"Just one last thing."
- Lt. Columbo
Twitter (TWTR) started with Underperform at Bernstein -- after the close.

* The big gets bigger
* The long strange trip continues

"Truckin', got my chips cashed in
Keep truckin', like the do-dah man
Together, more or less in line
Just keep truckin' on..."
- The Grateful Dead, Truckin'

The market train continued to chug along today -- with little regard to its recent speed.

Market breadth (the object of my interest) peaked early in the day but still ended +375 advancers over decliners.

But considering the duration and magnitude of the advance since October 2019, this is still constructive.

"Arrows of neon and flashing marquees out on Main Street
Chicago, New York, Detroit and it's all on the same street
Your typical city involved in a typical daydream
Hang it up and see what tomorrow brings..."

Thanks for reading and enjoy the evening.

No trades in regular trading hours today!

PredictIt on the Presidential election.

The Republican Party moves to very slight favorites.

Thomas C

"When the Music stops playing..."

Those of us who track the "Baltic Dry Index" and with the index now tumbling the most since 2008, it may suggest that the global economy is, in fact, continuing to decelerate. Economies have debt fueled asset price booms, like the US in the 1920's, before eventually hitting their 'Minsky Moment', and by saving the banks we avoided perhaps an end to our capitalistic system and its basic economic framework in the 1930's Great Depression, and ended up with a balance sheet recession the likes of which had never before been seen and which has seen the Japanese economy flat-lining since the early 1990's. Currently there is no economy beyond the the Federal Reserve and U.S. Treasury, as the U.S. is 100% bank owned. However, something I remember learning in my college economic's class, that the bankers do need to ensure the vast majority of the money that gets loaned out does indeed gets paid back. Banking requires prudent sound lending practices. If someone cannot repay a loan, the asset in question needs to repossessed and sell it to recoup some of that original loan money. If bank loans are used to inflate asset prices as they did in 2008/2009 and looks eerily similar now once again, they get into a world of trouble when those asset prices collapse. The Fed's current repo facility and balance sheet expansion is a great example of this. How long can this charade last is anyone's guess. Only then will the masses see that the Emperor has no clothes as the Fat Lady begins to sing her siren song.

Market breadth continued strong this morning - at +600 more advancers than decliners.
I am laser focused on this statistic.

Cowen kisses its sister and raises their price target for Twitter (TWTR) from $32 to $34.

I will be out of the office at a business lunch from 12:30-2:00 today.

With the Fed speak today, here's a chart of the Fed's balance sheet in white and the S&P 500 in orange since mid August, just before the balance sheet skyrocketed in size.
Coincidence? No. It's in part psychological and certainly in part due to the desperate search for yield so it really doesn't matter that the Fed doesn't think this isn't QE.
The market has spoken as to what they think this is.
As mentioned in my opener, the price to sales ratio and the EV/EBITDA ratio on the S&P 500 have now partied like its 1999, literally. This is not a market call, it just is what it is.
Here is the weekly chart of new Fed balance sheet data:

This chart illustrates the price to sales ratio of the S&P Index: 

And here is the enterprise value to EBITDA ratio of the S&P Index: 

In terms of data released this morning, initial jobless claims totaled 214k, that -6k less than expected and down from 223k last week (revised up by +1k). Smoothing out the holiday season has the four week average at 224k vs. 233k last week because a print of 252k dropped out. Of note though and we'll keep an eye on this, continuing claims, delayed by a week, rose to the highest since April 2018 but it could be holiday noise. 

For a perspective, here is the continuing claims series:

I have reduced my (GLD) down to small-sized.

I am responding to the price action.

Taking another profit out of gold (for the fourth or fifth time).

OMG (409k's?):

* On private equity.
* How to sell good ideas.
* Did Twitter stop the war in Iran?

* These days the "Watusi girl is really smart"
* The Wah Watusi was the all the rage but similar to other dance crazes (The Macarena or Locomotion) it didn't have legs and it's popularity faded abruptly

"When the music stops, in terms of liquidity, things will be complicated. But as long as the music is playing, you've got to get up and dance."
-Chuck Prince, CEO of Citigroup (2007)

"Baby, baby, when you do The Twist
Never, never do you get yourself kissed
'causeyou're always dancing far apart
The Watusi, girl, is-a really smart."
- The Orions,The Wah Watusi

It is growing increasingly clear to me that global stock markets are in the process of making a speculative move (driven by global liquidity) that may even compare to the advances that culminated in the seminal market tops in the Fall of 1987 and in the Spring of 2000.

Here is what I wrote yesterday in "Staying Real:"

As the today's trading day comes to a close, it is apparent that, like the 1997 Long Boom paradigm expressed in a column in Wired Magazine during the dot.com bubble -- the current market is similarly viewed as in its own, new liquidity-based paradigm.

No longer is the market hostage to the real economy or sales and profit growth - stuff I have spent four decades analyzing. Instead, liquidity is seen as an overriding influence - actually it has become the sine quo non.

As such, historical valuations become increasingly irrelevant and price momentum is the lodestar.

There are many that are willing to play this game of musical chairs. I salute you - but that approach is not in my investing "DNA."

I am not willing - as I must admit to not having the conviction (in either direction) with knowledge that, in the fullness of time, buying high and selling higher will ultimately come to a brutal end. Equally important (and honestly), I currently don't have a real notion what to even look for as a signpost.

Accordingly, I have materially reduced my gross and net exposure today and I plan to stay in that state of suspended animation for a while.

This means, while I will be trading and investing actively (as usual), I will be doing so in much smaller size than in the past - both on the long and short side - as my conviction is simply not there.

While I was fortunate to have covered a good portion of my short book in the Tuesday overnight market "panic" (when the S&P futures dropped by nearly 50 handles), I did not expect the sort of continued speculative liquidity-driven climb that followed on Wednesday and that has become more apparent and powerful (this morning futures are up by another 10 handles).

How To Time a Top?

"Markets are strongest when they are broad and weakest when they narrow to a handful of blue-chip names."
- Bob Farrell

Timing the top of a speculative and liquidity driven market is difficult, at best - as more succumb to the upside price momentum, even as (I expect) continued disappointments in the real economy.

As long as the rally extends itself, this disconnect between financial asset prices and the real economy will likely continue to be an anathema to fundamentalists, like myself.

Following Bob Farrell's lead (above) - and the key to my personal maneuvers in this market - I will be looking for a narrowing in market breadth in the weeks (or even months ahead).

In the meantime, as expressed in yesterday's column, I will continue to be active - though I plan to trade in substantially smaller sized lots - reflecting the absence of my conviction in the duration of the advance and with the knowledge that the end of this move is unclear in it's timing.

Lack of Conviction and Continued Transparency

My uncertainty regarding the duration of the current up move and its ultimate conclusion is in marked contrast to the growing confidence (and even hubris) of many other market observers.

Even when my positions have been large (both long and short), I have recognized that Mr. Market exists to embarrass us all and that the "cossacks may attack us sooner than you think." (Hat tip Grandma Koufax)

As stated yesterday and reflecting the emergence of a speculative market stage, all of my current short positions - in either individual stocks or in the Indices - are small-sized.

My longs vary from small to very large-sized.

I have subordinated my ursine market view to adapt to the notion that we are in the late and speculative advancing stage of the equity markets.

I am now very liquid - in terms of my gross exposure.

In net terms I am basically market neutral (after having my largest net short exposure in two years late last week).


The Data Mattas

I will continue to chronicle and analyze the macroeconomic backdrop.

I will continue to assess upside reward vs. downside risk - in the search for a "Margin of Safety."

As, while recognizing that the market is a voting machine in the short run there is no question that, in the longer run, it is a weighing machine.

Bottom Line

"We learn from history that we do not learn from history."
- Georg Wilhelm Friedrich Hegel

"Baby, baby, that's the way it goes
Nothing happens when you Mash Potatoes
I just gotta fall in love with you
Watusi is the dance to do."
- The Orions, The Wah Watusi

2020 marks the fifth decade I have been in the markets (and the 23rd year writing my Diary on Real Money) - and I am always learning.

I have seen this movie being played in the past.

We live in unusual times - in which central bankers have adopted policy unlike any point in history.

Near zero interest rates around the world have become common place and are accepted with little thought given to the adverse consequences. Forgetting history, central bankers seem to have no idea that they have created another monster again - just as they did in 1999.

Fiscal policy is undisciplined/irresponsible and, again, little thought (by either political party) is being given to what the possible adverse consequences might be.

Meanwhile, corporate profits are lower (year over year) and the rate of global GDP growth remains below the historic trendline - as it takes more and more debt to deliver a unit of production.

The climb in stocks will likely end badly as it is not supported by the fundamental (social, economic, political and geopolitical) backdrop and, increasingly, classical valuation metrics have moved to the highest percentiles in history (enterprise value/EBIT, price to sales, market capitalizations to GDP, etc.)

As Citigroup's (C) Chuck Prince observed 12 years ago (in the same year that The Great Recession of 2007-09 started), the music is still playing and traders/investors, like Sly and The Family Stone, are "dancing to the music". 

Chuck Prince's jig ended badly within a few brief months and so will today's dance craze likely end badly (in the fullness of time).

Like the S&P Index The Wah Watusi (released in 1962) was the all the rage (climbing to #2 on The Billboard Chart) but, like other dance crazes (TheMacarena (Los Del Rio) or Locomotion (Little Eva)), it didn't have legs and it's popularity faded abruptly!

We should all learn from Chuck Prince, Bob Farrell, Georg Wilhelm Friedrich Hegel, Grandma Koufax, Ben Graham and, even, The Orions.

Lessons learned from a bank executive, a legendary technical analyst, a German philosopher, a grandmother, the father of "value investing" and a Philadelphia-based R&B singing group.

As contrasted with Macy's (M) which beat comp expectations, Kohl's (KSS) disappointed. 
I am adding to KSS under $45 in pre-market trading.

This tweet touches on some of the points I made in my opener this morning (it's coming up shortly):

Some observations from Peter:

Driven again by skyrocketing food prices, China said its December CPI rose 4.5% y/o/y, the same pace as in November but that was two tenths less than expected. Food prices rose 17.4% y/o/y again driven by pork prices which were up by 97% y/o/y. Taking this and energy out though and prices rose a more benign 1.4%, unchanged with the month prior. While the PBOC will look past the rise in food prices when determining where they want to place monetary policy, this is not fun for those in China that eat, particularly pork which is their most popular food. Wholesale prices fell .5% y/o/y, about as expected and less of a moderation compared to November.

Markets in China were green, as they were for all of Asia following the US rally as oil prices dropped. Many countries in Asia are big energy importers.

After the weak German factory order seen this week, industrial production did beat estimates as it grew by 1.1% m/o/m, 3 tenths more than expected and October was revised higher by 7 tenths. Production still fell though by 2.6% y/o/y, down for the 13th straight month. Hopes remain that German is coming to the end of its downturn and the Economy Ministry said that business "should brighten somewhat in the coming months." Again, it is the industrial side of the German economy that has activity in the aggregate flat lining, offsetting a better situation for services with the unemployment rate still very low.

Reflecting though still a modest pace of global trade and the mixed economic picture, German exports in November fell 2.3% m/o/m, worse than the estimate of down .9%. The big question for 2020 is whether the phase one US/China trade deal will move the needle on the industrial and trade slowdown seen in 2019. With many of the tariffs still with us, any improvement I believe will be modest.

Also in Europe, the November unemployment rate for the region held at 7.5% as expected at the lowest rate since 2008. Is this worthy still of negative interest rate policy?

EURO AREA UNEMPLOYMENT RATE

Finally, UK short rates are dropping sharply and the pound is weaker after soon to be exiting Bank of England Governor Mark Carney is saying they are contemplating another rate cut. Just as I said good riddance to Mario Draghi, I do the same for Mark Carney. With the core rate of inflation at 1.7% and which has averaged 2.1% over the past two years and getting as high as 2.7% in 2017, he's saying that with inflation now below target its .75% benchmark rate could be cut. What stimulus a cut would provide from this already very low level is beyond me but central bankers are just drug dealers, trying to feed the rest of us ever more credit so that we're all addicted to borrowing. At some point, like now, businesses and households are already too drunk to drink more.

We do hear today from Fed Vice Chair Rich Clarida and the newly voting member and uber dove Neel Kashkari that never once voted for a rate hike in his past run as a voter. Williams, Barkin and Evans also speak. I wonder if they'll be any comments on their exploding in size balance sheet. Likely not.

Danielle DiMartino Booth introduces Short-Term Compensation (STC) -- which stands as a good cyclical indicator:
Short-Term Compensation/Workshare claims depict employees experiencing a reduction in available work; what differentiates STC/Workshare and Initial Claims is the former is filed by the employer compensating for reduced hours and the latter by the worker

At roughly 10,000 claimants, those collecting STC are a fraction of the 1.8 million collecting unemployment insurance via continuing claims; nonetheless, STC provides a prism into the cyclical U.S. economy and is thus an early indicator of cyclical inflection points

STC is a significant macro indicator for Industrial Production, GDP and Hours Worked; STC's December rebound vis-à-vis the prior five months' weakness corroborated the December rebound in ADP

The California Gold Rush (1848-1855) drew some 300,000 prospectors from the United States and around the World, all seeking riches from the precious yellow metal. The sudden population bulge was so great, it allowed California to seek statehood in September 1850. Panning from streams and riverbeds was the preferred methodology of the early "forty-niners" who were able to retrieve loose gold flakes and nuggets with their hands. Panning was so "easy" that the first miners tended to be entire families; women and children prospected right next to the men. Today, you can still pan for gold at Marshall Gold Discovery State Historic Park in California, which bears the name of James W. Marshall, the man who kicked off the Gold Rush when he first discovered it at the site in 1848.

Prospecting is not limited to panning America's waterways. There are always new and undiscovered fundamental macro factors that economists and investors have yet to uncover. Regular readers know our affinity for the weekly jobless claims report and how we've dissected both initial and continuing claims six ways to Sunday. Well, we just unearthed a nugget from the claims report that will be a useful guide for determining how fast or slow the economy is growing at any point in time.

Introducing Short-Term Compensation (STC). Out-of-work individuals don't only collect regular state claims for unemployment insurance. There are other smaller programs for Federal employees and veterans, as well as extended benefits that kick in during recessions. The U.S. Department of Labor also describes another program, STC as "Workshare" and "an alternative to layoffs for employers experiencing a reduction in available work."

What does STC do?It preserves employees' jobs and employers' trained workforces during times of slower economic activity by allowing employers to reduce working hours rather than laying off some employees while others continue to work full time. The key difference between STC/Workshare and Initial Claims is that the former is filed by the employer, while the latter is filed by the employee.

STC/Workshare claims offset lost wages from reduced working hours. Labor adds, "STC cushions the adverse effect of the reduction in business activity...by averting layoffs and ensures that these workers will be available to resume prior employment levels when business demand increases." Currently, 26 states have STC programs.

How big is STC?It's not. About 10,000 people are currently collecting, compared to the 1.8 million receiving state continuing claims.

Despite being small in stature, STC stands tall as a cyclical indicator. STC has been around since the mid-1980s and its inverse correlation versus the annual trend in U.S. industrial production is a robust 0.80. The current economic expansion has featured three down cycles for the soft data bellwether ISM New Orders index in 2012, 2015 and 2019. But the hard data STC only bulged during the last two episodes, meaning those were true economic slowdowns, not just periods of financial market dislocation.

STC provides forward guidance for cyclical sectors of the U.S. economy. As you see in today's chart, STC plotted over the last few cycles shows how well it tracks gross domestic product (GDP) and private sector aggregate hours worked, the labor input in GDP that gets plucked out of every monthly U.S. employment report to gauge near-term growth prospects. As is the case with industrial production, STC's inverse correlations are high with GDP, at 0.73, and hours worked, at 0.77.

STC promises to sound an early warning on the growth outlook. Since STC is released weekly, it's much more real time than GDP, which is released on quarterly basis with a lag. To wit, we'll have to wait to the end of January for our first look at fourth-quarter GDP. Conversely, most of STC's fourth quarter figures are available now.

STC is real as it gets. When workshare claims rise, they reflect actual business decisions in the economy. Six of the top ten most populated states have STC programs, and some of them also are key manufacturing hubs (like Michigan and Ohio) and exporting gateways (such as Texas, California, New York and Washington).

STC monthly data corroborate the rebound in the December ADP data. In the five months through November, STC rose by an average 45.1% monthly year-over-year increase (up in claims is bad). But as was the case in the ADP strength, STC's increase fell to 19.3% in December. In keeping with one of QI's 2020 themes, it was "less bad."

STC is a nugget worth adding to Quill's economic data arsenal. It will enhance our ability to monitor the short-run ups and downs in the U.S. economy. And it will flag shifts in the GDP outlook before they're recognized by the broader forecasting community. In keeping with the Golden State's motto, that's what we call a "Eureka!" moment.