Calling it a day -- a bit early. Enjoy the evening.

Another day, another rally off of the lows.

I will be out of the office from noon to about 2 pm at a lunch meeting.

Needham lowers Apple (AAPL) from Strong Buy to Buy this morning.

I have further reduced Alphabet (GOOGL)  ($1396) and Amazon (AMZN) ($1896) longs from medium-sized to small-sized in the belief that I will, once again, have the opportunity to build back the positions at lower prices on a possible market selloff.

Thomas C

Night of upsets at 2020 Golden Globes

• Once Upon a Time in Hollywood from Sony Pictures (NYSE:SNE ) and 1917 from Universal (NASDAQ: (CMCSA) ) took home the top prizes for best picture in their respective categories on a night packed with upsets at the 2020 Golden Globes.
• Other big award winners included AT&T (NYSE: (T) ) (+6), ViacomCBS (NASDAQ: (VIAC) ) (+3) and Disney (NYSE: (DIS) ) (+3).
• Despite 17 nominations, the most of any single studio, Netflix (NASDAQ: (NFLX) ) only garnered two trophies during Sunday's ceremony, though its nominations still underscore the changing Hollywood landscape.

I added to my Apple (AAPL) short at $296.80, reduced Alphabet (GOOGL) ($1379) and Amazon (AMZN) ($1891) longs. 

* This time the absence of short sellers will not likely cushion a potential market fall.* If economic growth slows, pay attention to the public debt bubble among other areas of concern. * Let's closely watch interest rates, credit spreads, inflationary expectations, energy prices and gold in the days and weeks

There are many who felt that the Thursday night U.S. military attack in Iraq would have a limited impact on the equity market - often expressing this position with confidence on our site, Twitter and elsewhere.

In Friday's opener I expressed a far different view (and a less confident one) -- that the uncertainty associated with the Middle East could put an immediate damper on the relentless market rise of the last three months and may increase the risks associated with a broader market decline.

In that column I wrote:

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.

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.

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.

Bottom Line

To me, with the Thursday night attack in Iraq, one potential Black Swan (the Mideast or broader violence) becomes a near certainty rather than a possibility.

Rising energy prices and the general uncertainty will likely adversely impact the public's appetite for spending which has been the driving force in the domestic economy. To the degree this happens, I know not - but we must recognize (as Danielle and I related) that the manufacturing recession was already beginning to feed into consumer spending.

Manufacturing activity has been falling for months and even the Federal Reserve has finally seemed to recognize the potential harm in endless QE and easing.

Perhaps once the algos realize the downside offers more promise, the machines could be as relentless as sellers as they were as buyers.

If the tinder lights on fire in the Middle East over the next few weeks, look for the Fed to keep monetizing our debt (until it can't). The reality is that we don't know the limits. (Japan is still managing to pull it off at 245% of GDP!)

During this heightened period of uncertainty we might also have our eyes on a developing crisis in public debt (rather than the private debt markets) as the lack of covenants in corporate debt gives a lot of running room for companies. When the deficit hits some level that the markets and public won't tolerate -- the bell will be rung. We are already at a $1 trillion annual deficit, so that isn't the number. I don't know what it is going to take but we are going to see some eye-popping deficits. Tax burdens are going to rise and the pressure to raise corporate taxes and on the wealthy will no doubt intensify. The Democratic party is going to benefit from this as we lead into the November election.

Behind all the hoopla of the Bull Market and stronger domestic economy is a very dark cloud but there is no way to know when it will burst.

This might end when we get enough consumer inflation to spook the Bond Market and for the bond vigilantes to emerge out of the cave. The Fed will try ignoring it and maybe even buy enough government bonds to cap their rates - but the cost of real-world lending will soar anyway and the Fed will be forced to relent (just as it happened in the early 1950s).

Again, I have no clue of the timing of when it happens (other countries like Japan have been pulling this off for decades and it hasn't yet).

The Fed and its monetary largesse and its excess liquidity help to explain why so many hedge funds have thrown the towel in for shorting - shorting is hard enough without playing against a stacked debt (meaning a 25% move lower is likely capped to a much lower figure as long as the Fed prioritizes propping up asset prices over all else).

Indeed, in an informal survey of my hedge hogging pals over the weekend, there was not one single player holding any significant short positions at all. This shouldn't be surprising if we look at the bullishly tilted investor surveys or the near 100 (that existed in the middle of last week) in the CNN Fear & Greed Index (which has declined only to 93 from 97).

Potentially dangerous for investors, the Thursday night attack happened at a time in which valuations were stretched and at a time in which market participants (in a changing market structure of ETF and risk parity dominance) have moved investors (most noteworthy previously cited CTAs and hedge funds) into extreme bullish positions and a possible (mini) Minsky Moment.

Over the next few days let's continue to closely watch interest rates, inflation, energy prices, gold and, of course, credit spreads to gauge what the possible market fallout may be.
And, if I was you, I would (more than ever) hide my portfolios (and children) from those that express certainty of view in a renewed era of uncertainty.

Here is the gold price channel - for those that are involved in the asset class (it's a very bullish chart):

Source: Bloomberg

* Optimism on Apple may be at a bullish extreme now
* The parabolic move over the last three years may have been completed in the latest (potential) blowoff
This week's Trade of the Week is to short Apple (AAPL) .
There has been a wave of upgrades ("price has a way of changing sentiment") in Apple over the last two weeks as the company's share price relentless moved higher.
There has been alot of reasons for the justification for the +100% (year over year) price appreciation in the share price and for the many price target upgrades - the dominant factors cited by Apple bulls apparently are the continued growth in the installed base, the strength of the service business (but the rate of growth is decelerating) and the generation of substantial free cash flow (enabling the largest share buyback in corporate American history).
That said, regardless of one's views of the above, the company's operating income has stagnated for a half a decade - as the entirety of the EPS growth has been based on the aforementioned share buyback.

Despite stagnating operating income (see table, above), the price earnings ratio of Apple has doubled over the last year or so - at a time in which world trade, global economic growth and country coordination/cooperation seems to have peaked.
Investor sentiment towards Apple couldn't get more bullish."Everyone" is long Apple (almost by definition as it has an ever increasing role in many Indices) - the company even has the Buffett imprimatur (Berkshire Hathaway owns 249 million shares worth nearly $70 billion, representing Buffett's largest passive investment holding).
One can argue this is "as good as it gets."

From Charlie:

I believe in data based judgment as it relates to the markets.
I don't believe in self confidence of views.
The data is mixed and there is plenty of crosswinds:

• With Customers' Inventories hitting a 10-month low and New Orders falling to a decade low, manufacturers will either restock or liquidate; while a pop in New Orders is on the horizon, its sustainability is uncertain
• Consumer spending has accounted for 90% of real GDP growth in 2019; as evidenced by faltering car sales, weakening retail sales at the start of the fourth quarter and rising consumer debt delinquencies, consumption's momentum is at risk of stalling
• While the ISM-NY Employment Index rose to a four-month high, the Current Business Conditions index fell to levels seen during the last manufacturing recession; due to the state's high concentration of service sector workers, it's an excellent proxy for future consumption

Nervous flier? Detest turbulence? Look out the window. We promise you'll be heartened so long as you see the wings wobbling. Wait. What? On a recent flight, a pilot assured this nervous flier that flexibility in a plane's wings is a surefire sign of safety. Upon further investigation, the Federal Aviation Administration requires that all airplanes be able to withstand 150% of the maximum expected load for four seconds, an eternity in the air. In theory, not that anyone would want to be on board to test the theory, a plane's wings can survive turbulence that's 50% worse than what's been recorded. Wavy, good. Rigid, bad.

The stock market is being tossed about by different sorts of crosswinds. After being lulled into a sedate state, geopolitics is back to being front and center. Bond yields are down and oil prices up. This instability could go in many directions - escalation all the way to Russia abetting Iranian cyber-attacks and God forbid, U.S. troops on the ground in meaningful numbers or full de-escalation. For now, markets' working assumption is the latter.

That brings us to the crosswinds buffeting economic data. We dare say investors had their eye on the wrong ball Friday. Yes, on the surface, the December ISM manufacturing report was a disaster. But boy did it have a silver lining. At 41.1, Customers' Inventories, the green line in today's chart depicted on an inverted scale, fell to a 10-month low. The implication: investors can discount New Orders falling for five straight months to a decade low. At these levels of stockpiles, factories have two options - re-stock or liquidate. If that seems extreme, the last time Customers' Inventories rose above the 50-line and stayed there was the last recession when manufacturers did indeed go out of business.

For their part, credit managers are signaling industrial bankruptcies are not ramping up. And since you can't run a business without supplies on hand, it's intuitive that inventories will be rebuilt which will manifest in a bump up in New Orders in the coming months and be well received by markets.

Barring war and a massive ramp-up in defense spending, the durability of the expected reprieve is questionable at best. In keeping with one of QI's three themes for 2020, despite the wage inflation brewing as firms pay up to retain their best workers, aggregate factory employment is at increasing risk. There have been two months in the current expansion when the ISM's Employment index (yellow line) was as depressed as December's 45.1.

The change agent to derail the slowdown being signaled: a material increase in consumption. Judging by December car sales, households' propensity to spend is headed in the opposite direction. We won't know for sure until Ford reports today, but 2019 looks to break a three-year stretch of sales coming in north of 17 million. We would add that sales fell despite record fleet flattery. Due to a favorable tax law, car sales to commercial and rental fleet channels hit a record in 2019. The flip side is that you must be extra vigilant, recognizing that the sales figures reported do not solely reflect household demand.

Cox Automotive Chief Economist Jonathan Smoke laid out why it's so very critical for consumption to be sustained: "Consumer spending accounted for 90% of real GDP growth in 2019. Consumers tapped a record amount of non-housing debt to keep spending on big ticket items, including automobiles, and that debt started to show signs of worry through rising severe delinquencies and defaults as we reached the end of the year. Consumers also started to become less enthusiastic about the future as the political climate heated up. Retail spending growth began to slow as we entered the fourth quarter. Collectively these trends suggest that the consumer may not be capable of single-handedly carrying the economy in 2020, which is why we are expecting another decline in new-vehicle sales."

Perhaps Wall Street has begun to figure this out, despite big bank CEOs insisting that the consumer is strong. That brings us to Friday's true data bombshell - the other ISM, the New York ISM. The Current Business Conditions index (blue line) crashed to 39.1 in December. Aside from a similar collapse in May 2016, the index is at recessionary lows. At slightly more than 80%, New York has the highest private service sector concentration of any U.S. state - a near pure play on consumption.

In keeping with the crosswinds theme, the Employment index rose to a four-month high of 60.8. NY ISM Senior Advisor Jonathan Basile shed light on the apparent disconnect: "Current Business Conditions are impacted by external elements while Employment is reflective of internal conditions within businesses in the NYC metro area. There could be a lag between external conditions affecting internals." Ladies and gentlemen, the fasten seatbelt sign has been illuminated.

As expressed in the middle of last week, I went to my 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.


It is important to emphasize (again) that I am simply providing transparency (what, when and why) of my investing and trading which is based on my perception and calculus of the upside reward vs. downside risk.
Nearly every investor possesses their own unique needs, risk profile and objectives.
I personally believe that investors and traders should always consider the non-consensus course. And today that course is an above average cash reserve - especially after the large reset in valuations over the last 12 months and the other ongoing headwinds that seem to be intensifying.
But the decision, as always, is all yours.

A bunch of stuff from Peter:

I don't want to downplay the importance of the current geopolitical situation but most usually have a fleeting impact on the economy and markets. I understand the tinder box that the Middle East is but unless WTI breaks above $75, I think there will be little impact on economic activity. I say $75 not on some econometric modeling but just because that was the multi year high touched in early October 2018.

WTI

In terms of the impact of rising oil prices, everyone has their opinion in an aggregate sense but I just think simplistically here in that it helps oil producers and the services surrounding E&P and it hurts all those that use it as a raw material and the consumer that consumes it.

As for the potential inflationary impact of higher oil prices, the Fed must be happy, particularly Charlie Evans who is ok with a 2.5% inflation rate due to his nonsense symmetry focus. Now of course oil doesn't fall into the core rate but a sustained period of higher oil prices will certainly seep into core goods prices and services. I'm not sure myself how the view that a 2.5% inflation rate for a period of time in order to make up for a period of 1.5% will be good for those living paycheck to paycheck and on fixed income but it seemingly fits into some econometric model at the Fed.

Gold continues its breakout higher as it is now at the highest level since April 2013. I remain bullish but caution not to buy it on geopolitical concerns because as stated they are usually temporary. Buy it instead because the dollar continues to weaken and real yields continue to fall. See the chart below, as real yields fall, gold rises in value.

Gold is in white, REAL 5 yr yield in orange

In terms of what this means for the stock market, it all comes down to the sustainability of the oil move. It will of course help oil related companies and hurt those who consume it. Overall though, because valuations are as rich as they are, there is no room for error but that's been the case for a while so I'm saying nothing new. I've stated before that the price to sales ratio on the S&P 500 is where it was in early 2000, now the EV/EBITIDA ratio is as well. Overseas markets remain much more attractive to me although I still like plenty of value names in the US.

ENTERPRISE VALUE/EBITDA ratio

Shifting to the data, China's private sector Caixin services PMI for December fell 1 pt m/o/m to 52.5 and that was below the estimate of 53.2. Domestic demand is better than overseas demand. Caixin said "the level of optimism expressed by service sector firms edged down to the 2nd lowest on record. Companies highlighted ongoing trade tensions, relatively subdued economic growth and staff shortages as factors that could dampen prospects over 2020." Combining the services PMI with manufacturing has the composite index at 52.6 vs 53.2 in November and vs 52 in October. Let's just say that while there is a Phase One trade deal, businesses are still taking a wait and see on what comes next as the tariffs remain almost all with us.

Elsewhere, Hong Kong's December PMI bounced to 42.1 from 38.5 but still remaining in deep contraction for reasons we all know. Singapore's PMI improved to 51 from 50.4 while services PMI for Australia was revised slightly higher and India's services PMI rose too. On the other hand, manufacturing remained soft in Japan with its manufacturing PMI slipping to 48.4, below 50 for the 10th month in the past 11.

In the Eurozone, the December services PMI was revised to a better 52.8 from the initial print of 52.4 vs the estimate was for no change. That is up from 51.9 in November and clearly is offsetting the big drag from manufacturing. Markit said "All nations covered by the survey recorded growth in activity, led by Spain and Ireland." Overall, growth is still anemic in the region as Markit expects .1% GDP growth in Q4 from Q3. Hopefully with Brexit getting some clarity and China and the US calling a timeout, confidence will improve from here. If the case, I expect a further rise in European bond yields.

Speaking of Brexit, the UK services PMI was revised up by 1 pt to exactly 50 and above the estimate of 49.1. That is up from 49.3 in November and vs 50 in October. Markit said "It is notable that the forward looking business expectations index is now the highest since September 2018...The modest rebound in new work provides another signal that business conditions should begin to improve in the coming months, helped by a boost to business sentiment from greater Brexit clarity and a more predictable political landscape." The pound is higher which is weighing on the FTSE 100 while gilt yields are up too.

When you are flying a plane, the entire experience is weather-risk assessment that takes two forms. When it is perfectly clear out, you look for pilot reports for areas of unexpected turbulence or instability that may not be visible, yet will make the flight suddenly uncomfortable.

Then there are the obvious cloud buildups that anyone could see and know not to fly directly into.

Until now, our four key tactical indicators have been like the pilot reports in clear skies that remind us to pay attention and expect some bumps -- nothing significant or sustainable, just a period of instability.

At this point the duration of the extreme overbought condition coupled with excessive optimism represent cloud buildups that should be avoided. The developing conflict with Iran may act as a catalyst for the market to finally see a correction, but if it weren't the Iran issue it would have been something else.

Still avoiding expected turbulence. We have continued to advocate holding off adding exposure into the strength over recent weeks as the S&P 500 ^GSPC has ground higher. Other than a historically overbought and highly optimistic condition, there has been nothing wrong with the rally as the major equity indices have hit record levels with strong breadth and expansion of new highs.

We now believe the market has the potential to hit an air pocket as an unexpected event could be seen as a risk to the fundamental outlook. It is our experience that corrections are only considered a normal and healthy part of investing -- until you actually get one. Event-based corrections are even more difficult to deal with because investors then begin to fear the event could derail the favorable fundamental backdrop that generated the upside prior to the event. The developing conflict with Iran could be a great example of this idea and represents a cloud buildup that even a non-pilot knows not to fly into.

The fundamental bear market drivers continue to suggest correction vs. bear market. Since the Global Financial Crisis ended in March 2009, there have been dozens of minor corrections like last July (7%) and September (6%), usually driven by excessive optimism and fear the upside cannot continue unabated. Nearly all corrections in a fundamentally driven bull market typically begin with an overbought condition and high optimism, but what differentiates the three major declines in the SPX this cycle (2011, 2015-16, and 2018) was they were preceded by period of synchronized growth that turned weaker, and a deterioration in the corporate credit markets.

At this point, the opposite conditions exist:

Global Leading Indicators off low and accelerating. Prior to all three bear markets this cycle, the percentage of OECD Composite Leading Indicators (CLI) for the 36 economies they track were decelerating from peak. The most recent share of CLIs above average, as well as posting positive monthly and year-to-year chances are accelerating off historically weak periods, which has identified better growth prospects ahead· Corporate Credit remains near best level of cycle.

There are two ways we look at the health of the corporate credit market; the absolute level of yields in the risky areas of Investment Grade paper and the spread between the 10-year U.S. Treasury yield and Speculative Grade yields. The three major market declines we noted above were also preceded by a sustained trend higher in the Moody's BAA Index and widening of High Yield to U.S. Treasuries, but both remain near historic lows and the best levels of the cycle.

On Friday I wrote:
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. On Monday morning, gold is +$28 (and trading at $1580/oz).
GLD is +$2.75/share in premarket trading.