"Pachalafaka, pachalafaka
they whisper it all over Turkey
pachalafaka, pachalafaka
it sounds so romantic and perky
oh I know that phrase
will make me thrill always
for it reminds me of you, my sweet
just the mention of
that tender word of love
gives my heart a jerkish Turkish beat..."

-- Soupy Sales, Pachalafaka

It was another abnormal day on Wall Street and in Washington, D.C. as we try to find out what Pachalafaka (or Papadopoulos) means!

* Bond prices closed at their high as yields closed at their low (-5 basis point).

* Retail again took it on the chin with broad declines across the board.

* As discussed earlier, consumer packaged goods got schmeissed -- led by Procter & Gamble (PG)  , Campbell Soup (CPB) . Kimberly Clark (KMB) , Mondelez (MDLZ) and Kellogg undefined .

* Oil stocks provided the upside to a lower day -- with the commodity price up by only two bits.

* Biotech (e.g., Allergan (AGN) ) couldn't hold the morning's gains.

* Gold +$5 and ag commodities flatlined.

* The Russell Index provided the downside relative to the Nasdaq and S&P Indices.

* S&P futures (at 330PM) at the low of the trading session.

* Trade of the Week, (GM) GM short showed little price movement after the gap opening lower.

A special hello and shout out (thanks for the recent package of Soupy Sales' greatest hits!) to my pal, RealMoneyPro subscriber, Ken Supman, Soupy's nephew!

I did only a small amount of trading today and I end the day with a large net short exposure.

Break in!

Netflix (NFLX) to pull "House of Cards" after Kevin Spacey scandal, per Deadline Hollywood.

A week ago I wrote this:

There Is Something Happening Here...

OCT 23, 2017 ' 2:39 PM EDT

Stock quotes in this article:

IWM

There's something happening here
What it is ain't exactly clear
There's a man with a gun over there
Telling me I got to beware

-- Buffalo Springfield, For What Its Worth

For what it is worth, I am thinking that the price action in the Russell Index is the best tell with respect to whether tax reform is fully priced in or not.

The constituents of the Index are dominated by domestic companies with high tax rates.

Late last week I observed that there was a load of expectations on the tax front built into the markets based on the fact that iShares Russell 2000 Index (IWM) was inflated by +26% since the Trump election win at the same time the Russell 2017 consensus earnings estimate was deflated by over -8%.

Today (and all day) the Russell has underperformed.

I continue to view the Russell Index as a good proxy for tax reform.

And the recent strength in the Index (as well as the robust strength in the ten or eleven trading days following the Trump victory) suggests to me that tax reform is now fully expected in the markets - though its delivery is something I am far more uncertain about. https://www.cnbc.com/video/2017/10/30/is-tax-reform-priced-into-the-market.html

That said, IWM has just hit a day's low - completely repudiating the rally in the Russell Index last Thursday and Friday.

Again, this market is a strange brew of hope and change and the absence of fear and doubt.

NONE

Lows in Russell Index, highs in bonds -- would think a negative "market tell."

But, alas, nothing is normal these days.

For those who think that the hedge fund business is an "easy game," read this June article on John Paulson's hedge funds. (He once managed $38 billion. It is now estimated at $7.5-$10 billion, most of which is his money.)

Here and here.

There continues to be a lot of interest in Teva Pharmaceutical Industries (TEVA) .

I have received a number of additional inquiries via email again over the weekend.

 Here was my most recent analysis from early October. 

At the core of my concern is that consensus estimates are too high and they the company's debt load is onerous relative to anticipated cash flows.

I still would not bottom fish in the name owing to these issues and other operational and financial (balance sheet) risks I discussed in the analysis above.

iShares Barclays 20+ Year Treasury Bond ETF (TLT) at the best of the day. At +$0.86/share, this -- in a normal market -- would be cautionary.

We are not, however in anything close to a normal market.

The 10-year U.S. note is now down by 5.5 basis points to 2.375% and the long bond by 4 bps to 2.895%.

I placed Procter & Gamble (PG) on my Best Ideas List at $92.56 -- it is now trading at $86.38.

Here is my rationale behind PG and consumer packaged goods shorts.

Midday musings from Sir Arthur Cashin:

Manafort and lawyer said to be due in court at 1:30 but plea and bail request likely so no fireworks likely.

I think Papadopoulos charge may be more intriguing. Lied to FBI (that's what put Martha Stewart away). What was the topic of the lie?

Dow dips before noon on Bloomberg report that cut in corporate taxes could be a multi-step; multi-year process.

The Russell 2000 Index has now given back the Thursday/Friday rally.

I should have mentioned that the Goldman Sachs downgrade of General Motors (GM) should focus investors on the downside to the auto industry, in general and for GM in particular -- serving as a potential catalyst to a lower GM share price this week.

Break in!

From Bloomberg

*HOUSE IS SAID TO BE DISCUSSING PHASE-IN OF CORPORATE TAX CUT

*PLAN WOULD CUT CORPORATE RATE GRADUALLY, REACHING 20% IN 2022

*CORPORATE TAX PLAN IS STILL UNDER DISCUSSION, SOURCE SAYS

Market expectations are certainly for a one shot deal here to 20%.

Today I shorted General Motors (GM) ($43.43) and placed the stock on my Best Ideas List (short).

I am now making the stock "My Trade of the Week:"

* While the hurricanes have served to pull forward auto industry sales -- I see this only as a rather temporary respite from my "Peak Autos" thesis. In 2016 U.S. car industry sales totaled 17.6 million units -- a number that will not likely again be seen over the next 3 years. It is not difficult for me to see 2020 industry sales at sub 15.0 million units.

* If auto industry sales decline in the magnitude of my projection, General Motors will face a large cash burn, leaving cash balances to levels that could threaten its dividend paying ability.

* General Motors receives over 105% of its profits and free cash flow from the North American market - especially the light truck market.

* Ford's (F) F- Series recent truck refresh will be a competitive share threat to GM in 2018-19. Goldman Sachs estimates this could be a $2 billion (profit) volume/mix headwind to GM as the company undergoes a product makeover next year.

* Meanwhile, industry competition in crossover utility vehicles is also accelerating as competitors have shifted production into this product offering.

* General Motors' valuation has expanded (particularly relative to Ford), in part because of optimism on the company's autonomous vehicle business expansion. I believe the optimism may be premature.

* General Motors' EPS is likely to exhibit a multi year peak in 2017 ($6.25). My 2018E is $4.25 and my 2019E is $3.00-$4.00. This compares to consensus of $6.29, $5.83 and $5.76.

* My 12-month price target, based on a 8x PE and a 3x EV/EBITDAP (these are mid cycle valuations), is in the range of $32-$35.

Once again, the iShares Russell 2000 Index ETF (IWM) is leading us lower.

Amazon  (AMZN) has more (intraday) moves than a short stop batting .210!

UBS on Tesla (TSLA) : "Model 3 Miss Hit Q3 Margins and Cash Burn," (Price Target $185, Sell):

The brokerage notes TSLA is up 50% year to date, yet since the start of the year consensus 2017 earnings per share fell from a loss of $0.65 to a loss of $6.81. Assuming $1bn in operating cash, TSLA has about four quarters of cash at the current burn rate. TSLA also has $1.4 billion in debt coming due by the end of 2018.

The analyst sees third-quarter results as a potential negative catalyst.

The year-to-date run likely reflects that TSLA maintained the Model 3 production timeline; therefore, it's surprising that shares ended up 2% following the Model 3 production miss (220 delivered vs. 1,500 target).

Not only does the miss undermine the credibility of future Model 3 targets, but it increases the near term risks. The Model 3 ramp will be a key question, particularly following the recent Wall Street Journal article that claimed Model 3's were still being made by hand as recently as September. UBS says we also may get color on the recent layoffs (400-700 workers) reported in the media.

Lastly, there might be details on reports that TSLA has worked out an agreement to build a factory in Shanghai's free trade zone.

My old research partner at Putnam in the 1970s, Larry Harverty, just informed me via email that he will be on CNBC at about 11 a.m. ET

I suspect Larry will talk about retail, the Internet and maybe even Amazon (AMZN) .

No one analyst I know knows more about these subjects than Larry!

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:

European bond yields are crashing.

Here are my trades to this point today.
I added to my Allergan (AGN) long.

I initiated a General Motors (GM) short and added to my Amazon (AMZN) short.

"What kind of a host invites you to his house for the weekend and dies on you?"

- Larry Wilson, "Weekend at Bernie's"

I spent a portion of my weekend looking for lagging sectors.

Most of my research was centered on the retail sector, an area of dramatic absolute and relative underperformance.

I specifically looked at Macy's (M) and JC Penney (JCP) .

Unfortunately, I concluded in my analysis) that M's dividend is likely to be reduced in 2018 and that JCP may need to restructure its debt sometime over the next two years.

I remain long only one retail stock -- Dillard's (DDS) , which rallied from about $51 to more than $80 a few months ago (I sold out in the $70s); I recently have re-accumulated a large position.

I am placing General Motors (GM) as a short on my Best Ideas List.

More later this week.

The Lindsey Group's Peter Boockvar on the morning economic data; perhaps the unsustainability of consumer spending is serving to buoy bonds more now:

The PCE inflation figures for September were all right in line with expectations. The headline gain was .4% m/o/m and 1.6% y/o/y. The core rate was higher by .1% m/o/m and 1.3% y/o/y. To highlight, there remains a 4 tenths difference between core CPI and core PCE because of the latter's reliance on healthcare costs which are suppressed by government imposed prices for Medicare and Medicaid and a lower component of housing compared to CPI. The rise in energy price in particular contributed to the jump in m/o/m inflation. Services inflation rose 2.1% y/o/y and remains persistently above 2% while goods prices accelerated by .6% y/o/y, the most since March. Supply constraints have become evident since the hurricanes and the rise in commodity prices is also apparent with the CRB index at a 6 ½ month high.

Mostly included in Friday's GDP report and thus not market moving was the Income and Spending data. I pointed out on Friday that a large contribution to the number was a sharp decline in the savings rate which in turn boosted consumer spending. With the savings rate down to a 10 yr low, there is very little ammunition left here for a boost in consumer spending unless its debt driven and/or wage driven. The savings rate in September fell a sharp 5 tenths to 3.1%, the lowest since December 2007. It's averaged 5.2% over the past 25 years.

PERSONAL SAVINGS RATE

Most positively on the income side though was a 3.4% y/o/y gain in private sector wage growth, the quickest since March. Nominal spending was up by 1% and was goosed by a jump in durable goods, most likely influenced by the sharp rise in auto sales post Harvey. Spending on services also picked up as well as nondurable goods spending (likely helped by higher gasoline prices).

Bottom line, let's hope that wage growth accelerates from here because the decline in the savings rate is disconcerting. As stated, it contributed a lot to personal spending in Q3 but that is not sustainable. As for inflation, I've said it before and will say it again, the PCE is a flawed number that understates inflation and the Fed's focus on it instead of CPI has resulted in much easier policy for much longer.

Here is Wired Magazine's review of the Apple AAPL iPhone X.

For a change, some good drug approval news (out of China) for Allergan (AGN) this morning. 

I am medium in size in this name.

In contrast to what is happening with yields in China, as noted in the two previous posts, bond yields continue to decline for the second day.

At 2.40% and 2.92%, the 10-year and long bond are down two basis points in yield this morning.

My pal Peter Boockvar, chief market analyst with The Lindsey Group, touches on an overnight issue I raised in the previous post, namely the increase in Chinese interest rates:

Ahead of the BoE meeting on Thursday where they will raise interest rates by 25 bps and therefore will take back their perceived emergency rate cut last summer after the Brexit vote, here is a visual of UK CPI y/o/y vs the BoE benchmark rate. Since that rate cut in August 2016, CPI has risen from .3 y/o/y to 3.0% y/o/y and the rate hike will take them to just .50%. Because of the BoE's Brexit fears, they will tip toe their way into rate hikes past this. As for the rate impact on mortgage rates, fixed rate mortgages in the UK totaled 57% as of Q2 vs 27.5% as of Q3 2012. Also of note in Q2, gross new mortgage lending at a fixed rate was at 88%. Thus, controlling inflation should be a priority here, especially in light of the hit consumer spending has taken on falling real wages.

UK CPI YOY vs BoE BENCHMARK RATE

The European economic confidence index for October rose to 114 from 113.1 and that is the best level since January 2001. The estimate was 113.3. All 5 components were up m/o/m. Keep in mind though with this particular confidence index that it peaked in May 2000 as tech was blowing up, again in May 2007 right before you know what and thereafter in February 2011 just before Greece blew up. Therefore, relying on this as a tell for the future has not been very helpful. The euro though is up on the data beat and calmness in Spain. European bonds are mixed with strength in Spain, Italy and Portugal as the polls in Spain are showing waning support in Catalonia for independence. The IBEX is up by 1.4%.

Even before the turmoil in Spain, their economy has been one of the best in Europe over the past few years and today they reported a 3.1% y/o/y growth rate for Q3. This marks the 10th straight quarter with true 3% y/o/y growth. The Spanish stock market still provides a lot of value. The IBEX is still 35% below its 2007 peak. It trades at 13x next year's earnings estimate and has a 4% dividend yield.

A key missing piece of the recovery in Japan has been mediocre spending on the part of the consumer due to lackluster wage growth, zero interest income, the VAT increase of a few years ago and with a central bank that is telling its people it wants a higher cost of living for them. September retail sales rose .8% m/o/m as expected after a 1.6% drop in August and 1.1% gain in July. This would mean personal spending would be about flat q/o/q. As it was in line however, the yen, JGB yields and the Nikkei were all about flat overnight.

While the market's focus has been predominantly on US and European yields in the face of what the Fed and ECB are doing, I have to point out again what is going on with Chinese yields. The Chinese 10 yr yield rose another 9 bps overnight to 3.93% after rising by 5 bps on Friday. Go back 3 years to see it previously this high and this is the worst day for Chinese bonds since last November. We also saw another jump in 3 month interbank rates in Hong Kong. They rose by 3.5 bps overnight to near a 7 month high.

CHINESE 10 YEAR YIELD

This rise in rates pressured Chinese stocks. The Shanghai property stock index fell .5% after dropping by .4% on Friday. The Shanghai comp was down by .8% which is the worst day since August, the Shenzhen index closed down by 1.7% and the H share index was lower by .7%.

A key overnight feature was the drop in Chinese stock and bond prices.

The Shanghai composite, which was down as much as 1.75% , ended the session down 0.8%, the largest drop since August:

Source: Zero Hedge

Chinese bonds declined by 0.9%, the largest drop in nearly 11 months; yields rose for the sixth consecutive day:

The Bull Market in Complacency goes parabolic:

Source: Jesse Felder

From Antonia Fatas:

I have just raised my Amazon (AMZN) short to medium in size.

As expressed in my opening missive on Friday, here is why.

I have taken a trading short rental in General Motors (GM) in premarket trading.

Goldman Sachs has downgraded the stock to sale and has a price target of $31.

JPMorgan raises its 2018 Brent crude forecast by $11 a barrel.

The brokerage sees a 2018 average of $58 a barrel.

Electricity in Palm Beach has been out for a while. Should be back shortly. I wish it was out all day Friday!