High above the Alps my Gnome is hearing that tomorrow's "tax reform" bill will likely have a corporate tax rate at 32% in 2018 -- gradually declining to 20% in 2022.

The bill will also likely include a limit on interest expense deductibility.

This may be an interesting test as to whether the administration's more aggressive and initial tax recommendations have been discounted in the equity markets. 

I believe that a normal market would view these factors as unfriendly.

But as I have repeatedly written, we are not in a normal market.

I am adding to my short Indices now -- in after hours trading.

Electronic Arts (EA) is a company I have followed for years.

I just took a small trading short rental at $116.50 based on in-line numbers and lukewarm guidance.

Shooting and truck incident in Lower Manhattan, here and here.

At month's end, there is $2.2 billion to sell market on close.

"From my laboratory in the castle east
To the master bedroom where the vampires feast
The ghouls all came from their humble abodes
To get a jolt from my electrodes."

-- Bobby Pickett, The Monster Mash

I have a business meeting at around 3:30PM so I will be ducking out early.

Stated simply, with machines trading with machines -- the algorithms exhibit no emotion. 

Indeed fear and doubt seems to have been eradicated from investors' and traders' mindsets.

And with momentum based strategies and passive investing dominating trading -- don't lose sight of the fact that buyers live higher and sellers live lower.

There is a tendency by many who believe "price is truth" to conclude that we live in a Goldilocks environment and in a new paradigm of uninterrupted and inflation free growth, in which most expected outcomes are favorable. 

By contrast I see numerous outcomes, many of them adverse, that have a growing probability. 

"The zombies were having fun
The party had just begun
The guests included Wolf Man
Dracula and his son"

Happy Halloween!

In response to a number of emails I would be a $19 buyer on Twitter (TWTR) .

Subscriber comment of the day: 

badgolfer22

Dougie, again, I'd like to know what 'small' , 'medium', 'large' and 'over your skis' long or short means as a percentage of your AUM. If I characterized myself as 'over my skis' index short, that to me signifies a fairly large number...north of 50pct of AUM.

• dougie kass

  Again, it is a function of one's risk appetite/profile.
  I am a very conservative investor (representing investors who want to preserve capital as their primary objective) - and I am never on margin.
  Remember: reward v risk for longs is mathematically favorable vis a vis shorts (we can make an infinite amount on longs but can only make 100% on shorts). Therefore a maximum large long exposure should exceed a maximum large short position.
  
  For me, a large net short exposure could be 35% - 60% net short.
  A medium sized net short position could be 20% to 35%.
  A small sized net short exposure could be under 20% net short.
  For me, a large net long exposure could be 65%-85% net long.
  A medium sized net long exposure could be 35% to 65%.
  A small sized net long exposure could be under 35%.
  Dougie

Here are five scary stocks that you might consider avoiding on this Halloween holiday:

1. General Motors (GM) : Though the company will benefit from the replacement of autos damaged or destroyed in the recent hurricanes, the "Peak Autos" thesis is growing more likely.
2. Starbucks (SBUX) : Domestic saturation and elevated product price offerings are concerns for this popular purveyor of coffee and related goods.
3. Disney DIS: Sky high theme park admission prices coupled with "Peak Sports Viewing" (and cord cutting at ESPN) serve as the basis for a continued and scary investment of this popular stock.
4. Goldman Sachs (GS) : The transformation of this brokerage into an asset manager (and accompanying low P/E accorded most peers) coupled with subdued capital markets activity, historically low interest rates and low volatility in many markets represent a near term and intermediate term threat.
5. Procter & Gamble (PG) : Competition from private label and Amazon (AMZN) , changing consumer trends and still high valuations form the rationale behind this short.

Radian (RDN) has just hit my year end 2017 price target of $21. 

My 2018 year end price objective is about $25/share.

Radian was placed on my Best Idea List sixteen months ago at $10.00/share.

Retail and biotech just continue to be horrific performers -- across the board.

And, given their vulnerability to year-end tax-loss selling, I don't see a respite over the next two months.

I remain long only Dillard's (DDS) (retail) and Allergan (AGN) (biotech).

Yesterday I reemphasized that Teva should be avoided.

Today Mylan (MYL) was hit by an apparent extension of a generic drug pricing collusion probe. 

Mylan's shares have fallen by nearly seven precnet in the morning session.

The Lindsey Group's Peter Boockvar reports on the Conference Board's Consumer Confidence Index and other economic data:

The Conference Board Consumer Confidence Index for October rose 5.1 pts to 125.9 and that is the highest since December 2000. Both main components contributed to the rise. Also, the answers to the labor market questions improved further. Those that said jobs were Plentiful jumped by 3.6 pts to the highest level since June 2001. Those that said jobs were Hard To Get fell .5 pt to the lowest since August 2001. This said, there was a slight decline in those expecting More Jobs in the coming 6 months. Also, there was a .2 pt drop in those expecting Higher Income but a 1.2 drop in those expecting a Decrease in Income.

Notwithstanding the headline jump in confidence, spending intentions were mixed. Those that plan to buy an auto rose 1 pt after falling by .8 pts last month. Those that plan to buy a home fell 1.4 pt to match an 8 month low. Those that plan on buying a major appliance dropped 5 pts to a 3 month low. What stood out was those that plan on taking a vacation within 6 months spiked by 11.3 pts to the best level on record dating back to 1978. Spot this outlier in the chart. One year inflation expectations fell 2 tenths to 4.7% after rising by 4 tenths last month.

THOSE THAT PLAN ON TAKING A VACATION WITHIN 6 MO'S

Lastly, there was a bifurcation in the confidence breakdown amongst ages. Those under the age of 35 saw confidence fall to the lowest level since February. Those aged between 35-54 rose to the best since November 2000.

Bottom line, notwithstanding how millennials feel, overall confidence is certainly robust driven by optimism with the labor market but I'll say again, this data only is a snapshot and is rarely a good indicator to tell us what is to come and why it's never market moving. In fact, when it gets very stretched either up or down it typically marks a top or a bottom.

Following a string of good regional manufacturing surveys (except Richmond), the Chicago PMI index for October rose 1 pt m/o/m to 66.2 and that was 6 pts above the forecast and the best since March 2011. The components however were mixed. New orders and backlogs (43 year high) accelerated but inventory growth slowed and employment fell into contraction. Prices paid moderated due to "a partial stabilization in material prices and an abating of input shortages, both initially induced by the storms." The reason for the backlog spike is "partially brought on by the disruption caused by the recent storms." MNI also said "The storms across the country were also culpable for both longer supplier delivery times and firms stockpiling goods last month but in October Supplier Deliveries and Inventories softened." With employment, "Firms have repeatedly reported a shortage of skilled and trained workers and have resorted to having existing staff working overtime or to hiring temporary workers. In what was a new development, there was evidence of firms losing their skilled workers for higher wages elsewhere in October, further reinforcing the shortage of this profile of employees. The underline is mine.

Bottom line, all the regional surveys has the ISM estimate expected to fall 1.4 pts to 59.4 but that is off the best level since 2004. What I underlined above is why the Fed will keep raising interest rates in 2018 after doing so in December (all else equal right now).

Semiconductors are on fire.

I have added to my Wells Fargo (WFC) and Hartford Financial Services Group (HIG) longs in recent days.

I have added to my SPDR S&P 500 (SPY) and Amazon (AMZN) shorts.

I am now medium in size with my Amazon short.

My good friend Peter Boockvar, chief market analyst with The Lindsey Group, asks whether the tax reform package is priced in (something I also have discussed in my Diary):

In the daily debate over whether tax cuts/reform has been priced into the market, the worst day in the Russell 2000 yesterday since August 17th certainly lends support to the believe that it has been. I also present this chart again for evidence. Note the yellow line being the index and the white line being the progression of earnings estimates this year which do not reflect lower corporate taxes.

YELLOW LINE RUSSELL 2000, WHITE LINE is earnings estimates this year

Proving that low inflation is the driver of strong growth, eurozone Q3 GDP grew by 2.5% y/o/y, one tenth more than expected, up from 2.3% in Q2, and that is the strongest quarter since Q1 2011. Also the September unemployment rate for the region fell to 8.9% from 9% in August and that is the lowest since January 2009. In fact, since this stat was started in 1998, the average is 9.6%. As for inflation, October CPI was up 1.4% y/o/y, one tenth less than expected and down one tenth from September. The core rate slowed to a .9% gain, down from 1.1% last month and that was 2 tenths below the forecast. In terms of the market response, the 5 yr 5 yr inflation swap actually is up a hair with the drop in the unemployment rate and quicker Q3 growth offsetting the CPI print. Also European bonds are down slightly with yields up a touch while the euro is little changed.

EUROSTAT UNEMPLOYMENT RATE



5 yr 5 yr EURO INFLATION SWAP going back to June 2014 when NIRP was 1st introduced.

Lastly out of Europe was September retail sales out of France that was better than expected. Macronomics helped to also drive a 2.2% Q3 GDP y/o/y growth rate. That is the first 2 handle since Q2 2011. MFGA! The CAC though is little changed but is up 13% ytd.

Japan's unemployment rate in September held at a 24 year low at 2.8% (a drop in the number of employed was almost matched by the fall in those in the labor force) and the jobs to applicant ratio held at 1.52, a 43 ½ year high. But, we know this has not lead to a faster rise in wages and to the BoJ's chagrin, it is not leading to higher inflation and overnight they cut their 2017 core inflation rate (just ex food) to .8% y/o/y from 1.1%. They however believe it will rise to 1.4% next year (previous estimate was 1.5%) and like magic will head to 1.8% in 2019 which is unchanged. As 2% is still their arbitrary target (they estimate will be reached now in March 2020), they in turn must continue with the forecast to a path to 2% in order to save face of a policy that has taken their balance sheet to about the size of the entire Japanese economy. Understand though that a more realistic inflation target would mean less reason to nationalize all of Japan's publicly traded assets.

In the data out of Japan saw a drop in industrial production in September of 1.1% m/o/m but that wasn't as much as the 1.6% fall that was expected. As stated here many times, household spending continues to be very mediocre and the September figure printed down .3% y/o/y vs the forecast of up .6%. Wanting a higher cost of living at the same time consumer spending remains so punk is completely nonsensical. As the BoJ meeting was basically as expected, JGB yields are unchanged as was the Nikkei. The yen is down a touch vs the US dollar.

China reported its state sector weighted PMI's for October and the manufacturing index fell to 51.6 from 52.4. The estimate was 52 but part of this is purposeful as for pollution and capacity reasons, some production is taken offline (but then replaced by new, more updated production). The National Bureau of Statistics specifically said "some regions intensified their efforts to clean up the environment with firms adjusting, halting or staggering production." Also of note was the 1.2 pt decline in export orders to basically flat line at 50.1, the 1.9 drop in new orders, the 1.8 fall in backlogs to just 45.6 and 2.4 pt fall in business expectations. There was a decline in price pressures too. Services weakened as well and that is not on purpose. This index was 54.3 vs 55.4 in September. New orders, employment, business expectations, backlogs and both prices paid and received all fell.

On the weaker than expected economic data, the Chinese 10 yr yield which was up 14 bps over the past 2 days fell by 3.4 bps. The Shanghai comp was unchanged while the H share index was down by .5%. Rates continue higher in Hong Kong as 3 month HIBOR was up another 2 bps to .96% and up about 20 bps over the past month. The Hang Seng was down by 1/3 of a percent. Do not forget that Hong Kong imports Federal Reserve monetary policy via the peg and one has to worry about the bubble that is the Hong Kong property market. In this paper back in August, Hong Kong was determined to be the most unaffordable housing market in the world.

"The opening crawl is the signature device of every numbered film of the Star Wars series, an American epicspace opera franchise created by George Lucas. It opens with the static blue text, "A long time ago in a galaxy far, far away....", followed by the Star Wars logo and the crawl text, which describes the backstory and context of the film. The visuals are accompanied by the "Main Title Theme", composed and conducted by John Williams.

The sequence has been featured in every live-action Star Wars film produced by Lucasfilm with the exception of Rogue One. Although it retains the basic elements, it has significantly evolved throughout the series. It is one of the most immediately recognizable elements of the franchise and has been frequently parodied.

Each film opens with the static blue text, "A long time ago in a galaxy far, far away....", followed by the Star Wars logo shrinking in front of a field of stars. Initially the logo's extremities are beyond the edge of the frame. While the logo is retreating, the "crawl" text begins, starting with the film's episode number and subtitle (with the exception of the original release of Star Wars - see below), and followed by a three-paragraph prologue to the film. The text scrolls up and away from the bottom of the screen towards a vanishing point above the top of the frame in a perspective projection. Each version of the opening crawl ends with a four-dot ellipsis, except for Return of the Jedi which has a three-dot ellipsis. When the text has nearly reached the vanishing point, it fades out, the camera tilts down (or, in the case of Episode II: Attack of the Clones, up), and the film begins."

--Star Wars Opening Crawl, Wikipedia

As Mel Brooks wrote in the opening crawl of his parody "Spaceballs": 

Once upon a valuation warp. . . .

In a market very, very, very, very far away, there lived a ruthless race of beings known as ... Momentum Investors.

Chapter Eleven

The evil leaders of momentum investing, having foolishly overestimated economic and profit growth and taken valuations to an extreme, have revised a secret plan to take every breath of reason from their reason- loving neighbor, Value Investing.

Today is Halloween. Unbeknownest to the consensus, but knownest to us, danger lurks in the stars above..

If you can read this, you don't need glasses.

But I am getting ahead of myself, so let me start from the beginning:

Episode I: THE PHANTOM MENACE

"Turmoil has engulfed Planet Investors, upending rational investing. The statutory corporate tax rates to outlying star systems are in dispute.

Hoping to resolve the matter with a tax-free repatriation of overseas cash, the White House has stopped all shipping to the small planet of Maine.

While the Congress of the Republic endlessly debates this alarming chain of events, the Supreme Tweeter has secretly dispatched two of his warriors (Mnuchin and Cohn), his guardians of low taxes for the nobles in the galaxy, to settle the conflict...."

Episode II: ATTACK OF THE CLONES

"There is unrest in the Galactic Senate. As several establishment Republicans have declared their intentions to leave the Republic.

This separatist movement, under the leadership of the mysterious Count Flake, has made it difficult for the limited number of warriors to maintain peace and order in the galaxy.

Senator Collins, the former Queen of Maine, is returning to the Galactic Senate to vote on the critical issue of creating an ARMY OF THE REPUBLIC to assist the overwhelmed Jedi...."

Episode III: REVENGE OF THE SITH

"Twitter War! The Republic is crumbling under attacks by the ruthless Sith Lord, Robert Mueller. There are heroes on both sides. Evil is everywhere.

In a stunning move, the fiendish aging droid leader, General Bernie Sanders (not to be confused with the Evil Colonel Sandurz), has swept into the Republic capital and kidnapped Chancellor McConnell, leader of the Galactic Senate.

As the Separatist Droid Army attempts to flee the besieged capital with their valuable hostage, two other Jedi Knights lead a desperate mission to rescue the captive Chancellor...."

Episode IV: A NEW HOPE

"It is a period of investor strife. Rebel spaceships, striking from a hidden base, (with price-earnings ratios eve- expanding and dips ever bought) have won their first victory against the evil Galactic Empire (despite the robotic and fake impressions coming out of Facebook and Twitter) .

During the battle, Rebel spies managed to steal secret plans to the Empire's ultimate weapon, the Death Star AMAZON, an armored space station with enough power to destroy an entire planet (and/or markets).

Pursued by the Empire's sinister agents, Princess Kamala races home aboard her starship (on the Left Coast), custodian of the stolen plans that can save the markets and instill value and common sense to the galaxy...."

Episode V: THE EMPIRE STRIKES BACK

"It is a dark time for the Rebellion. The Death Star Amazon has not yet been destroyed and Imperial troops have driven the Rebel forces from their hidden base and pursued them across the galaxy.

Evading the dreaded Imperial Starfleet (of Generals Kelly, H.R. McMaster and Mattis) , a group of freedom fighters led by Luke Booker has established a new secret base on the remote ice world of California.

The evil lord Paul Ryan, obsessed with finding young Booker, has dispatched thousands of remote probes (and quant strategies) into the far reaches of space, continuing to boost investor confidence and buoy the S&P Index...."

Episode VI: RETURN OF THE JEDI

"Luke Booker has returned to his home planet of Newark in an attempt to rescue his party from the clutches of the vile gangster Bannon the Hutt and from (unregulated and growing power/value) of the sinister FANGS.

Little does Luke know that the Galactic Empire has secretly begun construction on a new armored space station even more powerful than the first dreaded Death Star, AMAZON.

When completed, this ultimate weapon will spell certain doom for the small band of rebels and short sellers struggling to restore freedom and common sense to investors..."

Episode VII: THE FORCE AWAKENS 

"Luke Booker has vanished. In his absence, the sinister DARTH PUTIN has risen from the ashes of the Empire (and Facebook/Twitter) and will not rest until Booker, the last Jedi (and market complacency), have been destroyed.

With the support of the REPUBLIC, Princess Kamala Harris leads a brave RESISTANCE. She is desperate to find her brother Luke Booker and gain his help in restoring peace and justice and reasonable valuations to the galaxy.

Princess Kamala has sent her most daring pilot on a secret mission to PLANET DNC, where an old ally (Princess Elizabeth) has discovered a clue to Luke's whereabouts...."

Hopefully, to find out the market outcome, we may only have to wait for next month's (Dec. 15) release of Episode VIII, "The Last Jedi."

But the wait could be as long as Dec. 20, 2019, with the release of the still-untitled Episode IX.

"Your eyes can deceive you. Don't trust them."
- Obi-Wan Kenobi

It's scary out there -- after all, it's Halloween.

Trick or treat? 

Regardless of market outcomes, "May the Schwartz be with (all of) you."