Thanks for reading my Diary Thursday and all week.
Volume, as anticipated, was well below the average Thursday trading session (as investors and traders hit the beach) and I used the rally off of the morning's lows to expand my net short exposure.
Machines are in control. As an indication, in the last few minutes, the S&P 500 rose by seven points -- and it just fell down by nine handles as algos go wild and dominate trading.
I am continuing to use this new regime of volatility opportunistically.
Banks did a good job Thursday as bonds get hit (and yields rose).
Energy was weak, again. (A good summary of the space by Jim "El Capitan" Cramer) 

On Monday I will have a lot to say about the fixed income markets (Hint: Bonds are in a bubble around the world).

And I believe strongly that a likely rise in rates will bode poorly for equities.
Enjoy the evening.

* "Stick to the fundamentals, Bud"* "Good things sometimes take time"
* "Quick buck artists come and go with every bull market, but the steady players make it through the bear markets" * "Enjoy it while it lasts - 'cause it never does"
"I gave you Darien... I gave you everything"

-- Gordon Gekko, "Wall Street"

Wednesday, I gave you Philly Fed's Patrick Harker in "Recommended Readings," a day before he said the same things at Jackson Hole, Wyoming.

Two takes on the U.S. economy from Knowledge@Wharton:

* Harker 

* Siegel

Let's go to the (Harker) tapes today at Jackson Hole! 

Here is more.

"You can't make a buck in this market. The country is going to hell faster when that (expletive) Roosevelt was in charge... There is too much cheap money sloshing around the world. Worst mistake we ever made was when Nixon went off the gold standard."

-- Lou Mannheim, Wall Street

I have added to my (SPY) short at $292.65, and my (QQQ) short at $188.22.
Both are large-sized and my aggregate net exposure is medium-sized short.

Out to lunch, back at 2 pm.

The economic weakness is only unexpected by the perma bulls parading in the financial media who never seem to see an economy or stock market they don't like!

The facts continue to fall negative, while the long side is based on intangibles and dreams.

From Peter Boockvar:

The August Markit PMI's disappointed as the manufacturing PMI slipped just below 50 at 49.9 down from 50.4 in July and the services PMI is getting close as it printed 50.9 vs 53 in the month prior. The composite index, combining the two, fell to 50.9 from 52.6. 

This is the first time since September 2009 that the manufacturing component has fallen below 50. Markit said most of the weakness came in the new orders index where "the latest downturn in order books was the sharpest for exactly 10 years. Export orders fell to the lowest since August 2009. Inventories were trimmed "which was mainly linked to concerns about the demand outlook." 

With respect to services, "Survey respondents commented on a headwind from subdued corporate spending as softer growth expectations at home and internationally encouraged tighter budget setting." Also, "business expectations among service providers for the next 12 months eased in August and were the lowest since this index began nearly a decade ago." 

Bottom line, yes the US consumer is keeping the economy afloat but more data points like this and we'll see a further time out from companies on hiring, spending and investment that will eventually impact that consumer. With respect to hiring specifically, "The rate of job creation eased to its weakest since February 2010." 

US Treasuries rallied in response with the 2 yr at 1.56% vs 1.59% just prior. The 10 yr was at 1.60% just before and is now at 1.58%.

As a fiduciary of client money and/or a pontificator (is that a word?) on the macro world (I do both) it's particularly prudent to be watching one's back in the 10th year of an economic expansion. It's also important to be looking out for where the excesses lie in the era of extraordinary interest rate policy and as to when things begin to change. I can argue, I believe easily, that the excess in this cycle was in rates and corporate borrowing, especially in the lower quality credit world of leveraged loans which is now a bigger market than high yield. Please read this article from Bloomberg News today. It may lead to nothing and maybe is just a temporary lull but I point it out in the context of again, just watching one's back for where the risks lie. Even the Fed, as seen in yesterday's minutes and comments from some such as Robert Kaplan, have highlighted the risks in corporate credit. They of course incentivized the over leverage but that's a separate conversation.

It's a PMI day and the results so far are mixed for August. Starting in Asia the Australian manufacturing and services composite index fell below 50 at 49.5 from 52.1 as this time it was weakness in services that is less than 50 that offset manufacturing which is still above at 51.3 vs 51.6. The reasons now are obvious, "A persistent concern is that the fallout from the US-China trade war will dent global capex and consumer spending as cautious businesses and households retreat to the sidelines." The Aussie$ is down slightly and their 10 yr yield is down by 2 bps to .91%, just shy of a new low. The ASX was up .3%.

In Japan, the services PMI picked up some pace at 53.4 from 51.8 in July but manufacturing was little changed below 50 at 49.5 vs 49.4. Services are "being lifted by resilient demand within the domestic economy." We wonder though how much is a pull forward ahead of the hike in the VAT come October.

Shifting to the Eurozone, the manufacturing and services PMI's did improve slightly m/o/m. Manufacturing still remains below 50 at 47 from 46.5 in July and services was up .2 pts to 53.4. Combining the two puts the composite index at 51.8 from 51.5 last month. The estimate was 51.2. France led the way as its manufacturing PMI got back above 50 while Germany's remains well below at 43.6 (from 43.2 in July). Markit said "The dynamics of the Eurozone economy were little changed in August, with solid growth in services continuing to hold the wider economy's head above water despite ongoing manufacturing decline." Markit estimates the regional economy to grow by just .1% to .2% q/o/q in Q3. Future confidence is not looking good as Markit said "The lack of a quick rebound from the recent economic slowdown has impacted firms' confidence, with sentiment the lowest in over 6 years. It appears that companies are braced for a sustained period of weakness, and as a result are showing greater reluctance to take on additional staff." What exactly does the ECB think in believing that more upside down policy action that kills the banks will change this behavior? Who freaking knows at this point. The slight beat was not enough to help the euro as it's down a touch but yields are slightly higher (less negative).

The US PMI's come at 9:45am today.

The UK CBI retail sales index plunged in August to -49 from -16 and that was well worse than the forecast of a slight increase to -15. What this is telling us is that 10% of respondents said that sales volumes were up y/o/y offset by 59% that said they were down. This is the lowest print since December 2008 at the depths of the great recession. CBI said "Sentiment is crumbling among retailers, and unexpectedly weak sales have led to a large overhang of stocks. With investment intentions for the year ahead and employment down, retailers expect a chilly few months ahead." As the Brexit drama is top of mind, many of the weak UK data points are being given a pass from the markets. The pound is flat, the 10 yr gilt yield is up 1 bps while the FTSE 100 is lower by .6%.

Because they have room, the decision making is much easier and the Bank of Indonesia responded with a rate cut of 25 bps to 5.5%. Most actually expected no cut but they, like others, are trying to get ahead of the economic slowdown as they called this move "preemptive." For perspective, the July rate of inflation was 3.3%. It's ironic that only in EM are real rates positive as central banks here haven't gone off the deep end like those in the developed world. Notwithstanding the surprise cut, the rupiah is little changed and the Jakarta index fell by .2%.

* "Everyone" has them


Over the last few days I have been working on three problem children -- Macy's (M) , Kraft Heinz (KHC) and Canopy Growth (CGC) .

Though I have still not completed my analysis (all three companies face substantive competitive and business challenges and researching them is time consumptive), here are some brief and updated fundamental views and stock outlooks:

Macy's This real estate rich retailer has consolidated its store base, is buying back shares (and reducing its share count) and is reducing costs (Nordstrom (JWN) proved in yesterday's quarterly release that this can yield great results). A large dividend (yielding about nine percent "for now") supports the shares. The principal problem is that there are about 1200 large enclosed malls in the U.S. - Macy's primary locations - that's double where it should be. Macy's equity capitalization is under $5 billion but its market capitalization is close to $12 billion. I have made quite a lot in Macy's over the years. Though the reward vs. risk looks attractive, I currently have a small to medium sized position in this name and I haven't really increased it much it in a while.

Kraft Heinz This consumer staple is burdened with outdated product offerings and brands, overvalued intangibles and a bunch of debt used for prior acquisitions. (Overall equity capitalization is only $30 billion but $31 billion of debt makes the market capitalization over $60 billion). Procter and Gamble (PG) (on my Best Ideas List) has proven the ability to transform the product mix towards more popular items. With two smart large shareholders seemingly committed to a turnaround and a price to sales of only 1.2x, the shares seem attractive on a longer term basis but I am awaiting the completion of my analysis to get even larger-sized.

Canopy Growth The largest ($9 billion market cap) pot stock has also gotten schmeissed in the markets and like the other marijuana stocks is trading at a new low. With over $3 billion in its coffers (Constellation Brands' (STZ) investment) the company's market capitalization is quite low relevant to its prospects but weakness in the recreational marijuana market and slow moving FDA approvals (for health applications) continue to weigh on this stock. I have been adding small to this large-sized and speculative holding.

Bottom Line

I have been slowly adding to a couple of the above equities - though the timing seems uncertain with these "show me" stocks.

I hope to have more analytical clarity in the days ahead as I complete these research projects.

* Cannabis restaurants are coming to California.

* Byron Wien on the markets.

* Economists are rotten in predicting recessions.

* Trump's economic anxiety.

* In a low conviction investment backdrop
The S&P Index closed at about 2930 ($293 on (SPY) ).
This compares to my expected trading range of between 2700-2750 ($270-$275 on SPY) and 2900-2950 ($290-$295) - so it's at the upper end of my projections.
With an unfavorable upside vs. downside I am back to medium-sized short in exposure.
As written extensively, sometimes positioning is as much about conviction levels as investment views.
From a very short term perspective my conviction level is low today:
* Late August is a notoriously low volume backdrop as vacationers vacation.
* With machines and algos dominating, trading more than usual volatility can be brought on by "news" (on trade, the Federal Reserve, politics, geopolitics, etc.)
* The recent wild swings in the shares of (HD) , (JWN) and (TGT) are examples of what can happen in a seasonally low volume period.
* A continuing "newsy" market in which machines react to almost any headline.

I will be filing less than usual on Thursday and Friday morning.
My posts will be less frequent and shorter than usual.

At 5:30 a.m. ET, S&P futures are -9 handles while the Nasdaq futures are -36 (we initiated a (QQQ) short at $188.75 late yesterday, it is currently trading under $188). 

There was little overnight news to move the markets -- though the President knocked the manufacturers and praised Apple's (AAPL) Tim Cook.

Gold is -$7/ounce, oil is +$0.20 and bonds are unchanged.

I start the day medium sized net of exposure.

We spent a lot of time discussing the real estate market yesterday.

Here is some more from Danielle DiMartino Booth:

• From the trough of post-crisis valuation, apartment prices have been the key driver in overall CRE price increases as apartment prices have risen nearly three times the average across the broad sector
• Luxury apartments have been a key driver in this cycle as nine in ten apartments were luxury in 2018 versus 52% in 2012; the luxury market is more susceptible to economic uncertainty -- as reflected by the decline in the Architectural Building Index
• While new home starts have been declining and disappointing results from homebuilders are being reported, existing home sales have seen some modest improvements in response to declining mortgage rates; affordability and uncertainty may cap the upside in housing

"Fix the problem, but don't finish the job." Can you imagine being a structural engineer and instructed as such? But that's likely the sensation felt by the team of engineers tasked with stabilizing the Leaning Tower of Pisa in 1999. Constructed in 1173 on unstable subsurface soils, the bell tower sank further and further south until it tilted 5.5 degrees in 1990, defying simulations that suggested it would topple over at 5.44 degrees. In came the rescue squad, who reversed the gravitational pull by placing weights on the structure's north end while simultaneously removing soil from below causing it to gently sway north-ish, resting at 3.99 degrees. In the engineers' estimable estimations, barring an earthquake, the tower should stand for several hundred more years, safely continuing to draw marveling tourists.

Commercial real estate investors also have a deep faith in their towering monuments to the current business cycle being built on foundations that are just strong enough. And why should they harbor doubts? As per Morgan Stanley, "The recovery in commercial real estate (CRE) prices is driven in large part by multifamily, which has recovered 331%, while core commercial's recovery is a more modest 126%." Translated, from its trough post-crisis valuation, apartment prices have rebounded at nearly triple the rate of CRE as a whole.

The trend doesn't look to be ebbing. In June, Industrials' prices (read Amazon (AMZN) warehouses) -- which, as detailed in last week's Quill, look to be topping out as e-commerce hits its limits -- grew by a blistering 13.3% over the prior year. In second place was the cycle leader, multifamily, which tacked on a 7.3% in year-on-year gains.

Why harp on apartments when single-family residential real estate is what moves the GDP needle? Let's just say that the current cycle redefines multifamily's contribution to GDP. The term "rentership nation" did not come about without a huge movement into apartment living.The catch is that a repressed interest rate environment challenges IRRs outside the construction of high rises to the sky. And that's exactly what's transpired: Nearly nine in 10 apartments constructed in 2018 were luxury units.That compares to 52% in 2012 before QE priced anything rational out of the market.

The stutter-stop downward move in Architectural Billings for apartments you see above has unsurprisingly tracked down housing starts as a whole, which have been dominated by apartments in the current cycle. While that's still the case, the organization issued the following warning: "A growing number of architecture firms are reporting that the ongoing volatility in the trade situation, the stock market, and interest rates are causing some of their clients to proceed more cautiously on current projects."

Where does single-family fit into this equation? In short, it's been largely absent compared to its multifamily peer. Home sales have also weakened, even as multifamily has hung in there. That, you may have noted, changed for the better yesterday morning. It took nearly a full percentage point decline in the 30-year fixed mortgage rate, but traction has finally been achieved. For the first time in 17 months, existing home sales rose a fraction over the prior 12 months in July.

What should Jay Powell indicate in reaction to this finally encouraging housing data come 8 a.m. ET Friday in Jackson Hole? Far be it from us to say, but a fractional move up in exchange for 100 basis points of easing defines "pushing on a string."

Single-family housing has also been along for the luxury ride this cycle. The same math and economics apply. With that in mind, we've taken to following Toll Brothers (TOL) to glean trends in the single-family market.

In its latest earnings report, the high-end homebuilder reported revenue had fallen 8% over the prior year, deliveries had sunk by 11% and backlogs by 10%. The only plus sign was cancellations, which were up 2.4% vs. 1.9% the prior quarter. Can you say ugly?

On a higher level, how surprised should we be when we read stories about real estate in the Hamptons and coastal markets on both sides of the country sliding into the abyss? This is, after all, how real estate cycles are supposed to end.

The sad thing for home buyers, keen on capitalizing on a capitulating housing market, is that it's still God-awful expensive. All-cash buyers continue to muscle their way into markets out-bidding organic buyers as they're price agnostic(it's someone else's money they're playing with). As seen in yesterday morning's home sales report, first-time buyers made up 32% of purchases, exactly in line with year ago levels.

Any way you slice the current cycle, we've built too many fancy pads and homes. Thanks to the Fed leaving rates too low for too long, we haven't fixed the problems of the last cycle, nor can we finish that job.