* Good market breadth (at 18-11).
* A large market on close buy program kept the advance going at the end of the day.
* Bond yields rose by 4-5 basis points.
* Oil and gold showed little change.
* Banks/financials, FANG, select technology and highly shorted stocks led the way to the upside.
* Another one bites the dust. After-hours pressure on Shake Shack (SHAK)  spit the bit (a huge miss to margins and lowered forward guidance).
Thanks for reading my Diary today and enjoy the evening.

A good interview in Yale News with Dr. Robert Shiller (I taught his course during the Spring Semester).

CNN's Fear & Greed Index hit 86/100 today.
That's extreme greed.

Banks are standouts today along with the Bobbsey Twins, Alphabet  (GOOGL) and Amazon (AMZN) .

I continue of the view that the large money center banks provide the single best reward v. risk opportunity of any S&P sector over the intermediate term - in an overvalued market.

Here is my thesis, "In a Richly-Valued Market, Bank Stocks Represent Uncommon Value Under Almost Any Time Frame":

* Bank earnings, to begin to be reported this morning, will mostly be in line to modestly higher than consensus expectations.
* In this quarter, bank EPS will begin to improve and grow relative to the S&P - with flat to slightly higher operating profit growth but quicker (+3% to 5%) EPS growth owing to share buybacks.
* Most of the downside in interest rates and in the flattening of the yield curve is now likely behind us - so, improving relative profit performance will be even more noticeable in the next 2-4 quarters
* Though the stocks have rallied in the last month, a lot (but not all) of the short term risk is behind the sector.
* We likely have already seen a generational low in interest rates - banks are rate/asset sensitive, they will prosper when rates rise and the yield curve steepens.
* Private equity, on line trading and private equity industry shares remain vulnerable.
* To me, bank stocks represent the best intermediate to longer term value in the markets (of any S&P sector).

In the financial sector I am bullish on bank stocks (and negative on pure on-line trading, investment management and private equity shares).

I am very long (C) , (BAC) , (GS) and (WFC) (my recent update is here) - having recently added when the banks sold off a few weeks ago. Bank stocks have recovered by about +10% since then and are approaching 52 week highs.

My Long Term and Bullish Bank Thesis Is Very Much Intact

Let's revisit and update my comprehensive bullish thesis, "Banks Are A Must Own For Years, Not Just Weeks or Months," from January, 2019:

* In a richly valued market, banks represent uncommon value
* Banking industry profits are now generating a reasonably high return on investment (ROI) despite a very tough operating environment
* Though capital markes remain tough and investment management is under margin pressure, the strength in mortgage activity will be a positive contributor and highlight in 3Q
* However, beginning in 3Q2019, year-over-year bank industry earnings growth should improve absolutely and relative to the S&P 500 Index
* The future seems even brighter, as balance sheets and income statements are levered to any rise in interest rates and to a more normalized yield curve
* Markets are underappreciating the value of the industry's large core deposit bases, buoyed by the big takeovers during the crisis of 2008-2009, and business-line market share gains achieved against a weakened, non-U.S. based banking industry

I have been following the banks and other financial stocks for more than 45 years:

* While getting my MBA in finance from Wharton I was a "Nader Raider" and I co-authored the book "Citibank" with Ralph Nader and The Center for the Study of Responsive Law. Over the years the book was used as a textbook in a number of college banking courses.
* When I entered the workplace I was a bank and thrift analyst at Putnam Management in Boston. Near the end of the 1970s Institutional Investor Magazine voted me the No. 1 buy side analyst in financials.

As I started out my career, the banking industry was undergoing a metamorphosis from stodgy to progressive. Bricks-and-mortar, traditional banking was undergoing systemic change. ATMs were introduced, negotiable CDs provided balance sheet growth and regional banks and thrifts in California, Texas, Florida and in other rapidly expanding states were considered growth stocks and were accorded high valuations.

But I also saw the downs: The failure of Charlie Knapp's Financial Corp, of America, which I was indirectly responsible for exposing through my friend Dan Dorfman at CNBC; the savings and loans crisis in the 1980s and 1990s; and, of course, the mortgage crisis in 2008-2009 which effectively bankrupted nearly all the world's largest financial institutions.

In reaction to The Great Decession of 2008-2009, bank regulation became significantly more stringent, which was in marked contrast to the unregulated and highly leveraged past. Fines and rising compliance and legal costs ramped up over the last decade, serving to restrict banking industry profitability. The days of leveraging capital to the extremes was over, and balance sheets contracted. These factors served to reduce return on invested capital as well as profitability over the last decade.

The Case for Bank Stocks

* The banking industry is asset-sensitive, benefiting from a backdrop of rising rates and a widening yield curve
* Abating cost pressures, relatively stable net interest margin and income (despite historically low rates) coupled with aggressive share buyback programs (the outgrowth of excess capital) augur well for better-than-anticipated earnings growth in the quarters and years ahead
* Future industry share price performance will also benefit from the currently low valuation base

A decade-long retrenching, penalized by associated compliance and legal costs, is now nearly complete and the banking industry is in a more solid state of affairs than its 25% to 30% relative price-earnings (P/E) valuation discount implies. Capital positions are no longer stretched; indeed, excess capital positions have been built up, serving to provide the powder for the aggressive buyback of shares. Those buybacks, off of low valuations, will be antidilutive to earnings per share.

I expect to hold on to bank stocks for an extended period of time, measured in years and not in weeks or months. To me, bank stocks are the best long hedge when viewed and measured against a baseline expectation of modest and below-consensus global economic growth. On the other hand, if you possess a more optimistic growth assumption, an ultimate resolution of the Chinese trade issue, a less-protectionist U.S. policy, slowly rising inflation and a steady Real GDP growth of about 2% annually, I am convinced that the relative outperformance from a low valuation base may dramatically surprise to the upside in the years ahead.

The key features seen in the soon to be reported third quarter EPS releases are:

* Modest credit demand growth
* A slower rate of growth in deposits than the rate of growth in commercial and industrial (C&I) loans
* Short-term interest rates remained historically low, so net interest margins and income will be stable to slightly lower
* Mortgage originations and refinancings are robust
* Good and contained credit quality metrics
* Growth in the top line (assets) in the wealth management business offset by competitive margin degradation as commoditization sets in
* Aggressive share buybacks have been maintained
* 3Q2019 capital markets activity, trading and investment banking will be weak

These variables likely will lead to in line (relative to expectations) flat revenues and also to in-line profit announcements this week (with gains of about +3% to +5% year over year). Nothing to write home about, but nothing to get scared about, either, especially given low P/E ratios and low consensus expectations.


Sunny Skies Lie Ahead

The banking industry has come out of the last decade materially safer and stronger as measured by excess capital positions than at almost any time in history.

A number of secular factors, (implicit with low PE multiples) not clearly appreciated by many investors, will likely buoy future bank industry profitability and share prices in the years ahead:

* Europe's banking industry financial and operating woes will continue to inure to the benefit of the large U.S. money center banks, which will continue to be opportunistic, stampeding toward gains in corporate and retail market share as well as taking share in global fixed-income trading.
* Loan demand should begin trending better as corporate profit growth moderates in 2019-2020 and credit markets tighten as companies will begin to rely again on large banks to fund growth
* Deposit bases have expanded materially over the last decade, in large measure because of Fed-sanctioned big bank acquisitions following The Great Recession of 2008-2009 (this is underappreciated by the markets)
* Interest rates are likely headed higher in the fullness of time and the yield curve should be widening
* The banking industry is asset-sensitive, so the inevitable rise in interest rates on top of the aforementioned expanding deposit bases will be a big profit generator and fuel for growth
* I expect strong absolute and superior relative EPS progress compared to the S&P Index beginning in the current quarter (third quarter of 2019)
* The banking industry is vastly overcapitalized, and Comprehensive Capital Analysis and Review (CCAR) results will continue to allow a return of capital in the form of higher dividends and large buybacks that will support share prices and EPS growth for years
* Assuming a progressive Democrat doesn't win election, the pendulum back toward easing bank regulations markedly will reduce the pressure on costs and will lead to easy profit comparisons in 2019 through 2024
* Bank price-earnings multiples begin at a low base; valuation expansion is likely in the years ahead

Bottom Line

Third-quarter bank industry results likely will be in line with consensus forecasts, with little meaningful deviation from EPS expectations and, considering the awful backdrop of trading, the low level of interest rates and the slope of the yield curve, that's a good starting point for better share price performance.

For the reasons mentioned in the body of this morning's missive, bank stocks may represent the single most attractive industry group in the S&P Index over an intermediate term time frame.

The banking industry is selling at low historical relationships to tangible book value, at modest multiples to forecasted EPS and possess excess capital (that will continue to be returned to shareholders). This puts the banking sector on an unusually positive ground on a reward vs. risk basis - just at a time when the persistent drop in interest rates has soured investors to the group (and investors are looking at the rear view mirror and not at the windshield).

Given the extent of the recent rate drop and the likelihood that rates have bottomed for the cycle - the near term opportunity for bank stocks has also improved.

The major risks - as I see them - would be global recession and/or a win by a progressive Democratic in the 2020 November Presidential election.

I anticipate holding bank stocks for an extended period of time, measured in years not weeks/months.

No trades today.

* Unusual call activity is often quite usual
* And costly!
"Slow down, you move too fastYou got to make the morning lastJust kicking down the cobblestonesLooking for fun and feeling groovyBa da-da da-da da-da, feeling groovy"-Simon & Garfunkel,59th Street Bridge Song
Under Armour (UAA) very recently had "unusual call activity" which was actually quite usual.
To me, the whole concept of buying solely on this variable is a quick way to the poor house.
I suppose some now have a better understanding of why these trades are not memorialized.
At the core of my disbelief is that often the sellers of the calls (not the buyers) are the smart money. (This was clearly the case in the unusual call activity cited a few weeks ago in Under Armour!)

Let's go to the tape.

Not feeling groovy.

Cannabis stocks looked like they were making a bottom recently but unfortunately have gone "up in smoke" over the last few weeks.
For those that have been subscribers for a while you may recall that 3-4 years ago, when the municipal closed end bond funds acted poorly throughout the year, that there was extreme tax loss selling in the first two weeks of December - that afforded the emotionless trader a very large and quick upside return a month or so later.
That is my expectation for cannabis stocks - and I am on high alert to a large volume bottom during the month of December.

SEMI-MONTHLY FISCAL/MONETARY UPDATE - QE4 HAS CLEARLY BEGUN, GOLD SHOULD SHINE BRIGHTLY

The equity averages were up modestly in October. Interest rates, intra-month, went down, then up, then down again after the Fed predictably lowered rates, ending the month where they began. Gold bullion was up 3.0%, and the gold miners were up closer to 5% For the year to date, gold bullion is up about 17% and the gold mining stocks are up about 30%. Still, this is just a beginning. The miners have just begun to outperform gold bullion on the upside. We expect gold bullion to go up by a multiple of its current price, and the gold miners by a multiple of that multiple. See point (4) below.

The most prominent recent short term developments that come to mind are as follows:

Whatever you call it, "QE4" or "whatever", the latest monetary accommodation by our central bank has clearly begun. The Fed, as expected, lowered the fed funds rate by 25 bp last Wednesday, and tried to make the case that rates are on hold, "pending the incoming data". They should talk to the world class economist, David Rosenberg, who provides many indicators that point to consumers (who have been keeping the GDP positive) backing off. For the moment, in spite of the highly touted "greatest economy in US history", GDP growth, in Q3 was all of 1.9%, and slowing. Furthermore, while the (disingenuous) Fed talked about buying treasuries starting October 15th at a rate of $60B per month, their balance sheet started expanding the week ending September 4th and is already up by $260B by the week ending 10/30. That's a rate of $130B per month (started in early September, and double the stated $65B objective), and that's in addition to the tens of billions they are adding to the repo market daily to add to short term marketplace "liquidity". We don't pretend to understand the daily repo market, but the need for Fed "intervention" on a daily basis cannot be a sign of financial strength within the capital marketplace.

• We agree with David Rosenberg, who predicts that short term interest rates will move toward the zero bound as the Fed tries (in vain) to support the economy. There will be many painful unintended consequences from ten years of interest rate suppression. We can't help to interject here, relative to gold: all the gold ever mined, about 160,000 tons, is worth less than half of the current worldwide debt selling with a negative yield. The argument, therefore, that gold is "useless" because it earns nothing has become moot. Nothing is a better return than a negative yield.
• The disillusionment, finally, with the ridiculous valuations of the money losing "unicorns" (i.e. WeWork, Uber, Grubhub, al.) indicate that the monetary debasement and credit bubble that has supported the last twenty years of (meager) economic expansion is finally winding down. In response, however, it is clear that the worldwide central banks will double down with their monetary heroin. It took more than $10 trillion of fresh paper to avoid economic disaster in 2008. It will take $20-30 trillion the next time. It always takes a bigger "hit" to stay "high".
• The gold miners have just begun to report their third quarter, which is the first quarter in eight years that gold has been $200/oz. higher, YTY, and the operating leverage is asserting itself. The first group of mining companies that has reported so far has shown dramatically better results and those stocks have jumped 7-10% in days. With bullion down 20% from its high, but the miners down 50-75%, there us obviously the potential for a major upside move in the gold mining stocks.

Goldman Sachs (GS) and Citigroup (C) filed their third quarter 10Qs late Friday afternoon:

Goldman Sachs

During the quarter GS had 14 loss days (a bit higher than is typical) and five "outsized" trading revenue days. At quarter-end the brokerage's investment banking backlog rose from second quarter's end - and was above the historical seasonal gains. GS noted that potential advisory transactions and upcoming debt underwriting deals (investment-grade and leveraged finance) were stronger while the prospects for equity underwriting was diminished. My 2020 year end price target remains at $235/share.

Citigroup

There were no guidance changes. The bank said that its earnings sensitivity to lower rates decreased modestly in the quarter and the litigation risk/exposure was unchanged. Credit losses were expected to be at the higher end of the anticipated range. Here is my most recent update on Citigroup - my 2020 year end price target remains at $82/share.

Holy Frack, Batman!
The UK has called a halt to fracking after a new report found it was impossible to predict "the probability or magnitude of earthquakes" caused by the shale gas extraction technique. The decision comes at the start of an election campaign where opposition parties are set to make environmental issues central to their attacks on Boris Johnson's Conservative party.
The government said there would be a "moratorium" on fracking until "compelling new evidence" showed that it was safe.
The Financial Times notes this morning that the new policy is a sharp reversal of the government's stance, with Boris Johnson and Andrea Leadsom, the business secretary, both voicing support for fracking in the past.
Fracking ban fears and ice cold weather has put a short squeeze on natural gas this morning - it looks like a potential breakout:

* Well... maybe a mini P&G!
* With a new and more focused CEO, Kraft 's shares now "have a chance"
* The 3Q report provided a glimpse of opportunity for the company
* It is not unreasonable to expect KHC shares to reach $40/share price by year-end 2020

"So you are telling me I have a chance!"
- Jim Carrey, Dumb and Dumber

Only 18 months ago, in April 2018, Procter & Gamble's (PG) sales, cash flow and profits were weak and the company was experiencing worsening comp sales. The company's shares were wallowing in the low $70s and I placed the stock on my Best Ideas List.

The company (influenced by activist Nelson Peltz) aggressively picked itself up, reinvested in growing brands and is now trading above $124/share.

While the comparison is not directly related there are similarities.

Following the release of better than expected third quarter sales, cash flow and EPS -- Kraft Heinz's (KHC) shares immediately gapped higher by +14% (a gain of almost $4/share).

Third quarter EPS beat deflated expectations, benefiting from the non-recurring benefit of the sale of the company's Canadian cheese operations. Unlike the first half of 2019 when expenses were very high relative to deflated top line growth (leading to a -20% drop in cash flow against only a -4.5% drop in sales), management controlled expenses much better in the recently reported quarter. 3Q2019 sales was comparable to the first half's decline but the third quarter's EBITDA dropped by only -7% vs. -20% in the January-June interim interval. Though domestic organic growth was -1.5%, emerging market (EMEA) and rest of world (ROW) actually recorded a modest resumption of positive organic growth. The contraction in retail inventories has pressured the company's comps for several quarters - and though still a headwind, the rate of change is moderating.

The current quarterly organic and cash flow guide indicate similar trends but sequential improvement from 2019's first half. Reflecting the cash flow beat, full year estimates will likely, for the first time in over a year, be raised for full year 2019.

The company reaffirmed its objective to stabilizing EBITDA next year.

The conference call confirmed that the company will address their problems more aggressively than past management. New CEO Miguel Patricio will likely begin implementation of his strategy plan in the first quarter of next year, only a few months away.

Kraft Heinz is expected to show sequential improvement in the rate of EBITDA degradation next year - with stability likely late in the second half of 2020.

I view all of these developments (above) as positive signposts.

On the conference call, the company's management said that KHC's capital structure will be a major focus in its strategic review and CEO Patricio appeared to re-open the possibility of divestitures (particularly the $500 million infant formula business) over time. Significantly, the company reduced leverage in the quarter from both internal cash generation and divestitures. This is significant as debt is the number one problem facing the company. Debt/EBITDA is about 4.5x as the company is barely generating enough free cash flow to pay its dividend - so the chance of a dividend cut is non trivial. That said, the sequential improvement in the reported three month period gives the company more flexibility with the debt agencies than it had before. Though the product portfolio is challenged (and must/will be addressed) and even given the inconsistent results over the last 1 1/2 years, I don't expect a debt downgrade as the company will tactically continue to reduce its debt load.

After the beat, Wall Street EPS estimates for 2019 will likely rise to about $2.80/share. Given the likely asset sales, consensus is for approximately $2.60/share next year. 14x $3.00/share or $42/share is not an unreasonable year end 2020 price target.

However, look for new management to more aggressively evaluate its product offerings and businesses in the year ahead - with, like Procter & Gamble, seeking to turnaround its organic growth. New management will likely adopt a more focused divestiture schedule and with a break from the never ending climb in the U.S. dollar, earnings (expected to be down year over year in 2020 because of business sales) consensus estimates could very well prove to be too low.

Investors underestimated the timing of the operating improvement at Procter & Gamble and might be doing the same for Kraft Heinz. It will all be in the execution.

Kraft Heinz still has the Buffett imprimatur and like Procter & Gamble and Disney (DIS) , is a familiar "name" that many investors "want to own."

I own it and plan to get bigger on any weakness.

Yes, Kraft Heinz has a chance!

* Two weeks ago I introduced a new column in my Diary
* Rate of change (absolutely and relative to expectations) is likely the most important near term determinant of stock prices
* On balance, last week's data-based changes (5 positive, 3 neutral and 2 negatives) were a positive for the markets for the third week in a row

These days, change is happening so rapidly - it is leading to more of a sense of uncertainty and a heightened regime of volatility.

As a result, I am initiated a new column two weeks ago , "What Has Changed - At the Margin - Over the Past Week", which is meant to assess the changing landscape of the economy, politics, geopolitics, interest rates, inflationary expectations, and of course, the markets.

Here is what changed (at the margin) last week:

1. U.S./China Trade: Though there was talk by Larry Kudlow that the issue of intellectual property may be shifted to "Phase Two" there was little incremental trade information delivered last week. This is a neutral for the markets.

2. The Domestic Economy: The U.S. economy grew by +1.9% quarter over quarter annualized. This compares with the estimate of +1.6% and helping with the beat was the +2.9% gain in consumer spending vs. the estimate of +2.6% along with a price deflator that was 2 tenths less than expected and thus lifted the REAL rate. Investment spending was soft and trade was a slight drag. Core PCE rose +2.2% quarter over quarter annualized. The Atlanta Fed's GDPNow 4Q2019 forecast was just revised lower to +1.1% (from +1.5% the day before). Meanwhile, on Friday, the NY Fed lowered their fourth-quarter GDP projection to just +0.8%.

The U.S. economic expansion hit 124 months in October, the longest in history.

The U.S. economy is in such a 'good place', according to Fed members, that it can only handle a Fed funds rate of 1.5%-1.75%, below the rate of every single inflation gauge except one?

The October ISM manufacturing index was 48.3, up +0.5 pt from September but below the estimate of 48.9. This marks the 3rd month in a row below 50. New orders rose +1.8 pts month over month but still below 50 at 49.1. Backlogs fell another point to only 44.1. The employment component was up +1.4 points to 47.7 but still below 50 for a 3rd month and just 5 of 18 industries are adding employees vs. 4 last month. ISM specifically said, "Labor force reduction concerns increased, indicated in 40% of employment comments." Export orders were the standout, jumping by 9.4 pts to back above 50 at 50.4 but only 5 of 18 industries saw growth, and "Two of the six big industry sectors expanded, and four contracted during the period." Imports on the other hand fell 2.8 pts to 45.3, the least since May 2009. Zero companies saw growth in imports. Of the 18 industries surveyed, just 5 saw growth but up from 3 in September and vs. 9 in August. 12 saw contraction vs. 15 last month. ISM said, "Comments from the panel reflect an improvement from the prior month, but sentiment remains more cautious than optimistic...Overall, sentiment this month remains cautious regarding near term growth."

Within the NABE Business Conditions Survey released this week, they said, "the US economy appears to be slowing, and respondents expect still slower growth over the next 12 months." On that hiring question, "Hiring was far less prevalent at panelists' firms in the third quarter, as was wage and salary growth." The hiring index component fell to a 5 year low. With respect to the influence of tariffs, "Two-thirds of respondents from the goods producing sector indicate that tariffs have had negative impacts on business conditions at their firms." This all resulted in "fewer respondents reported increased capital spending on equipment and information technology at their firms than at any time in the past five years."A negative for the markets.

3. The U.S. Consumer: U.S. jobs increased for the 109th consecutive month, the longest in history.

Payrolls in October grew by 128k, well better than the estimate of 85k and the two prior months were revised up by a net 95k. The unemployment rate ticked up by one tenth to 3.6% but because the size of the labor force grew by 325k, above the increase in the household survey of 241k (with a gain in the key 25-54 age area). The all in rate rose one tenth too, to 7%. Manufacturing employment was better than expected while service sector hiring remained steady. Hours worked and average hourly earnings were as expected with the former at 34.4 hours and the latter up by .2% month over month and 3% year over year. Combining the two puts average weekly earnings up +2.7% year over year, the same trend as in September. The participation rate ticked up by one tenth to 63.3% while the employment to population ratio held at 61%. The level of job leavers remained high at 14.5%. A sign that we are finding it more difficult to find new workers is the 'pool of available labor' which fell to the lowest level since December 2000. The private sector 3 month average job gain is now 154k vs. the 6 month average of 138k and 12 month average of 162k.

The Employment Cost Index for Q3 rose +0.7% quarter over quarter as expected. Going direct to the most important component, private sector wages and salaries rose +3% year over year, the same pace as in Q2 and Q1. On the negative side, ADP's private sector job survey recently is more muted than the BLS. Their three month average for private sector job growth is 126k (28k below BLS) vs. the 6 month average of 112k (26k below BLS) and 12 month average of 163k (about even with BLS). Initial jobless claims rose to 218k from 213k, and that was 3k more than expected and last week was revised up by 1k. As a print of 220k came out of the 4 week average, it fell to just under 215k from just over. Continuing claims, delayed by a week, rose by 7k to quietly the highest since mid August.

Bloomberg's weekly consumer confidence index (the old ABC consumer confidence index) had its biggest one week drop since March 2011 falling to 61 from 63.4. It typically moves up or down less than 1 pt week to week. The glaring weakness was from those who make less than $50k where confidence "slid by the most in records back to 2010, while sentiment of those earning more was little changed", according to Bloomberg.

The Conference Board's consumer confidence index for October fell a touch to 125.9 from 126.3. The estimate was 128. This is a 4 month low where the two main components were mixed with the Present Situation up while Expectations fell to the lowest since January. One year inflation expectations were unchanged at 4.8% and which is the same print seen one year ago. Of note, those that said they see More Jobs under the Employment category fell to a 6 month low while those that see 'Fewer Jobs' rose to the most since September 2016. Business expectations moderated by 1.4 pts m/o/m to the lowest since March. Spending intentions were mixed. The bottom line from the Conference Board was that "the Present Situation improved, but Expectations weakened slightly as consumers expressed some concerns about business conditions and job prospects. However, confidence levels remain high and there are no indications that consumers will curtail their holiday spending." This is a neutral to positive for the markets.

4. Foreign Policy: No change. This won't have a meaningful impact on the markets.

5. The Fed: The Fed cut interest rates by 25 bps, its 3rd cut in as many meetings. With the third insurance rate cut in, markets are hopeful for a soft landing. Overall, apositive for the markets.

6. Brexit: Again, it seems things have stabilized a bit. This is a slight positive. 

7. U.S. Politics: There was little change in the Democratic nomination process. President Trump continued to rail against The Deep State. This is likely a neutral for the markets.

8. Corporate Profits: Reported earnings continued to track along the same percentage beats as in the prior week. What was different was the market's reaction to the expected profits - the reaction was far better than expected (especially for a number of industrial and other cyclical companies). This is apositive for the markets.

9. The U.S. Stock Market: Up about by another +1.75% on the week. The S&P 500/Nasdaq/Wilshire 5000 hit new all-time highs. A positive for the markets.

10. Overseas Economies: The Eurozone economy grew +1.1% year over year in Q3 as expected after a +1.2% rise in Q2 and 1.3% in Q1. This marks the 5th quarter in a row with a 1 handle. Inflation was also reported and the core rate was up +1.1% year over year in October vs. +1% in September and vs. the estimate of +1%. The headline rate was higher by +0.7% year over year as forecast. The consumer confidence index in France in October held steady with September at 104. That's the highest since January 2018 and for perspective, it plunged to 87 at the height of the Yellow Vest protests.

The UK manufacturing PMI for October stayed below 50 but rose to 49.6 from 48.3. Markit said, "The manufacturing downturn continued at the start of the final quarter as uncertainties surrounding Brexit, the economic outlook and domestic politics all took their toll." Both South Korea and Japan reported upside surprises to their industrial production figures for September.

Buying ahead of the hike in the VAT, retail sales in Japan rose 7.1% month over month, double the estimate of up +3.5%. Household appliances and cars led the way and expect a hangover in October.

Looking at the Tokyo region only in October, CPI rose .7% y/o/y ex food and energy as expected and up from .6% in September. Low inflation is a good thing. Japan's labor market weakened in September as their unemployment rate rose to 2.4% from 2.2% and what the estimate was and the jobs to applicant ratio fell unexpectedly to 1.57 from 1.59. That's the lowest since November 2017.

China's private sector weighted Caixin manufacturing index rose to 51.7 from 51.4 and that was better than the estimate of 51. New orders rose back above 50 "and reached the highest point since February 2018, due likely to the US' move to exempt more than 400 types of Chinese products from additional tariffs."

The Chinese manufacturing state sector weighted PMI fell to 49.3 from 49.8 while services weakened to 52.8 from 53.7. Within manufacturing, new orders fell back below 50 and exports dropped 1.2 pts month over month to 47. In services, new orders also fell below 50. 

Hong Kong's economy contracted by -2.9% year over year in Q3, well worse than the estimate of down -0.3%.

South Korean exports in October fell -14.7% year over year, a bigger drop than the estimate of -13.6%. It's the 11th month in a row of y/o/y contractions. Imports were down by -14.6% vs. the forecast of a decline of -13.7%.

Taiwan's October manufacturing PMI fell to 49.8 from 50. Japan's dropped to 48.4 from 48.9, and is the weakest in 40 months. Thailand's PMI declined to exactly 50 from 50.6. Indonesia's is down to 47.7 from 49.1. Vietnam's fell to 50 from 50.5. India's fell to 50.6 from 51.4. South Korea's remained below 50 but rose a touch to 48.4 from 48. This is negative for the markets.

Bottom Line

Rational people think at the margin.

It has been my experience that rate of change (absolutely and relative to expectations) is likely the most important near term determinant of stock prices.

On balance, last week's data-based changes (five positive, three neutral and two negatives) were a net positive benefit at the margin for the markets.

That's the third consecutive week of positive data, at the margin.

These short-term weekly changes should be also viewed in the context of one's intermediate-to longer-term outlook (and relative to one's risk profile/appetite and time frames).

Peter say it looks like Xi is coming to farm country:

It's a quiet morning with markets riding on hopes of the initial trade deal becoming signed within weeks where it looks like it will include soybean purchases, currency parameters and the opening up of the Chinese financial industry with no implementation of the December 15th tariffs but we'll still be left with the tariffs on $360b of goods. I've still seen no details on IP protection and assume that will part of the much more difficult phase two process that will likely spill over well into 2020. The Shanghai comp was up .6% while the H share index jumped by 1.8%. The yuan is higher to its best level vs the US dollar since mid August. 

Following the good BLS payroll report and the more modest ADP measure, tomorrow's ISM services index will give us more color on October as well as from Markit where their employment component within its services PMI fell to a 10 year low. Reconciling all the indicators are not easy and always clear at once. 

The Eurozone manufacturing PMI for October was revised to 45.9 from the initial print of 45.7 and up from 45.7 in September which was the lowest in 7 years. This level equates to a decline of more than 1% annualized in industrial production according to Markit. They cite Brexit and US trade policy as the main culprits. Hopefully after Boris Johnson wins next month and a Brexit soon follows, the first factor will go away and the trade tensions will calm after a trade deal, although tariffs will remain. How are Eurozone companies dealing? "The focus of manufacturers remains on cost cutting, reducing inventories and investment spending while also lowering payroll numbers at an increased rate." 

The October construction PMI in the UK rose to 44.2 but off a recessionary level of 43.3. The estimate was 44.1. "Civil engineering was the worst performing area of activity in October, with business activity dropping at the fastest pace in ten years...House building has also lost momentum this autumn amid a broader slowdown in market conditions...There are clear signs that construction firms are positioning for an extended soft patch for project starts, as highlighted by a further decline in purchasing volumes and another month of cuts to workforce numbers through the non-replacement of voluntary leavers." As long as Brexit seems more likely after Boris Johnson wins, all the bad news out of the UK will be looked at as old news. I remain positive on the pound and UK domestic businesses that have gotten beaten up over the past 3 years.

* The key to electric cars. 

* A Trump victory is likely if economy stays the course. 

* The Prince, the billionaire and Amazon.

Danielle DiMartino Booth does a deep dive on the jobs data: 

• The not seasonally adjusted BLS birth/death model is often misrepresented as the "culprit" for exaggerated strength in payrolls, given critics compare it to the seasonally-adjusted headline number; that said, private-sector benchmark revisions in the year to March 2019 of -0.4% are outside the +/- 0.1% band classified as statistical noise, meaning births of 274,000 overstated strength
• Continuing jobless claims provide hard data and are much more reliable than payrolls, which are subject to long-lagged revisions; claims fell (good) at a recent peak rate of -14.2% last September -- and have since risen (bad) by 2.5%, the first increase of the current expansion
• ASA's nine-month deterioration, depicting falling temporary employment, corroborates the continuing claims signal; high-paying jobs for workers also contracted in October, which will hit spending, given the top 40% of earners account for more than 60% of consumption

Paul Revere did not ride into the Massachusetts night screaming, "The British are coming!" Betsy Ross did not design the U.S. flag though she did helpfully suggest five-pointed stars over those with six points for ease of construct. The original cowboys donned derby hats, not Stetsons, which weren't even in existence until 1865. The Declaration of Independence was ratified on July 4, 1776 but wouldn't be signed until August 2nd of that year. And the New York suicide rate fell following the stock market crash of 1929. There were two prominent Wall Street figures who took their lives, but there was no jumping out of windows. And that's just the short list of Americana myths.

Bearish investors also cleave to a myth, one they likely will for all time - the fabled birth/death model. Every time there's a jobs report which surprises to the upside when it's expected to disappoint, you can set your watch to how long it takes for the birth/death model to be trumped out to take the blame. Friday was no exception. The most strident devotees cumulated the additions to further exaggerate payrolls mythical strength over the past year. There's just one problem. They're monkeying with the wrong math.

It's important to understand the intent of the number crunchers at the Bureau of Labor Statistics. Measuring the number of jobs created at new firms and companies that shutter operations is an exact exercise once a year when tax records are updated. So they created the birth/death model to estimate it based on the trends of the past five years. Cyclical inflection points, however, negate the efficacy of those historic averages, which is where we find ourselves today given private-sector benchmark revisions in the year to March 2019 of -0.4% are outside the +/- 0.1% band classified as statistical noise. This dynamic renders October's addition of 274,000 via the model overly optimistic.

But here's the key that most miss -- you can't simply subtract that number from the 128,000 that was reported for the month, a figure that's reported on a seasonally adjusted basis given the birth-death factors are not seasonally adjusted. The mistake, however, is made with regularity by angry masses of bears who want a simple scapegoat to explain away the data coming in stronger than forecasts.

More to the point, why leave it at that when there are alternative hard sources of data that can better reveal the truer underlying trend in payrolls well before revisions are reported this coming February. Continuing jobless claims (the red line) can get you there. This is hard data representing those who are currently receiving unemployment benefits, and they're reported weekly. As you can see, after troughing at a recent low of -14.2% last September, continuing claims are on the rise -- they're up 2.5%, their first increase in the current cycle.

In the last cycle, claims first rose in February 2007, a point at which we knew the economy was slowing as is the case today. But nonfarm payrolls did not fall until July of that year nor did they stay in the red until February 2008 when we were two months into recession. This is why economists classify payrolls as a lagging indicator.

As you can see, the ASA Staffing Index doesn't have a history that stretches back to the years that preceded the last economic contraction. In fact, it debuted in July 2007, when nonfarm payrolls first printed negative warning recession was imminent. The index then simultaneously peaked in December 2007 with the highest nonfarm number that would be seen until March 2010.

If it wasn't for the corroborating continuing claims signal, we'd be reluctant to assign the term "definitive" to the ASA's recent deterioration. While temporary employment has been declining for nine months, it lingered in contraction for an even longer stretch in the 13 months through May 2016, the last industrial recession.

Let's let the last line, the blue line -- high-paying job creation among workers (as opposed to managers) -- be the deciding factor, bearing in mind one Jerome Powell has hung his hat on consumption sustaining the current expansion. As a reminder, we define "high-paying" as jobs excluding Retail, Education and Health Services, Leisure and Hospitality and "Other" Services.

Presumably, consumption hinges on income and confidence in its durability, which thereby encourages households to take on debt, the other critical support that underpins spending. And that precondition relies on high-paying job creation given the top two quintiles of job earners account for more than 60% of consumption, not just retail sales.

The current cycle has featured exactly three months in which high-paying jobs among workers have contracted -- January and May 2016 and October 2019. You might agree the economy then and now is in different places, which we hope dispels the myth of it being in a "good place."