4.22%, a 21 week low. They however remain 40 bps higher y/o/y and hence the refi drop. It's amazing that a modest rise in mortgage rates can lead to a collapse in refi's but that also tells you that there aren't many homes left to refi at these historically low rates.

We were reminded again one of the factors that has helped the euro from breaking below the $1.00 that so many have been expecting for years and that is their trade surplus. While somewhat dated, the eurozone trade surplus was 19.2b euros in February, above the estimate of 18b and up from 15.7b. The peak in this cycle was back in May 2016 when it touched 25b. In the mid 2000's it never got above 8b and spent time in deficit. Exports are just off the recent high seen in December. The euro is little changed after yesterday's almost 1% rally on the heels of the British pound spike. I still like both currencies but of course the Sunday French vote could change things for the euro. While Le Pen and Melenchon want out of the euro, in a poll last month 72% of the French want to keep it.

Quietly the Shanghai composite is down for the 4th straight day and by 3.2% during this time period. It's now trading at the lowest level since early February. This action is certainly part of the whole unwind of reflation bets and comes with another overnight decline in iron ore prices which is trading at the lowest level since October. I want to remind people though that industrial commodities bottomed in January 2016 and have rallied since mostly because of the supply side of the equation as we saw a collapse in mining investment globally and promises from the Chinese that they would dramatically cut capacity in a variety of materials. Some of those promises were kept in China, others were not but the oversupply in many commodities diminished sharply. I include a chart of the Journal of Commerce index that shows prices still near two year highs. Yes, focus on the demand side and the Trump trade certainly helped since November but the supply side matters too.



The FT today reported Part 2 of its interview with Treasury Secretary Steve Mnuchin and he further tried to back track the Trump dollar comments. The FT reported that he "rejected the idea that recent complaints by Mr. Trump about the strength of the dollar were an attempt to talk down the US currency. 'Absolutely not. Absolutely not,' " he said. Mnuchin is trying to put the toothpaste back in the tube. Good luck. The dollar index is sitting at the lowest level since mid November and is below where it was in March 2015. Also I'll repeat again that negative real rates don't help either. The day after the Fed first hiked rates in December 2015 the REAL 5 yr yield was +.50%. Today it sits at -.16%. Gold was $1055 on that day in 2015 vs $1284 today.

As I have expressed in both the Comments Section (see last week's negative second-quarter industry forecast by brokerage B Riley) and in my Diary, the volatile optical space appears to be facing poor short-term fundamentals.

And takeover hopes seem to me to be in the far distance.

This morning brokerage MKM was extremely negative on Finisar (FNSR) , which is taking that stock down as well as a number of the laterals such as Oclaro  (OCLR) Lumentum Holdings  (LITE) , Fabrinet (FN) , Acadia Communications (ACIA) and Applied Optoelectronics (AAOI) .

I would continue to avoid the sector.

Rosie responds to my Part Deux post below: 

You don't actually need a crash in anything, just a lack of contribution in most things, and an assumption that while the swamp has been drained in Washington, gridlock remains

Read my daily from today and you will see what happens to nominal GDP in recessions ...and we are 12-18 months away. The starting point on nominal growth is scary low and peaked this cycle below 5 pct for the first time in recorded history

Lots of information about this cycle. Housing starts and mfg output, for the first time, failed to reclaim the prior cycle peak. And the Fed has raised rates thrice, threatening more, and about to tinker with its balance sheet which implies more liquidity tightening

Lending standards on auto credit and the Fed's demand measures on mortgages reveal an interesting tale as well

We're in the 8th or 9th inning.

This morning on CNBC, Steve Ballmer had some pleasant things to say about Twitter's (TWTR) stock 

Now there are two people that like the stock -- me and him.

As Grandma Koufax used to say, "Will wonders never cease?"

There is one thing I left out in the previous post.

In order to get to David Rosenberg's 1% Real GDP forecast, we probably have to see a crash in the automobile market. While I see "Peak Autos" (and have for some time), a crash is not likely due to low interest rates.

Meanwhile, consumer discretionary spending (cruise ships, casinos, airlines, etc.) are reasonably vibrant.

Moreover, general merchandise is not decaying.

I will stick with my below-consensus forecast of 1.75% Real GDP growth.

On Monday I made what I believe to be a strong case that all fixed-income products should be sold, post haste:

• Bonds may represent one of the most expensive asset classes extant
• Barring a recession, bond holders are almost guaranteed losses over the next decade

Subsequently, in a series of email exchanges, my pal, the lynx-eyed David Rosenberg, chief economist and strategist with Gluskin Sheff, took issue with my conclusions.

It is always important to consider the input from knowledgeable sources. Exchanges I have with people such as Howard Marks, Ira Harris, Lee Cooperman, David Einhorn, Peter Boockvar, Mike Lewitt, Larry Haverty, Jerry "The Chief" Jordan, Jim "El Capitan" Cramer and many others (some that you never heard about, such as my pal Abie B.) are invaluable to me.

From my perch, Rosie is as economically knowledgeable as anyone on the planet. While I disagree with many of David's points as well as his investment conclusion, he has given me permission to share his emails so that we can all benefit from his thoughts and wisdom.

The first email from David:

Dougie ... Seriously, nominal GDP growth has peaked for the cycle, is running about 3-1/2% now and by this time next year is likely closer to 2.5% -- you can argue with what the bond market may be pricing in for nominal growth but it is certainly tied to expectations. With real growth likely to be 1% a year from now and the Cleveland Fed inflation expectation grinding ever lower and now 1.7%, I don't think bonds are as expensive as you suggest.

My email back to David:

Most expect 2Q to rapidly accelerate from 1Q weakness. For full year my +1.75% Real GDP is less than consensus reflecting some of the economic fears we share. As to your forecast of +1% Real GDP a year from now, that is your projection - substantially below consensus and obviously not giving Trump initiatives much chance of passage (which I don't altogether disagree with).

David responds:

There is no momentum being built into Q2 as an aside. Give me a break on the consensus please -- the bond market clearly has a different forecast. It's not about 'expensive,' it is about what sort of economy the treasury market is predicting. It certainly is not related to backward looking economic data. It is one thing to say that you have a different view on where things are going than Mr. Bond does, but it's not about 4 qtr trailing gdp growth.

Like I say about the stock market. If you think EPS growth this year will be north of 40 pct, it's a bargain! I prefer to look at these asset classes and depict what it is they are telling me about the future. And my sense indeed is that Treasuries have a higher odds forecast of recession than the 15 pct chance penned in by the consensus at the current time.

And I get back to David:

I tend to watch high-yield spreads as a sure-fire indicator of future economic concerns, Rosie. I wonder if you have done a correlation between the relationship of future domestic economic growth and the spread between junk/treasuries? While widening small recently those spreads are well below 18 months ago.

David responds:

You can ask me about the VIX too, where it is and where it was. Only question that matters is where it is going. Spreads, imo, are going to widen out.

And a final email from David:

More like one percent real and one percent inflation - equals two percent nominal!

***

I hope the above was as helpful to all of you as it was to me.

Much like David, I have been concerned and conscious of the message of the bond market over the last few years -- that domestic economic growth and U.S. corporate profit growth will not meet consensus expectations.

I am still of this view -- it forms the foundation of my negative stock market position.

Looking forward, though, I expect continued subpar and below-consensus economic growth I am not as pessimistic as David's 1% Real GDP projection; I see closer to 1.75%. And, unlike David, I see a faster rate of growth in inflation; he sees 1% and I see 2% or more.

Finally, given those expectations of growth and inflation I am solidly of the view that the current 10-year U.S. note yield is discounting only about 0.55% Real GDP in each of 2017 and 2018. By contrast, my baseline expectation is for GDP growth to be more than 3x that figure.

In conclusion, according to my still-conservative assumptions for domestic GDP growth, anticipated inflation and the extraordinary low multiple of less than 0.6x vs. 1.0x historically that the 10-year note yields (2.2%) relative to forecasted nominal GDP (4%), bonds currently may be materially overpriced.

While David and I are in disagreement in assumptions and outcomes on the subject of bonds, I am most respectful of his view and thankful for his input.

It is always important to consider thoughtful and contrary opinions such as Rosie's.

"Welcome to the party, pal."

--John McLane, "Die Hard"

For the first time in a long while, I am not short any indices and I own no leveraged inverse market ETFs.

It is not because I am bullish. I am not, as I continue to believe, looking over the balance of 2017, that the downside risk is roughly 2.5x to 3.0x the upside reward.

Indeed, the market recently has displayed obvious technical and fundamental flaws that have led to some serious markdowns of certain sectors (e.g., financials) and individual equities (e.g., IBM (IBM) overnight); we have taken advantage of some of these. Moreover, most valuation metrics are extremely stretched against a backdrop of numerous and unknown economic, profit, political and geopolitical outcomes, many of which could be adverse.

As I have noted, it is increasingly difficult to navigate a market dominated by the overly popular ETFs and quant (volatility-trending and risk-parity) strategies that worship at the altar of price momentum. It is also because the "buy the dip" mentality remains indelibly etched on the forehead of most investors and traders that the Pavlovian reaction won't die easily.

While it has paid in financial shorts (covered!) and elsewhere to be anticipatory on the short side over the last few months, going forward I prefer to revert to a reactionary position for the reasons mentioned in today's opening missive.

The markets are likely to be whippy in the near term and, with a little help from Trump policy (expectations have become more realistic and have been pushed back) and modestly improving hard data, the markets may be bought by some after the recent weakness. A market stabilization/recovery also could occur if my conclusion is correct that we are seeing a buying climax in bonds (see my next column).

That said, if the market does rally hard, I will be back to re-establishing my short book. In the meantime I plan to trade opportunistically from both the long and short sides and from a market-neutral and underexposed position.

As discussed in Feeling the Market's Pain(below), I start the day in a market-neutral position:

I continue to believe that the complexion of the market is changing - for the worse. While the technicals, as Rev Shark relates, are ugly, the machines, algos and ETFs run the asylum. But that doesn't mean that stocks will move straight down.

Indeed, if I am correct that bonds are witnessing a buying climax and a slow but steady rate rise may follow -- stocks (even of a financial-kind) may be able to stabilize over the near term.

Regardless of my view, it's probably a good time to try to stay out of trouble with larger-than-average cash positions.

My guess is that the market without memory from day to day -- see Mel Brooks and The Markets (Part Trois) -- will frustrate both bulls and bears with its inconsistencies in the days ahead.

I plan to remain flexible and opportunistic. I am still very bearish, however, over the balance of the year.

I also plan to short some anticipated strength, when appropriate.

Bottom Line

"I don't know.

That's nice.

I really like that

You know what I am going to do?

I am going to leave your words on this blackboard for all my classes to enjoy

Giving you full credit of course Mr. Spicoli."

--Mr Hand, "Fast Times at Ridgemont High"

I am short-term neutral and intermediate-term bearish.

The above is a blueprint of my strategy and my attempt to game an inconsistent market with no memory from day to day, and one dominated by investor products governed by machines and algos that rely on price-momentum strategies that are agnostic to balance sheets, income statements and private-market value.

If it sounds like I am confused and uncertain, I am -- and that is manifested in my market-neutral exposure today.

The 8-year-old Bull Market may not die easily.

Over the next month or two I plan to remain flexible and opportunistic, reacting to the market action with a keen eye on the fundamentals and on valuations.

But, like another machine -- the cyborg assassin called The Terminator -- "I'll be back" to the dark side. 

"The US Treasury has asked banks for feedback on issuing 'ultra-long' government bonds stretching beyond the current 30-year threshold, as the Trump administration studies ways to reduce funding costs.

Primary dealers, the club of institutions responsible for underwriting the US government's debt, have been asked to respond to questions on the potential demand, pricing and other factors for 40-, 50-, or 100-year bonds, as part of the Treasury's latest quarterly survey.

The survey of primary dealers comes ahead of meetings at the end of April that will inform the agency's debt management. The results will probably be part of the Treasury's next refunding announcement at the start of May."

- Financial Times, "U.S. Treasury Canvasses Appetite For 'Ultra-Long' Bonds"

In the news this morning and as I premiered yesterday in "Tell me Something I Don't Know" is a story that the Fed is canvassing the appetite for ultra-long bonds.