From my perch stock prices have been further stretched today -- rendering the risk/reward ratio even more unattractive.

Today's fuel was the hope for individual and corporate tax cuts. I believe the optimism is unjustified and tax cuts will be substantially diluted and delayed.

I do not share the optimism and my portfolio's structure is a reflection of my views.

As I have written, the massive injections of liquidity, coupled with a conditioning to buy on the dip and the dominant role of passive investing (ETFs and quants) -- have elevated financial asset prices despite a likely deterioration in economic fundamentals (slowing hosuing/autos) and in the outlook of non-energy earnings. 

Thanks for reading my Diary and enjoy the evening!

Consumer package stocks continue to be leaders on the downside.

I remain short Unilever (UN) Mondelez (MDLZ) and Procter & Gamble (PG) (a former Trade of the Week, short, -$2.20)

Given the weakening fundamentals I believe these are low risk shorts with good reward.

Levered inverse ETFs back into my buy zone now -- after the strong rally from the lows.

I am adding to ProShares UltraShort S&P500 (SDS) again at $47.14 and to ProShares UltraPro Short QQQ (SQQQ) at $27.40.

The markets bent a bit hours ago but have promptly rallied strongly from the morning's lows.

The Russell Index ( (IWM) +2%) is crowing.

Programs are (and remain) in control.

From Peter Boockvar:

With the 5 yr Treasury yield sitting at the highest level in 2 ½ months, the just announced 5 yr note auction was a touch better than average. The yield of 1.911% was right in line with the when issued. The bid to cover of 2.52 was slightly above the one year average of 2.47. Direct and indirect bidders took 77% of the auction compared with the previous 12 at 71%.

Bottom line, yesterday buyers got caught out on the 2 yr auction on Yellen's comments and today buyers came in on weakness related to tax reform optimism (and/or debts and deficits fears) with the end result being a lack of enthusiasm considering the recent jump in yields. Also of note, coincident with the 4 bps increase in the conventional 5 yr yield, the 5 yr inflation breakeven is higher by 3 bps to 1.81%, the most in 4 ½ months. As stated this morning, making American companies globally competitive is great to see but please don't do the analysis in a vacuum. Consider where interest rates go on $13T of total business debt and what labor costs do on $7T of employee costs in a market where the supply is tight.

Midday musings from Sir Arthur Cashin:

Market pullback is a multiple factor move. First, the technical -- Dow stalls at highs of the two prior days. S&P different stall levels.

Then the tax package seemed a bit less sure as details leak out. Futures now see 100% chance of a rate hike in 2017 and maybe before December. Move of 10 year above 2.3% was no help either.

Hopefully I will deliver a rather lengthy (but entertaining) thought piece on FANG tomorrow morning.

I have an outline of my thoughts and commentary, entitled "Sell FANG" that I think will make you rethink about the merits of investing in Facebook FB , Amazon (AMZN) , Netflix (NFLX) and Google (Alphabet) (GOOGL) .

I am short two of the names.

Here are today's trades thus far:

I reduced my Allergan (AGN) long from large to medium sized at $209.73.

I added to ProShares UltraShort S&P500 ETF  (SDS) and ProShares Trust UltraPro Short QQQ ETF (SQQQ) longs at $47.16 and $27.50, respectively.

I added to my Radian Group (RDN) long at $18.28.

I added to my Facebook FB short at $166.63 and to my Apple (AAPL) short at $154.03.

If there ever was a day to tell us what has been FULLY priced in, today is the day.

With the Fed's quantitative tightening (QT) coming shortly, tax reform may be the only thing this bull market has left, and today and this week we'll prove yes or no on whether we're done pricing it in.

This morning, on the market strength, I added another trading layer to my ProShares UltraPro Short QQQ (SQQQ) (at $27.50) and ProShares UltraShort S&P 500 (SDS) (at $47.16) longs.

I am adding further to my net short exposure on the seeming tax-cut-induced rally, as I expect the administration's initiatives will be diluted and delayed.

This has been my long-held view, as most of you know.

I consider Twitter's (TWTR) announcement that it will test 280 characters to be a non-event for the shares.

I continue to accumulate TWTR on weakness.

Great job by "Meet" Bret Jensen on Monday and Tuesday -- thanks, B.

I made the posts below in our Comments Section after the close yesterday.

I would not be bottom fishing on the long side in Nike (NKE) :

dougie kass • 16 hours ago

Nike nearly -$4 from high on EPS pop.
Trading under $52 now, covered short rental.

dougie kass • 17 hours ago

Nike beats lowered expectations. I suspect the initial +$2 pop will evaporate as channel checks indicate weakening markets. Accordingly, I have taken a trading short in the name.

According to Investors Intelligence, Bulls rose by seven points to 54.3, which compares with 47.1 in the week before. Bears fell 1.9 points to just 17.1 and the spread between the two is the widest since early August.

The trend all year is when Bulls get around 60, stocks top out and consolidate, then Bulls fall to around 50 and stocks rebound. At the same time, bears are still hiding and rarely seen.

Also, note that Market Vane last week had Bulls at the highest level since June 2007. The CNN Fear & Greed Index, though, has moderated to 67 (Greed) from 81 (Extreme Greed) last week.

Wells Fargo (WFC) , everyone's most-hated stock -- well, maybe the second most hated, with Equifax (EFX) being the first -- is trading at a new multi-month high in premarket trading (up around $0.70 to $54.50).

Here are my most recent comments about the bank. 

Ludacris Forecast? If WFC share price continues its ascent, look for those who confidently have avoided the stock and worship at the altar of price momentum to say/write that "the bank's problems have been discounted and I like the stock now."

From my pal and fellow member of the South Team (Real Money Pro Conference and Golf Tournament I and II) Mikey.

Mikey, like many other bears, is throwing up his hands in disgust. I understand his thought process, but I will remind everyone (respectfully) that when die-hard bears give up the advance is probably mature and could be ending:

• badgolfer22 • 24 minutes ago

  Buckle up folks, this is gonna be a long one. I haven't written much these past few days, doing more pondering and thinking instead of pontificating.

  Dougie, I've quoted David Stockman, David Walker, Peter Schiff, Fred Hickey, Fleckenstein, Jim Rogers, Marc Faber, Robert Shiller, John Hussman for many years now. There are many more like Howard Marks as well. I subscribe to all the 'rational' arguments of why the economic fundamentals and stock specific fundamentals don't support valuations at these levels.

  But what I've come to AGAIN, is the painful realization that all of these economic and market data points have not mattered. And I'm not sure when they're gonna matter.

  Most market 'insiders' like you and me and most folks on this blog like Dave, Tat, Fish, Kim, Neil and others KNOW the risks and what's KNOWN. We all know that rates are artificially low thereby causing p/e ratios and discount models to be 'fantasy' in relation as to what they would be in a non Central bank dominated market.

• But trying to pick a top in this market from time to time has been fruitless, frustrating and counter productive. I've said a thousand times it seems that we just don't know how stupid this thing gets before the end comes. I personally don't agree with guys like Jeff Saut that we're in a new secular bull. We're in a Central bank created liquidity orgy. All the parameters of a secular bear ending were never present in 2003 and 2009. The system wasn't allowed to clear. All those problems mentioned above have been kicked out it seems forever.

  But here's the thing. It's you and I and all of those guys mentioned above and others that have been 'wrong'. We may ultimately be right about how this ends. I for one am more and more convinced every day that when this ends, it's gonna be the biggest, most destructive collapse we've seen yet. To that I'm almost 100pct positive for all the reasons I state above and more..much much more.

  We know all the issues and worries and irrational arguments the perma bulls make and why to us it feels 'wrong'.

  We KNOW that earnings growth has been sub par vs the run up in the market these past 4 years.

  We all know the 200-500 trillion debt and unfunded liability problem. We all know that there's a huge pension mess that awaits this country and others. We all know that the can't be kicked down the road forever on these issues.
  

  We KNOW that earnings growth has been sub par vs the run up in the market these past 4 years.

  We know all the issues and worries and irrational arguments the perma bulls make and why to us it feels 'wrong'.

  But here's the thing. It's you and I and all of those guys mentioned above and others that have been 'wrong'. We may ultimately be right about how this ends. I for one am more and more convinced every day that when this ends, it's gonna be the biggest, most destructive collapse we've seen yet. To that I'm almost 100pct positive for all the reasons I state above and more..much much more.

  But trying to pick a top in this market from time to time has been fruitless, frustrating and counter productive. I've said a thousand times it seems that we just don't know how stupid this thing gets before the end comes. I personally don't agree with guys like Jeff Saut that we're in a new secular bull. We're in a Central bank created liquidity orgy. All the parameters of a secular bear ending were never present in 2003 and 2009. The system wasn't allowed to clear. All those problems mentioned above have been kicked out it seems forever.

  But. Jeff has been right, you and I have been wrong. That's the simple fact. Jim Cramer, who frustrates me to no end with his cheerleading of this market has been right. I'm fast coming to the realization about something he said many years ago.

  'Do you wanna be right, or do you wanna make money?' I wanna do both. I am confident about what you and I think happens after this party is right. But I want to play the game and not get bearish any more until the MARKET tells me it's time to get bearish.

  Now I've said for a while that the longer term monthly charts are showing a lot of negative divergences and that we've been trying to build a top. When we crack long term trend lines and retest them and fail, THAT's when we need to pay attention that all these issues ..plus the Fed walking liquidity back..might finally MEAN something.

  Fred Hickey, for all his brilliance in tech land, has been wrong..so far. he'll end up being right I'm sure, because he knows the industry and the cycles. But in the meantime, he missed stocks like NVDA go from 20 to 180. As a tech analyst, that's a fail. period.

  Companies like TXN continue to add 10s and 100s of millions of shares to buybacks. Is it the wrong thing to do longer term? probably, at 30% of the price they'll be doing secondaries.

  but for now, why continue to fight it and tell them they're wrong?

  Dougie, I'm bearish longer term on the structural issues you and I have talked about forever. But I'm tired of imposing my will...and those others above..as to why it can't go any higher..or shouldn't.

  At some point it won't. Again from where? 2500? 3500? and when? today? October? October 2020?

  this isn't sour grapes, I'm up in my accounts somewhere near the avg rate of return in the SPX, even after giving back about 1% on the metal pullback and a 1/10 of a percent on this stupid TWM and SOXX short I started 3 weeks ago.

  but man I gotta tell you, at least from a day to day trading standpoint, I'm getting tired of tilting at windmills and looking out the window waiting for Godot.

  We all need to focus on the here and now, learn to play the momo even though it makes no sense fundamentally and rationally....BUT always have one foot out the door in case we really do finally see the top.

  But to quote Rev, I feel awfully foolish for the last few years watching stocks go up sometimes hundreds of percent without me because....

  It makes no sense. It never does. and when the worm turns and we get what I'm confident we'll get, the valuations on the down side will be just as stupid for longer than we can imagine.

  It's time to play the cards we've been dealt and not argue it's a stupid game anymore. It's stupid for sure, but I'm gonna try to play the cards we've got.

  So tell Mr. Stockman, a guy I respect, what he mentions in his tweet matters not. right now. maybe soon, maybe a year or 3 or 5 from now.

  but not today.

"If everyone is going left, look right..."
-- Sam Zell

My pal and idol Sam Zell guest-hosted CNBC's "Squawk Box" yesterday.

Sam is a brilliant investor and businessman. He always is a fountain of information and provides interesting and sometimes controversial views.

Here are some things I have written about Sam in the past:

* An April 2017 review of his book, "Am I Being Too Subtle? Straight Talk From a Business Rebel ":

Last night I received a gift from Sam Zell in the mail -- his new book, "Am I Being Too Subtle? Straight Talk From A Business Rebel"

I got up extra early (for me that is 4AM!) and I finished the book by noon today.

In his book, Sam explores his distinctly opportunistic professional and personal journeys.

My favorite chapter in the book is "A Godfather Offer" in which Sam describes the early 2007 sale of Equity Office, the largest REIT in the U.S, for $39 billion.

I particularly enjoyed the email reparte between Sam and another good pal of mine, Vornado's Steve Roth, in which Vornado made a counter bid against Blackstone for Equity Office.
The email exchange went like this:

Dear Stevie:

Roses are red

Violets are blue

I heard a rumor

Is it true?

Love and Kisses,

Sam

And Steve responded:

Sam, how are you?

The rumor is true

I do love you

And the price is $52.

To see if this poem will rhyme

We should talk at a set time

While to talk like this is nifty

We should really talk at three fifty.

Forever yours,
Steve

I am a big fan of Sam Zell.

Back in late 2006 I wrote a Barron's editorial entitled, "Look Who's Selling " -- as you can see below, his sale made me think about the possibility of The Great Recession well before it was formed:

"THERE ARE SOME PEOPLE you just shouldn't trade against. Among them: George Soros, Stanley Druckenmiller, Steve Cohen, Ed Lampert and Sam Zell -- yes, the Sam Zell who recently agreed to sell his Equity Office Properties Trust to the private equity firm Blackstone Group. Shares of EOP, the largest real-estate investment trust specializing in commercial properties, have nearly doubled from the mid-20s in the fall of 2002 and now, at almost 50 a share, the value of one of Zell's jewels is relatively full. Zell accepted cash and the associated tax bill, which supports the view that he thought the price was rich...

SPECULATORS TOOK OVER and began to take a disproportionate role in the residential-real-estate market. Home prices kept on rising until they were elevated to levels that were out of reach for most buyers. Eighteen months after demand evaporated we still don't know where the bottom will be.

Today's boom in commercial real estate, like the bubbles that preceded it, has been fueled by the belief in a long, uninterrupted economic boom and a continued stream of equity and debt capital. Both could come to an end.

How? Let us count the ways:

(1) A more serious housing decline leads to a broader consumer-led global economic downturn than is generally expected.

(2) A continued fall in the U.S. dollar lowers purchasing power while the defense of the dollar raises interest rates.

(3) Foreign trade initiatives like protectionism and tariffs reduce confidence in the capital markets.

(4) A geopolitical event adversely affects confidence in the capital markets.

(5) A domestic event precipitates a loss of confidence and the figurative or literal closing of the capital markets.

(6) Failure of a deal or some other event precipitates a loss of confidence and the closing of the bridge-financing window.

We don't know what to expect, but that should be no comfort. The unexpected is what usually puts needles in bubbles."

At the end of the chapter on the Equity Office Sale, Sam contends that people incorrectly credit him with calling the top in the real estate market:

"The reality is I wasn't trying to. While I was certain the market was frothy, I wasn't selling to get out of the office market. I had simply received a Godfather offer."

To me and many others he did call the top -- nearly $40 billion says so -- despite his protestations

Regardless, "Am I Being Too Subtle" is a must read!

Run, don't walk to read it!

* A December 2006 editorial I wrote in Barron's on Sam, entitled "Look Who's Selling."

Marketwatch on "Group Stink" from yours truly.

A key market feature this morning is the sharp rise in domestic interest rates. The yield on the 10-year U.S. note is up six basis points to nearly 2.30% (remember when we shorted bonds at a 2.04% yield only three weeks ago?) iShares 20+ Year Treasury Bond ETF (TLT) is getting thrashed in the premarket (down around $1.20).

My pal Peter Boockvar, chief market analyst with The Lindsey Group, embraces the reasons for the rate rise in his commentary this morning:

I'm guessing it is due to the reason that we are finally taking the tax reform debate to actual steps toward becoming law that global interest rates are rising across the board. It started in Asia with yields higher throughout the region. In particular there was a 3 bps 'jump' in Japanese JGB yields with the 10 yr yield moving to 6 bps and the 40 yr (least impacted by BoJ yield curve control and buying) at 1.06%, a 5 ½ week high. In Europe yields are also up everywhere. The German 10 yr bund yield is up by 6 bps to .46%, a 7 week high. The 10 yr Gilt yield up by 4 bps to 1.37% and is a yield last seen in early February. The US 10 yr yield is now at a 2 month high at 2.29% which is a key level as the multi month range that began in the week after the US election until April was 2.30-2.60% in response to 'the Trump regulatory/tax reform trade' that got a bit distracted this year, until now. The US 2 yr yield at 1.46-.47% is at a fresh 9 year high (also helped by more hawkish Yellen comments yesterday which is also boosting the US dollar today).

The bottom line seems to be that tax reform will be crucial in both making America competitive again and possibly extending this aging economic recovery but it won't happen in a vacuum and interest rates are not going to sit idly by if growth and inflation truly respond to any fiscal boost. What this means for stocks therefore is I expect multiple compression that better be offset by quicker earnings growth. Lastly, if this is a trigger for sustainably higher market rates (putting aside the central bank driven change in yields where ECB tapering I believe will be lifting them) and I emphasize IF, remember the debt accumulation that has taken place globally. In the US in particular, debt to GDP is at a new record high according to last week's updated flow of funds statement from the Fed. Lunch is not free.

As a key focus of course with the tax bill is where the corporate tax rate ends up, Howard Silverblatt at S&P estimates that the weighted average tax rate for the S&P 500 companies is 25.6%. Thus, the biggest beneficiary of tax reform will be of course those that are mostly dependent on state side business and pass throughs. In a tweet Howard said 99 of the 500 companies have tax rates above 35% while 115 have then below 15% (which includes 42 that got outright refunds).

With a 7 bps rise in the average 30 yr mortgage rate w/o/w to 4.11%, refi applications fell 3.5% from last week and are down 36% y/o/y. Purchase applications were up by 2.8% just off the lowest since February and are higher by almost 4% y/o/y. The recent housing data has become much more mixed with August new home sales in particular seen yesterday at the lowest of the year at the same time inventories are creeping higher.

The Italian economy got good news in that its economic confidence index for September rose almost 1 pt to the best level since October 2007. Of the 4 internal components, manufacturing, construction and retailers confidence all rose m/o/m. Services were unchanged. Bottom line, it's great to see Italy joining the recovery being seen in the European region but they still have a ways to go just to get back to actual economic activity seen before the last recession. Industrial production for example is still 17% below the '07 high. Following on to my comments on bonds above, the Italian 10yr yield is up by 3 bps to a 10 week high at 2.15%.

The ECB said money supply growth in August was up by 5% y/o/y, a pick up from 4.5% seen in July. Positively, lending to non financial companies rose by 2.5% y/o/y vs 2.4% in July and that is the quickest pace since June 2009. Household lending held at 2.7% y/o/y growth. These stats are another reason why the ECB needs to reign in their scorched earth monetary policy.

Just as we worry about the state of the UK consumer because of an inflation squeeze on their standard of living, the CBI said its retail sales index for September spiked to +42 from -10 and that crushed the estimate of +8. The CBI said the main drivers were the grocery and clothing sectors. CBI said "It's encouraging to see some vigor returning to the retail sector in September...and consumer demand expected to hold up reasonably well next month. But inflation continues to squeeze household budgets, and with the pressure on incomes to set to persist, retailers will continue to face a challenging environment." The UK gilt 2 yr yield is just below a 15 month high. Expect a BoE rate hike at the next meeting which will take back the emergency cut after Brexit where all of the BoE's estimates came nowhere near being reality. The pound is off its lows in response to the data.

I remain of the view that the administration's tax initiatives will be substantially diluted and delayed.

I have been adding recently to my long Radian Group (RDN) position (now large in size) as the share price has declined coincident with the recent hurricanes and what I believe to be unjustified investor concerns that losses would be rising from the awful havoc and property damage.

However, the market has begun to recognize the private mortgage insurance industry's general lack of exposure to the recent natural disasters, and Radian's shares have steadily rallied (up $0.67 on Tuesday). Most other private mortgage insurers' shares also rallied yesterday, though there was no apparent macro news to account for it.

On Tuesday I touched based with Radian's management in Philadelphia and I am satisfied that the insurer's exposure to potential losses ultimately will be modest and will be contained.

I continue to have a price target for RDN of more than $20 by year-end and in the mid $20s by the end of 2018. (RDN and Wells Fargo (WFC) are my two favorite financial longs.)

To begin with, private mortgage insurance doesn't insurer physical (i.e., property and casualty) losses. Indeed, a homeowner has an obligation under the mortgage insurance contract to restore the property back to where it was before a natural disaster impacted the home. It is only then that a claim can be filed. As a result, claims are more a function of job losses from economic consequences than from weather.

Moreover, in the case of Fannie Mae and Freddie Mac loans, which represent a large amount of Radian insurance product, the financial responsibilities fall on investors in those products and not Radian.

It will not be until fourth quarter, at the earliest, that any notice of defaults will be filed from the hurricanes. We have a good sample and experience of potential losses with the Hurricane Katrina experience, in which notice of defaults totaled only 2%. More important is that ultimately 98% of the claims were cured.

Below is from page 18 of Radian's 2016 10-K, which describes Radian's geographic exposure (Federal Emergency Management Agency -- aka FEMA -- areas approximate 2% of the company's risk in force):

I have profited mightily from investing and trading in Allergan (AGN) since initiating the position at around $190 last December. I sold a lot of my stock in the $240 level earlier in the year and have been actively trading around my long stake since then. The accumulated profits have been substantial.

While I am keeping Allergan on my Best Ideas List and while AGN remains my favorite large-cap long for 2017, I am reducing my price target for the shares this morning to a more realistic level given company fundamentals and the broader market's possible vulnerability.

Yesterday UBS modestly cut its Allergan estimates but maintained its price target of $275.

The UBS note cited:
* A poor risk/reward regarding a judge's coming ruling (by late October) on the Restasis patent case as the sell side includes Restasis in the models to 2024

* The consensus 2018 EPS needs to come down

* Management's latest deal with Mohawk regarding the Restasis IPR may draw some bad press and PR. They admit that the Restasis patent case is not a good risk/reward as we also assume the 2024 patents hold, and this remains the key risk to their model in the near term.

The brokerage admits that they had been too aggressive with numbers, but even with their revised forecasts, they believe the story (and valuation) doesn't change that much, and the stock is very attractive. They don't have an issue with the Mohawk strategy.

Even if just some of the Allergan pipeline events are positive over the next 18 months, UBS thinks investors quickly will look past these issues and, as I mentioned, it has maintained its price target of $275.

Nevertheless, as seen above (and in recent company guidance), the upside to Allergan's earnings estimates likely has been removed for 2017-18.

I believe this helps explain the stock's recent weakness.

My forecast for a $300 year-end price for AGN is clearly too high, particularly given a rich equity market and the risk that we see rotation out of biotech (yesterday the iShares Nasdaq Biotechnology ETF (IBB) was down by nearly 2%).

A six- to nine-month price target of approximately $250 is likely closer to reality.

Therefore, I still am a buyer at these levels (risk/reward favorable) and like the stock, but I plan to keep the position as medium in size as I now have to be more realistic in my expectations.

I have been arguing that, adjusting for volatile energy earnings, the rate of growth in corporate profits is decelerating.

David Stockman makes this point in a tweet: