"Just one more thing."
- Lt. Columbo
Futures are getting hit on rumorsthat a U.S. Iraq base has been fired on.

Not the greatest of closes (for Apple (AAPL) or the broad market) -- but after such a strong advance we shouldn't be surprised or disappointed:
* Market breadth closed at negative 300 issues net decliners.
* FANG traded plus or minus from unchanged -- depending on the name.
* Retail was strong, but Walmart (WMT)  was down for the third day in a row.
* Financials profits were taken (though modestly) again, for the second consecutive day. Goldman Sachs (GS) was an upside feature (I have been selling the recent strength).
* Industrials and cyclicals (e.g. Caterpillar (CAT) , General Motors (GM) ) were dogs.
* Big tech (i.e., Microsoft (MSFT) ) weakened.
* Tesla (TSLA) (+$17/share) is a good example of why I don't short stocks with high short interest relative to float or average trading volume.
* Boeing (BA) up on a Berkshire rumor.
All in all, a lot of noise today in our still complacent market.

With the news backdrop changing so rapidly, I have now made 27 revisions to my upcoming 2020 "Surprise List." I am hopeful that I can complete the project this Sunday and deliver it to you on Monday morning.

Gold's price chart continues to move from the lower left to the upper right.
+$4/oz and now trading above $1572.
As previously written, intellectually I couldn't envision a better set up for precious metals than exists today.
That said, (GLD) has risen from $139 to $148 in a heartbeat - so I would no longer chase this overbought commodity.

* Critics may be wrong about TWTR's investment appeal

Over the last several years I have traded and invested in Twitter (TWTR) on the long side on multiple occasions (at least ten!). These forays have resulted in accumulated share price gains of well over $60/share on a cost basis of about $20/share.

Recently, at a time in which the shares of other social media and other internet based stocks (e.g., Facebook FB , Alphabet (GOOGL) and Amazon (AMZN) ) experienced meaningful upward price moves, Twitter's shares have languished after laying a third quarter egg (owing to some really stupid technical issues that I expect to be resolved sooner than expected).

In December, 2019, the shares were blasted by a panelist on CNBC.

By contrast, I recently argued (in early December, 2019), that despite poor price momentum and an ugly chart the upside reward vastly exceeded downside risk - and I moved to a large long position at around $31/share:

While I recognize what a bad actor Twitter's (TWTR) shares have been and what a poor technical setup the charts indicate (as to the future price action) - I am nonetheless aggressively buying the shares at $30 today.

The resurgence of FANG stocks (coincident with Senator Warren's fall in the polls) gives me renewed courage and so does my primary analysis (over the last two weeks) that the "glitches" that led to the 3Q disappointment may be more quickly resolved than the consensus (and the company in its conference call) had suggested.

And, remember the optionality of a takeover. As the share prices of potential acquirers rise, so does their currency for a possible takeover of Twitter.

Here is my investment thesis on Twitter.

* Market breadth -300 issues.
* Twitter (TWTR) , despite some protestations from financial media playas, getting jiggy.
* Banks back off for the second day in a row after some Sell Side downgrades. (Many of my holdings recently came within 10% of my year end 2020 targets - I expect some more profit taking, certainly if I am correct about the markets! I plan to stick to my medium-sized holdings after taking off some nice gains from larger sized positions previously).
* I am not a technician, but it looks like Caterpillar (CAT) shares may be rolling over.
* On the other hand, FedEx (FDX) is trading well.
* Retailers ++.

The ISM services index for December rose to 55 from 53.9, +0.5 pt better than expected and compares with 54.7 in the month prior. This brings the 2019 average monthly print to 55.5. The internals though were mixed. Business activity got back what it lost in November but only 10 of 18 industries saw growth. New orders dropped by 2.2 points to a 3 month low and backlogs fell 1 point to 47.5, matching the lowest since December 2013. Employment also softened to 55.2 from 55.5 but after a rise of +1.8 points last month. Export orders (only some service companies report them) were down -1 point to 51, while imports were below 50 for a 4th straight month but up 3 points month over month. Inventories were up by +0.5 pt. Lastly of importance, prices paid were unchanged at 58.5, holding at a 3 month high. 

Also pointing to the mixed aspect of this important data point was the weakening breadth. Of the 18 industries surveyed, 11 saw growth vs. 12 in November and 13 in October. That matches the least since January 2016. Six industries saw a contraction. 

ISM said, "The respondents are positive about the potential resolution on tariffs. Capacity constraints have eased a bit; however respondents continue to have difficulty with labor resources."

As seen in the ISM manufacturing report on Friday reflecting another below 50 print and today's services index at 55, well below the 60.8 peak in September 2018 and a touch less than the average in 2019... I'm surprised we didn't see more of a positive response to the U.S./China detente. Maybe that is to come but it better considering the high expectations for things as we begin 2020. I still believe that with most of the tariffs remaining with us, the annoyance and impact of them remain and are an impediment to better growth.

Here is a chart of ISM Services:


And here is a chart of the number of industries seeing growth: 

* What is private equity and why is it killing the things we love.

* Cable lost buy streaming may be bleeding out.

* The hottest thing in life insurance has huge risks.

* Putting my money where my mouth and pen are!
In keeping with this morning's opener, "Stocks Grow Expensive as the Market Ignores Geopolitical Risks ", I have further increased my outsized net short exposure this morning:
* In pre-market trading I reduced Alphabet (GOOGL) (over $1400) and Amazon (AMZN) (over $1900) longs from small to tag ends. (Less favorable near term reward vs. risk)
* In pre-market trading I expanded my Apple (AAPL) short to large. (Apple is my Trade of the Week $297.43 (short)).

* I have added to my (SPY) , (CAT) short exposure.
* I reduced my individual cannabis longs from large to medium-sized.
* I reduced further my (GS) long.
* Bidding for more (TWTR) , (VIAC) .
I will end with my typical qualifiers.
I manage money with a contrarian orientation and a calculator.
In general, shorting is not for most and these moves (made this morning) are based on my assessment of market and individual equities upside reward vs. downside risk.
That calculus, of course, is only as good as my input!
__________
Long AMZN (small), GOOGL (small), TWTR (large), VIAC (large) CGC, CRON, HRVSF, CURLF, GTBIF, CRLBF.
Short SPY (large), AAPL (large) CAT, GS (small).

* Pondering why the market rallied yesterday... yields some interesting observations/speculation
* Is there "another" force - like Government buying of stocks - out there?
* Or is it just about massive amounts of central bank liquidity buoying equities?
Let me start this morning by stating that, by numerous traditional measures and metrics, equities are as expensive as other market tops (e.g. March, 2000).
Yet, somehow this registers with few investors.
Warren Buffett's favorite valuation indicator, stock market capitalization vs. GDP is at a record high.
Another, the price to sales ratio is at an all-time high:

Here is a very specific and important example of that overvaluation - the median non-financial small cap trades at an EV/EBIT multiple of nearly 45x. That valuation towers above prior market cycles. Moreover there are more speculative public companies than ever before, with 37% of domestic small caps losing money over the last 12 months:

The stock market's reaction yesterday to the Soleimani attack and even more so to the tweet storm from Washington astonished me.

The stock market is supposed to reflect the future prospects for the profitability of the companies that are listed.

It is hard for me to see how the recent geopolitical events would be positive - yet markets haven't seemed to care. 

As a minimum, corporate costs for the security of American interests will be rising, perhaps materially, around the world and the places U.S. citizens are welcome and can safely go to conduct business will likely be reduced. 

The President's improvisation and, arguably incoherent policy coupled with his continued disregard of his advisers, is deeply troubling. His threats to Iran's cultural institutions will win no friends - and Secretary of Defense Mark Esper is backing off of Trump's statement already.  

An Iranian response is inevitable. Its scope and effectiveness adds another level of uncertainty which is usually unwelcome to markets of long dated assets. 

As I have frequently noted, this has come at a time when sentiment figures overwhelmingly reflect greed rather than fear.  

So the initial market response to sell off on Friday made sense. 

However, I do not understand the subsequent recovery and further advance on Monday. Stated simply, yesterday's reversal surprised me. 

The stock market has been Trump's strongest positive achievement and he refers to it constantly. 

Is there something else going on?

Could the government in some way be an active buyer of stocks?

After all, other countries, like Japan does it.

Or perhaps it is, as many argue, just about massive liquidity being injected into the financial system.

We all know that the Fed has been effectively monetizing the market for a long time in many forms. And that infusion of liquidity has accelerated over the last 3-4 months as the Fed is funding with the repo and "not QE" money.

However, yesterday's action (and upside reversal) could be a trap.

To me, the reversal illustrated the investing (and general) public's profound ignorance of geopolitics reinforced by a long string of circumstances that insulated them from any negative impact from geopolitical events such as Russia's invasion of Ukraine, collapse of Syria and resulting European immigration crisis, etc. A war with Iran would be on a whole different level but people can't conceive of it. Thomas Friedman wrote that 9/11 was due to a "failure of imagination" and that's true of most crises - they happen because we couldn't imagine they could ever happen.

Today people can't imagine we could go to war in a way that will impact them back home (wealthy people generally don't send their children to fight) or can't imagine the market going down again. Sooner or later the limits of their imaginations will become painfully clear to them.

More likely, the entities the Fed is funding with the repo and "not QE" money are the buyers, but it's the same (absurd & ultimately ruinous) effect.

A few things:

Well, at least for now it looks like, where the price of oil goes, so goes the S&P. Yesterday's rebound in stocks coincided with the slip in oil prices. No other explanations needed until something else takes over and/or the drama of the geopolitics calm down. As I stated my belief yesterday, it's rare that geopolitics has a lasting impact on the economy and markets.

As comparison's start to get easier, we should see some y/o/y improvement in the trade data in coming months, also hopefully helped by the US/China detente and some inventory building. Taiwan for December said its export rose 4% y/o/y with exports to China and Hong Kong up by 6.2%. With China becoming less dependent on US chip companies, Taiwan will be the beneficiary. The estimate was up 3.1%. Imports jumped by 13.9% y/o/y, well more than the forecast of up 5%. The data came out after the TAIEX index closed down .6%.

The December Japanese services PMI was revised to 49.4 from 50.6 and that is down from 50.3 in November and is the weakest in more than 3 years. Combine this with soft manufacturing and Markit said "Overall, survey data for the 3 months to December imply that 4th quarter GDP is likely to contract. While the sales tax and typhoon hampered October's performance, we saw a very limited recovery in November and the service sector has registered its strongest downturn in over 3 years in December." The Nikkei though did rebound by 1.6% after yesterday's decline which followed a long holiday of theirs. The JGB yield closed up by 1.5 bps and is back to zero.

In the context of the scorched earth policy of the ECB to generate higher inflation, the CPI for the Eurozone is the holy grail number. For December it rose 1.3% y/o/y as expected, up from 1% in November. The core rate held at 1.3% y/o/y, matching the quickest pace of gain since October 2015 as services inflation was higher by 1.8% y/o/y. Maybe higher oil prices will now give the ECB what it wants and get this inflation rate closer to the arbitrary level of 2%. As the data was as expected, there is little change in inflation expectations in the 5 yr 5 yr euro swap and with sovereign bond yields. The euro is also not moving much. I continue to believe that the risk is to the upside this year with European bond yields and in turn, global bond yields.

EUROZONE CORE CPI

A dated number but a sign that the European consumer is helping to offset the weakness in manufacturing, retail sales in the region in November rose 1% m/o/m, above the estimate of up .7% and October was revised up by three tenths.

More economic crosswinds from Danielle DiMartino Booth:

• As revealed in December's U.S. Markit Service report, demand is improving with the Current Business Activity index rising to 52.8, compared to 51.6 in November; foreign demand is accelerating, enjoying its first upturn since July
• Treasury traders flagged the slowdown with the 3-month/10-year spread inverting and Markit Service's survey spread between future and current service activity compressing; the services spread bottomed in July while the Treasury spread hit a low the following month
• The Treasury market and C-suite service executives are calling for a soft landing in U.S. employment trends in the short run; the rebound in Germany's service sector ratifies the optimism, given it will lessen the pressure emanating from the global slowdown

For Lou Costello, it was better than an Oscar. The occasion: He and his comedy partner Bud Abbott donating their gold record for "Who's on First?" to the National Baseball Hall of Fame in Cooperstown, New York. The presentation by the famed funny men to Hall of Famers was carried live on the Steve Allen Show on October 7, 1956. Abbott and Costello performed the classic routine that night in what was described as their swan song, the final performance of the classic skit they claimed to have done 15,000 times.

Most remember the "hook": "Who's on first?", "What's on second?" and "I Don't Know" on third. But do you remember the pitcher's and catcher's names? "Tomorrow" and "Today." The literal difference between Tomorrow and Today, from pitcher's mound to home plate, is 60 feet, 6 inches. To cycle chasers, it's a little different. It's a way to view forward guidance.

The yield curve serves as a prime example of forward guidance. In fact, the interest rate spread between 10-year Treasury notes and the fed funds rate is a "varsity" leading indicator, one of the 10 components of the Conference Board's Index of Leading Indicators. For an equivalent metric that's more dynamic, where both parts fluctuate based on daily market pricing, we prefer the spread between the 10-year yield and the 3-month T-bill, illustrated by the red line in today's chart du jour.

Translating back to Abbott and Costello terms, the 10-year is Tomorrow and the 3-month is Today. Traditionally, higher yields Tomorrow versus Today signal better activity in the future. Lower yields Tomorrow compared to Today hint that the economy could be in for a slowdown. When Tomorrow's yields are below Today's, the inversion suggests recession risk is rising.

This same future vs. current comparison can be applied to any economic report that includes both types of indicators. Ask any economist and consumer surveys would probably come to mind, with expectations vs. current conditions. Regional Fed surveys on manufacturing also allow for such assessments. So do the IHS Markit surveys on the broader service sector.

You want to know about "Today"? As per the December U.S. Markit Service report, headline current business activity index rose to 52.8 in December, compared to 51.6 in November, and was revised up six tenths from the flash 52.2 figure. Markit noted that the gain signaled "a further rebound in output growth following a slump in activity during the summer. The moderate upturn accelerated to the fastest since July and was linked to more favorable demand conditions." New orders hit a five-month high and "foreign client demand also improved...the first upturn in new business from abroad since July."

What about "Tomorrow"? The future activity index rose to 55.7 in December and has recorded a bounce off the record low 53.6 reading hit back in August. Firms are optimistic that sales will get a boost in the next 12 months.

The spread between Tomorrow and Today, or future and current service activity (the blue line shown above), has traced the same slowdown that rates traders depicted with the flattening and subsequent inversion in the 3-month/10-year spread. Interestingly, traders sniffed out the slowdown first, but it was service sector executives that called the turn in the outlook first. The service spread bottomed in July at 1.3 index points. The trough in the yield curve happened one month later, at the end of August, when the inversion hit -49 basis points.

Why link these two "Tomorrow-Today" series? They both foreshadowed a downshift in job creation in the service sector during the second half of 2019. In the first two months of 2018's fourth quarter, ADP service employment came in at 110,000. If this punk run rate is confirmed in tomorrow's December report, it would be the weakest quarterly rate of service employment growth since 2012's second quarter.

We purposely illustrated this narrative with ADP employment data because of its advantage over the nonfarm payroll data in terms of the granularity across company sizes. The same applies to the Markit Service data relative to the Institute for Supply Management (ISM), the latter of which depicts activity at larger firms only.

In the spirit of globality, we would add that Germany's services sector grew at the strongest pace in four months in December, defying other data that suggest economic growth was arrested in the fourth quarter. Markit's final composite PMI, which aggregates the manufacturing and services sectors that together account for more than two-thirds of the German economy, rose to 50.2, signaling a tiny expansion after three successive months of contraction. Less heat from a European slowdown implies less stress in the U.S. industrial sector.

We leave you this morning with the Treasury market and C-suite occupants in the broader U.S. service sector calling for a soft landing in America's job market. If the geopolitical events of the last few days have given you pause, this comes as welcome news. Even Lou Costello wouldn't get his signals crossed by that development.