I have little to add to my opening missive and what I have been saying for months -- that the markets have under priced risk and that the potential downside may dramatically exceed upside opportunity and reward (by about a factor of 3.5x).

Today's market swoon will likely do little to change most observers' market views.

But, as I asked in my opener, if the decline continues and accelerates who is going to buy when the ETFs sell?

* One conspicuous element of today's trading was the eye-opening drop in bond yields -- in the short, intermediate and long end. The ten year US note yield ended the day at only 2.06% a clear break down from the previous trading range in yields. Moreover we are near a multi-year low in the 2s/10s spread. Though the "talking heads" protest this has nothing to do with domestic economic growth -- I strongly disagree (they may now be protesting too much). I believe an important short selling opportunity may be approaching in iShares Barclays 20+ Year Treasury Bond ETF  (TLT) .

* Financials took the brunt of the strength in fixed income. Goldman Sachs (GS) was consistently -$8 all day, which should be a worrisome sign for bulls. Junior mining ETFs supported the rise in the price of gold.

* Gold's strength also points to a flight to safety and quality.

* A $1.33 rise in crude oil helped oil stocks buck the lower market trend.

* The S&P Retail Index was flat. (Target (TGT) and Walmart (WMT) ++)

* Though biotech was off by only -1%, speculative biotech got schmeissed. (Portola Pharmaceuticals (PTLA) ,  Sage Therapeutics (SAGE) , etc).

* Industrials lower. (3M (MMM) was a downside leader.) Even aerospace, formerly the "world's fair," is showing cracks of underperformance. I am looking for short exposure now in this sector (I might just short The Industrial Select Sector SPDR   (XLI) , which has breached a trendline recently).  I sold the balance of my DowDuPont (DWDP) late last week. The shares fell by about 3% today.  Stay tuned.

* Transports were weak.

* The bulls -- in the media (I a currently listening to Fast Money, as a proxy for the bullish cabal) and elsewhere -- seem unconcerned with today's weak price action.

*The financials, as mentioned early this morning are rolling over and an important institution over there (Deutsche Bank (DB) ) is hitting new lows despite a universal optimism regarding EU growth expectations.

* In an increasingly and hyper partisan backdrop in Washington, DC, the DACA decision is yet another potential obstacle towards compromise on tax and regulatory reform and repatriation of overseas cash. I believe the DACA decision, even more than the North Korean launch over the weekend, accounts for a larger proportion of today's drop in the indices.

Though I am negatively positioned I recognize that the dominant role of quants can exaggerate short term moves (to the upside and downside) -- so I am less certain than the certain bulls.

Nevertheless I am putting my money where my pen is.

I ended the day in a large net short exposure -- not materially different than the exposure when I entered the day.

My baseline case is that a "garden variety" market correction could lie ahead.

As a concession to the flight to safety, I am shorting some iShares Barclays 20+ Year Treasury Bond ETF  (TLT) .

ProShares UltraPro Short QQQ ETF (SQQQ)  was my Trade of the Week for each of last two weeks -- sticking with all of it

Adding to Wells Fargo (WFC) long and trading around (meaning covering) some of my Goldman Sachs (GS) short (trading around position).

"Just one more thing..."
--Lt. Columbo

Before I take a drive to business meeting over lunch, In "This Ain't No Seder - I Now Have an Eight Question" I asked:

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

If you have a thought on how to answer that question, please post in The Comments Section.

Mid-morning musings from Sir Arthur Cashin:

While most folks believe that neither side would intentionally "start" something, the strength in the haven plays show big concern about an accident (e.g. missile deconstructs over a populated area)

"I know you've deceived me, now here's a surprise

I know that you have 'cause there's magic in my eyes

I can see for miles and miles and miles and miles and miles
Oh yeah

If you think that I don't know about the little tricks you've played
And never see you when deliberately you put things in my way"

- The Who,"I Can See For Miles"

The optical space continues to move to new 2017 lows on a consistent basis.

I continue to be cautious regarding this tech sub-sector.

From my pal Sportbull:

Sportbull • an hour ago

Dougie, I couldn't agree with you more. Folks underestimate the importance of a smoothly functioning central government, which I don't believe is functioning very smoothly at present. If that becomes a more widely held perception when the next storm arises, risk will happen very fast. Irma may turn away from us this time, but there's another Category 5 out there brewing right behind it

I added to all of my financial shorts on the breakdown this morning of yields.

The 10-year U.S. note yield is five basis points lower to 2.105%, a new low.

Moreover, a further compression in the 2s/10s is being seen.

Financials are among the most popular sectors of the market. Indeed, they might be the second choice to FANG -- which, as I have written, I believe is rolling over as well.

I think you can kiss all the financials goodbye over the second half of the year.

Without financials I don't believe the S&P 500 Index can advance much, if at all.

And so can you kiss the rosy domestic economic growth expectations!

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 it goes:

Bitcoin traded at over $5,000 on Saturday but has traded as low as $4,000 today -- a decline of about 20% -- on China news.

I recently wrote a cautionary piece on cryptocurrencies, "Woodstock or Bitcoin."

This week's Trade of the Week is to short Procter & Gamble (PG) common (it closed Friday at $92.53).

For aggressive traders, I would look to sell the PG weekly calls and/or to go long PG weekly puts.

PG continues to rebuff Trian Partners' overtures.

More importantly, however, moats of consumer packaged goods companies have been irreparably damaged as mentioned in "Warren Buffett Evolves as 'Ketchup Stand' Loses Value in Epic Retail Struggle," written last week. 

As I wrote at the time:

"In business, I look for economic castles protected by unbreachable 'moats'."
-- Warren Buffett

According to Warren Buffett, the wider a business' moat, the more likely it is to stand the test of time.

In days of old, a castle was protected by a moat that circled it. The wider the moat, the more easily a castle could be defended, as its width and depth made it very difficult for enemies to approach. A narrow and shallow moat did not offer much protection and allowed enemies easy access to the castle. To Buffett, the castle is a company's business and the moat is its competitive advantage. He wants his managers to continually increase the size of the moats around their castles.

Over history, when looking to purchase a business, Buffett has paid careful attention to a business he understands -- not just in terms of what the business does but also of "what the economics of the industry will be 10 years down the road, and who will be making the money at that point." He also looks for "enduring competitive advantages." This, in a nutshell, is what makes a company great: the width and depth of the moat around the company's core business.

In an important interview, skillfully conducted by CNBC'sBecky Quick yesterday morning, Warren Buffett demonstrated the remarkable ability for the 87 year old to be flexible and non-dogmatic -- and, importantly, to identify that the definition of a moat has changed, in time, for the American retail industry.

This flexibility is yet another example of why The Oracle is the greatest modern day investor: he is adaptable.

For years Berkshire Hathaway /Buffett has acquired and extolled the merits of packaged-goods firms with multiple brands. After all, Kraft Heinz (KHC) , Berkshire Hathaway's (BRK.A) (BRK.B) second largest investment, was the merger of cheese and ketchup.

In the past Buffett used to say there is always money in the ketchup stand as Heinz ketchup will be prominently positioned on the dining room table for years to come.

But, as reflected in the CNBC interview, Buffett's views on the value of moats in consumer packaged-goods companies are undergoing a radical change in an epic retail struggle.

Let's go to the tape of yesterday's Buffett interview!

To Buffett, packaged goods have begun to struggle in the marketplace under the weight of other retailers' growing influence, reflecting growing size (Walmart (WMT) and Costco (COST) ) and the adoption of new technology in retail (Amazon (AMZN) ).

Buffett explained that today the possession of a wide number of brands is less significant (than it has been historically) and non-additive compared to having one dominant brand that is strong and appeals to the consumer. The greater the number of brands will no longer necessarily, The Oracle related, translate into a better negotiating position for shelf space nor will it preserve pricing advantages (that protect margins and profitability):

"If you have five items that might be served at dinner, that doesn't (and no longer) make you a lot stronger than having one."

To Buffett, the dominance of Costco and Walmart -- and now Amazon -- reflect a profound change to the competitive landscape for packaged-goods companies and have shifted the weight of power away from packaged goods towards mega-sized and innovative retailers.

As a result, Buffett suggested, in Becky's interview, that Kraft Heinz would not likely purchase Mondelez (MDLZ)in the future.

This seeming about face is similar to his seeming change in view of investing in technology. For years Buffett has avoided technology that he was uncomfortable analyzing as the space too often was faced with technological obsolescence. But, recently, with the purchase of interests in IBM (IBM) and Apple (AAPL) , Buffett has appeared to change his strategy and tune.

To me, the specific investment take is that the relatively highly prized and highly priced (read: valuations) consumer packaged-goods companies (like Mondelez, Unilever (UN) (UL) , Procter & Gamble (PG) and Campbell Soup (CPB) (which badly missed EPS expectations this morning) are quickly losing some of their relevance (and earnings power) and that their value to potential acquirors has been diminished.

Bottom Line

I would now avoid all of the publicly traded packaged-goods companies as the brand manufacturer is now disadvantaged (in its bargaining power) relative to the emergence of enormous and powerful retailers and because of the innovations at Amazon. (Reflecting diminished product pricing power, I would consider selling Kraft Heinz and P&G if I was long - as their "muscle" in the current epic retail battle has been lessened).

The influences discussed in this morning's opening missive and the Buffett interview will no longer cushion consumer packaged goods as models of safety or produce an assured and steady stream of profits and cash flows.

Stated simply, the consumer packaged-goods moats have been permanently damaged.

"Why do fools fall in love?
Why do birds sing so gay?
And lovers await the break of day
Why do they fall in love?

Why does the rain fall from above?
Why do fools fall in love?
Why do they fall in love?"

--Frankie Lymon and The Teenagers, "Why Do Fools Fall in Love?"

Though fall doesn't begin until Friday, Sept. 22, the Labor Day weekend marks the unofficial end to summer.

What will the fall season bring for the markets?

To answer that question, I invoke some of my favorite market prognosticators (and philosophers): Frankie Lymon), Tom Petty, Patsy Cline, Elvis Presley, and, of course, Bob Dylan!

Will markets be, as Tom Petty suggested, Free Fallin'?:

"All the vampires walkin' through the valley
Move west down Ventura Blvd.
And all the bad boys are standing in the shadows
All the good girls are home with broken hearts
And I'm free, free fallin'
Yeah I'm free, free fallin'"

--Tom Petty and The Heartbreakers, "Free Fallin'"

Or, as Patsy Cline chimed in, will the S&P Index Fall To Pieces?:

"I fall to pieces

Each time I see you again.

I fall to pieces

How can I be just your friend?"

--Patsy Cline, "I Fall to Pieces"

On the other hand, Elvis Presley would argue that market participants Can't Help Falling in Love:

"Wise men say
Only fools rush in
But I can't help falling in love with you
Shall I stay?
Would it be a sin
If I can't help falling in love with you?"

--Elvis Presley, "Can't Help Falling in Love"

Me? I expect, for a host of reasons (as articulated here and here)  and that A Hard Rain's a-Gonna Fall:

"I've stumbled on the side of twelve misty mountains
I've walked and I've crawled on six crooked highways
I've stepped in the middle of seven sad forests
I've been out in front of a dozen dead oceans
I've been ten thousand miles in the mouth of a graveyard
And it's a hard, and it's a hard, it's a hard, and it's a hard
And it's a hard rain's a-gonna fall"

- Bob Dylan, "A Hard Rain's a-Gonna Fall"

Risk Is Underpriced in the Shortand Intermediate Term

"In the wake of the global financial crisis, fear of such 'black swan' events drove some investors into hedge funds that offered extreme insurance policies. But the swans have yet to return, and such strategies have fallen out of favor.

Those who invested in tail-risk funds at their peak in September, 2011 would have lost 55% of their money by now."

--The Wall Street Journal, "A Decade After Crisis, Investors Have Stopped Hunting For Black Swans"

While the only certainty is the lack of certainty, I am more or less convinced that we are likely in a Bull Market in Complacency.

I have asked and will ask once again my Eight Questions that I think about every morning before the markets open. Here are five that are especially relevant today:

* In a paperless and cloudy world, are investors and citizens as safe as the markets assume we are?

* 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?

The markets have run up since the November election. First, animal spirits -- enthusiasm surrounding the Trump agenda -- moved the markets higher. Then the "machine spirits" took over as markets have been positively influenced, aided and abetted by the popularity and proliferation of passive investing (ETFs and quant strategies governed by questionable arbiters of value -- machines and algorithms).

While the consensus seems to be that the markets will continue to slowly trend higher in the year ahead, I give this view as having only a 25% chance of being realized.

Instead, I see a hard rain that's a-gonna fall.

Here is a simplified view (with a combined probability of 75%) of my most likely market expectations and outcomes over the next three to 12 months:

* Scenario #1 -- a 5% Market Correction: At best, with valuations so elevated, the S&P 500 Index likely will have a normal correction. According to well-respected technical analyst Walter Murphy, the S&P is on the longest run in over 20 years without a 5% correction and the longest run in a decade without even a correction greater than 2.5%.

* Scenario #2 -- a 10% Market Correction: My base case is that we get something worse in the markets given the plethora of potentially adverse political, geopolitical, policy and economic outcomes. According to my calculus, there is about $3.50 of risk for every $1 of reward in the S&P Index. That is an unattractive downside versus upside.

* Scenario #3 -- a 20% Market Correction: Unlike most, I see Peaks Everywhere and a weak foundation to global economic growth and U.S. corporate profits. At the core of the weak foundation are a number of secular threats, led by a continued wealth and income gap that is not being addressed by Washington, D.C.

At worse, we already may be facing a Black Swan, but with a different color -- the Orange Swan. While many have as their primary concern a monetary mistake given the lengthy economic and market advance, I continue to see policy and other (military) dangers associated with the current administration that could result in an even more substantive market decline. Most market participants seem to be of the view that the market has not already priced in any success of the administration's tax, regulatory and financial reforms. I respectively disagree as the elevated valuations that exist today suggest to me that some of the White House reforms, which are aimed to buoy S&P profits and domestic economic growth, are already incorporated in currently high share prices.

I do not expect many, if any, White House legislative accomplishments between now and year-end that could buoy profit and economic growth over the next 12 months.

Bottom Line

Risk is being underpriced and the S&P 500 Index is overvalued.

After being on vacation for a week, my good friend Peter Boockvar, chief market analyst with The Lindsey Group, separates the noise from what is relevant this morning:

A lot of what we do every day as analysts, investors, economists, strategists, traders etc... is sift thru the noise and separate what's important for markets and what is not. I do my best to consistently shift attention to what is most relevant and avoid that which is not market moving. There is plenty of important news that we should all be aware of but many times it doesn't matter to markets. On this, North Korea, the US debt ceiling and possible government shut down certainly qualify.

I don't want to minimize the risk of North Korea dropping bombs but I will continue to assume nothing comes of this. I mean, how can one position for this anyway? I do however ask myself every day, 'What does North Korea want? What is the point of all of this? Maybe Kim Jong-un just wants to commit suicide?

With respect to the debt ceiling, instead of constantly debating how and when to raise it we should all be discussing why we have it all. What is dumber than a debt limit that is never adhered to and is always raised. Here is directly from the Treasury web site, "Congress has always acted when called upon to raise the debt limit. Since 1960, Congress has acted 78 separate times to permanently raise, temporarily extend, or revise the definition of the debt limit - 49 times under Republican presidents and 29 times under Democratic presidents." Thus having to talk about this every few years is a complete waste of time because we know it will eventually get raised.

I laugh at some of the commentary though surrounding this. The Treasury Department themselves said "failing to increase the debt limit would have catastrophic economic consequences. I would cause the government to default on its legal obligations." Does anyone actually believe that a holder of US government debt will not get paid back, even if its temporarily delayed? Yes, it would be a huge short term inconvenience, but catastrophic? S&P also used the word 'catastrophic' when they wrote, "failure to raise the debt limit would likely be more catastrophic to the economy than the 2008 failure of Lehman Brothers and would erase many of the gains of the subsequent recovery." Does anyone really believe the debt limit won't get raised? Will this equate to an implosion of the US banking system due to massive overleverage?

Lastly on the possibility of a government shutdown, I can guarantee this: If it closes, it will soon reopen. Move on.

I'll repeat again, what is most relevant for markets in the last 4 months of the year is the behavior of central bankers. I know you're shocked at me saying that but how can it be otherwise. Don't tell me its earnings instead as we've priced that in many times over, aka multiple expansion. Tax reform and what the complexion of it is in terms of size and extent is hugely important of course but that would play against where multiples go.

As for where to be invested, I maintain my nearly 2 year bullish stance on emerging markets, both equity and debt (particularly India and Brazil but no longer South Korea). I think agriculture is one of the few areas of value, particularly in the fertilizer space. My bullish stance on the euro since $1.05 is intact but I acknowledge the bear dollar camp has gotten large and a contra rally may be in front of us. I also like still the commodity currencies like the Aussie$, Canadian $ and Brazilian Real. My stance of US stocks remains the same. They are too damn expensive which of course doesn't matter until it does and the Fed is staring you in the face and saying it now matters because they are no longer your BFF. QT really matters people, just you wait. This said, there are always attractive individual stock stories, themes and values.

Always.

I still love gold and silver and believe the December 2015 lows were the bottom in the 4 year bear market. If correct, the previous highs will be taken out in coming years.

The next big short is the European bond market I'll say again. What with European junk bond yields little different than the US 10 yr yield and sovereign yields that are in LA LA land for the sole reason that the ECB has their foot on them. Well, whether this week or in October, the ECB will tell us all that the foot is letting up again. European economic growth is good, inflation, while low, is creeping higher.

European stocks are attractive, particularly France with Macron trying to MFGA, and I've rode the wave over the past year but I'm completely clueless on how they'll trade as the ECB alters policy.

As for the 2nd and 3rd largest stock markets, I was just in China and am bullish on the Chinese consumer and anything related to the environment such as water treatment. With Japan, higher earnings, ROE, corporate governance, and shareholder friendly activities are positives but with the constant BoJ buying of ETF's, I just don't know what's real and what's not in terms of performance. Thus, what happens when the BoJ stops or slows down?

Data wise today we saw some new PMI figures overseas. The Chinese private sector weighted Caixin services PMI for August rose to 52.7 from 51.5 and which is back above the year to date average of 52.3. Caixin said "The latest increase in new work was the fastest seen in 3 months and solid overall, with a number of companies linking growth to improving market conditions and new marketing strategies." Also, payroll growth was the best in 4 months. Price pressures were modest in contrast to those felt in the manufacturing sector. Chinese stocks were little changed in response.

Japan's August services PMI fell by .4 pts to 51.6 and that is a 6 month low as the delivery of uneven economic data continues. New orders and business confidence both fell ("the lowest recorded by the survey for over a year." Backlogs though rose as did employment ("moderately"). I hope the BoJ reads this report because on pricing it said this: "Latest survey data showed that service sector input prices continued to increase, maintaining a trend that stretches back to November 2012. Labor costs were cited as a primary inflationary source by those panelists that recorded a rise in average operating expenses in August. Service sector companies sought to protect margins by passing on their higher costs to clients, as highlighted by the strongest increase in average output charges since March." The underline is mine.

In Europe, the August eurozone services PMI was revised slightly lower to 54.7 from 54.9. The estimate was for no change. It is also now at a 7 month low as lower revisions were seen in France, Spain and Italy. Germany's though was up a touch. Economic growth in the region is still expected to be 2% this year.

The UK services PMI was lower at 53.2 from 53.8 and below the estimate of 53.5. That is the weakest since September. Employment though did improve and price pressures intensified to the most since February as "higher staff costs, fuel bills and prices for imported items contributed to another solid increase in average prices charged by service providers in August." There are so many economic cross currents slicing thru the UK economy but what is consistent is the inflationary pressures.

Lastly, for almost 2 years I've been talking about the supply side response to the industrial metal bear market that ended in November 2015 and now the CRB raw industrials index is at the highest level since September 2014 at the same time everyone is so sanguine on inflation. It's up 11 of the past 13 days.