Today the markets were influenced by the continued disorganization in the White House (the "Orange Swan" is still flying in the air), new allegations against the Supreme Court nominee and a breakdown in trade negotiations between the U.S. and China.

The Nasdaq rallied well from the gap lower in the morning as FA(A)NG -- Facebook FB , Amazon (AMZN) , Apple (AAPL) , Netflix (NFLX) and Alphabet (GOOGL) -- recovered. 

Bonds continued weak and I suspect another leg in yields lies ahead.

Oil spiked higher, gold rallied a tad.

Banks were weak despite the above weakness in fixed income -- perhaps a reflection of the lackluster third quarter earnings reports to be released in the middle of October or maybe its just some profit taking. (I am a buyer on report induced weakness).

Retail stocks were also downside leaders. I own Macys (M) (which is now below my buy level, though I haven't recently pulled the trigger) and Dillards (DDS) (which is $3-$4 above my buy point).

The shiny object in the marijuana patch continue to fall swiftly back to Earth - including Tilray (TLRY) and the other asteroids (which represent the silllines of a maturing and aging Bull Market).

Thanks for reading my Diary today -- I hope it the information was helpful.

Have a good evening.

Given the continued breakdown in bond prices I am adding to my iShares US Real Estate ETF  (IYR) short.

I have been buying Hartford Financial Services Group  (HIG) recently as it met my buy level.

This morning B. Riley FBR raised their price target (from $55 to $60) and increased their 2020E EPS by four percent (to $5.30) and raised their "sum of the parts" calculation.

This, to me, is an attractive and conservative holding with quite a favorable reward vs risk.

Added to DowDuPont (DWDP) at $68.15 -- in my buy zone.

A 10-year high in what a 2-year U.S. Treasury note yields was no attraction at all in the auction that just occurred. The yield of 2.829% was a touch above the when issued. The bid to cover of 2.44 was very weak, well below the one year average high of 2.81. That matches the worst bid to cover since December 2008. Also reflecting weak demand, dealers got stuck with 47% of the auction and that is the most since December 2016.

This was a crappy auction and we have to wonder why there is still punk demand for U.S. paper. It could be the massive supply that is turning away buyers. It could be rising expectations that the Fed will keep on going with its rate hikes even if further curve flattening is the result, especially after hearing from Fed. Governor Lael Brainard and New York Fed President John Williams recently. It could be rising inflation expectations in response to higher wages and now tariffs. The 2-year inflation breakeven today is up 3.5 bps to the most since July. This auction also follows a weak day in European sovereign bonds on the heels of Mario Draghi's inflation comments. Either way, the set up for higher rates continues and I think will surprise people on the upside.

Two Year Yield


Source: Peter Boockvar

I like the price action and the price level (reward vs. risk favorable) in Twitter -- and I am adding to my already large position.

While press is all abuzz about Rosenstein, the primary market influence remains the China tariffs and apparent cancellation of the trade talks.

Hong Kong was down the equivalent of 440 points in the Dow. Trade talks failure is likely 160 points of Dow selloff with the balance likely Rosenstein uncertainty.

Further effect would be if market believes whatever happens will be a key influence on the coming election.

Last week I wrote a negative column on trading shiny objects.

The action in the interim interval confirms my concerns.

I have added to my short exposure this morning in keeping with my opener.

I am shorting more (QQQ) and (SPY) , which are already sizable.

My good pal Peter Boockvar, chief investment officer at Bleakley Advisory Group, looks at China, monetary policy and overseas economic data this morning: 

Well I guess any hopes for a trade deal between the US and China won't happen anytime soon and is more likely a 2019 event which means those 10% taxes on the latest tranche on China that kicks in today will become 25% by year end. China's stock market was closed overnight so the only response seen was in the H shares in Hong Kong which closed lower by 1.8%. The Hang Seng was down by 1.6%, also impacted by rising HIBOR rates which rose to a 9 year high overnight. Copper is down about .5% after a big rally last week.

This week though we'll be shifting the conversation back to monetary policy with the Fed meeting Wednesday and as we enjoy the last week of excess liquidity on a combined basis from the Fed, ECB and the BoJ. Starting on October 1st, the Fed will shift QT to its max level of $50b per month, $600b annualized. The ECB takes QE down to a negligible amount of 15b per month from 30b (peaked at 80b last year). Throw in the reduced amount from the BoJ and the net goes to zero. It was running at $100b per month in Q4 2017. In my list of market challenges, the change in global monetary policy is number 1.

One other stat: as of last week the world has the least amount of negative yielding debt since July 2017 at about $6.5 trillion.

The euro heavy US dollar index continues to trade poorly, back near 94. The only currencies that it has traded well against has been most EM countries and the British pound. Many of the former have shot themselves in the financial foot and the pound weakness is for obvious reasons. The standout US economy relative to the rest of the world and a central bank that is well ahead of many others in terms of tightening hasn't done much to help the dollar. Why? I'll just guess that maybe the FX market has shifted its focus to the rising US debts and deficits which we know are moving sharply higher. Meanwhile, the net spec short position is in place for a 6th straight week in gold, the longest stretch since the end of 2001 when gold sat at $280. It finished 2002 24% higher.

To help finance these rising US deficits, the Treasury will auction off 2s, 5s and 7s at record level sizes with yields at key levels, particularly the 10 yr at 3.08%, just below the 3.11% high so far this year. Yields are up today in Europe but unchanged in Japan after Friday's spike higher in long term yields.

German reported its IFO business confidence figure for September and which fell to 103.7 from 103.9 but that was better than the expectation of a drop to 103.2. Both the Current Assessment and Expectation components were slightly lower m/o/m but better than forecasted. August was the only month this year that has seen a m/o/m increase in this figure. The IFO said simply, "Despite growing uncertainty, the German economy remains robust." Germany's economy grew at a solid pace in 2017 at an average rate of 2.4% y/o/y. In the first two quarters this year that has slowed to 2.1% so far on average.

The other data point of note in Europe was the CBI UK industrial orders figure which fell to -1 from +7. The estimate was +4. The CBI said "While manufacturing order books remain strong and output is still growing, Brexit uncertainty continues to cloud the outlook. Heightened fears of a 'no deal' Brexit scenario have prompted some firms to move publicly from contingency planning to action." This number is rarely market moving and the pound is getting back some of what it lost Friday after Theresa May spoke.

"Tops are a process, bottoms are an event."

--Wall Street adage

* The search of value and comparing it to risk taken is, at its core, the marriage of a contrarian streak and a calculator

* Investors are not being compensated for taking risk as the market's margin of safety has shrunk to microscopic levels

Back in July I wrote about the possibility of a market top; that warning "bears" repeating in an updated form and version.

In that column I wrote that tops are a process and bottoms are an event, at least most of the time in the stock market. If you looked at an ice cream cone's profile, the top is generally rounded and the bottom V-shaped. That is how tops and bottoms often look in the stock market, and I believe the market is forming such a top now.

Consider the following fundamentally based issues and concerns:

* Downside Risk Dwarfs Upside Reward. I base my expected market view on the probabilities associated with five separate (from pessimistic to optimistic) projected outcomes that seize on a forecast of economic and corporate profit growth, inflation, interest rates and valuation. In the past I have suggested that this exercise is a guide and is not intended to be a precise calculation, especially in uncertain times. The averages recently have surpassed my expectations of a top in the trading range by about 120 S&P points, or about 4%. With the S&P 500 Index at 2923 at Friday's close we are significantly above my calculation of intrinsic value.

* Global Growth Is Less Synchronized . The trajectory of worldwide growth is becoming more ambiguous. I have chronicled extensively the erosion in soft and hard high-frequency data in the U.S., Europe, China and elsewhere, so I won't clutter this missive with too many charts. But needless to say (and as shown by these charts here and here), with economic surprises moderating from a year ago and in the case of Europe falling to two-year lows, we are likely at "Peak Global Growth" in the current quarter. (The data are even worse in South Korea, Taiwan, Indonesia and Thailand.)

* FAANG's Dominance Represents an Ever-Present Risk. I have warned that earnings disappointments in the FANG stocks represents an immediate risk to this league-leading sector, and to the markets FANG has become GA! Since I initially wrote this article investors have been clearly rotating out of FANG, reflecting misses in important metrics (subs) and some lower broader guidance ahead. As well, the existential threat of increased regulation and antitrust hostility that I warned about nearly a year ago are now on the front burner.

* Market Structure Is One-Sided and Worrisome. Machines and algos rule the day; they, too, are momentum-based on the same side of the boat. The reality that "buyers live higher and sellers live lower" represents the potentially dangerous condition that investors face in a market dominated by passive investors -- a threat I have focused on since early 2017.

* Higher Interest Rates Not Only Produce a More Attractive Risk-Free Rate of Return, They Also Make It Hard for the Private and Public Sectors to Service Debt. And over the last 2 1/2 months short-term interest rates have made a decisive move higher. This also serves to reduce the value of stocks as every dividend discount model incorporates a discount factor based on the current level of interest rates.

* Trade Tensions With China Are Intensifying and Mr. Market Is Improperly Looking Past Marginal Risks. From Goldman Sachs' David Kostin (h/t Zero Hedge). Remember, as previously discussed, the dispute has buoyed second- and third-quarter U.S. GDP. The benefit soon will be over and a third-quarter economic cliff is possible.

* Any Semblance of Fiscal Responsibility Has Been Thrown Out the Window by Both Political Parties. This has very adverse ramifications , which shortly may be discounted in lower stock prices, especially as it relates to the servicing of debt -- a subject I have written about often. Not only are our legislators acting irresponsibly and recklessly, but the Republican Party is now considering more permanent tax cuts. Should economic growth moderate, tax receipts diminish and undisciplined spending continue, stock valuations will likely continue to contract.

* Peak Buybacks. Buybacks continue apace, but look who's selling. As Grandma Koufax used to say, "Dougie, that's quite a racket!" If I am correct about the peaking in corporate profits, higher interest rates and slowing economic growth, we shortly will have another rate of change -- negative in buybacks.

* China, Europe and the Emerging Market Economic Data All Signal a Slowdown. It's in the early innings of such a slowdown based on any real-time analysis of the economic data. The rate-of-change slowdown on a trending basis is as clear as day. A rising U.S. dollar and weakening emerging-market economic growth sow the seeds of a possible U.S. dollar funding crisis. This slowdown has not gone unnoticed by investors, as emerging markets have declined absolutely over the summer, materially lagging the strength in the S&P index and the Nasdaq.

* The Orange Swan Has Returned. Again, hastily crafted policy delivered by Twitter that conflates politics is dangerous in a flat and networked world. The return of an untethered Orange Swan is market-unfriendly... brace yourselves as the Supreme Tweeter will likely "Make Economic Uncertainty and Market Volatility Great Again" (#MUVGA) This weekend's allegations against the Supreme Court nominee likely raises the risks of more volatility and may jeopardize some elements of the administration's agenda.

* We Are Moving Closer to the November Elections, With Their Uncertainty of Outcome and the Potential For a "Blue Wave." The current sub-40% approval rating (which is trending lower) for the president is historically a losing proposition for the incumbent. We also may be moving toward some conclusion of the Mueller investigation, creating even more uncertainty.

Bottom Line

"Confronted with a challenge to distill the secret of sound investment into three words, we venture the motto, Margin of Safety."

--Benjamin Graham

The search for value and comparing it to risk taken is, at its core, the marriage of a contrarian streak and a calculator.

While it is important to gauge the possibility that the market may be making an important top, it is even more important to distill, based on reasonable fundamental input, what the market's reward versus risk is. This calculus trumps everything else that I do in determining market value.

On that front, I continue to believe that downside risk dwarfs upside reward.

Moreover, there is a growing fundamental and technical list of signposts -- many highlighted this morning -- that the market is starting to look like it is in the process of making a possible, and important, top.

As Columbia University's Joel Greenblatt wrote:

"There's a virtuous cycle when people have to defend challenges to their ideas. Any gaps in thinking or analysis become clear pretty quickly when smart people ask good, logical questions. You can't be a good value investor without being an independent thinker - you're seeing valuations that the market is not appreciating. But it's critical that you understand why the market isn't seeing the value you do. The back and forth that goes on in the investment process helps you get at that."

I do a lot of back and forth every day in my Diary as I try to communicate my own views, which today seem most contrarian to the consensus and to those who worship at the altar of price momentum!

Comcast (CMCSA) has outbid Twenty-First Century Fox (FOXA) in an auction for SKY over the weekend.
CMCSA closed at $37.90 on Friday and I expect Comcast's shares to slide by 4% to 5% today.
I would be a $34.50 buyer of Comcast, which was placed on my Best Ideas List at about $32 months ago.

Speaking of German yields, here is an important observation:

"Dollar Break With Yields Prompts Concern U.S. Has Funding Issue"