Besides (BAC) and (SPY) puts, no trades today.

I am buying more February (SPY) puts now.

The January NY manufacturing index, the first January industrial figure seen, was little changed at 4.8 from a revised 3.3 in December (from 3.5). That is a touch better than the estimate of 3.6. After averaging 19.8 in 2018, manufacturing in this region has been barely in expansion since last spring. 

New orders rose to 6.6 from 1.7 while backlogs were less negative at -2.7 from -13.8. Inventories though fell back below zero and the employment component fell 1.4 pts m/o/m. Prices paid doubled to 31.5, the highest since March from 15.2, and those received more than tripled to 14.4 from 4.3. 

As for the forward looking components, the six month outlook fell to 23.6 from 26.1 and capital spending plans moderated as well. 

The NY Fed defined this manufacturing figure as "Activity expands modestly" which a number barely above zero reflects. On the day we are going to sign the U.S./China Phase One trade deal, the manufacturing confidence numbers have barely moved in response to the December commitment that led to today. Maybe that is because almost all the tariffs are still with us and thus mud will remain in the gears of global trade.

I just heard and yesterday read the argument that the tariffs are a winning strategy. I don't get how damaging our own economy with tariffs that we ourselves pay for is the right strategy in fighting an IP war. The way to fight an IP war is going directly after those that steal like we've done with ZTE (ZTCOY) and Huawei, along with the daily fight of the FBI and CIA going after Chinese IP theft (sorry to go off message here).

Canopy Growth (CGC) continues to make a nice run this morning.

Here is your "Marijuana Moment."

The Global Times reports that Phase Two talks may not start soon:

The signing of a phase one trade deal between China and the US may not lead to phase two talks any time soon, while trade arguments, tariff threats and US investment restrictions on China will become the "new normal" over the longer term, a source with knowledge of the talks said on Wednesday.

"The phase one trade deal shows the two sides have reached a consensus at the moment. We can't expect that China-US trade friction will disappear simply because of signing a deal," a source close to the Ministry of Commerce (MOFCOM) told the Global Times.

Moreover, after the signing, the US will maintain 25 percent tariffs on $250 billion of Chinese imports, along with 7.5 percent tariffs on $120 billion of Chinese imports, according to the Office of the US Trade Representative.

Existing tariffs imposed by the US on Chinese goods will not be lifted in the short term, said the person close to the MOFCOM. But China has reiterated its stance that the US ought to remove all tariffs on Chinese products.

They prefer to focus on the earnest implementation of the hard-won phase one trade deal before moving to the next phase of talks, the person said, noting that future talks will be more challenging, as they'll be closely connected to WTO reforms.

A day ahead of the signing ceremony, the US, Japan and the EU proposed new global trade rules - that they are intending to bring to the WTO - to curb subsidies they allege are distorting the world economy, with China a clear target, Reuters reported.

"Whether an economic system is reasonable or not is measured in line with WTO rules, but the US only use standards that are conducive to itself. This is unfair. Unless the US makes compromises in this aspect, the two countries can't reach a phase two agreement," He Weiwen, a former senior trade official and an executive council member of the China Society for World Trade Organization Studies, told the Global Times on Wednesday.

He indicated that the US position is one of hegemony in demanding that China cut support and subsidies to its emerging industries.

"Industrial and agricultural subsidies are common in the US, with media reports saying that Foxconn could get subsidies of about $400,000 per job for its new factory in the US. Hence, the US maintains double standards on China's industrial policies," he said.

Yesterday I shorted JP Morgan (JPM) (at an average price of about $139.65) to hedge out a portion of my (BAC) , (C) and (WFC) investments - which could be subject to a price correction in the weeks ahead.

Yesterday and today I pared down C and BAC as they approach within 10% of my year end price targets.

I am guided by my perception of upside reward vs. downside risk - which, naturally deteriorates on the big 2019 bank sector price gains.

I will be leaving earlier than usual - at about 2 p.m. today.
I will be out Thursday and Friday - as I have a fun filled few days and important golf (member/guest) engagement with subscriber and BFF Johnny The Greek.
You will be in the very capable hands of Chris Versace and Bret Jensen on Thursday and Friday, respectively.

* Goldman Sachs provides a lesson to do the less obvious (in both buying and selling)
* Higher prices is the enemy of the rational buyer

Last week I sold out my Goldman Sachs (GS) long investment position at about $240/share (that was my 2020 year end price target). The shares proceeded to rise over the last few days to over $245 and were about -$4 in pre-market trading this morning.
I had previously placed GS on my Best Ideas List and purchased the shares at about $169/share in December, 2018 - in the middle of the 1mdb probe and near the S&P's cyclical bottom.
With the benefit of hindsight, the controversy surrounding the probe was an opportunity to buy Goldman Sachs.
The resolution of the probe may be an opportunity to sell Goldman Sachs.
GS's sharp price rise (+$75/share) has dramatically changed the upside reward vs. downside risk - and it is this calculus plus a contrary bent that guides my portfolio.
Buy the rumor, sell the news.
I am.

This chart and commentary is from Straszheim at ISI - he is the best observer of China I know of:

* I added short exposure yesterday
* But still taking only "baby steps"

"Baby steps, baby steps to the office. Baby steps out the door..."
- Bill Murray,What About Bob

With the "everything bubble" moving ever higher I couldn't resist the discrepancy between current share prices and my perception of a much lower "fair market value" - and I purchased defined risk (SPY) puts in yesterday's trading session.

I also increased my Spyder short from small to medium on this week's market advance.

Those puts provide me with nearly 38 days of exposure, gamma on potential downside action, and, as mentioned, defined risk.

While bull markets die hard, as Peter Boockvar noted this morning, investor sentiment is changing with price:

"Along with the persistence rally in stocks, Investors Intelligence said bullish sentiment rose on the week with Bulls rising to 57 from 55.1 while Bears remained unchanged at 17.8. The spread is just shy of the extreme read of 40. The uber extreme on the Bull side is when it gets above 60 and Bears get around 15. Bottom line, sentiment is very bullish as measured by a variety of metrics but at least for now they've been right. That said, with earnings results now upon us, the expectations are of course high."

But, we have all observed and have recognized that sentiment is not a terrific short term trading tool.

That said, on top of the weakening real economy and nose bleed valuations, (discussed fully in my Diary over the last few months) I have many additional anecdotal observations which provide me with bear fodder (that I might touch on later today).

I am intellectually committed to the short side but I take only short, baby steps out of respect for the forever QE/liquidity and, resulting, continued upward price momentum and limited selloffs.

"Gimme, gimme. I need, I need."

Like Citigroup (C) , Bank of America (BAC) is trading within 10% of my year end 2020 price target - accordingly I reduced further, on pre-market strength, (but I am still medium-sized where I plan to stay) this name.
Q4 results for BAC were better than expected - aided considerably by an aggressive buyback program.
Subject to market conditions, I expect some profit taking in the banking group.

Peter on sentiment, retail sales, UK, etc.:

Along with the persistence rally in stocks, Investors Intelligence said bullish sentiment rose on the week with Bulls rising to 57 from 55.1 while Bears remained unchanged at 17.8. The spread is just shy of the extreme read of 40. The uber extreme on the Bull side is when it gets above 60 and Bears get around 15. Bottom line, sentiment is very bullish as measured by a variety of metrics but at least for now they've been right. That said, with earnings results now upon us, the expectations are of course high.

Ahead of the December retail sales figure, Target said this in their comp miss press release: "We faced challenged throughout November and December in key seasonal merchandise categories...For the Holiday period specifically, sales results came in below our expectations as we experienced softer than expected performance in areas of our business that are critical during the season, including electronics, toys and portions of our home assortment. Because these categories account for a much higher portion of sales during the holidays, they have a larger impact on our overall sales growth as compared to the rest of the year." Is this just a competitive issue compared to other retailers or a sign of something broader in terms of consumer spending? I guess we'll soon see.

With people back from their holiday vacations or whatever they were doing, the MBA said mortgage apps bounced by 30%. Purchases were higher by 15.5% w/o/w and 8% y/o/y while refi's jumped by 43% w/o/w and 109% y/o/y. As things always fall in the last few weeks of December and then rebound in early January, throw this data out the window. Next week or the week after we'll see things normalize and we can glean a true trend.

The chatter on the Bank of England cutting interest rates from an already low level of .75% continues to heat up after the less than expected print in December CPI and comments from the already dovish BoE member Michael Saunders. He said the slow economic growth and softer labor market deserves a "relatively prompt and aggressive response." One of the most important things I learned way back when in Economics 101 was "The Law of Diminishing Returns." Business Dictionary.com defines it as "if one factor of production is increased while other factors are held constant, the output per unit of the variable factor will eventually diminish."ALL central banks have reached this point but many don't seem to realize it. They are still trying to play the part of Economic Superman by stuffing more debt down our throats. The 25 year lesson of monetary easing from the Bank of Japan and its futile results just don't seemed to be learned anywhere. The more debt you lay upon us, the SLOWER economic growth becomes.

Also, this is a committee that sat on their hands basically throughout the entire Brexit process, after panicking right after the vote with QE and rate cuts which helped to hammer the pound and which resulted in higher inflation, and now that we have a clear mandate to get it done and hopefully business confidence thus returns, they seem to be panicking again. It is beyond me why they might not wait until they see data in the months to come after the December election.

As for the CPI report, the headline rate rose 1.3% y/o/y vs the estimate of 1.5% and the core rate was higher by 1.4%, 3 tenths less than expected. Keep in mind, when analyzing rate of change numbers like CPI, a lot depends on the comparison as December last year saw a core gain of 1.9% and the benchmark interest rate is still deeply negative.

While the pound is little changed in response around $1.30 to the CPI figure and the BoE comments, the 2 yr gilt yield is falling by 5 bps to .45%, the lowest since October while the 10 yr yield was down by 8 bps to .64%.

Finally of relevance in Europe, Germany said its economy grew by .6% y/o/y in 2019, the slowest pace of gain since 2013 with weakness in manufacturing offsetting strength in consumer spending and construction. Growth for the entire Eurozone likely grew about 1% in 2019 and the estimate is for a similar rate of growth in 2020. The German 10 yr bund yield, days after rising to the highest since May, is back sliding by 4 bps today.

Pointing to easy comps and maybe a sign of stabilization in global trade, Indonesia said exports rose 1.3% y/o/y, better than the estimate of down 1.9%.

* Another lesson learned?
* Avoid "Group Stink"
* The consumer is likely less buoyant and healthy than the consensus assumes
* QE/liquidity may show up in Target's price earnings multiple but not in its Holiday sales comps!

"We faced challenges throughout November and December in key seasonal merchandise categories and our holiday sales did not meet our expectations. However, because of the durability of our business model, we are maintaining our guidance for our fourth quarter earnings per share. We also remain on track to deliver historically strong full-year results in 2019, including comparable sales growth of more than 3 percent and record-high EPS reflecting mid-teens growth compared with last year.

For the Holiday period specifically, sales results came in below our expectations as we experienced softer-than-expected performance in areas of our business that are critical during the season, including Electronics, Toys and portions of our Home assortment. Because these categories account for a much higher portion of sales during the holidays, they have a larger impact on our overall sales growth as compared to the rest of the year. At the same time, we've seen continued strength and market share gains in Apparel, Beauty, Essentials and Food & Beverage. And in Toys, despite approximately flat comparable sales, we continued to gain share over the holidays, according to data from the NPD group."

- Brian Cornell, Target CEO (complete release)

Break in!

Everyone's favorite retailer, Target (TGT) , whiffed on quarterly sales - saying that comp sales for the three month period ending January will be less than half the +3% to +4% previously expected. (Here is a further explanation by CEO Cornell of holiday sales.)

Through November and December Target achieved comps of only +1.4% - these were aided by +19% digital growth.
In its release, the company emphasized that the retailer expanded market share in most of its business lines - which could suggest that the consumer was generally weaker than expected during the Holiday period.

Observers will now debate whether the Target report suggests that the consumer is slowing or if the shortfall was company-specific. Regardless of the outcome of this debate- this is another lesson learned.

Target has been widely regarded as a retail "winner" - a company that is universally seen as navigating well the competitive on-line threat and embracing the benefits of a still strong U.S. consumer.

Target's shares are -6% lower in pre-market trading.

Bottom Line

Be cautious.

Be cautious about "Group Stink."

Danielle DiMartino Booth analyzes small business conditions:

• Small Business Optimism as reported by the NFIB, remains strong and the momentum is likely to hold with the addendum passed to the Tax Cuts and Jobs Act which repealed the Health Insurance tax and the Cadillac tax as reported, a boon to cost-wary small businesses
• Small businesses earnings growth is highly correlated to increased wages with a typical quarter lag; expect to see wage inflation during 2020 as the S&P SmallCap 600 operating earnings expectations for the fourth quarter is expected to rise at a 24% annualized rate
• Capital expenditure plans remain in low gear and have not risen to post-TCJA August 2018 peaks; small business owners are likely to wait to invest until there are assurances that the tax cuts and its benefits are permanent and the economic recovery sustainable

"The Cadillac of Minivans." That's how Chili Palmer (John Travolta) described his Oldsmobile Silhouette rental car to Martin Weir (Danny DeVito), a well-respected, egocentric actor he was trying to sway in Get Shorty, the 1995 crime comedy based on Elmore Leonard's novel of the same name. Travolta's character was a gangster looking to get away from crooked deals and double-crossing grifters, so he traveled to Hollywood to collect a debt. There, he discovered that the movie business was much the same as his current job, just with a higher grade of scumbags than he was used to.

Thankfully, American small business owners aren't trying to create the next Academy Award winner. Instead, yesterday's National Federation of Independent Business (NFIB) Small Business Optimism report closed another banner year, "as owners took full advantage of strong consumer spending, and federal tax and regulatory relief." NFIB Chief Economist William Dunkelberg noted, "2020 is starting out with a solid foundation for continued growth, two-years into the Tax Cuts and Jobs Act that's providing fuel to grow small businesses and their workforce."

But that's boilerplate filler from the man we know fondly as "Dunk." His commentary included the following nugget: "...Most importantly, Congress passed a significant tax addendum to the Tax Cuts and Jobs Act in December that repealed the dreaded Health Insurance Tax and the Cadillac tax, taxes that would have increased the cost of health insurance, further limiting the ability of small business owners to offer employee sponsored health insurance."

This is very good news.

Changes to tax policy hold massive sway over the operating environment for small business. Lowering the cost of health insurance gives the "little guys" wiggle room to compete for talent.Translation: health benefit costs saved become labor costs spent. This is especially noteworthy when the single biggest impediment to small businesses is finding qualified labor to fill open positions - 23% of owners cited it in December, far more than the 17% castigating taxes or the 15% decrying regulations.

Plans to raise worker compensation are driven by changes in corporate income. It follows that there's a pretty tight relationship between the year-over-year trends in small business earnings and compensation plans over the last few business cycles dating back to the late 1980s. The proverbial secret sauce is small business earnings give forward guidance for future wage plans. The most significant lead time between earnings trends and wage plans is one (whole) quarter.

With fourth-quarter corporate earnings season upon us, let's take it a step further. Let's ask equity analysts for their small cap earnings expectations. Conveniently, Standard & Poor's has beat us to the punch. S&P SmallCap 600 operating earnings per share is expected to increase in 2019's final quarter to a 24% annual rate, accelerating off 2019's soft patch that persisted through the remainder of last year.

If these optimistic earnings expectations are accurate, they are foreshadowing a bullish environment for small business wage inflation in 2020. The strong end to 2019 for owners' profits, in combination with the removal of future health care benefit impediments, allow for more clarity in planning future staffing allotments to attract or retain talent.

Let's rewind for a moment to Quill Intelligence's 2020 New Year's Evolutions. The first one called "The Decoupling" highlighted the concurrence of rising wage inflation and rising continuing claims. Underscoring the former was, in part, small business owners' comfort in adding to future labor costs. The path for small cap earnings provides a crystal ball of sorts into the evolution of this narrative over the first half of this year.

We also noted in the New Year's Eve Feather what we called the 2020 productivity challenge.

U.S. firms will look to boost efficiencies by adding more productive (higher skilled/higher paid) employees and shedding their less productive counterparts. We fully expect this will apply to NFIB members, especially during an election year that brings its own measure of elevated uncertainty for the near-term capex outlook.

To that end, NFIB capex plans ended 2019 on a down note. Those who said it was a good time to expand fell while expected earnings matched a February 2019 low. At no point last year did future investment prospects test the August 2018 post-TCJA highs. To this end, Dunk thinks Congress has some unfinished business to tend to: "Two years ago, Congress and the President provided real, significant tax relief to small business owners. Now, owners are anxious to have their tax cuts made permanent, so Congress needs to get back to work."

What would proprietors think? "Now, that would Be Cool." Chili Palmer would agree.