* Breadth was slightly negative on the day.
* Gold and bond prices were down bigly.
* The S&P closed near the day's low -- but nothing dramatic.
* Retail (Macy's (M) +5%) and financials were upside features.
* Boeing (BA) up off a well received CNBC (+$7) interview early in the morning.
* Our Trade of the Week (short Micron (MU) ) fared well - down by $1 (-2%).
* Beloved Disney (DIS) was a conspicuous underperformer.
Interesting to me that not one person in financial media mentioned the Atlanta Fed's GDPNow 4Q forecast of only +1%.
But, hell, maybe it's just me!
Thanks for reading my Diary today and enjoy the evening.

Macy's (M) , the object of my recent affection, picked up a bid (along with retail) and is trading +5%.
The rotation into retail is impressive considering the flat market. Note the bounce off 200-day moving average (arrows).
Perfect backtest?

I have sold my speculative Deutsche Bank (DB) shares (for a very small profit) and I am taking the stock off of my Best Ideas List.

The proximate reason for the sale was my analysis of the bank over the past weekend following the Wednesday report of a $925 million loss. The loss was bad enough (and in excess of my expectations) but the revenue and expense trends indicate the timing of a "recovery" is more distant than I previously thought.

And, with global economic growth slowing (and the ECB continuing its insanely easy policy as far as the eye can see), I am no longer willing to wait as the road to the bank's recovery will likely become filled with many more dangerous potholes.

I will stick with the quality of (BAC) , (C) , (WFC) and (GS) in the financial space.

* Is Nero fiddling while Rome burns?
* The Atlanta Fed's GDPNow model has reduced their estimate of fourth-quarter Real GDP growth to only +1%.
* The NY Fed is now estimating even less growth at +0.8% for 3Q2019
* As stock prices make record highs

"The GDPNow model estimate for real GDP growth (seasonally adjusted annual rate) in the fourth quarter of 2019 is 1.0 percent on November 5, down from 1.1 percent on November 1. Following data releases by the U.S. Bureau of Economic Analysis, the U.S. Census Bureau, and the Institute for Supply Management, the nowcasts of fourth-quarter real personal consumption expenditures growth and fourth-quarter real gross private domestic investment growth decreased from 2.2 percent and -2.5 percent, respectively, to 2.1 percent and -2.7 percent, respectively."

- Atlanta Fed


In "GDP, Uh, Oh!" I asked where was the economic beef:

So, as stock prices climb to all time highs, the prospects for domestic economic growth are deteriorating.

At the same time, complacency is percolating, and with the CNN Fear & Greed Index at "77" (an expression of "extreme greed"), our old friends fear and doubt have left the building.

Insane in the brain -- as market participants have become almost delusional in their optimism for economic and profit growth.

Today the Atlanta Fed further reduced its expectation of fourth quarter Real GDP to only 1%.

Remember the 1% forecasted rate compares to "at least +3% to +4% growth" projected by the Administration following the implementation of the tax reform bill back in January, 2018.

Where is the beef?

And who are the delusional ones, the Bulls or the Bears?

Levels of Conviction

* Its not necessary to have a strong view at every market level
* Nearly every investment view has a different level of conviction

"The best lack all conviction, while the worst are full of passionate intensity."
- William Butler Yates

Conviction is something James "Rev Shark" DePorre and I often discuss in our columns.

I don't think there is enough attention paid to this subject.

Remember all investment views are not equal.

The investment mosaic is complex, and we often are uncertain as these are volatile and unpredictable times.

So, with your indulgence, I wanted to repost a column on the subject of conviction that I initially wrote nearly a year ago:

Recently the market has been a powerful demonstration of:

* Its vulnerability.
* Its strength.

Wait, how could it be both conditions at once?

Because it was.

Three weeks ago Monday, the S&P Index, up by over 10 handles on the opening, reversed to being down by nearly 35 handles (at its nadir) only to close down 10 handles at day's end. That's a 45 handle reversal from best to worst.

However, the close indicated that dip buyers remain very much alive -- indicative of an underlying strength.

The fact to me is (and what makes this game unusually difficult in current times) is that there is so much artificiality apparent in the market's structure that it is hard to believe, at any point in time, that prices are representative of natural demand and supply.

It helps to explain why so many brilliant hedge hoggers have left the business and why so many are frustrated by the changing market structure in which ETFs and quant strategies dominate the landscape and, arguably, impact natural price discovery.

It also helps to explain why, as a matter of principle these days, start small in initiating positions and slowly build them up subject to a favorable upside/downside ratio. This does not prevent me from getting to large net exposures (short or long) that have longer term timeframes as prices more than ever get out of whack based on the influences below - as the "voting" of investors grows ever more extreme - as I am confident that the "weighing" will, in the fullness of time, reflect closer to intrinsic values.

Back in early January, 2019 in "Not All Investment Views are Created Equal," I covered the subject of my diminished conviction levels in a changing market structure:

It is said that opinions are like buttholes -- everyone has one (and that includes me!)

It seems that in today's investment world in particular almost everyone has an opinion and a view on nearly everything. In many cases these views are delivered by self-confident messengers who seem to never be in doubt but are often wrong.

It also seems, that the more anonymous the person is, the more confident is the view! The Twitter platform comes to mind.

Few say, "I don't know."

But this is not a representation of reality.

The fact is that a view invariably is associated with differing degrees of conviction.

Nearly every strategist, analyst and portfolio manager is first asked about a "view" in the business media, but I can't remember the important follow up question: "What is your conviction level associated with that view?"

This very simple concept gets little discussion, but it should as it is very important, sometimes as important as a given view itself.

As an example, last night I "liked" Clemson. Based on my analysis I thought the spread of six points (Alabama was favored) was too great given Clemson's talent (of a Trevor Lawrence kind) and momentum, among other factors. But my conviction level was not high, so I wagered a small amount with Badgolfer -- thanks, Mikey! -- on Clemson to win.

The Clemson Tigers easily won the college championship by a score of 44-16, blowing out the Crimson Tide.

It is also true when investing that not all views are equal.

Investment Convictions Today Should Be Lower Than in the Past

There are several factors that recently have contributed to rising uncertainty:

* The market structure has changed -- The dominance of passive products and strategies are also contributing to the new regime of volatility that began in early 2018.
* The Orange Swan and political turmoil -- These factors are contributing to policy uncertainty, which in a flat world (see below) has broad ramifications to investors. The administration's hostility towards the other G-7 countries and a lack of sense of the world community (i.e., the abandonment of the post-World War II order) jeopardizes the U.S. leadership position and poses new economic and market risks.
* The world is growing more flat, networked and interconnected -- Non-coordination and lack of cooperation among the largest countries in the world represents a profound and new risk. I continue to ask these three questions every day, as the answers might serve to raise uncertainties but also may be viewed as valuation busters in the fullness of time:

• In a paperless and cloudy world, are investors and citizens as safe as the markets assume we are?
• In a flat, networked and interconnected world, is it even possible for America to be an "oasis of prosperity" and a driver or engine of global economic growth?
• With the G-8's geopolitical coordination at an all-time low, how slow and inept will the reaction be if the wheels do come off?

The reason I want you to remember these questions is that the answers might serve as valuation busters in the fullness of time..."
- Kass Diary, "This Ain't No Seder, I Now Have Eight Questions" (2017)

Differing Conviction Levels and the Uncertainty of Views

"I'm astounded by people who want to 'know' the universe when it's hard enough to find your way around Chinatown."
- Woody Allen

Besides the three contributors that form the foundation of growing uncertainty, there are other factors that may reduce conviction of views.

Price is an important consideration.

For example, with the S&P 500 Index advancing by nearly 130 handles (adjusted for Tuesday morning's futures rise) since the close of trading last Thursday to almost 100 handles above my "fair market value," the conviction level of my many individual long holdings - many of which are up 20% or more in a brief period of time - is much lower than from three trading sessions ago.

For that reason and others, I have adopted a market neutral position, which is a manifestation of my lack of conviction in either direction.

The Rare Time of High Conviction Should Be Followed in Practice

"Soros has taught me that when you have conviction on a trade, you have to go for the jugular. It takes courage to be a pig. It takes courage to ride a profit with huge leverage."
- Stanley Druckenmiller

I didn't want to end this missive without mentioning that, though uncertainties reign, when your conviction is high you should not be reluctant "to go large."

In the last 30 years, George Soros and Stanley Druckenmiller are the best practitioners of convicted and concentrated investment positions/bets.

This was also the case, at least for me (on a more limited scale), when the S&P in the last week of December 2018 collapsed to 2340 (now at 2560 only a week later) and I moved to a large net long exposure.

Then there is the rare bird, Berkshire Hathaway's (BRK.B) Warren Buffett, who, more than anyone in modern investment history, has a documented history of confidence and large, concentrated portfolio investments that have manifested in the delivery of remarkable investment returns over the last five decades.

"Our destiny is frequently met in the very paths we take to avoid it."
- Jean de La Fontaine, Fable 16

For the reasons addressed in this morning's missive, my conviction levels over the last few years are far lower than they have been in the past, especially when compared to when I started out in the investment business more than four decades ago.

For me, my conviction is strongly a function of rising uncertainties -- in policy, politics, market structure and interconnectivity -- as well as the difference between current share prices and my calculus of intrinsic or fair market value. While it is counter-intuitive to momentum-based strategies, my conviction rises when the spread between current share price and intrinsic value widens. As the spread contracts, my conviction is reduced.

These factors help to explain my weightings -- small, medium and large -- which tend to be a reflection of my varying conviction levels and the consideration that it is increasingly hard to find the ideal entry point!

The Bottom Line

In the final analysis, all investment views are not equal.

Gold is getting schmeissed today - down by -$27.50/oz.
The proximate reason is the eight basis point rise in the yield on the 10 year U.S. note (to 1.87%).
I remain short of bonds in the belief that current yields are discounting less than +0.5% growth in U.S. Real GDP.
And I have a small position in (GLD) .

Rev Shark and I have been going back and forth on Twitter (TWTR) with Tony Dwyer and Thomas Lee on where investor sentiment stands. (Also with Mikey in our Comments Section)

My view is that it is too easy to data mine the sentiment data - its all over the place. Moreover, it's not necessarily a good timing tool. I can always fit a sentiment data point as in support of my market view!

That said, as you can see from the chart below, a low Put/Call ratio (that exists today) has not necessarily been the peak day - but more of a sign of rising risk: 

                                             SPX vs P/C (showing only readings below 65%)

In Friday's Minding Mr. Market I highlighted the difference in what bulls see and what bears see.
With this week's schmeissing of Shake Shack (SHAK) , Uber (UBER) and other former high flying IPOs, I wanted to emphasize something I wrote in Friday's column:"Bulls think the valuation compression in all the high flyers, particularly the new IPO crop, is a sign of reason and health coming back to the market. Bears think this is classic late stage cycle activity where valuations now matter, which provides much less room for error."

From Peter Boockvar:

The October ISM services index rose to 54.7 from 52.6, which was a 3 yr low, and was 1.2 pts above the estimate of 53.5. For perspective, the average this year is 55.7. New orders rose 1.9 pts to 55.6 but after falling by 7 pts last month. And, only 10 of 18 industries saw an increase vs 12 last month and 15 in August. Backlogs were weak, falling 5.5 pts to back below 50 at 48.5. Employment rebounded to 53.7 from 50.4 but was 53.1 in the month before and 56.2 in the month before that. Of 18 industries asked, 11 added headcount, the same number as in September. Export orders fell 2 pts to exactly 50. Inventories fell to 50.5 from 53 last month and 10 industries said "Inventories are too high" vs 8 in September and 7 in August. Lastly, prices paid fell 3.4 pts to the least since May but are still above 50 at 56.6.

While the headline figure rose, the breadth was the same as last month with 13 of 18 industries surveyed seeing growth, unchanged m/o/m. More reported a contraction totaling 5 in October vs 4 in September.

ISM said while the "non manufacturing sector had an uptick in growth after reflecting a pullback in September, the respondents continue to be concerned about tariffs, labor resources and the geopolitical climate." Bottom line, the weakness in manufacturing as spilled over into the services area of the US economy with today's print the 3rd lowest since 2016. It is though the remaining strength in the US economy.

Looking at the Markit PMI's index on services, it is barely above 50 at 50.6 announced today. That's the lowest since early 2016. Its employment component fell to a 10 yr low and it was a combination of less demand but also still the difficulty in finding new workers that are qualified. Markit said "voluntary leavers were not replaced and firms struggled to fill outstanding vacancies." Also of note, new orders fell below 50 "for the first time since 2009." There was some optimism over the possibility of a trade deal and the Fed rate cuts helping. "However, the overall degree of optimism remains sharply lower than this time last year as companies remain concerned by ongoing uncertainty about the outlook."

ISM Services PMI


The number of job openings in September fell to 7.02mm, the least March 2018 and as seen in the chart we've likely seen the peak in this cycle. This is a demand issue now and we cannot just say that the lack of supply of qualified labor is the key labor market problem. That said, the level of job openings above 7mm is still very high.

JOB OPENINGS

I noted back in late October that retail stocks looked better technically.

Mikey (BadGolfer) and others have said the same in our Comments Section.

As mentioned, I continued to buy the weakness in Macy's (M) over the last few weeks. 

Its now a large long position.

I shorted more Micron (MU) on the opening at $49.62.

Good stuff from Lance Roberts, "Everyone is Swimming in the Deep End."

* Semiconductor stocks are momentum darlings and are making new highs
* I question the bottoming thesis
Micron's (MU) shares have risen because of hope that the U.S./China trade negotiations will be resolved favorably. (I am less optimistic).
Here are some reasons why Micron is my Trade of the Week:
* Last week the SIA reported that September total semiconductor revenues rose to $38.4 billion (+8.3% month over month). That was more than 310 basis points below the average seasonal increase of +11.4% (also month over month). September semiconductor revenues (excluding memory) was +8.8% - well below the seasonal average of +12.2%.
* September marks a change from the past two consecutive months of above seasonal trends for semiconductor sales (ex memory).
* Despite the Administration's protestations the outlook for a satisfactory resolution of the China/U.S. trade negotiations remains low.
* I question the bullish and bottoming semi thesis. Rather, I believe, based on outsized demand from Hisilicon, Crypto and Apple Supply Chain, that supply chain "pulled forward" demand to minimize the impact of additional tariff increases. 2020 EPS estimates for Micron and others seem to be too elevated.
* DRAM ASPs have now fallen sequentially in 13 of the last 14 months - and are now down 58% from the peak in July, 2018, 15 months ago. This compares to the cycle average of ASPs down 52% over 18 months.
* NAND ASPs have now fallen sequentially in nine of the last 10 months, though we would note that since April-19, NAND ASPs are down just 6.6%. Now ASPs are down 63% since the peak October, 2017 (23 months ago) compared to the cycle average of down 42.4% over 18 months.
Here are some of my recent columns on Micron and the semiconductor space:
* Chips Ahoy!
* A Contrarian View
* Semis Woes
* Still Say No to Micron
* Spots of Vulnerability

From Peter Boockvar on sentiment and other topics:

It was music to my ears when I heard last night the possibility that the administration is considering, upon request of the Chinese, to also roll back the September 1st tariffs on about $110b worth of consumer goods. In return we'll have to see but it would at least further temper the negative economic impact of tariffs and take us back to where we were on July 31st, the day before they were initially threatened. China buying US ag products to the extent spoken about would take us back to where we were in 2017. So, the point of this whole thing? Hopefully we'll get as close as we can on IP protection that we were in early May on the deal that was supposedly 90% done.

The stock market highs driven by trade deal hopes, Brexit resolution optimism, another rate cut, and QE4 via Tbills (The Fed's balance sheet is back over $4 Trillion as they are back to monetizing the US budget deficit) has the CNN Fear/Greed at 86 and 'extreme greed' read and the highest level since late 2017 during the euphoria over the tax reform bill. The index, which ranges between 0-100 was 8 one year ago and 67 just one week ago. The market rallied right into mid January 2018 so don't use this as a timing tool but do realize how much the mood has changed. What separates this index from II and AAII is that it measures what people are actually doing rather than just the emotions of II and AAII. It encapsulates the put/call ratio, the difference in the 20 day return between stocks and bonds, how extended the S&P 500 is above its 125 day moving average, the McClellan volume summation index, new 52 week highs vs 52 lows, the yield spread between high yield and IG bonds, and lastly the VIX. We'll get the II figure tomorrow and expect a further stretch between Bulls and Bears to around 40.

CNN FEAR/GREED

Treasury yields continue higher, with the 10 yr breaking above 1.8% following weakness in overseas bonds on this trade optimism. The German 10 yr bund yield is higher by 2.5 bps to the least since mid July while the French 10 yr is getting close to zero again at -.03%. This followed a sharp rise in JGB yields of 5 bps but just gets back what if lost late last week. The BoJ again is limiting their purchases of longer term bonds in order to try to steepen their yield curve. I repeat again my belief that the August lows in global bond yields will be the lows for a while as the BoJ and ECB have reached the end of their extreme easing. And any positive news on trade and/or the economy will see yields spike I believe.

Back to the economy, the Federal Reserve's Senior Loan Officer Survey released yesterday points to a still very mixed situation. Demand for C&I loans softened, which has been seen in the weekly data, but standards were mostly unchanged. About 85% of banks said that investment in plant and equipment weakened in some fashion. Banks tightened standards for commercial real estate loans but demand was little changed. In line with the drop in mortgage rates, residential loan demand picked up while standards were steady.

Covering about 80% of the US economy, today's October ISM services index will be the most important figure of the week. The estimate is 53.5 vs 52.6 in September which was a 3 yr low.

Overseas, Hong Kong's October PMI fell further to 39.3 from 41.5 and well below the breakeven of 50. No explanation is needed here. China's private sector weighted Caixin services index fell a touch as expected to 51.1 from 51.3. That matches the lowest level since October 2018. New orders fell to the lowest since February. For the first time in a while, it was the manufacturing side that outperformed services with respect to expectations in October.

India's services PMI in October remained below 50 but rose .5 pt m/o/m to 49.2. Singapore's PMI weakened further below 50 at 47.4. Markit said "Difficulties endured by Singapore's economy have merely intensified at the start of the fourth quarter, with firms registering historically marked drops in demand and output, as well as cut backs to staffing levels. Weak regional economic activity across Asia has also clearly sent shock waves through the domestic economy, and panelists have subsequently curbed their expectations for the coming year."

The global $64k question is to what extent this global economic slowdown will be reversed when there is some deal between the US and China.

The UK services PMI in October improved slightly but did get back to 50 from 49.5 in September and vs the estimate of 49.7. Markit said "The outlook improved slightly as a number of firms expected Brexit to be resolved early next year, reducing uncertainty, but overall sentiment remained historically weak."

Futures fall a bit on the tweets I just cited.

Its all lining up to Danielle DiMartino Booth -- a weakening rate of economic growth in the U.S. (as financial asset prices continue to climb with little end in sight):

• The ISM Manufacturing report revealed that out of the 18 industries reporting in October, no single industry saw increased imports; this introduces downside risk via inventories to Q4 GDP forecasts, currently pegged at 1.8%
• Lower imports reflect faltering domestic consumption, which is often missed given the initial boost to GDP growth; the threatened slowdown may catch investors off guard due to the lag in reporting manufacturing inventory, which rose by 0.3% in September, a six-month high
• If the recent declines in C&I loans persist, firms have likely shifted their focus to deleveraging the balance sheet; a more meaningful transition to de-risking could flag risk building in robust trade credit activity, which has recently offset falling C&I loan activity

For residents of northern climes, leaf peeper season turns purple mountain majesties into a vast array of autumn hues that spark cravings for all things pumpkin spice. But there's another brief span between fall and winter that most enterprising municipalities celebrate once all the leaves have fallen. Any New England kiddo, mesmerized as they tend to be by large and loud industrial machines, can tell you "leaf vacuum season" is nearly upon us. That all-too-familiar whirr the leaf vacuum truck makes elicits oohs and ahhs from the back-seat windows of family SUVs rushing to and from school drop-off and pick-up. Come December, the branches bare, and leaf piles assembled curbside, the giant sucking sound comes to an abrupt end.

For U.S. imports, their season end arrived a few months early -- in October. Last Friday's ISM Manufacturing report revealed that sourcing imports dried up at the outset of the fourth quarter. Not a single industry out of eighteen reported increasing imports in October. Why do we care? It starts with an appreciation of the ISM's middle name, as in 'Supply." Imports sourced from outside U.S. borders are the feedstock that supplies inventories. The last time this breadth indicator hit the zero bound, the U.S. economy was in the middle of recession in 2009 and ISM New Orders, the bluest of blue chip leading indicators, plunged under the 30 mark, miles below the 50-line that separates expansion from contraction.

An import signal of this magnitude flags high caution from procurement professionals and downside risk for supply assumptions in the outlook for fourth-quarter U.S. Gross Domestic Product (GDP) that the consensus currently pegs at 1.8%. Notably, this forecast incorporates a -0.4-percentage point annualized drag from inventories.

Now think like a trader. If imports disappoint, Econ 101 invokes ceteris paribus and concludes that, all else being equal, lower imports will shrink the trade gap AND simultaneously raise GDP. Yes, those two things are politically popular and look good on paper. They are even correct mathematically and in a national accounting sense.

What will this reflex interpretation miss? Globalization denialists aside, it's a fact of life that lower imports are a sign of weakness in domestic consumption. The sharper drawdown on stockpiles will lower GDP, offsetting the import compression. Traders overlooking this key variable will miss the second-round effects from the downside surprise emanating from import channels.

Investors will likely be caught off guard on near-term growth prospects. Yesterday's manufacturing inventories through September revealed a 0.3% monthly advance, the largest gain in six months. Industrial supply also continued to expand at a 2.6% pace over the last 12 months. Moreover, it's been more than three years since we've seen a sizable and persistent shrinkage in manufacturing inventories.

These past few weeks, we've raised concerns about the emerging deleveraging signals seen through the pullback in commercial and industrial (C&I) loans which tend to run concurrently with the inventory adjustment we expect to unfold over the next few months.

That said, we can't deny an opposite signal of business debt that's still flashing green in the trade credit space. This divergence between weakening bank loans and expanding trade credit typically manifests during periods of tight monetary policy, say a five-month stretch of an inversion between the 3-month/10-year Treasury curve. Fancy you mention it. That's just what we saw from May to September as markets protested Fed policy being too tight.

Cost-conscious businesses were left with the aim of minimizing funding costs saying 'no' to bank loans, and 'yes' to trade credit. The appeal: trade credit is "free" while banks charge interest. Think of trade credit as 0% financing that increases a company's assets while deferring payment for a specified value of goods or services through an agreed upon date in the future. Firms that offer trade credits give buyers 30, 60, or 90 days to pay, while business loans run for longer durations of out to two years.

Should the recent declines in C&I loans persist, we should deduce CFOs and Treasurers have shifted their focus to deleveraging the balance sheet. This could set up a cliff risk for the relatively more affordable financing choice of trade credit beyond the definition of "idiosyncratic." As reported in yesterday's Wall Street Journal on Newell Brands (NWL) being the latest fallen angel, "About 10% of all companies rated triple-B, the lowest investment-grade rating, have a negative outlook by at least one ratings company."

With trade deal optimism buzzing in the financial media amidst U.S. stocks hitting fresh record highs yesterday, such dour scenarios are the furthest thing from investors' minds. We get it. But we equally caution against dismissing macro signals from imports, inventories, business loans and trade credit, all lining up, and in that order. Prudent investors prefer to avoid altogether vacuum season on their portfolios.

Asset class returns since 2008 (from Charlie Bilello):