"Just one more thing."
- Lt. Columbo
This was one of the few days in the past couple of weeks in which:* The indices closed weakly and without a rush higher in the last hour* SPY and QQQ closed below their opening prices

* People are doggone mad that Burns (the dachshund) didn't win Best In Show at The Westminster Dog Show last night* My market view this week has been gone with the dogs

An overbought market failed to reverse today, as I hoped it would.
What is worse, speaking of dogs, was the Best In Show judging at The Westminster Dog Show last evening.
With my long haired dachshunds, Ollie and Bella, looking on and rooting for fellow doxie Burns, we were quite disappointed about the verdict.

Bella and Ollie
As our Milo watched fellow bulldog Rudy (in amazement)! Well, its just a dog eat dog world I guess.
Thanks for reading and enjoy your evening.

Below is a chart of the CBOE total equity P/C ratio - but as a bar chart not a last sale. Currently we are at the high of the day, and at a low-ish number, but nothing crazy.

That said, I have circled the times it did something like we've done today - where it started really low (and it was below 60 for the first 90 minutes), and then rallied. This has tended to be a stopping point for the market, if it was overbought:


Source: The Little Chief

* Not even America 


"No man is an island entire of itself; every man is a piece of the continent, a part of the main;

if a clod be washed a way by the sea, Europe is the less, as well as if a promontory were,

as well  as any manner of thy friends or of thine own were; any man's death diminishes me,

because I am involved in mankind.

And therefore never send to know for whom the bell tolls; it tolls for thee. "

- John Donne
I simply don't understand the near universal notion that the U.S. economy will be immune to a likely recession in Europe and a broadly weaker China.
Our world has never been more flat and interconnected and, non U.S. geographies deliver a contribution of over 40% to the profits of the S&P Index constituents.
China's growth is slowing measurably. As mentioned yesterday, China is the largest exporter to the U.S. and, at the same time, the country is the second biggest importer from the U.S. And, while it represents around 14% of world GDP (at $13 trillion GDP vs. $20 trillion GDP in the U.S.) it is responsible for almost 35% of global growth.
Meanwhile, Europe's growth is foundering and beginning to look recessionary-like. Consider the worsening data in Germany, which represents one third the size of China's GDP and about one fifth the size of our GDP:

Bottom Line

In economic terms, no country is an island unto itself.
When Europe and China cough, so will we.

If you are trading developing and emerging markets here is a good chart from Steve Cortes:

From Sir Arthur:

Will be going radio silent at 1:30 - medical stuff.

There is an old Wall Street saw along the lines that "The market will hurt the largest number of people possible."

Does anyone know the correct wording and, if there was a specific author?

With the exception of my (SPY) and (QQQ) shorts, I have made no trades today.

Break in.

Morgan Stanley (MS) reports a passive stake in Twitter (TWTR) of 5.6%.

"Now don't be sad'Cause two out of three ain't bad"
- Meatloaf, Two Out of Three Ain't Bad
Thus far Twitter (TWTR) has been a good pickup in the last few days.
Macy's (M) not so much.

* Reward v. risk is unattractive
With my shorts (moving from small-sized to medium-sized) in (SPY) ($275.50) and QQQ ($171.53) just now - I am back to market neutral.
Given my views, expressed as recently as my opening missive, I am uncomfortable even with my longs being paired equally with my shorts.
I am watching the price action and will most definitely respond by shorting if I see any weakness. (Taking my cue from Rev Shark.)
Further complicating my strategy may be the upcoming option expiration which could provide a lot of volatility.

From my pal and charter RMP Golf Tournament and Conference member Dave:

Eurodollarguy

SPY now unch from 11/30, but the 10 year was trading near 3.0% on 11/30! Valuations matter, and in spite of QT the long end of the credit market refuses to challenge the stock market. Lots of talk yesterday about an earnings recession in '19, well, if it happens we'll look back at this divergence between stocks and bonds and with perfect rear view trading know that the credit market was 'right'. But as for right now I'd say the much touted slowdown that spooked everybody in December is nowhere to be found in the data or earnings reports.

* I would continue to avoid Disney
I have received several emails from subscribers over the last week who are wondering if they should bottom fish in Disney (DIS) .
The share price performance has been conspicuously weak since the last EPS report - when the shares briefly rallied to over $115 (they currently stand at $109.60).
I continue to pass on the name.Here is my thesis.

The January CPI saw no change at the headline level and a +0.2% core rate of increase which brings the year over year increases to +1.6% and +2.2%, respectively. This is in line with expectations. Another decline in oil prices kept a lid on the headline figure. Food prices were up +0.2% month over month and +1.6% year over year.

In what continues to be the case, services inflation ex-energy remains persistent as it grew by +0.2% (month over month) and +2.8% (year over year).

Please stop telling us there is no inflation. Rents and medical care continue to mostly drive this. Rent of Primary Residence was higher by +0.3% (month over month) and +3.4% (year over year). OER, the understated measure of housing inflation, was also up +0.3% and +3.2%, respectively.  A +2.4% year over year increase in medical care services was partially offset by a decline in medical care commodities and drugs, both prescription and nonprescription. Overall, medical care costs rose +0.2% (month over month) and +1.9% (year over year).

Other important price increases for things that are important to the average family, tuition and childcare costs, rose +2.8%. College tuition and fees were higher by +2.9%, elementary and high school tuition was up by +4.4%. For those sports fans (my RMP pals), ticket prices jumped by +7% year over year. For those that drive, insurance prices rose +3.4%. In direct response to tariffs, laundry equipment prices were up +7.2% year over year. On the other hand, if you fly a lot airline fares fell by -2.8% year over year.

Of note in January, we finally saw an increase in goods prices ex-food and fuel. They jumped by +0.4% month over month over month and actually brings the year over year gain to +0.3%. Higher prices for apparel was the main reason as they jumped by +1.1%. New and used car prices were up +0.2% and +0.1% month over month, respectively. Tariffs and high transportation costs are lending support to higher core goods prices.

Bottom line, the core rate of inflation is now up +0.2% a month for five straight months. The Fed shouldn't breathe easy just yet. If you watch the PCE instead, remember the biggest component, medical care, is mostly price fixed.

Inflation expectations in the TIPS market jumped 2 bps immediately after the in line print. The 10 yr breakeven is at 1.86%, one bp from a two month high.

Peter Boockvar shows yesterday's intraday chart of 10 year breakevens: 

* The markets may again be detaching from the real economy
* When have we seen this before? Well, in September, 2018 we did!
* Take the blinkers or shadow rolls off and consider raising cash now in anticipation of possible market weakness

"Worldwide economic growth is now clearly on the descent in rate-of-change terms. China's growth is appreciably less than reported publicly and Europe appears to be headed toward a recession. Meanwhile, our domestic economy is slowing and probably will contribute to an earnings recession in 2019-2020. "
- Kass Diary, A Dovish Fed and a Slowing Global Economy Enter a Tug of War

And as Lisa Abramowicz remarks, the EU is the weakest link in the global economy:

This morning, Danielle DiMartino Booth cautions: 

"Intriguingly, the current cycle is setting up the same way. Nonfarm hires peaked in October 2018, three months after the quits-layoffs spread peaked in July 2018. Obviously, the first-print decline hasn't been dropped onto investors yet. But we would argue this shell will pass through the bomb-bay doors in the current calendar year.

Are financial markets prepped for a decline in payroll employment? Clearly that's not the case with NFP posting back-to-back initial prints in December and January north of 300,000 for the first time in 19 years.

Rewind to September 7, 2007. The market's performance the day the August 2007 jobs report hit the wires conveyed the magnitude of the shock with the S&P 500 closing down 1.7%, the Dow losing 1.9%, 2-year Treasury yields falling 18 basis points (bps) and the 10-year Treasury yield by 13 bps - a bull steepening of the curve. The risk-off tone generated safe haven flows into the yen (up 1.5%) and gold (up 0.7%).

The thing is, cycle tops in the two JOLTS metrics of nonfarm hires and the quits-layoffs spread were well entrenched by then. Their signals had already raised the probability for a negative NFP surprise. It's time to put these labor indicators on your business-cycle doomsday preppers' list of must haves right next to water, food, fire, light and ammo."

How to Doomsday Prep for a Decline in Nonfarm Payrolls

VIPs

• Nonfarm payroll employment (NFP) is the residual between labor flows that perpetually rotate in and out of the private and public sectors; the JOLTS data, released with a lag, proxies NFP's initial print by laying bare the difference between nonfarm hires and nonfarm separations
• The JOLTS hires-separations spread dictates NFP; it hit 362,000 in December, a four-year high that corroborates that month's initial print and suggests January's spread will be in the vicinity of last month's initial NFP print of 304,000
• JOLTS nonfarm hires provide an early indication for the first NFP negative-print of a cycle as expansion turns into contraction; that said, it's the JOLTS quits-layoff spread that signals a turn in the labor market with the longest lead time
• The JOLTS quits-layoff spread separates quitters, who leave their jobs voluntarily, from layoffs, which are by definition involuntary; the current cycle echoes the last as nonfarm hires peaked in October 2018, three months after the quits-layoff spread peaked last July
• The market is nowhere near prepared for a negative NFP print, especially in the wake of December and January's back-to-back initial prints north of 300,000; if the cycle gleaned from JOLTS holds, the first negative print will indeed occur this calendar year

Bottom Line

* Market vision is often blurred over the short term

I ended yesterday's missive in the following manner:

"The apparent resolution of a government shutdown is a sideshow. The most important factors that threaten our markets are slowing in global economic growth and the force of the rally that started on Christmas Eve that has taken markets to well above "fair market value" and has delivered a market that now has large downside risk relative to upside reward."

We know from experience and from Benjamin Graham and from The Oracle of Omaha that "over the short run the market is a voting machine but over the long run the market is a weighing machine."

When I was in the harness racing business we used shadow rolls (attached to the noseband of the horse's bridle) on our horses so they wouldn't be spooked by the undulations of the track. Like blinkers used in thoroughbreds, they restricted the horse' vision and helped them to concentrate on what was in front of them, rather than objects on the ground (such as shadows).

Take those shadow rolls and blinkers off now and view the growing evidence that global growth is slowing - at a time in which monetary tools are limited in scope.

Back in late January and again in late September (of last year) I warned about the schism between financial asset prices and the developing unfavorable trends in the real economy.

I am warning again.

I would consider capitalizing on the collective optimism over the last 1-2 weeks by considering the act of raising more cash and reducing invested positions.

In case you missed this late post yesterday:

More Twitter

"Just one last thing."

-- Lt. Columbo

We discussed Twitter (TWTR) a bit in my Diary and in the Comments Section.

BTIG raises their Twitter price target to $42 after the close:

"Having last updated our Twitter model and price target in early 2018 (link) when the stock was at $24.35, we felt it was time to lay out revised forecasts that tie to management's new mDAU disclosure and year-end 2018 earnings. Worth noting, when we moved our price target to $30 last year, we forecasted $2.8 billion of 2018 revenue and Twitter ended up exceeding $3 billion. We are now raising our Twitter one-year price target to $42 (based on 20x estimated 2020 EBITDA, 16x adjusted 2020E EBITDA).

The key driver of our confidence in Twitter's upside over the coming year is based on its product offering continuing to get better and better. Twitter is iterating the product faster than at any time in its history, making the service more useful to users. Surfacing the right tweet at the right time and making events/information that you want to find easier to discover via the main feed, explore tab and/or search leads users to come back more often, driving DAUs. More daily users who are increasingly engaged around content that interests them leads to... "

Peter Boockvar writes that charm, sentiment and lower rates didn't help:I think it's great that Chinese President Xi will meet with Lighthizer and Mnuchin on Friday (according to the South China Morning Post) as I'm sure he wouldn't be doing this if the two sides were far apart on a deal. Assuming we get one of some sort, the next question then is what happens to the tariffs already in place. Will they immediately come off or will they only gradually get reduced depending on China's adherence to the terms of any deal. I and most business people of course want them gone asap. With respect to the markets expectations, it seems pretty clear that most everyone expects some resolution short term.

According to Investors Intelligence, Bulls continue to get close to 50, rising to 49.5 w/o/w, up .9 pts from last week. A few weeks ago II said "optimism doesn't become a concern until it at least exceeds 50%." Bears too rose by .9 pts to 21.5% and thus keeping the spread between the two at 28. Those expecting a Correction fell to a 4 month low. The CNN Fear/Greed index yesterday closed at 67 from 62 Monday and 30 one month ago. Bottom line, sentiment has clearly shifted as it always chases price.

Unfortunately, the drop in mortgage rates doesn't seem to be bringing back home buyers. The MBA said for the week ended Feb 8th, the average 30 yr mortgage rate fell 4 bps w/o/w to 4.65%, the lowest in a year. But, purchases applications fell 6.1% w/o/w and are down for 4 straight weeks. Versus last year, they are weaker by 5.3% and the index is now at the lowest level since mid November if we don't include the holiday influenced last print of 2018. Refi's were unchanged but still down 17% y/o/y. Bottom line, this purchase data was pretty disappointing in light of falling mortgage rates.

The producer price index in Japan rose just .6% y/o/y in January, well below the 1% estimate and fell by .6% m/o/m, down for a 3rd month. The drop in commodity prices have led the way. The number is never market moving as our eyes are trained on CPI.

The 10 yr JGB yield is crawling back towards zero and ended the day at -.006%. BoJ Governor Kuroda was put on the defensive for not succeeding in raising the cost of living of Japanese citizens. An opposition party member actually called for his resignation because of it. In response and speaking in parliament, Kuroda said "It is my duty to continue persistently easing policy" somehow believing he'll achieve a different result. He admitted that his policy is impairing the profitability of its banks but that hasn't yet mattered to policy. The monetary madness in Japan continues.

The Swedish Riksbank, another that has experimented with negative interest rates, remains committed to get out from underneath them. They kept rates unchanged today at -.25% as expected after hiking by 25 bps in December but said they want to get back to zero "during the 2nd half of 2019, provided that the economic outlook and inflation prospects are as expected." They also said they will stop intervening in the FX market. Swedish bonds did sell off in response to the comments and the Krona rallied. We'll of course see if the ECB follows this summer.

The UK January CPI was up by 1.8% y/o/y, one tenth less than expected but the 1.9% rise in the core rate was as expected and unchanged with December. As stated here many times, the BoE has been left completely frozen by Brexit while the average Brit has had to deal with higher inflation and a weak pound. Wholesale prices came in less than expected but output charges are still running below the input price gains.

Reconciling all the country industrial production figures that we've seen over the past few weeks with about all of them weak, Eurozone IP in December was down by .9% m/o/m, 5 tenths worse than expected and the y/o/y drop of 4.2% was the weakest since 2009. Because a decline of substance was widely expected, the euro is little changed. Recession talk for the region will continue.

Here is a link to my Fox Business appearance from yesterday afternoon.