As mentioned, I end the week at the largest net short exposure since January 2018. (Most should avoid shorts as I have repeatedly warned over the years)

It remains my view that the market is underpricing geopolitical risks and has decoupled from the real economy (e.g., lower earnings revisions are climbing and this morning's ISM report).

The almost universal view that the Fed's liquidity will continue to buoy stocks (without associated problems from that infusion) may be questioned -- after all, if it was that easy would the Fed always be injecting liquidity and lowering interest rates?

I know of nearly no one (save Perma Bears) that believes a large drawdown in stocks is a possible event this year. That is clearly reflected in the AAII bulls vs. bears and the inflated CNN Fear & Greed Index.

Most everyone is on the same side of the boat -- and the odor of "Group Stink" permeates that side like a stinky five-day-old fish in a newspaper.

Thanks for reading my Diary and consider the non-consensus course and an above-average cash reserve after the large reset in valuations over the last 12 months and the other ongoing headwinds that seem to be intensifying.

TGIF.

* A trading opportunity for energy stocks may now be upon us
* But I don't view this as a long-term investment opportunity

Two weeks ago, in "More Oil Vey! Could There Be An Energy Trade?" I suggested that an opportunistic trade (not an investment) might be now in place for the oil patch:

While I have been negative on energy for the last five years, this chart, which shows that the ratio of Energy sector to the S&P 500 is at its lowest level in 20 years, is striking:

However, my ongoing negative thesis on the energy space was last expressed in September -- and I stick by it:

* I plan to continue to avoid energy shares
* As I have for most of the last decade

"If you own oils, I would scale them back. If they didn't move after the Middle East burned, I don't know what they will do if the economy keeps slowing. Seems hopeless."
-- Jim "El Capitan" Cramer, Here's Why Oil Stocks Have Become Pariahs

Many long-time subscribers may recognize that I have not owned an oil stock in years -- like more than five years!

Not MLPs, integrateds, coals, nor exploration companies... nada.

My long-time concerns previously expressed are:

* The rising role of conservation in the U.S. and around the world.
* The expanding role of renewables.
* And the large and emerging supply of natural gas and oil in the U.S. (especially of a Permian-kind).

My immediate (and growing concern), on top of the above, is the likelihood that the global economy will continue to deteriorate.

Despite the weekend's attack on Saudi oil facilities, the price of crude oil is down again today -- for the second day in a row. And many oil company shares are giving up their recent gains.

This afternoon, Jim "El Capitan" Cramer expressed a similar sentiment in a well crafted column, Here's Why Oil Stocks Have Become Pariahs.

Check it out before you make any moves in the oil patch.

Bottom Line

There is a price for everything and the severity/weakness of the chart above combined with the events of the last 24 hours suggest that a long trading opportunity is now upon us.

Color me short-term bullish but long-term bearish on energy stocks.

Trade energy longs for now but don't invest in them.

Here is a good piece of financial analysis from my pal Lance Roberts.

Recognizing the absence of certainty, intellectually I can't see a better set up for gold than exists today. (GLD) was placed on my Best Ideas List on at $120.19 in April, 2019.
GLD is trading today +$1.85 at $145.78.

* Markets may be underpricing geopolitical risks

Apropos to my bearish market position and my opener, "Are Investors and Citizens As Safe As The Markets Assume We Are?" - it is important to recognize that markets move (and make potential inflection points) on the unexpected.

Consensus in late 2019 and in the last few days was not focused on the Middle East as a potential risk to our capital markets.

So, it is natural for them to virtually dismiss (as just being "prickly") the recent chain of events - as they weren't focused on it as a leading market concern.

This is human nature.
It might also be evidence of an (investing) ostrich with its head in the sand.
That said, there is no certainty, for, as Grandma Koufax used to say, "Dougie, we will see what we shall see."

For me, the market has been and continues to be underpricing geopolitical risk along with a plethora of other risks.

Opinions are like butts - everyone has one (and that includes me!).
That said, my conviction is high and I have moved to my largest net short exposure since early January, 2018.

Year-End Fiscal/Monetary Summary

Gold, and the Gold Miners, Re-Establish Upward Trend, with Good Reason!

Buying more FedEx (FDX) .

I pressed some shorts on the rally off of the lows.

I disagree with those that are of the view that the added uncertainty of Middle East hostility will have limited impact on the markets.

Yet!

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 toward 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 represent 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)

Several of the above (of my long-held secular concerns) are back on the front burner following the emergence of further geopolitical risks and possible reprisals associated with the overnight attack on and death of Iran's commander of the powerful Revolutionary Guards Corps, Qassim Soleimani.

Stock futures have been pressured (S&P 500 down -35 handles at 8 a.m ET) and oil (up $2-plus per barrel) and gold (up $24 per ounce) are moving higher.

Prior to Thursday night's announcement the markets had been buoyed by the global liquidity provided by central banks around the world. Confidence in 2% Real GDP growth with little inflationary pressures had stretched markets and punished the bearish cabal. Complacency had turned into exuberance , as measured by certain sentiment measures such as CNN's Fear & Greed Index and other metrics.

Now comes this advisory from the State Department.

It should come as no surprise that I have strong views on the president's decision, but I recognize that I am unqualified as a geopolitical commentator so I will refrain from commenting on the attack. I will only to state the obvious.

Soleimani has spearheaded unthinkable violence over the decades and the world is a better place without him.

The attack was apparently the president's decision and occurred only days after Trump declared that peace in Iran is the policy direction to be taken. Congress did not authorize the attack and it is uncertain (and will be debated) whether the American people want a war with Iran, which is what we are now likely to get.

It will be debated whether Thursday night's attack was a reckless move that increases the possibilities of more deaths in a new and escalated Middle East conflict and from likely terrorist responses.

It will also be debated whether the administration is fully equipped and staffed by the world's top experts and advisors to handle a complicated, enduring and international crisis that could play out broadly in many countries and which demands experience, rigorous process and judicious decision-making. (I will leave it to you to determine whether the delivery of a U.S. flag image via Twitter (see Tweet of the Day) sends the appropriate diplomatic message to Iran and the world).

The obvious investment conclusion is that geopolitical risks have multiplied geometrically and a new level of uncertainty has been introduced into the market equation. This uncertainty, as mentioned earlier, occurs at a time in which the market is arguably stretched by heightened bullish investor sentiment, in high prices and with elevated valuations. Accordingly, I would not underestimate the very broad and negative ramifications of Thursday night's attack.

Over the near term even the Fed's robust injections of liquidity may not insulate the markets from this new uncertainty.

From Danielle DiMartino Booth:

• While the ISM U.S. manufacturing index moves markets most, IHS consistently has a higher correlation and tighter r-squared vs. official U.S. factory data; IHS manufacturing employment, in particular, sports a 0.91 correlation with factory payrolls vs. ISM's 0.78
• While the breadth of declining global backlogs peaked in August, it remains at elevated levels, suggesting demand remains at risk; U.S. backlogs have declined less than countries with more open supply chains exposed to Asian trade and, by extension, the global trade war
• Backlogs are also valuable indicators for future manufacturing employment; the current U.S. reading of over 50 coupled with December's IHS employment index of 51.4, off of November's 8-month high, indicate marginal continued gains in factory sector payrollsWe know that Coca-Cola (KO) has many uses -- it can remove rust from bolts, clean a toilet bowl and even kill mice who delight in the bubbles but, bless them, are physiologically incapable of expelling the gas post facto. This cavity-inducing carbonated cola isn't the only multi-tasker available for delivery to your home in the blink of an app. There's also Mr. Clean's Magic Eraser, a relative phenom in a market that had gone dormant on the innovation front. While it too can remove stains from grout and clean toilets, it can also shine your leather, erase scuff marks off your kids' overly expensive tennis shoes and eradicate those coffee stains -- from your favorite mug, not your front teeth. If at all possible, we prefer our data to be equally clean, sans the magic element. Given the record divide that's opened up between the U.S. manufacturing indexes compiled by IHS Markit, released yesterday, and the Institute for Supply Management, due out this morning, we thought it best to dig deeper to see which gives a cleaner read.As with all things market-related, there is stiff competition between these two data providers to gain investors' attentions and affections. While we don't dispute ISM's dominance in this respect -- today's ISM New Orders is the "it girl" of leading indicators -- we do note that the applicability of IHS's data to that which we hope it leads is more efficacious.In early December, Chris Williamson, IHS' chief economist, used simple statistical analysis to compare the forward-looking sub-indices such as output, new orders and employment, which he rightly contends, "should be directly comparable between the two surveys, as they measure the change in each variable from one month to the next over a consistent definition of manufacturing"In a period spanning the co-history of the reports between June 2007 and October 2018, the IHS data exhibited consistently higher correlation coefficients and adjusted r-squares vis-à-vis the ISM data compared to a rolling three-month average of comparable official data. While the relationship between IHS and official output, factory and durable goods orders was indeed tighter, it was manufacturing employment in particular that stood out. IHS' correlation of 0.91 was materially higher than that of the ISM, which was 0.78.This year's global reflation theme is also germane to interpreting the two providers' survey methodologies. IHS, which casts a broader net capturing small- and mid-size businesses, specifies that respondents restrict their reporting of business conditions to their U.S. facilities. ISM, skewed towards the largest companies, refrains from doing so meaning multinational U.S. manufacturers are likely also reporting the health of operations they have scattered around the globe.As per Williamson, "As the ISM data are seemingly more reflective of the performance of multinationals than the IHS Markit survey, we argue that it could be sending misleading signals regarding the health of the US economy."So where does that leave us? As you can see in today's graph...If you view the key deciding factor of economic growth -- future demand -- through the prism of backlogs, which fit that bill, the United States (blue line) is the best of the bunch on a relative basis. This outperformance ties to past outsized fiscal support for the domestic economy and the U.S. being a less open economy which has left it less vulnerable to the global trade war fallout. The consumer-heavy composition of the U.S. economy relative to the rest of the world means the tremors in the supply chain from trade war risks have had a larger effect on more open economies.As for the rest of the world, although off August's peak of 88%, the breadth of declining backlogs remained at an elevated 80% in December. South Korea and Australia best illustrate the underperformance via their tight links to Asia and, more specifically, China. That said, as seen in its export data, South Korea continues to show signs of stabilization after a long run in contraction territory.Backlogs are also useful guides for future employment trends given they advertise when there is excess demand -- with readings consistently north of the 50-line, or excess supply when backlogs persist under 50.As for where all eyes will be a week from today, the December jobs report, after the ups and downs driven by the GM strike, the IHS employment index stayed above 50, at 51.4 in December. While down from November's high of 52.7, the implication is we will see continued, albeit weakening gains in factory sector payrolls.Australia's backlogs weakening anew suggests the nascent revival seen in Chinese manufacturing data will have to be closely monitored. It's with good reason that markets cheered China's stimulus yesterday. It's less cause celebre if the stimulus is as needed as it was a year ago at this juncture.

I picked a bad day to travel this morning to a research meeting.
My posts will be less lengthy and more infrequent than usual this AM.

While we can argue about the merit, justification and possible consequences of this Presidential tweet, it is without question The Tweet of the Day: