Small ($275 million) to buy on the market close.
Thanks for reading my Diary today -- I hope my information and analysis were value added.
Enjoy the evening.

* A "snoozer"

* Good overall action in the face of possible snags in the U.S./China trade negotiations.
* But volume is light and programs mainly moving the markets.
* Breadth almost flat and little movement in the Indices.
* Gold rallied (+$8/oz) after yesterday's schmeissburger.
* Crude oil down another -$0.70/barrel.
* Bonds advanced as yields dropped by nearly five basis points.
* Little change in the FANG names - though FB looks like it might be rolling over (I sold at about $190 a few weeks     ago). 
* Banks finally got a bit overbought but the stocks act well (which surprises me a bit!). RSI is now over 70.
* Boeing (BA) gave up more than half of Tuesday's gains.
* Retail reversed yesterday's strength.
* Micron (MU) , a short fave (and Trade of the Week) down another beaner after yesterday's weakness.
* I did little trading during the session.
__________
Long BA (large), GLS (small), GOOGL, AMZN, BAC (large), C (large), WFC (large), GS (large).
Short TLT, MU (large)

I have already begun to assemble my 15 Surprises for 2020.
I will release one of them now... and it is that I anticipate that Twitter (TWTR) is acquired next year.
Stay tuned.

The 10 year note auction was good. The yield of 1.809% was below the when issued by about a full basis point. The bid to cover of 2.49 was above the one year average of 2.42. And, direct and indirect bidders took about 77% of the auction which is the most since June and slightly above the 12 month average of 75%.

Bottom Line

This was the highest yield in almost two months - and it brought out some buying. Trying to read further into that is tough because I think the long end of the bond market is in this tug of war.

On one hand, I believe yields are rising because of the rise in Japanese and European yields as central bankers there reassess what they've done to their yield curves, in addition to going up on hopes of a China trade deal, Brexit resolution and a Fed engineered soft landing.

On the other hand, we have bond buyers betting on lower yields because the actual economic data around the world is soft. If the Atlanta and NY Fed's Q4 GDP estimates of around 1% are right, growth for the year will average just 2% with obvious weakness in manufacturing, trade and capital spending. We know growth is punk in most areas overseas.

Here is a chart of the 10 year U.S. note yield: 

I heard a lot of confident chatter in the financial media just now about why asset managers' shares are attractive.
I couldn't disagree more.
The asset management business is being disrupted post haste - companies like Morgan Stanley (MS) charge enormous fees on overpriced and underperforming spread products.
Their salad days are over.
Asset managers are vulnerable to commoditization - which will take their investment management fees and product profit margins down dramatically in the years ahead.
Think of on-line trading as a template, foreshadowing aggressive fee competition ahead.
And Katy Bar The Door! if we face a Bear Market.

Ned Davis provides some of the best research on sentiment and valuations extant.
The service is data based and not opinion based.
His conclusions in his latest report are contrary to those that say investor sentiment is weak - and use that as a bullish sign:
* Money market cash is less than one half the mean level since 1980.
* Cash in brokerage accounts relative to margin balances is at only 61% (vs 93%, on average, since 1999).
* Stocks are overvalued relative to the median P/E since 1965.
* Stocks are overvalued relative to the latest EPS estimates.
* Median price/sales at nearly record high levels.
* Stock allocations are elevated while cash allocations are low.
* Long term sentiment indicators are high.

I am shocked, just shocked that there might be a possible snag in the U.S./China trade negotiations.

This helps to explain the small selloff in stocks this morning.

From my pal and golfing partner Jack Ablin at Cresset Capital:

Despite protestations from some quarters that investors are bullish, the Goldman Sachs sentiment poll suggests otherwise:

Compare the November poll with the October Poll:

Micron's (MU) shares fell yesterday in a flat tape.
Today they are down another -$1.50/share (nearly 3%).

Weaker than expected productivity coupled with higher labor costs means that profit margins are in jeopardy:

The data mattas.

Third quarter productivity disappointed, falling by -0.3% quarter over quarter annualized vs. the estimate of up +0.9%. Compared to last year's third quarter, productivity still was up +1.4% but a moderation from the +1.8% and +1.7% gains in the prior two quarters. Due to the quarter over quarter fall in productivity, unit labor costs jumped by +3.6% quarter over quarter and +3.1% year over year. That year over year gain follows a 2.6% rise in Q2 and it's the biggest rise since Q1 2014. 

Bottom Line

Productivity definitely has improved over the past few years with 2019 being the best in years notwithstanding the third quarter miss. But if we keep seeing job numbers like we saw on Friday at the same time growth continues to slow, the third quarter productivity moderation won't end here. Also, the rise in unit labor costs is the main reason why corporate profit margins are now falling.

See the chart below from Ed Yardeni: 

* But a change is gonna come
* Yes it is...

"You were tired and you want to be free
My love is growing stronger, as you become a habit to me.

Oh I've been loving you a little too long
I don't want to stop now, oh.

With you my life
Has been so wonderful
I can't stop now.

You were tired and your love is growing cold
My love is growing stronger as our affair grows old.

I've been loving you a little too long, long
To stop now"

- Otis Redding, I've Been Loving You Too Long

Written in 1964 and released the following year, "I've Been Loving You Too Long," is considered to be Otis Redding's finest performance. It is a slow, emotional piece characterized by his pleading vocals and backed by producer Steve Cropper's arpeggiated guitar parts and a blasting horn section. It was Redding's second best selling single ("Sitting on the Dock of the Bay," recorded right before his death - he was only 26 years old when he died in a plane crash on the way to Madison, Wisconsin) and was number one.

It's hard to say what Jerry Butler and Otis Redding had in mind when they sat down one night in a Buffalo hotel room and wrote, "I've Been Loving You Too Long." Clearly they were weary of the road; it shows in the melancholy mood. Maybe they missed their wives or maybe one of them had just broken up with someone. Maybe they were trying to find a way to get over with a girl down the hall.

We can only guess. But everybody knows what they came up with: the ultimate slow dance, a nonpareil seduction song, an actual standard, a song that will be covered as long as men and women want an excuse to clutch each other tight in public.

But then, Otis sort of messed that up, because his version is inimitable. Phrasing as though each line is coming to him only the instant before he sings it, quavering notes as if in the grip of an undeniably exquisite passion that must be consummated - now! - Otis tears the song up without showing a second's strain. Aretha may have been able to cop "Respect," but neither she nor anyone else would ever touch him on this one.

If Otis has been loving her too long, traders/investors may also be loving the markets too long (whether measured by fundamentals, sentiment or valuation...and even politics):

* In duration, at over 124 months, the Bull Market is old.
* And so is the economic recovery long in the tooth - particularly with years of near zero interest rates having pulled forward sales and profit growth.
* Fundamentals (global economic growth and U.S. corporate profits) are deteriorating.
* We are in an "earnings recession." Factset just shifted their 4Q2019 S&P EPS estimate to slightly negative - that would be the fourth quarter in the row if negative.
* Consensus S&P EPS estimates for 2020 (year over year) of +11% are too optimistic. (I am using +5%).
* Arguably, the U.S. political landscape is filled with more hate than anytime in history. Nothing will get done. The widening wealth and income gap will not be addressed - and that holds adverse social and economic ramifications. No infrastructure, nothing.
* Trump is faltering and the impeachment process is gaining steam. That's market and business unfriendly.
* The probability that a Democratic progressive will win the Presidential election in 12 months is rising. That's also market and business unfriendly.
* The world's political and economic landscape is enveloped in nationalism and the lack of coordination and cooperation between the major economic powers.
* Valuations, based on historic measures, are elevated in the 95th percentile or higher. (Just check out Buffett's fave valuation metric, stock capitalization as a percent of GDP).
* The spread between GAAP and non GAAP earnings has never been wider. I am not sure why "talking heads" only use non GAAP these days - but it creates the perception of an artificially low S&P price earnings multiple.
* Our fiscal policy has lost any semblance of discipline - and few are concerned about the adverse economic ramifications.
* Our monetary policy is on overdrive - and, again, few are concerned about the adverse economic ramifications.
(Investors should consider what Ray Dalio said yesterday on CNBC - central bank responses to the crisis have conditioned investors to do the opposite of what is in their long term interests because it has convinced them that this is a normal environment that can continue indefinitely. But we know it can't.)
* Investors are complacent and certain measures (e.g., put/call or CNN Fear & Greed Index) indicate complacency, at the least, or extreme greed, at the most.

What the Bulls do have is price momentum - which drowns out concerns for many just like Otis Redding's profoundly soulful voice.

There are numerous reasons for the recent leg to the upside: Jim "El Capitan" Cramer rightfully discussed the machines and algos yesterday morning but above all as The Divine Ms M often writes, "Price has a way of changing sentiment."

More than ever, we live in an investment world where not only quants, but human traders worship at the altar of price momentum. There are more products and strategies than ever before, that are momentum based. This helps to explain why Tilray (TLRY) traded above $300/share, why Beyond Meat (BYND) rose by six fold, why WeWork had a near $50 billion capitalization... and why so many buy high and sell low.

Finally, in the financial media this week I heard repeated calls that "seasonality" will force buyers in even further (one of my pal Thomas Lee's favorite arguments). I am not a fan of this theory that investors will have a performance chase in the next 55 days - last November and December certainly is a lousy template for the bullish cabal's argument.

What I am certain of is that the crowd is almost always more comfortable with a herd formation.
Not me, I possess an intermediate term view, a contrarian streak, use probabilities of outcomes and use my calculator in forming the basis of my market view that has concluded upside reward is now dwarfed by downside risk. Bottom Line
Traders and investors have been loving this market too long - and they can't stop now.
Which gets me to another breathtaking song released in 1965 - Sam Cooke's "A Change Is Gonna Come."
If Otis was soul, Sam Cooke was gospel.
In "Change Is Gonna Come" we don't hear the horns (as we do with "I've Been Loving You Too Long") - rather we hear a lush orchestral arrangement in which Cooke smoothly preaches a sermon on humanity. There are those who would argue that the single is inferior to the album track because it omits the most militant verse (about being refused admission to a movie theatre). But in 1965, much less 20 years later, what Cooke was singing about was clear enough, especially when he talks about his "brother" who knocks him to his knees. This was Cooke's final hit and it is the one record that comes closest to the spirit of Dr. Martin Luther King Jr's self eulogy, "I've Been to the Mountaintop."
It's been a long time coming, but a change is gonna come.
Yes it is, yes it is.

Peter Boockvar on sentiment, rates and some data:


These trade talks are getting even more interesting now that there is talk of the Chinese wanting even more existing tariffs taken off than just those implemented on September 1st. I would love to be a fly on the wall of those oval office deliberations between those that love tariffs and those that don't. Either way, in terms of what's been priced in and not, just look at the sentiment data.

So the day after the CNN Fear/Greed index rose another 3 pts to 89 (0-100), the highest since late 2017 when the market was cheering the growing likelihood of the corporate tax rate falling to the low 20's from 35% and what that would do to corporate earnings, the Investors Intelligence index saw Bulls rising to 57.1 from 54.2 last week. That's the most since late July and II said "Counts above 50% call for caution and this week's further move above 55% again signals the need for defensive measures, tight stops and some selling among shares with large gains." Any read above 60 would be considered extreme. The rise in Bulls came from the Correction side which fell for the 9th week in the past 10 to just 24.8. That's the lowest since October 2018 right before you know what. Bears interestingly did creep up by .3 pts to 18.1 but the its spread to Bulls did increase to almost 40 at 39. Bottom line, sentiment clearly has shifted with this run to daily new market highs and now the bull boat is pretty full.

The average 30 yr mortgage rate dipped back below 4% on the week but applications to buy a home fell 2.5% w/o/w and is down for the 4th week in the past 5 and the y/o/y gain is down to 6.8%. The index is at the lowest level since late August as the housing market continues to balance the benefits of lower rates and the affordability issue of high prices and limited inventories. Refi's rose 1.8% w/o/w and are up 144% y/o/y.

The Japanese services PMI for October fell below 50 to 49.7 from 50.3 in September. It's the first time this area of their economy has entered a contraction in over 3 years. Japanese companies has had to deal with the VAT hike and a typhoon where both obviously disrupted business. Positively, the expectations component remained above 50 as "Plans to hire new staff and invest underpinned the confident outlook."

While this number is never market moving, the trend higher in interest rates continued with the 10 yr JGB yield jumping by another 4.3 bps to -.08%, the least negative since late May. I cannot emphasize enough again that after 20+ years of wanting to suppress interest rates, that the BoJ now wants higher long term rates to save their banking system is a really big deal for global bond yields. And also throw in the push back to monetary policy in Europe, the possibility of a trade deal, hopes for better growth as a result, and resolution to Brexit and the risk of a further jump in long term interest rates is real and likely I believe. European and Japanese bank stocks will however benefit. The Euro STOXX bank stock index is rallying to the highest since early May (also helped by the German comments on a banking union possibility) and the Japanese Topix bank index is at the best level since April. These stocks are dirt cheap for obvious reasons.

JGB 10 yr yield

The eurozone October services PMI was revised to 52.2 from 51.8 initially and that was .4 pts better than expected and up from 51.6 in September. It still is the 2nd lowest read since January and Markit said "A marginal increase in new business volumes signaled during October, with growth only slightly up on September's 8 month low. Export trade remained especially weak, declining for a 14th successive month." Hopefully, a trade deal and Brexit resolution will further help sentiment. Regionally, services rose a touch in Germany, was up by 1.8 pts in France and improved in Italy but fell in Spain. The euro didn't respond much as it's unchanged while European yields are up a hair after yesterday's jump.

German factory orders in September surprised to the upside with a 1.3% m/o/m increase vs the estimate of up .1% and August was revised up by 2 tenths. The Economic Ministry was hopeful that this "could signal a bottoming out of orders." After the tough run the industrial side of the German economy has had this year, that would be a nice turn of events if the case. This said, orders were still down 5.4% y/o/y and down for the 16th straight month y/o/y. Orders fell within the eurozone but were positive in Germany and outside the eurozone.

--The halving of companies that are public is supportive of the recent market strength. (This phenomenon has been discussed in my Diary over the years)--Another skeptical view of bitcoin. --The private equity paradox.

From Charlie Bilello:

Danielle DiMartino Booth writes that we should watch the shrinking labor pie and consider the economic and investment ramifications: 

• The labor market is facing typical late-cycle capacity constraints; what's changed is the demand side of the equation as employers are reluctant to replace exiting workers even as the skills shortage continues to plague employers in need of sufficiently trained workers
• In the last week of October, temporary labor demand was contracting at a -6.5% year-on-year rate; July 2008 was the last time a decline of this magnitude was recorded, seven months after the official onset of the 2007-09 recession
• JOLTS nonfarm job openings fell to an 18-month low in September, with all sectors suffering contractions on a 12-month basis; the "More Cyclical" industries saw openings decline 10.3% while "Less Cyclical" and "Non-cyclical" fell by 4.5% and 7.1%, respectively

Ever heard of an apples-to-pecans-to-pumpkins comparison? Didn't think so. Food and wine magazine nonetheless put the controversy right out there, asking, "What's the most popular Thanksgiving pie?" After polling 1,550 Americans, pumpkin was the clear winner. The South Atlantic, East North Central, West North Central, Mountain and Pacific regions all go the way of the gourd. Rebels New England and the Mid-Atlantic sided with apple, while East South Central was torn between apple and pecan. Going their own way, as if that's a first, West South Central stood alone contending pecan was the most worthy pie for their Thanksgiving feast.

Whichever fits your palette and whether a la mode or not, one thing will be for certain on the fourth Thursday of November -- pies will be shrinking. Economically speaking, that means that both supply and demand are shrinking simultaneously, which is exactly what we're observing in the U.S. labor market.

Labor is in short supply. This phenomenon occurs when the economy is late-cycle phase and bumps up against capacity constraints. There are shortages and mismatches between the existing labor pool and jobs on offer. To put a qualitative stamp on the former, we reference yesterday's ISM Non-Manufacturing report for October. It revealed four different employment metrics in short supply: 1) Construction Labor for 43 months; 2) Construction Subcontractors for 22 months; 3) (general) Labor for 13 months; 4) Temporary Labor for 4 months.

The IHS Markit Service survey for October also revealed an element of short supply. It noted that "service providers registered a faster decline in employment in October as voluntary job leavers were not replaced and firms struggled to fill outstanding vacancies." A dearth of warm bodies to fill open positions captures the short labor supply theme.

Labor is in short demand. Markit also picked up on headwinds facing the other side of the labor ledger. Chris Williamson, IHS Markit's Chief Business Economist said that "we're seeing jobs being cut at an increased rate among surveyed companies, with employment falling for a second successive month and to a degree not seen since 2009."

Such conveyances echo back to the last year of the Great Recession given the Markit Service Employment index fell to 47.5 in October, the largest contraction since December 2009. The ISM Non-Manufacturing Employment index wasn't near as bearish. It rose off September's five-year low to a middling level of 53.7 in October.

The divergence between these employment metrics is explained by the size of the companies in each sample. Markit covers small, medium and large companies, while ISM only surveys the biggest firms. Small and medium enterprises may have some external exposure to global demand, but most are domestically oriented concerns. Markit is likely detecting domestic economic headwinds that ISM may be failing to monitor.

Temps are in short demand. According to the American Staffing Association's (ASA) Staffing Index, temporary jobs contracted at a 6.5% year-over-year rate in the last week of October. This figure first breached this threshold in July 2008 during the last down cycle, seven months after before the official start of the 2007-09 recession.

Why is this shrinkage of contract labor significant? Two reasons: 1) It leads broader staffing trends and nonfarm payrolls; 2) More severe cuts to contract labor suggest increased downward pressure being exerted on corporate earnings, something that FactSet made clear in its Monday posting, "S&P 500 Now Projected to Report a Year-over-Year Decline in Earnings in Q4 2019." Earnings for this year's third quarter are running below that of a year ago marking a third quarterly contraction.

Labor demand is in short demand. Nonfarm job openings fell to an 18-month low in September in yesterday's Job Openings and Labor Turnover (JOLTS) report. But it's more than just the headline number that informs a cresting of the trend for help wanted ads.

We sliced job openings into three categories: 1) More Cyclical (Construction, Manufacturing, Wholesale, Retail and Transports); 2) Less Cyclical (Information, Financials, Professional & Business Services, Leisure & Hospitality and "Other" Services); 3) Non-Cyclical (Education & Health Services).

As different as they are, all three are rolling over on a 12-month basis. "More Cyclical" is down 10.3% in September, and in four of the last five months. Meanwhile, "Less Cyclical" is down 4.5% in September and for four consecutive months. And "Non-Cyclical" is down 7.1% in September, and in two of the last three months.

The chief takeaway: This dismal performance is longer and deeper than the 2015-16 industrial recession and harkens back to persistent deterioration in labor demand that became visible in April 2008, four months after the start of the Great Recession.

Leaving room for Thanksgiving pie is an American tradition. Be that as it may, the shrinking U.S. labor pie is a fundamental risk that could give investors a serious bout of indigestion.