The U.S. Treasury is designating China as a currency manipulator.
This should obviously have a negative impact on futures.

Let's end the day with a tweet from yours truly:

Let me end the day by quoting myself from my opening missive (regarding the risks associated with a changing market structure), "Risk Happens Fast: This Past Week and Weekend Uncovers and Underscores Old Risks and New Concerns":The decade-long transition from active to passive investment management holds some important risks -- as the most popular products and strategies worship at the altar of price momentum means that too many live on the same side of the bullish boat. This means that when the primary market trend turns, there will be an inordinate amount of selling and few potential buyers.

Despite a plethora of price target upgrades, Apple (AAPL) is now down by -$30 from its post earnings euphoria.

The drop in high yield bond prices today should be concerning.

iShares iBoxx $ High Yield Corporate Bond ETF (HYG) is -$1.

I have reduced from very large-sized to medium-sized my investment management shorts. (BEN) at $30.50 and (TROW) at $105.80.
I still like the short concept, but reward vs. risk has deteriorated - necessitating downsizing the positions.

As we approach 3 pm, breadth is nearly 10-1 negative.

This time -- and with the benefit of hindsight -- market participants have been reactionary when they should have been anticipatory a few weeks ago.
I feel, in listening to the "talking heads" today, that they are likedeer caught in the headlights -- they are unable to admit the mistakes of ignoring reward vs. risk (and the fundamentals) and are now fashioning a narrative within the context of their bullish leanings and worshiping of the previous market advance higher...
The machine selling throughout the day endorses what Lee Cooperman said last week on CNBC: "Machines know everything about price but nothing about value."

I just paid $40.20 for a very small position in Twitter (TWTR) (after having sold my position 5% higher recently).

I am a scale buyer now.

As we approach the 2 pm hour - stocks trade to new lows.

Sellers have completely overwhelmed any buyers.

August Strategy Picture Book

A generational change in the way Fed views inflation suggests a more aggressive Fed. For the better part of the last 40 years, the Fed has been worried about a potential inflation-driven rise in rates because the sheer size of the total US debt would make the interest less affordable and lead to economic catastrophe. Now, the fear of higher inflation has shifted to the fear of following Japan and Europe down the rabbit hole of negative interest rates driven by continually declining inflation expectations and interest rates. The Fed's stated goal is for an average of 2% core PCE inflation, yet despite years of historically low interest rates and massive fiscal stimulus from the 2017 tax legislation, the best they got was a five-year average of 1.6% in the core PCE. That should scare any central banker hoping for higher inflation expectations.

The Fed needs to get ahead of the market rather than behind it. A horrible FOMC press conference last week, rapidly rising trade tensions, and poor overseas economic data have caused all areas of the US Treasury Yield Curve to trade below the new lower bound of 2% in the Fed Funds target range. The market is again screaming the Fed's "insurance" cut is not enough, which was true before Friday's ramp in the trade war with China. This is all about inflation expectations as the Fed's own gauge of forward five-year inflation breakevens is below the lower bound of the new Fed Funds target range. Fed Chair Jerome Powell and several various Fed presidents have suggested they need to act more aggressively to turn inflation expectations back up, and the best way in our view to do that is to lead it higher with more offensive monetary policy. Expect it sooner rather than later.

A correction is a great time to re-evaluate our core fundamental thesis. In mid-July, we thought it was Time for a pullback, and the acceleration of the trade war with China, even slower global growth, political infighting, and a possibility of a hard Brexit offered more than enough spark for the fire. We often say corrections only feel "natural, normal, and healthy" until you actually get one, and the current drawdown is no different. It is times like this where we must evaluate if the positive influences that drive our core thesis still exist - and they are.

Our positive core thesis remains in place - don't fight the Fed (and market rates). A generational change in Fed thinking coupled with declining inflation expectations should allow the Fed to catch up to market expectations by more aggressively cutting rates. In addition, lower market rates and a still-positive 2-/10-year US Treasury Yield Curve suggest growth should reaccelerate as we approach 2020. In our view, this sets the stage for a move toward our 2020 S&P 500 (SPX) target of 3,350 based on SPX Operating EPS of $176 and a 19x multiple, which assumes an expansion back to the level of 3Q/16-3Q/18.

I am taking (KO) , (WMT) and (GM) off of my Best Ideas List (short) as I have no positions in these equities and I am no longer interested in shorting these names.

A "Perfect Storm" led to the weakness in the last 5-7 trading days.

Here is my partial list:

* China tariffs

* Weak economic growth

* Hong Kong's political discord

* Mass shootings

* Political paralysis

* Strong US dollar

* Brexit

* Expensive stocks

* Broken monetary and fiscal policies

* U.S.-Turkey relations broken

* Earnings slowing

* A risky market structure

* No political or business thought leadership

As these become "accepted" and the unjustified bull market in complacency is eradicated - the potential for some stabilization now exists.

To be clear, I am now out of  (DIS) and (GM) shorts.
I have added to (CGC) at $31/share.

I expect, after the magnitude of the recent market downturn, that we are likely entering a better (two-way) trading environment over the balance of the summer.
So start to look for more trading ideas from my Diary.

I am planning on updating my "Levels" post as I have made a lot of changes in buy, sell and short levels in light of weakening economic growth and lower interest rates.

The all important July ISM services index weakened to 53.7 from 55.1, and that was below expectations of 55.5. It's also the weakest since August 2016. New orders fell to 54.1 from 55.8, also the lowest since August 2016. Backlogs fell 2.5 pts to 53.5 while inventories dropped 5 pts to 50. Export orders, where only some service companies report, was down by 2 pts to 53.5. Employment was the one bright spot, rising 1.2 pts to 56.2 but only after falling by 3.1 pts in the month prior. The six month average is 55.7. Prices paid was down by 2.4 pts to 56.5 after rising by 3.5 pts in June. 

Of the 18 industries surveyed, 13 saw growth vs. 16 in June. There were five industries that saw contraction vs. just one in June. With new orders, only 11 industries saw growth vs. 14 in the month prior. 

The ISM said what we'd expect: "The non manufacturing sector's rate of growth continued to cool off. Respondents indicated ongoing concerns related to tariffs and employment resources. Comments remained mixed about business conditions and the overall economy."

As Danielle DiMartino Booth and I have suggested over the last few months, the weakness in manufacturing is now showing up in softness in services and thus the entire U.S. economy is getting impacted by the slowdown (along with construction and mining). With respect to the next leg to watch, hiring, we've already seen the initial employer response, cutting worker hours in Friday's payroll report. Hopefully that will be enough because if it's not, layoffs come next.

Here are two related charts provided by Peter Boockvar: 

ISM SERVICES

NEW ORDERS

I am calling an audible and covering the balance of my (SPY) ($286.80) and (QQQ) $(182.45) shorts!
I view this sort of convulsive and "forced" selling as an opportunity to cover into a deepening oversold market.
As well, reward vs. risk has materially changed in only a week's time.
But, make no mistake about it - I want to reestablish my Index shorts on a rally (which could occur at any time).
This move takes me back to a slightly net long exposure!

Goolge (LONG) is My Trade of The Week as I Make MOre Moves at THe OPening

I am making some more consequential moves as the market opens - moving, in aggregate my exposure from large short to between small and medium sized short:

* Moved from medium to large sized in several FANG stocks
* Added to Amazon (AMZN) at $1769 - now large sized
* Added to Aplhabet (GOOGL) at $1171 - now large sized
* Added to Facebook FB at $185.20 - now large sized


Alphabet is my Trade of the Week!

In pre-market trading I have:
* Covered my Apple (AAPL) short rental at $198
* Covered half of my very large (SPY) (at $288.10) and (QQQ) ( at $183.40) shorts - moving to medium-sized.
As is typical of the approach I am trading around positions - with the thoughts that I will be able to increase my Index shorts back on a rally.

* To date the accumulated impact of the risks discussed this morning have been ignored as the bull market in complacency continued
* Based on last week's market decline and the further drop in S&P futures this morning it is no longer the case
* As I wrote last week "The Stock Market Is Uniquely Vulnerable Now". 

Recent events underscore several of my themes of concern over the last year.

Several of these themes are interrelated and some of them are not typically considered or discussed when providing market commentary.

Let's briefly explore five of them this morning:


* Our Markets and Citizens Are Not as Safe As We Presume: El Paso and Dayton are as real as it gets. The events remind us, once again that we, as citizens and investors, are not as safe as the market suggests. Hatred and fear is engulfing the U.S. and the world. In the past leaders like President Nixon said these ugly things in private (though it was revealed in the "tapes.") But today, in a seeming legitimization of hate and absence of moral authority, leaders are stoking up this hate/division in loud and explicit terms - enthralled with the rapture of their crowds. There are too many signposts to suggest otherwise - as unity has been splintered as fans are flamed.
* The Lack of Coordination Between The World's Powers: Already facing demographic and productivity threats to aggregate economic growth, the rift between the U.S. and China is symptomatic of countries' new found nationalism - "looking within" despite the increasingly interconnected world. This raises continued global economic growth concerns - especially in the face of growing recognition that the aforementioned rift will likely be long lived.
* The Still Growing Schism Between The Haves and Have Nots: As noted in the quote above, the wealth and income inequality (that has grown over the last decade) will likely have broad political, economic and market ramifications. Most of the investment and other consequences are not positive.
* A Changing Market Structure: The decade long transition from active to passive investment management holds some important risks - as the most popular products and strategies worship at the altar of price momentum means that too many live on the same side of the bullish boat. This means that when the primary market trend turns there will be an inordinate amount of selling and few potential buyers. (At this writing S&P futures are nearly 40 handles lower).
* Unstable And Poorly Thought Out Policy: Hastily crafted policy, whether its fiscal policy that fails to "trickle down," currency policy or trade policy (or others), not well thought out and written on a napkin and delivered by tweet is not an acceptable strategy in a complicated and flat world. Yet the Administration is guilty on all counts. Nor is interference between the Executive Branch and the Federal Reserve well advised.

Some of the above concerns are related.

Many of these concerns I have expressed repeatedly in my Diary - and are on top of my broader economic and corporate profit concerns which form the basis for my ursine market view.

They are somewhat more subtle but no less powerful an influence.

Think about it.

I remain large net short in exposure to the markets.

The downturn in the economic data that I have addressed for weeks is supported by Danielle DiMartino Booth this morning:

• Three revisions to nonfarm payrolls in either direction mark a turning point which occurred as of May's NFP release; July's data lengthened the trend to five months and we now have three months of double-negative-revisions summing to 127,000, the most since 2009
• Since turning negative in February, ASA's Staffing Index's decline has accelerated to -4%; employers are also cutting hours as the average workweek fell to 34.3 hours, a near two-year low, reflected in weekly earnings growth slowing to 2.6% from January's 4.0% rate
• While the spike in Challenger transportation layoffs will take time to be reflected in the payroll data, July's transportation and warehouse payrolls were nonetheless flat, a significant departure from the 12,000 in monthly gains averaged over the last twelve months

Does your double vision get the best of you? No, we don't refer to diplopia, a condition in which you see two separate or overlapping images of the same object when you should only be seeing one. We refer to something even more obscure, the fabled record album by Foreigner that was released 41 years ago this summer. We highly recommend you download the whole Double Vision album. You might have a "Blue Morning, Blue Day." Or, given Mother Nature's current mood, you could well feel "Hot Blooded" just listening to one track after another. But it was the single "Double Vision," which topped the charts at No. 2, that popped into our minds when Friday's payroll report was released. The one line in particular was, "When it gets through to me, it's always new to me."

The newest of the new came with the news that the number of gainfully employed Americans hit 163.4 million. That record absolute high returned the labor force participation rate (LFPR) to its March level of 63%. Can you imagine how many more would be working if we got back to 2007's 66%? A separate reflection of the rise in the LFPR was the underemployment rate, which hit 7.0%, the lowest level since December 2000. More is definitely more when viewed through this prism, which we appreciate.

But these much-adored stats were not what had us humming Double Vision. In QI's Third Quarter Outlook, we paid homage to mentor Harvey Rosenblum whose wise guidance taught this cycle chaser the importance of revisions. Three revisions to nonfarm payrolls in either direction mark a turning point. We arrived at this juncture as of April, which we flagged.

Upon the release of the July data, it was noted that this trend has lengthened to a five-month stretch. But that wasn't what set off a bright lightbulb above QI's Dr. Gates' head. His Eureka moment came with a "WAIT! We've had three back-to-back months of Double Revisions!" The Pavlovian reply: "Yeah, like that song!"

Some rat-a-tat-tat on the Bloomberg terminal later, the tally for the last three months' double negative revisions summed to 127,000, the most we've seen since 2009. With all due deference to Jay Powell, it would be a lot easier to empathize with his view that the only economic stresses are outside our borders if that year would stop coming up with respect to domestic economic data.

In the spirit of distilling the effects of seasonal adjustment, we take our hat off to QI friend Phlippa Dunne of TLR Analytics. As she noted of the 41,000 in downward revisions to May and June's numbers, "Before seasonal adjustment, the two months together were revised down by 65,000, so the revisions were real and not a seasonal artifact."

The accelerating downtrend in temporary employment is also no artifact. Having first turned negative in February, the ASA Staffing Index has since fallen to a -4.0% year-on-year rate of contraction. This goes hand in hand with what we drill home constantly, that hours precede bodies. To that end, July's average workweek fell to 34.3 hours, a near two-year low. Employers are holding the line by cutting hours which explains average weekly earnings slowing further to a 2.6% rate, well off January's 4.0% level.

We completely understand employers' hesitancy. It's been an epic struggle to secure skilled labor in the current expansion. That said, if you're not a current or former Fed official, you'd have to be blind to not see the slowing in the economy. As demand wanes and higher costs refuse to abate, employers are slowly last-resorting to headcount reduction which helps the glacial four-month rise in the unemployment rate from 3.585% in April to 3.712% in July.

Still, we get the sense that workers are waking to the need for their employers to cut costs - "Could my job be on the line?" And this is before tariff uncertainty ratcheted up another notch. As Dunne observed, "The number of job leavers among the unemployed fell, which suggests a weakening in the quit rate, which isn't what you'd expect in an apparently strong market."

As for our analysis suggesting we could see job losses in the transportation and warehouse sector in July, that figure came in unchanged which is still a far throw from the 12,000 in monthly gains average from the last 12 months. This is still a meaningful development given this sector has added 370,000 jobs over the last two years. Of course, the spike in Challenger transportation layoffs will take time to manifest in the lagged payrolls data. To that, we would add one anecdote: Freight carrier Terrill Transportation of Livermore, California abruptly shuttered operations on July 30th. That marked the seventh major closure this year.

One by one, aberrations in the data are being displaced by trends. While we cheer the record number of working Americans, we cannot deny that there is no disguise for Double Revisions.

Dr. Copper sends a strong message: