"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 have to prepare for my Tulane trip.

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

The Good

* Mr. Market.

* Banks, insurance (Hartford Financial Services HIG, "Trade of the Week) and brokerages which are rate sensitive.

* Ag equipment after Caterpillar's (CAT) big beat. Deere (DE) gets pulled along.

* Biotech (Allergan (AGN) , Celgene (CELG) and GileadSciences (GILD) )

* Speculative biotech (ZIOPHARMOncology (ZIOP) ,  SAGETherapeutics (SAGE) ,Intrexon (XON) ,ValeantPharmaceuticals (VRX) ,  ACADIAPharmaceuticals (ACAD) , FibroGen  (FGEN) ).

* DuPont (DD) , Netflix (NFLX) ,Baidu (BIDU) ,Radian (RDN) and Biogen (BIIB) .

* New tech - (T)FANG (TSLA) , FB , (AAPL) , (NFLX) , (GOOGL) .
* ChipotleMexicanGrill (CMG) continues as a star.

The Bad

* Homebuilders -- fears of rising costs and lower margins after the lumber move against Canada?

* Retail still cant get much of a bid (excluding HomeDepot (HD) and Lowe's LOW) Kohl's KSS, J.C. Penney JCP, Nike NKE lower.

* Old tech.

* The "bobsy twins" -- Snap (SNAP) and Twitter (TWTR) .

The Ugly

* Silver -$0.30. Gold -$13. But what is worse are the levered gold ETFs like (GDXJ) and (JNUG) that I have been warning about.

* Bond prices are getting schmeissed as yields rise (by nearly seven basis points).

* Lumber -$10 (limit down) after Canadian tariffs were introduced.

* The US Dollar getting whacked for the second consecutive day following the French elections.

* Ryder System (R) , Express Scripts (ESRX) , Nielsen (NLSN) , T. Rowe Price Group (TROW) , Eli Lilly (LLY) and Laboratory Corp. of America (LH) .

* Sears Holdings (SHLD) breaking down, again - after a good run (short squeeze?)

 The 10-year US note yield has just broken through 2.32% resistance.

It's now at 2.335%, up by six basis points.

Now the risk parity and volatility trending strategies will press equity buys and bond sales -- in a "virtuous cycle" (at least to some!) of buying higher and selling lower.

And soon the ETFs will rebalance with their buying.

Machines, algos and exchange traded funds are the tail that wags the market dog.

Weakness in leveraged gold related ETFs (GDXJ and JNUG) continue to point to a path of weakening gold prices.

I would still rather be short gold than long gold -- as I have expressed over the last two weeks.

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:

Uber's valuation on the secondary market has dropped by nearly fifteen percent over the last month in the face of a number of controversial issues.

The yield on the 10-year US note is at the high of the day - at 2.32% (+4 basis points).

iShares Barclays 20+ Yr Treas.Bond (ETF) (TLT)  is at day's low.

Mid day musings from Sir Arthur Cashin:

Couple of blowout earnings reports and solid looking economic stats add to best two day return since election. Hope for corp. tax cut also helps.

Markets shrugs off North Korea, despite the fact that the topic still bubbles (Senate briefing, etc.). VIX continues to edge lower. Breadth is good but would like to see high volume, which might suggest bullish converts.

Programming Note

I will be lecturing at Tulane University on Thursday and Friday - and will not be writing on those days.

The US dollar continues to weaken -- a conspicuous feature of trading this week (post the French elections).

Peter Boockvar discusses the economic data released this morning - as well as the difference between analyzing what is in the rearview mirror contrasted to the windshield:

March new home sales in March totaled 621k, 37k more than expected and up from 587k in February which was revised down by 5k. The 621k is just 1k from matching the peak in this cycle but still has progress to make to get back to the 25 year average of 715k. Home sales out West led the way. The median home price was up by 1.2% and months' supply fell to 5.2 from 5.4 but is around the long term average of around 6 months unlike what is seen with existing homes. From a price perspective, most of the new homes again were those priced above $300,000 but we did see a pick up in homes sold priced below $150k. This is the area of the market that can most entice the cash strapped first time buyer from renting but is also the least profitable for builders.

Bottom line, the spring selling season has had a pretty good start notwithstanding higher mortgage rates y/o/y in March. Looking at April mortgage applications so far has purchases though about flat y/o/y. I'll say the industry continues to play catch up and the rise in rates hasn't had that much of an impact. That said, this all comes in the context of a homeownership rate that is still hovering around 60 year lows. Rent increases of 4-5% continues to be matched by home price gains at a similar pace with both rising twice the rate of consumer price inflation. Builder stocks are down by 1% but mostly off the Pulte earnings news. Pulte though was positive in the earnings release saying this: "Buying interest during the spring selling season of 2017 has been high and points to the ongoing strength in recovery for the housing industry." The market didn't like the slowdown in their order rates and drop in gross margin.

The April Conference Board Consumer Confidence index fell 4.6 pts to 120.3 and that was 2 pts below the forecast. This though does come after a nearly 9 pts rise in March. Both the Present Situation and Expectation components were down as was confidence in business conditions. Those that said jobs were Plentiful fell 1 pt but after a 5 pt jump last month. Those that said jobs were Hard To Get were little changed. Disappointingly there was a 3.2 pt drop in those expecting an Increase in Income which completely gives back the March rise.

Buying intentions were mixed. Those that plan to buy a car/truck within 6 months did improve by .4 pts to the best since 2012. We'll see if that shows up in the auto data which has seen the opposite trend. Those that plan to buy a home fell .4 pts to a 3 month low. Those that plan to purchase a major appliance was higher by 1.1 pts to the most since January 2016. Lastly, one year inflation expectations stayed the same at 4.7%.

The Conference Board's bottom line is that "Despite April's decline, consumers remain confident that the economy will continue to expand in the months ahead."

My bottom line is confidence continues to be buoyed by post election hopes for tax and regulatory reform which we will get in some form. However, the confidence increase has yet to show up in any of the consumer spending data in the aggregate where we might see a decline in real spending in Q1. As I've said many times, don't take this data to mean anything about what's to come in the future as its really only a snapshot of how people feel today.

An extraordinary amount of money has been made by selling volatility.

This Zero Hedge column explains further.

Within the article are some explanations why VIX tracking is poor -- and it helps to explain why I never trade the VIX!

I added to already sizable longs of Hartford Financial Services Group (HIG) and Twitter (TWTR) in the early going.

The former is my Trade of the Week and the latter reports earnings tomorrow (widely expected to be poor).

I have made some very small add-ons to ProShares UltraShort S&P 500 ETF (SDS) (at $13.16) and ProShares UltraPro Short QQQ ETF (SQQQ) (at $35.18) longs.

However, I am still small in size as I am giving the rally a wider berth than usual and I am looking to stay reactive and not anticipatory in my short-side commitments.

(T)FANG is taking a back seat to the averages today.

This morning the yield on the 10-year U.S. note rose by four basis points to 2.31%.

I remain of the view that a buying climax occurred a week ago in the bond market and that all fixed-income instruments should be sold, post haste!

As I have clearly expressed recently, I am uncertain about the near-term stock market prospects. However, over the intermediate term, I remain steadfastly bearish based on high valuations, still-lackluster economic and profit growth, high expectations and too much debt/leverage.

The market's near-term outlook is governed by risk-parity and volatility-trending and other similar strategies that vote and worship at the altar of price momentum.

The market's intermediate-term outlook is influenced by  the weight of value and fundamentals ascertained by those who worship at the altar of balance sheets, income statements and profit growth rates. 

Last week my pal David Rosenberg reminded me of the historical precedent that every Republican president since Ulysses S. Grant (a grand total of 17) has experienced a recession in the first two years of their first terms (and that includes the Gipper)!

Moroever, in that period there have been 13 Fed tightening cycles; 10 landed the U.S. in recession, while there was three soft landings.

More Questions

The problem, of course, is that with today's nominal GDP growth rate of barely 3.5%, what does a soft landing look like?     

What I ponder this morning is how the current subpar business expansion) cycle, now eight years old, will fare as it faces a likely deceleration and disappointing slowdown with nothing for the Federal Reserve to fight it with and considering the ton of leverage in the system. What brings back nominal GDP growth (real GDP growth plus inflation) to 5% that hasn't already happened (and please don't tell me a coordinated infrastructure plan -- remember Japanification)? What brings back nominal GDP growth to 3% to 4%? What brings back inflation when robots are competing with humans, both in the stock market and in our factories? 

Mr. Leverage...

The International Monetary Fund's April 2017 Global Financial Stability report expands upon the worrisome level of U.S. corporate leverage that was also recorded in a recent analysis by the Treasury Department's Office of Financial Stability.

For the purposes of my opening missive I won't get far in the weeds in their respective analysis.  But, suffice to say, as U.S. interest rates are in the process of being normalized, the bottom half of companies that already are committed to spending more than 30% of  profits on interest expenses/costs face the potential toxic cocktail of rising interest rates, near-peak EBIT margins and even peak EBIT (cash flow). 

In a recent report, Societe Generale's "Time to Re-Focus on U.S. Leverage - Who Will Burst the Bubble?," the author, Andrew Lapthorne, presents a chart (we dont have authorization to reproduce it!) that depicts the presistent rise from late 2010 of interest rate costs as a percentage of EBIT for all non-financial companies.

...Meets Ms. Slowing U.S. Economic Growth

Our markets -- and the mostly bullish commentators who discuss the factors  impacting equities --  have focused on the massive improvement in the soft data (confidence, etc.), explaining that the "animal spirits" in soft data will likely presage an improvement in hard data.

As seen in the chart below this is not happening. Indeed, now both the soft data (at two-month lows) and hard data are turning lower:

Source: Zero Hedge

Until recently, the bullish cabal has highlighted the consistent upturn in the Citi Macroeconomic Surprise Index. But this index, too, is not cooperating with their bullish and increasingly implausible yarns:


This week, both the March Chicago Fed National Activity Index and the Dallas Fed disappointed.



Bottom Line

This morning several companies have reported better-than-expected EPS results. But, as The Oracle (and Howard Marks) remind us, this is "first-level thinking" -- we should and must look ahead in analyzing.

To do that, we must look in the windshield and not in the rearview mirror. 

In doing so, the likely combination of higher interest rates, possibly peaking margins (cash flow and operating), elevated corporate leverage and slowing economic growth as seen in the turn down in soft and hard data are meaningful headwinds for our stock market over the intermediate term.

I start the day slightly net short of exposure.

On the large earnings beat this morning, I have covered (at $101) my small Caterpillar (CAT) short and I am taking the name off of my Best Ideas List (short).

My pal Peter Boockvar, chief market analyst with The Lindsey Group, on the "day after": 

Yields are higher across the board in Europe unlike yesterday when French oats and Italian, Spanish, Portuguese and Greek bonds rallied in celebration that the EU experiment is living to fight another day and it was German bunds and some other country bonds lower in a flight from safety. This whole group now is an even bigger short than before the election with political worries now calmed. The German 10 yr yield in particular is at a one month high and the German 2 yr yield is at a 3 month high. Draghi and the ECB do meet on Thursday and while Draghi has another chance to give us clues on the next taper, maybe he wants instead to wait until after the French election is official in two weeks. The rise in European yields is dragging the US 10 yr to back to 2.30%. I do have to say, for all the stock market excitement yesterday, the 4 bps rise in the US 10 yr was not reflective of the same optimism. We of course can say that about the entire drop in yields over the past month.

Here's another sign that global trade is improving. Exports from Hong Kong in March grew by 16.9% y/o/y, well more than the estimate of up 10.4% and it follows an 18.2% y/o/y gain in February. Exports grew in all major regions. Imports were up by 13%, about in line. I'll leave it to the Hong Kong government to bottom line it in the press release: "Looking ahead, the gradually strengthening global economic conditions should continue to render support to Hong Kong's export performance in the near term." But here is the caveat, "However, the outlook it still subject to uncertainties, including those related to the US interest rate normalization, Brexit and other political developments in Europe, possible rise of protectionist sentiment and heightened geopolitical tensions in various regions."

One interesting development of late is the weakening of the Hong Kong dollar versus the US dollar as interest rates in Hong Kong haven't reacted fast enough to the rise in US rates with the currency peg being the main link. Hong Kong has a huge property bubble on their hands so they might be dragging their feet in responding with higher rates but that then could put a strain on the peg. The spread between 1 month HIBOR in Hong Kong and 1 month US LIBOR is at the highest level since December 2008 with the latter higher by 60 bps. See chart on HKD:

The Hang Seng was higher by 1.3% in response to the trade data after yesterday's .4% bounce. Off a 3 month low, the Shanghai comp was up by .2% but the H share index traded much better with a 1.6% rally. For perspective, the Hang Seng trades at 12x 2017 earnings. Again, the more attractive stock market opportunities I believe are outside the US.

Surveyed before Sunday's election, French business confidence in April held at 104 as expected. This is within 1 pt of matching the best level since 2011 and we'll of course look forward to the May read to see if it gets close to the '07 peak of 115. Remember, MFGA! Within the index, the manufacturing component improved by 3 pts to 108, 3 pts better than forecasted and is now at the best level since 2011. Drops in services and retail is what offset this. On a closing basis, the French CAC today is trading at its highest level since 2008 but still has another 900 pts to get back above that level's high. The record high in the CAC was actually back in September 2000.