"Just one more thing."
- Lt. Columbo
A report from Bloomberg (after the close) indicates the Treasury is considering the sale of ultra-long bonds.

I say the following without pride (and self confidence) but because I am pleased about making the contribution...

Trading and investing are tough games. Mistakes (and I am the author of many!) are made every day.

The investing information flow is typically consensus and inside the envelope.

One of the things I try to do in my Diary is to provide differentiated, contrarian and creative insights ahead of others -- so you can profit.

I believe I did this yesterday in my column (reposted today) regarding the likely Wed-Friday equity market strength owing to the outperformance of stocks vs. bonds.

This is the sort of thing, after writing for 21 years, that I find rewarding and satisfying.

And I hope you find it the same.

Thanks for reading my Diary today and enjoy the evening.

I think today's market strength surprised many investors.
I continue to believe it is mostly a function of the asset allocation triggered because of the outperformance of bonds vs. stocks as discussed today and yesterday.

A must read!

"Twelve reasons why negative interest rates could devastate the world."

From Steve Cortes (and I agree):

Apropos to this post - my exchange with Rev Shark:

Long but interesting, see here.

Ss (S&P) over Ns (Nasdaq) today.

Big time.

Out for a holiday lunch.

The market has a feel that it won't go down (when the events suggest it should) because of the knowledge of a large asset allocation trade (buy stocks, sell bonds) in the next 2-3 days - as discussed.

* Knowledge@Wharton Is Data Privacy Real?

*Insiders are Selling Like Its 2007
* Camp Kotok

For a change the futures market was quiet overnight.

With little change, Mr. Market will open flattish today with an asset allocation bias toward stocks and away from bonds over the concluding days of August.

As posted - the possible scenario (and end result) in yesterday's column Month-End Rebalance May See Large Equities Buy, Bonds Sell Soon (owing to asset allocators' response to the massive outperformance in August of bonds over stocks):

This is important and helps to explain why I am a bit reluctant to short stocks now.The month-to-date performance of fixed income (+9%) -- that's the strongest returns since August 2011. With equities down by over 3%, August is only the 19th month in the last 32 years that bonds have outperformed equities by over +10%.Historically, this has resulted in relatively smart gains in stocks over the last three trading sessions of the month. (The median gain is +2.46%, more than 10-times the average of the last three trading days of all months since 1987 and delivers a positive return over 80% of the time, as you can see in this chart from Bespoke.):

Source: Bespoke
As a consequence I will likely stick with my small net long exposure for a few more days.

The countdown has begun - but expect upside first

After a long wait, the 2-10-year U.S. Treasury Yield Curve finally inverted, which means our countdown clock has started for a recession and "the" cycle peak in the S&P 500 (SPX). Over the past seven economic cycles, every recession was preceded by an inversion of the curve, but not before an extended lead time to recession and significant gains in the SPX to peak (Figure 1). In fact, looking at the last three cycles that have been similarly fueled by an excessive use of leverage, following the initial inversion of the curve the SPX rallies a median 34% in 22 months with a recession 24 months away.

Figure 1: The 2-10-Year U.S. Treasury Yield Curve inverted and started the long countdown

If you know a recession and market peak are coming, how do you know when? There is a bit of variability in the time to the market peak and subsequent recession, so rather than just use a median date, we have a bunch of credit-based indicators that offer great insight as the timing of an economic retrenchment:

• Bank Lending Standards to Businesses remain neutral/easy. Lending Standards for both large and small businesses tighten significantly heading into recession. The most recent quarterly data from the Fed's Loan Officer Survey show a neutral reading with a touch easier lending standard (Figure 2).

· Trend in Moody's BAA Investment Grade corporate bond yields still down. The Moody's BAA Corporate Bond Index measures the average yield among the lowest level of investment grade corporate bonds. This index hit a cycle and record low this week, and for only the second time since 1962, the average yield has seen a drop in the 10-week ROC of -15 (Figure 3). Historically the yield on BAA paper begins trending higher well before recession, which suggests very little recession risk.

Break in!
Autodesk's (ADSK) results should put new found fear in the mo mo community.

Warren Buffet famously said that investment vision is always 20/20 when viewed through the rear view mirror. So, look at expectations above the "present condition:"

"Just one more thing."

 -- Lt. Columbo

Regular readers of my Diary know I sometimes post things that replicate the theme of the "Tell Me Something I Don't Know" segment on MSNBC's "Hardball with Chris Matthews."

So ... "Tell me something I don't know, Dougie."

With the exception of during the financial crisis in 2008-09, the S&P dividend yield has never been higher than the yield on the long bond -- until this week.

Danielle DiMartino Booth explains how the consensus is turning a blind eye to the weakening economic data:

• Bloomberg's Q3 GDP consensus estimates of 2.0% are centered around the Fed's longer-run 1.9% projection; proxying Q3 GDP via credit managers' and purchasing managers' perceptions as well as freight volumes yields forecasts closer to 1%
• As flagged by purchasing managers, there's a significant risk to second-half GDP stemming from a large inventory correction; reflecting the continued weakening Cass Freight volumes, lenders have also begun to tighten credit standards to the trucking industry to stem losses
• The Transportation industry has been inundated with trucker layoffs and bankruptcies as transport volumes sink to a near-decade low, pushing freight rates down by nearly a fifth; that the consensus continues to expect in-line GDP growth suggests a blindness to the data

Three years after 1975's release of country & western song "Convoy," C.W. McCall's hit was adapted to the big screen. The 1978 Hollywood version was made when the CB radio/trucking craze was at its peak and was cast eclectically with Kris Kristofferson, Ali MacGraw and Ernest Borgnine. Were you among the 1970s kids who pleaded with your parents to pick up a CB radio to install in the family truckster? If you didn't have a handle like Rubber Duck (Kristofferson) or speak CB-ease -- breaker one-nine -- with your middle school buddies, you might have been ostracized in the cafeteria.

What brought this kitschy classic to mind is its depiction of "groupthink," the psychological phenomenon in groups wherein the urge to intellectually conform produces an irrational and dysfunctional outcome. Recall the plot: Rubber Duck and company journey to Texas to jailbreak a fellow trucker, eventually destroying half the town amid a successful rescue. Authorities now on the hunt, the truckers make a break for the U.S.-Mexico border. The film culminates with a showdown between Rubber Duck and Sheriff Wallace (Borgnine) and a National Guard unit stationed on a bridge. Machine guns fire, the tanker trailer explodes and Rubber Duck plummets into the churning river below, presumably to his death.

Groupthink is also manifest in Bloomberg's consensus of economists, centered on the Fed's median GDP expectations for 2019 (2.1%) and 2020 (2.0%) -- AND the Fed's longer run projection (1.9%).The consensus is effectively a linear extrapolation, i.e. no value-add. This conventional wisdom is disappointing in the midst of a trade war. But the crowds figure they may as well play it safe, given we can't determine the "victor" until we see the actual path of GDP over the next year and a half. We -- and you -- don't have that luxury of time.

As depicted in today's graph, U.S. GDP projections from three distinct sources -- credit managers, purchasing managers and freight volumes -- inform the near-term path for economic activity. And all three are below consensus expectations for third-quarter GDP of 2.0% year-over-year. July data foretell GDP of 1.7% according to credit managers, 0.6% as per purchasing managers and 0.9% matching up with freight volumes.

Regular readers know our affinity for credit managers' opinions. They are compensated based on their ability to forecast where their companies will be three, six, nine and twelve months down the road. Purchasing managers get their marching orders from somewhere higher up in the organization, so they provide slightly lower quality forward guidance. Even though Cass Information Systems would have you believe otherwise, freight volumes are as coincident as they come. That said, quarterly GDP data are old news compared to Cass's monthly Freight Shipments stats.

Purchasing managers today, though, have an upper hand. As highlighted in yesterday's Feather, the risk of a large inventory correction that undercuts top-line GDP is a material risk in 2019's second half. The underperformance of the supply management projection vis-à-vis credit managers and freight speaks volumes to that downside growth risk. Sadly, the herd of consensus economists, especially those at the Fed, can't see this evidence staring them in the face.

We cycle chasers know that late-cycle slowdowns also feature tightening lending standards. Given the earlier arrival and sharp fall-off in Cass Freight, it comes as no surprise that lenders to the trucking industry have begun to tighten credit standards, anticipating increased credit losses stemming from the impending economic downturn.

Freightwaves.com interviewed Robert Misheloff, president of SmarterFinanceUSA, to better understand the warning signals: "We work with around 25 different sources that fund trucking purchases for owner-operators and small fleets. Our funding sources tell us they are tightening credit standards now because they do not see the performance they expected out of their trucking portfolios. This is because the defaults are rising and delinquency rates are rising. From the lender's standpoint, it is not necessarily about economic forecasts but about people not making their payments like they used to."

Credit problems crop up at the end of economic cycles. But there are worse things than not being able to make the bills on time. Add the Freightwaves report to anecdotes of trucking firm bankruptcies. As reported by Business Insider, through mid-July, more than 2,500 truckers had lost their jobs and eight firms had folded. Meanwhile, July transport volumes fell to a near-decade low as the number of loads moving through the spot market slid by 37% over last year, dragging rates down by nearly a fifth.

Though hopes are running high for the holiday season to boost business, truckers have cited the ongoing trade war as more than an offsetting source of stress. Increased layoffs in transportation is the more probable sequel to the 2018 convoy as this sector led corporate job cut announcements in July. Note to Groupthink: "The hammer is not down. And that's a big 10-4."