* Adding to CAT short on weak dealer sales
I forgot to mention that I added to my CAT short today, based on the weak October dealer sales that indicated that total equipment was only up 3%, compared to a 6.5% increase in September.
It now looks like full-year sales will be flat, a disappointment.
Construction-related sales were up 2% vs. 4% in September, following an unchanged summer; North America was up 6% (in line with September); Latin America has easy comps and is up 14% (compared to September's 8% rise); Europe, Middle East and Africa rose by only 3% (down from a 7% increase); and Asia Pacific's weakness accelerated, slipping 10% vs. a 6% loss.
Resource-related sales also decelerated -- up by 7% compared to 14% in September and 25% in August. North America slowed down, Latin America fell 8% after a rise of 31% in September (which followed positive months since April) and Asia/Pacific was down 7% vs. an 11% loss in September (easier comps).
E&T sales inflected negatively, down 4% in October vs. a 6% rise in September -- again following a streak of positive compares since April. Power Generation was up 9% vs. a 14% rise in September; industrial (rose 18% vs 35% in September), transportation rose 6% and oil and gas were down 19% compared to a 3% dip in September.

"Just one more thing."
-- Lt. Columbo

I sold out a portion of my Trade of the Week ( (VXX) ) at $18.45 late in the day for a few pennies loss.

Again, for emphasis, the intent of the trade was to have an aggressive (very) short-term vehicle on top of my large (SPY) short that would benefit me if the market tumbled this week (it did not!).

I will be out of the position by the close tomorrow (win, lose or draw) as the intention, expressed in my Tuesday post, was for a very short-term trade (measured in a few days).

Contrary to the caution expressed by some, though the market rose in the last two days, I was certainly not crushed (in any way) in the position, I lost very very small and controlled my position by time (trade duration), price and discipline.

More on the trade in my opener, tomorrow.

It was a quiet day for the Averages but there was plenty of action underneath - in the relentless assault to higher levels:
* Breadth, at 3:15 pm was -150 on the NYSE - steadily improving from the early morning.
* Bonds rose in price and dropped in yield (-3 basis points).
* Gold +$10.30/oz.
* Oil +$0.42/barrel.
* Disney (DIS) spiked (and I covered most of my short) after revealing over 10 million subscribers in the first month. Conversely, Netflix (NFLX) (which I am short, fell by over -$8/share) as the market views Disney's installed base and immediate success as a more meaningful threat to the company.
* Banks are slowly losing a growing percentage from the recent highs - that decline is growing more conspicuous and it is something I have cautioned about over the last two weeks (and why I moved from very large to medium sized).
* Another new high, (HIG) .
* Amazon (AMZN) is also rolling over (-$28/share) and is a downside feature to FANG. Twitter (TWTR) remains a dog with fleas (I have added).
* Industrials/cyclicals ( (CAT) -$2/share) are mixed but consumer non durables (e.g., (PG) and (KHC) (a breakout?) are exhibiting strength.
* Semis weak and big tech ( (MSFT) , (CSCO) , etc.) was unchanged.
* Boeing (BA) rolled on after yesterday's outsized gain, despite losing a big contract to Airbus (EADSY) .
* Old media down after a small EPS beat - it's shares are now beginning to resemble the newspaper stock decline over the last decade. Large but steadily declining cash flows and I would not bottom fish on fundamentals.
__________
Long BA (large), GLD (small), KHC (large), AMZN, GOOGL, BAC, C, WFC, GS, TWTR (large), HIG (small).
Short TLT, DIS (small), CAT, MU (large), NFLX.

The bid to this market is relentless.
The S&P Index hasn't fallen two days in a row since Oct 7, 8.

The market dips on these Dow Jones headlines:
*U.S.-China Trade Talks Hit Snag Over Farm Purchases -- Sources
*Beijing Balks at Committing to Specific U.S. Farm Purchases -- Sources

From Neil "The Real Deal":
Doug, M* agrees with you on TLRY.Tilray Will Take A Little Longer Than 2020 to Reach Positive EBITDA, but Shares Still Undervalued by Kristoffer Inton, 11/13/2019

* Covered most of my (DIS) short.
* Sold (TLRY) trading long rental.
* Added to (TWTR) .

Sometimes discipline "trumps" conviction.
I took most of my loss in the Disney (DIS) short in order to "live another day."

I am short Micron (MU) on fundamental grounds.

Bruce Kamich gives a nice technical rundown on the name this morning - it's a worthwhile read!

Again, for emphasis, despite the rally in the averages from the morning lows, I continue to expect (per my last few missives) banks and FANG stocks to underperform (absolutely and relatively).
I have sized down my positions to levels I plan to keep for a long time.

I am calling an audible and selling my Tilray (TLRY) long rental for a small loss.

Equities are doing a great job in recovering (again!!) from an early morning fade.

I am not surprised but I am disappointed!

Market breadth is still about -300.

I am not very active today - nor was I all week.

Making some research calls.

I always try to point out that all Fed easing does is encourage the rest of us to borrow more, whether a business, household or the government.

Hearing Jay Powell point out the end results today is like hearing a bartender who has handed out drinks all night and then asking why everyone is drunk at the end of the party. As Rick Santelli just said on CNBC, "Here is a group that has aided and abetted all the debt accumulation." 

In today's speech Powell said, "Debt loads of businesses are historically high, but the ratio of household borrowing to income is low relative to its pre-crisis level and has been gradually declining in recent years." Pre-crisis should be our reference point on household borrowing when it went to record highs?

The chart below reflects total household debt as a percent of disposable income. We are only back to the long term average, have only given back the bubble mid-2000 years and are way above levels seen before: 

Also, "the federal budget is on a unsustainable path, with high and rising debt...I remain concerned that high and rising federal debt can, in the longer term, restrain private investment and, thereby, reduce productivity and overall economic growth." This, as the Federal Reserve is now essentially monetizing the U.S. T-bill market after exploding its balance sheet over the past 10 years, while keeping rates at zero for seven years, all of which Jay Powell voted for.

What a strange brew.

I think it only took one sentence in the entire Jay Powell speech that bottom lines his thoughts on future monetary policy: "We see the current stance of monetary policy as likely to remain appropriate as long as incoming information about the economy remains broadly consistent with our outlook."
In other words, we do not want to see more rate cuts from here (after the 'insurance' taken out) because of what that would imply.

Last week Tom Graff took a deep dive into this deal - it's a worthwhile read!

I added small to my trading long rental of (TLRY) on this morning's weakness.

I have a $21 stop on this trade.

Again, this is a very speculative trade and I have a low level of confidence.

It is, as Grandma Koufax used to tell me, "a crapshoot."

Again, from Peter Boockvar:

Headline CPI in October rose .4% m/o/m, one tenth more than expected while the core rate gain of .2% was as forecasted. The headline y/o/y print was 1.8% vs 1.7% in September while the core rate was higher by 2.3% y/o/y (vs the 2.4% estimate due to rounding), the 2nd highest level since 2008. Food prices were up by .2% m/o/m and 2.1% y/o/y and energy prices rose by 2.7% m/o/m after declines in the prior two months and are still down 4.2% y/o/y.

For the first time in years, the increase in the Rent of a Primary Residence slowed to a .1% m/o/m gain but comes after a .4% increase in September and is still up 3.7% y/o/y. The faux measure of rent, Owners Equivalent Rent, was higher by .2% m/o/m and 3.3% y/o/y. Medical care costs spiked by 1% m/o/m and is now up 4.3% y/o/y. That m/o/m gain is the most since August 2016 and this measures actual out of pocket healthcare expenses as opposed to the PCE measure of healthcare which mostly includes Medicare and Medicaid artificially suppressed reimbursement rates. The services CPI ex energy was higher by .2% m/o/m and 3% y/o/y.

The offset to 3% services inflation is the muted goods inflation. Goods prices ex food and energy fell .1% m/o/m while up just .3% y/o/y. New vehicle prices (helped by hedonic adjustments because actual new car prices continue to rise to new records) fell .2% and are basically flat y/o/y. Used car prices jumped by 1.3% but after falling by 1.6% in September. Versus last year they are up 1.4%. Apparel prices fell 1.8% after a decline in the month prior and are down 2.3% y/o/y.

Bottom line, again services inflation is being partly offset by pressure on goods prices. The 2.3% y/o/y core print is no worry because the Fed instead doesn't pay attention to this cost of living measure but instead to the PCE with its healthcare methodology flaw. Inflation expectations in the TIPS market is down 1 bps but didn't move after the numbers as they were basically in line. The 10 yr yield is being driven by the weakness in global equities today.

CORE CPI over the past 15 years

* But is the market's insatiable sex drive to be trusted?
* In the merry old land of Oz

"Anyone buying this book is going to be out a tidy sum if he is sucked in by the title. I wish I could write a real sexy book that would be barred from the mails. Apparently nothing whets a reader's appetite for literature more than the news that the author has been thrown into a federal pokey for disturbing the libido of millions of Americans."
- Groucho Marx

One might view with philosophic admiration the strange paths of the libido and might consider investigating the purposes of it's circuitous ways.

In psychoanalysis the libido is the energy of the sexual drive as a component of the life instinct.

Sigmund Freud is the originator of the modern use of the term ("libido"). It is the instinct energy or force, contained in what Freud called the id, the strictly unconscious structure of the psyche. Freud explained that it is analogous to hunger, the will to power, and so on insisting that it is a fundamental instinct that is innate in all humans.

Of course I am using the word "libido" as an acronym in an attempt to artfully deliver an investment point of view.

*L: Liquidity, the present that keeps on giving by the monetary Gods.
*I: (Low) interest rates provided by the world's central bankers.
*B: Buybacks, delivered at a record pace.
*I: (Low) inflation as a function of globalism, demographics, disruptive innovation and productivity.
*D: Diminished listings of New York Stock exchange companies (from 7800 in 1999 to 3800 presently) - producing a favorable demand/supply equation.
*O: Optimism, as a function of all of the above! (Included and expanded upon in my recent column, "What's Going On (In This Forgiving Market)?"

Importantly, Dr. Freud pointed out that libidinal drives can conflict with the conventions of civilized behavior, represented in the psyche by the superego. It is this need to conform to society ("Group Stink?") and control the libido that leads to tension and disturbance in the individual, prompting the use of ego defenses to dissipate the psychic energy of these unmet and mostly unconscious needs into other forms. Excessive use of ego defenses results in neurosis. A primary goal of psychoanalysis is to bring the drives of the id into consciousness, allowing them to be met directly and thus reducing the patient's reliance on ego defenses.

Freud viewed libido as passing through a series of development stages within the individual. Failure to adequately adapt to the demands of these different stages could result in libidinal energy becoming "dammed up" or fixated in these stages, producing certain pathological character traits in adulthood. Thus the psychopathologized individual for Freud was an immature individual, and the goal of psychoanalysis was to bring these fixations to conscious awareness so that the libido energy would be freed up and available for conscious use in some sort of constructive sublimation.

Of course, some suggest that an overactive libido, may be mephitic and can have adverse consequences!

Now that we got that over with (!), I am sticking to what got me here (over the last four decades) - a contrarian streak and a calculator.

To repeat my view, I just don't agree with market participants' elevated optimism.

Notwithstanding the strong and persistent price momentum I just don't see the basis for further gains - and I view the upside reward as being dwarfed by the downside risk.

Distilling my multiple concerns into two succinct points:

* The Fed Is Pushing on A String: The Fed has now cut three times and there is no meaningful improvement in the domestic economic data. Indeed, as mentioned in an earlier post, fourth-quarter Real GDP growth forecasts have moved to 1% or less from 3% in the first-quarter of 2019, and 1.9% in the third quarter.




As seen below we are already in an "earnings recession" and the underlying drivers (and rates of change) of deteriorating margins, slowing sales, policy uncertainty and lack of coordination and cooperation of the world's largest economic players (in an ever flatter world) are beginning to raise concerns for 2020-21.

Moreover, as I claimed in Monday's Trade of the Week (long VXX):

"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. According to the Wall Street Journal - "Last year, 97% of S&P companies used non-GAAP metrics, up from 59% in 1996."

As of last week about half of the S&P constituents (on an operating and GAAP basis) exhibited -3% year over year decline - the slowest growth rate since 2016 - as the S&P makes a new all time high (and is +23% year to date):




* Nor Are Some Stocks Higher From Easier Money: The Russell Index, supposed to be levered to domestic growth, is only +1% higher since the first rate cut in July. Meanwhile the CRB Index is down by over 3% and the 10-year TIPS breakeven is 20 basis points lower (to 1.55%) since that first cut in the federal funds rate.

Switching gears back, then again, there is this, from Dr. Freud:

"Unexpressed emotions will never die. They are buried alive and will come forth later in uglier ways."

But that, as the Wizard said in The Wizard of Oz, "is a horse of a different color!" 

"Ha ha haHo ho ho
And a couple of tralalas
That's how we laugh the day away In the merry old land of Oz."

Powell and the inflation debate from Peter: 

Today at 11am Jay Powell in his Congressional testimony will tell us that the US economy is in a 'good place' even though he thinks it can't handle a fed funds rate above 1.75%. He'll tell us that monetary policy is in a 'good place' even though they've already used up 1/3 of their available rate cuts with only 6 to go if things worsen from here. He'll also tell us that the $250b increase in the size of the Fed's balance sheet in just two months is not QE. Lastly, we'll hear that inflation is too low even though core CPI today is supposed to print an 11 year high at 2.4%. This is a day in the life of a modern day central banker where they've all decided to take on the weight of the world rather than having more faith in the regenerative powers of a capitalist economy.

As for wanting to play in the negative rate game. That's not a game we want any part of. It's poisonous.

Fed's BALANCE SHEET

With respect to inflation, if you weren't aware what was the cause of the huge protests going on in Chile, it was a hike in subway fares that inflamed people. This follows the Yellow Vest protests in France where people went ballistic when the government raised gasoline prices. Hearing a Fed member or others in Europe and Japan express their desire for higher inflation (higher cost of living) is completely tone deaf to what is going on with many living pay check to pay check and with little savings in the bank. Also, the whole symmetric inflation discussion that would tolerate an inflation rate above 2% for a period of time to offset one that is below completely ignores the state of finances for many people. Just saying and I continue the need to push back on this desire for higher inflation on the part of central bankers.

Now that Hong Kong has closed its entire school system for a few days has taken the disturbing state of protests to a whole new unfortunate level. This great city will never be the same. The Hang Seng was lower by 1.8% and all of Asia was red which then spilled over into Europe and our futures. Global bond yields are lower in response.

Stock market sentiment remains all bulled up with Investors Intelligence saying that Bulls rose .5 pt w/o/w to 57.6%. Anything above 55% is considered high and a print above 60% would be extreme. Bears fell .2 pts to 17.9% and the 39.7 pt spread between the two is the widest since July 31st. Those that expect a Correction fell to 24.5%, the lowest since October 2018. Bottom line, the bull boat is pretty full on hopes of a trade deal and Fed engineered soft landing. I emphasize 'hopes' because the fundamental economic and earnings story at least for now is not confirming.

As for the impeachment hearings and process, while it might make good tv, (emphasize on 'might') I believe it's irrelevant to markets and the economy right now.

The MBA said mortgage applications jumped by almost 10% w/o/w. Purchases rose 5.1% w/o/w and up by 15% y/o/y while refi's were higher by 13% w/o/w and 188% y/o/y. When comparing versus last year, particularly with purchases, the US stock market last October started its fall so the comparison this year from solely that perspective is easier. Add on of course the sharp drop in mortgage rates and we have a nice y/o/y rebound.

While two Bank of England members voted to cut rates from the already low rate of .75%, October core CPI printed 1.7% y/o/y as expected and holding at a 3 month high. Thus, policy is already extremely accommodative with a negative real rate of 1%.

Positively, September industrial production in the EU rose .1% m/o/m, 3 tenths better than expected. It still fell though 1.7% y/o/y, the 11th month in a row of declines. Hopefully the better than expected figure is the precursor to a rebound in Q4. As this number is never market moving, the euro is unchanged.

--It's not the economy anymore, stupid. --Your fund manager's politics can hurt performance. --Is Senator Warren correct about private equity? 

Two Tweets From Liz Ann Sonders:

Danielle DiMartino Booth writes that there is conflicting stocking stories:

• According to October's NFIB survey, the highest percentage of small businesses owners this year plan to increase inventories, which usually portends good GDP growth; if October's enthusiasm carries through to year-end, the fourth quarter will near the cycle high
• In a clear conflict, loan officers tightening standards for C&I loans to small business has risen to a three-year high; small business demand for C&I loans, which finance inventories, is also at a seven-year low, contrasting sharply with the NFIB survey results
• Imports into California mega-ports gapped down in October, with volumes sinking 13.3% versus a year ago; the hard port data points to much-weaker fourth-quarter imports, a sign of associated domestic weakness in inventories that will act as a drag on GDP

Steve Carrell's comic genius knows no bounds. The breadth of roles he's portrayed in The Office, The 40-Year Old Virgin and Despicable Me speak to his chameleon capabilities. The inimitable Gru aside, we have a soft spot for Hammy, the hyperactive American red squirrel Carrell portrayed in the 2006 animated hit, Over the Hedge.

What's not to like about an adorably short attention span, a mouth that moves as fast as his feet and an absolute love for cookies? The movie's climax involved Hammy chugging an energy drink that sends hyperactive into hyperdrive enabling him to trap the film's three villains. But Hammy's true prudent prowess is not revealed until the epilogue, when he shares with his animal family that while he was supercharged, he collected enough nuts to last the whole winter.

Speaking of winter, meteorologists expect 100 mid-November record low temperatures to be set in American cities by an arctic cold front plunging through the eastern half of the U.S. this week. A freeze is possible as far south as the Gulf Coast. Plunging mercuries make us think like Hammy, of the importance of stocking up for the cold months ahead. The thing is, we've been cold blasted by conflicting signs about the state of stockpiles in America from three distinct sources -- small businesses, senior loan officers and port statistics.

The Bull Case.Small business "owners feel that the prospects for growth justify adding to inventory stocks," according to yesterday's October National Federation of Independent Business (NFIB) Small Business Economic Trends report. The net 5% reading who plan to raise inventories was the highest of the year. If October holds on a quarterly basis, the level would graze the current cycle's highs. Over time, small business plans to add inventories (green bars above) have a solid record at gauging turning points in the official inventories line item that feeds the GDP calculation. But how will small businesses fund this supply bulge?

The Caveat.The net 5.6% of senior loan officers tightening standards for commercial and industrial (C&I) loans to small firms in 2019's third quarter marked a three-year high. The tightening manifested in a higher prevalence of interest rate floors, more stringent collateralization requirements, higher premiums charged on riskier loans and tighter loan covenants.

Inventory financing is one key use of C&I loan proceeds. The "little guys" are wise to the stricter standards, which are reflected in the weakest reading for small business loan demand since 2011 (orange line above). This suggests a squeeze on small business credit from both the supply and demand sides. Bank officer and small business owner actions are pointing to weaker, not stronger, inventory plans, which directly conflicts with NFIB's survey findings.

The Bear Case. Did we mention hard data trumps its soft counterpart when you want to prove a macroeconomic point? Enter fresh statistics from California's three major container ports that capture approximately 50% of the nation's total container cargo volume. Before citing what's happened "on the ground" -- actually, in the water -- we should preface it with this gem gleaned from the most recent ISM reports:

• Two of 36 U.S. industries in the manufacturing and non-manufacturing sectors increased imports in October; breadth this bad was first observed in the last cycle in November 2008, when only one industry reported increasing imports.

California Mega-Port data concur. Inbound container volume through the ports of Los Angeles, Long Beach and Oakland combined fell 13.3% versus year ago levels in October. If this contraction is sustained through year-end, it would be the weakest showing for California imports since the economy exited recession in 2009's third quarter.

The October plunge is not an outlier. In fact, it's part of a continuing downtrend that started in this year's first quarter. The four-quarter stretch of declines reminds us of the lead-in quarters to the Great Recession, when this metric fell modestly, then at progressively larger rates.

How do we judge which sources are accurately foreshadowing the future path for inventories? Mark your calendars for the Tuesday before Thanksgiving, November 26, for the advance reports on trade and inventories -- or just wait for us to Feather about it once the figures go public.

The "So What" Factor. Trade and inventories are inputs into GDP. With Atlanta Fed and New York Fed GDP nowcasts tracking at 1.0% and 0.7% rates, respectively, for the fourth quarter, a much weaker import picture painted by hard port data risks translating into a negative impulse for inventory investment.

As Powell heads to the Hill for two days of testimony, he will be wary of what growth expectations running near stall speed might mean for the economy. Chances are he'll need an extra swig of Hammy's energy drink to revive and in doing so, up the QE ante.