Market breadth closed at only +200 advancers over decliners, so the bears have that working for them.
Thanks for reading my diary and enjoy the evening. Again a special thank you to "Meet" Bret Jensen and Chris "Not The Designer" Versace for filling in on my Diary on Friday and Tuesday.

Not that this has mattered much but market breadth has steadily declined today.
Now at only +400 issues, it was over +1000 pliability of advancers over decliners early in the day.
I have made no additional trades since my earlier report.

Apropos to my opener this morning, I wanted to end the day with one more thought.

It seems that everyone these days is enamored with low rates and the offer of massive liquidity buoying stocks (and their price earnings ratios).

No one is looking at the downside, e.g., the gutting of banking industries in Japan and Europe.

Not only are Japanese banks -90% from highs but the Euro bank index is trading below its 2009 level. 

Think Jerry Lee Lewis: "What made Milwaukee famous made a fool out of me".

ZIRP and NIRP are the monetary equivalent of Schlitz beer.

* A trader or investor is like a race horse - they perform best on a racecourse to which they are specifically suited

"The big difference now is that this is not strength that is driven by retail investor excitement. It is cold, bloodless computers and passive investment that is using the liquidity to drive the action. Human emotions are a handicap when dealing with this market right now. Logic and common sense are the enemies of strategical buying solely on the basis of liquidity... Some market pundits deal with this by predicting the obvious - that it won't last forever and will end badly. We all know that already and it doesn't help one bit in trying to navigate action that may last much longer than seems possible."

- Rev Shark, A Cold, Bloodless Market Rally

In July, 2007, Citigroup's Chuck Prince famously told The Financial Times that global liquidity was enormous and only a significant disruptive event could create difficulty for the equity markets: "As long as the music is playing, you've got to get up and dance... We're still dancing."
Two or three months later the S&P peaked and began the long descent to 666 in early March, 2009 at "The Generational Low."
Fourteen months later Lehman went bankrupt.
We are at the point in time when investors are increasingly asking themselves whether they should continue to be disciplined in approach (consistent with their risk appetite and time frame) or whether they should simply join the chorus of market participants in the game of musical chairs described by Citigroup's Prince.
Again, back to Rev Shark:"We all know that already and it doesn't help one bit in trying to navigate action that may last much longer than seems possible...The best thing you can do is simply be aware of what is moving the market. It isn't news or fundamental or even human emotions. It is liquidity that is being fed to computers and passive investment vehicles. Once you fully appreciate that then you can either play that game or just wait patiently for the game to end."
So, if you are a facile, disciplined and experienced trader with a relatively short term time frame (like Rev Shark) and you are comfortable that you can navigate the current environment, go for it (and follow your dream and stock prices higher).
Unfortunately, (bad) trades became investments for many back almost 13 years ago - and the trading community was essentially wiped out. To this observer, there is little question that the potential exists for a larger than expected downturn (just when nobody is looking!) that will catch most with their portfolios vulnerable (and with their pants down).
From my perch the decision is "still" to stick with my calculator (that determines reward vs. risk in the markets, in sectors and in individual stocks) and to add to longs and to shorts based on the opportunities provided by the changing market backdrop (and structure) and artificiality of prices in which ETFs and quant strategies rule the roost, and under the largess and liquidity of the Federal Reserve.
To me, and generally speaking, a trader or investor is like a race horse - they perform best on a racecourse to which they are specifically suited.
I know my favorite distance be sure you know yours.

ViacomCBS (VIAC) is at an important technical juncture now ($35.70).

I was pleasantly surprised to listen to how good this podcast was -- it is moderated by Quoth The Raven and conducted with Pete Najarian.

Here are the industries at risk from possible China supply chain disruptions:

badgolfer22

TSLA up another 58 points pre open.

I'm gonna revise my original estimate of a few years ago as to how much fiat currency that central banks will print to try to reflate the next bubble from 20 trillion to 50-100 trillion dollars, yen, yuan, rubles, pesos, pounds and euros.

you don't have to own precious metals..anything of value and scarcity will suffice...art, diamonds, oil, real estate. I choose metals because they're mobile..you can put 5000 bucks in your pocket with 3 american gold eagles. Real estate can...and will...be confiscated when Dougie's socialists take over..like Russia 1917, China 1949, Cuba 1959, Vietnam 1975 etc etc.

The more I see, the more I'm more convinced this ends very very badly and I'm not sure our republic survives the next crash..Call me alarmist? that's ok, I can take it. but I'm seeing more folks day by day by day who laughed at me and Tat here for being gold bugs because of all this stupidity. Now one by one, I'm seeing converts who are now coming to realize what's happening here. Dougie, Euro, Greek on here. many many hedge hoggers and investment managers who laughed and laughed for years at Jim Rogers, Marc Faber, Bill Fleckenstein, Peter Schiff, Fred Hickey, Richard Russell...and yes even the maestro himself Alan Greenspan...among other smart thinkers who understand that creating something for nothing out of thin air..with no effort what so ever, by it's very definition........

CAN ULTIMATELY HAVE NO 'RELATIVE' VALUE. Folks, I've said this for years, I used to ask you like capital one....'what's in your wallet'?

It doesn't have to be gold, but my advice to everyone is to swap that deflating paper ..dollar,yen, euros et al...

with something of REAL value and scarcity. Even equities that provide a real return and dividend may suffice..unless again the republic doesn't break apart this next time.

Off my soap box now.

* Speculation is rising
* Economic growth is slowing
* Values are diminishing
It is not only coronavirus that is growing contagious, so is speculation (see the climb in Tesla's (TSLA) share price today).
Based on a plethora of reasons, I am now assuming that the last leg of the Bull Market phase which began in late December, 2018, is nearing its end.
If I am wrong I am still of the strong view that upside/downside is growing very unattractive.
I have recently been building up my  (SPY) short, and yesterday initiated a small (QQQ) short (which I am now adding to).
I am making some additional moves now:
* Eliminating (TWTR) based on reduced upside reward vs. downside risk.
* Paring back further my bank holdings (but still medium-sized where I plan to stay) based on the deteriorating economic outlook and the likelihood that rates will remain very low and the yield curve could invert. (Still bullish over the next few years.)
* Reducing (AMZN) and (GOOGL) (but still medium-sized where I also plan to stay) based on the recent outperformance and less attractive upside/downside ratio (still bullish for the intermediate term):

I am adding another surprise to my 15 Surprises for 2020:
* Surprise #16: As Mike Bloomberg has declared that he may sell Bloomberg LP if he becomes president, my new Surprise is that Warren Buffett (a supporter of many Democrats) initiates discussions for Berkshire Hathaway (BRK.A) (BRK.B) to purchase Bloomberg LP even before the Democratic National Convention in July, 2020.

Two points I wanted to add and underscore from my opening missive, The Coronavirus May Expose Investors to the Fragility of Global Economic Growth, this morning:
* It is questionable how monetary easing can address the kind of risk presented by coronavirus.
* Regarding the impotence of monetary policy, Japanese bank stocks declined by almost -90% over the past three decades as a consequence of the BOJ killing it's bond market and yield curve.

* The extent of the coronavirus contagion is being understated by Chinese authorities* Supply chain interruptions and demand concerns (caused by the coronavirus) are being ignored and underpriced by the financial markets* For the foreseeable future, China will likely no longer be the driver of worldwide economic growth* Japan is moving towards recession and Germany may not be far behind
* The benefit of monetary stimulation is diminishing and continued easing policy is being questioned around the world* Yesterday I covered my large Apple short but initiated a Nasdaq short (via QQQ) - as I continue to bolster my net short exposure even though, like Bruce Willis, this Bull Market "dies hard"
* It is questionable how monetary easing can address the kind of risk presented by coronavirus
* Regarding the impotence of monetary policy, Japanese bank stocks declined by almost -90% over the past three decades as a consequence of the BOJ killing it's bond market and yield curve
The coronavirus is an unexpected cog in the wheel of 2020 global economic growth and potentially to the continued rise in the global equity markets.
The impact of the coronavirus is being understated by authorities (of a Chinese-kind):

Though the market has not yet been seriously threatened by emerging and continuing coronavirus uncertainties and Apple's (AAPL) recent guide down (note: the Nasdaq closed slightly higher on Tuesday and S&P futures are +10 this morning) -- the strength in bond prices (and the move lower in yields) coupled with a breakout in the gold (+$18/oz) markets are delivering strong messages of concern.

I side with some good old fashioned common sense and analytical skepticism (regarding the coronavirus). I also listen to the warnings of the bond (lower yields) and gold (higher prices) markets.

Despite my concerns, the valuation reset (higher) in 2019 has continued into 2020 - but, to this observer, the odds likely favor both a valuation and a profit margin reversion in the near future.

Accordingly, I have continued to expand my net short exposure in the last several trading sessions.

The Coronavirus

Caution is warranted.

What we have all learned of the virus is that it is easily transmitted. It is asymptomatic, well established and it is spreading. As I have also noted its spreading has been under reported and, unlike other market headwinds, the liquidity provided by central bankers will have no impact on the damage inflicted by the virus' contagion.

While it is not unrealistic to expect the warm weather in the spring to reduce the spread of coronavirus, it is still unclear as the virus is unique and researchers have not had experience with it (unlike influenza and other more common viruses).

Among other issues, global travel will be decimated and this will have unusual "knock on" effects. Tourists, especially Chinese ones, spend lots of money. This will be a GLOBAL problem as China was to be a source of big growth for this sector. Retailers of EVERYTHING are going to miss budgets and economies like Japan and South Korea are going to be devastated by the impact.

In Japan, this will come after a massive (and ill timed) tax increase. Tech will play the role of major (not minor) collateral damage as long held supply chains are damaged/crushed.

Most investors, focused on price action, have little idea what could hit them.

So, while, mercifully, warm weather could help matters controlling the virus - we cannot be sure. Until the weather breaks, hold on to your hat. It's going to be a bumpy ride.

Meanwhile, a lot of the non-virus weakening in domestic economic growth has been lost in the news of the coronavirus. Walmart's (WMT) disappointing results suggests the consensus view of continued consumer strength may be misplaced.

Japan as a Template of The Fragility of Global Economic Growth

Global growth continues to slow and the negative impact on demand and the broad supply interruptions will likely expose the weakness of the foundation and trajectory of worldwide economic growth. This is particularly dangerous as the monetary ammunition has basically been used up.

As we have observed, monetary growth (and QE) can mechanically elevate and inflate the equity markets. For example, now in the U.S. market, basic theory is that in practice a side effect is that via the repo market it is turned into leveraged trades into the equity markets. But, again, authorities are running out of bullets and have begun to question the efficacy of monetary largess.

Let's view Japan as a template to these problems and conditions.

Japan's gross domestic product (GDP) shrank an annualized 6.3% in the October-December period, government data showed on Monday, much faster than a median market forecast for a 3.7% drop and the first decline in five quarters. Moreover, the print occurred before the spread of the coronavirus.

Bigger picture takeaway is beyond the fact that financial engineering does not help an economy, it probably hurts it. If it helped, after mega-doses of the stuff in every imaginable form, the Japanese economy would be humming. But the Japanese economy is doing the opposite. Japan tried to substitute monetary policy for sound fiscal and economic policy. And the result is terrible. Point being the things that really help an economy are sound fiscal and overall economic policy. The focus on monetary intervention from central bankers has gotten out of control and is very misguided.

Policy makers need to get back to basics! Focus on the underlying building blocks, not the drugs that help with symptoms over the short term, but don't get at the real underlying problem and allow it to fester and get worse because the symptoms are just masked. One of the most negative effects of financial engineering that masks symptoms over the short term is that the politicians don't make the proper underlying structural change because the short term pressure is off. 

Central bankers around the world have gotten carried away with monetary experimentation, and their role in economies. There is only so much Central Bankers should really do. The main things that help an economy function well are sound fiscal and economic policy. When an economy needs a little help, that help is much better off coming from the fiscal side and policy side of the house. If it isn't there, it's not the job of central bankers to try and fill the role of politicians and try to command the economy. Then you end up like Japan. And you have politicians that continue to act like idiots with their head in the sand and never fix the stuff that needs to be fixed! 

Japan did the most aggressive form of QE, had the most government intervention in terms of propping asset prices/stock market (BOJ is one of the largest holders of equities), and has negative interest rates on government bonds. And look at what all of that has done for their economy! 

While financial engineering clearly props up asset prices, I think Japan is a very good example that financial engineering not only does nothing for an economy (the real economy as opposed to asset prices) over the medium to longer term, it actually has negative consequences. Frankly, I don't even think it helped Japan over the short term. Both Japan and the U.S. basically missed every short term forecast for GDP as well when QE was implemented, and are also well below the trend line forecast that was established at the time these programs were put into place. 

I have often said that there is nothing normal about our markets. Anyone that believes things are "normal", especially after seeing asset markets trade UP into something like the coronavirus, and trade UP from prices that are elevated to begin with, well whatever you are smoking please send me a package of those goodies.

Summary

Like Bruce Willis, this bull market "dies hard."
However, the spread of the coronavirus has been understated and is a bonafide threat (supply interruptions, demand weakness) to an already subpar and subdued global economic recovery.
While monetary policy has buoyed financial assets (and valuations), the beneficial real economic benefit has recently been muted and increasingly, authorities are coming to the conclusion that more damage than good may be delivered by more cowbell.
The relentless market advance has continued and stock prices and valuations are getting more and more stretched.

On metals, sentiment and other "stuff":

While it's still so interesting how bonds and stocks are separately interpreting the current economic consequences of the virus, we still know at some point that things will return to normal. Normal though will take some time and I'm beginning to believe that we'll see price hikes in a variety of things coming out of China and which will include shipping and transportation costs. This is because it's likely that the demand side comes back rather quickly but it will still take time for the supply side to catch up. While this will be a temporary phenomenon, it comes with services inflation that is already running up 3%. Just something to watch for in coming months.

Until then we're still dealing with the economic slowdown. The Cass Freight shipments index for January fell 9.4% y/o/y and they said "The turn of the calendar didn't leave the bad news in 2019, as the Cass Freight Index showed continued weakness in the US freight market. Both the shipments and expenditures components of the Cass Freight Index worsened sequentially and showed decelerating y/o/y growth." They said while the stock market is optimistic that things will get better soon, "freight trends have yet to turn. And the Covid-19 corona virus case count continues to grow, creating uncertainty around containment and eventual impact on global supply chains...As stated last month, we expect Q2 2020 to have the best chance of showing actual y/o/y growth in domestic US shipments and freight costs, if traditional seasonal freight patterns hold, because Q2 2019 was below average in terms of the seasonal surge in activity. Plus, depending on how the aforementioned corona virus affects supply chains, there could be a Q2 2020 wave of import activity (and therefore truck and intermodal) when the Chinese export machine starts churning again."

This last point adds to my belief that we're going to see some serious, albeit temporary, price hikes in a variety of things related to Chinese supply chains.

With sentiment always chasing price, not the fundamentals, Investors Intelligence said Bulls rose to 54.7 from 52.9 last week and vs 47.6 in the week prior. Bears fell to 18.9 from 19.2 and the number of those expecting a Correction fell to the least in 4 weeks. Bottom line, complacency is creeping back in.

Meanwhile, gold continues its move higher in the face of a stronger dollar and that is because real rates continue to decline and I remain very bullish on gold. I also love silver and think silver is the most attractive asset right now on the belief that it will play catch up to this move higher in gold and the ratio between the two will narrow.

5 yr REAL YIELD

SILVER

Mortgage rates did tick up by 5 bps on the week to an average of 3.77% but of course remains very low. Mortgage applications to buy a home fell 3.4% w/o/w, the 3rd straight week of declines but are still up by 10.3% y/o/y but that is in part due to easy comparisons. The index itself is at the lowest since late December but really just puts it back to around the average over the past 12 months. Refi apps fell 8% w/o/w but are still up 165% y/o/y.

PURCHASE APPS

The trade data out of Japan was a mixed bag and doesn't fully capture what is going on with everything related to China. Exports did fall by 2.6% y/o/y which was better than the estimated drop of 7% and helped by big exports of cargo ships but imports were down by 3.6% y/o/y, twice the forecast. Exports to China fell 6.4% and to the US by 7.7%. Also of note out of Japan saw core machinery orders in December (thus dated) fall by 12.5% m/o/m, more than expectations of down 8.9%. All of these figures need to be updated in terms of reflecting exactly what's going on right now with China so consider them old news but not showing the best set up going into this virus spread. The Nikkei did close up by .9% helped by a weaker yen. JGB yields rose after 2 days of falling.

The only thing of note out of Europe was the inflation stats in the UK for January. Headline CPI rose 1.8% y/o/y, two tenths more than expected and the core rate was higher by 1.6% y/o/y, one tenth more than estimated. Producer prices also exceeded expectations. These figures had no market impact whatsoever as the pound is little changed, gilt yields are flat as are inflation breakevens.

* Is PE having its WeWork moment?* Some lessons of almost a century of data.* More on "esg." 

Like Danielle DiMartino Booth, I will be discussing the potential threat of the coronavirus this morning:  

• The market is beginning to extrapolate the top-line warnings from companies -- i.e. the microeconomic world -- into the macroeconomic; the U.S. Treasury curve continues to flatten, inverting the three-month/ten-year spread for the fourth trading day compliments of the Coronavirus spread and Apple's (AAPL) warning
• While the NY Fed's Empire headline manufacturing surged, the future inventories, as in future activity, declined significantly to -8.3 from January's 9.6; it's no coincidence that Germany's ZEW macroeconomic expectations index also declined by an equal level in February vs January
• The Cass Freight Shipment Volume's steep decline in January will likely be worse in February and provides additional support for a recession scare; traders will likely continue favoring the U.S. dollar over the euro, despite its three-year low hit yesterday, given Germany's huge exposure to China

'Writing on the wall' is an idiom that means a warning or sign that something unfortunate is coming to pass. The history stems from Daniel 5:5-31, the Biblical story of Belshazzar's feast. As the recounting goes, in the presence of the king, a disembodied hand appears and writes on the palace wall. The king, frightened, called for astrologers, Chaldeans, and soothsayers offering rewards to whoever could interpret the writing. But none of the wise men could read the message at which point the queen suggested Daniel, "in whom is the spirit of the holy gods," be summoned. Of course, he rightly interpreted the message.

Coronavirus brings the 'writing on the wall' into today's narrative and speaks to the disruption building in supply chains with key trade links to China. Although Yesterday's Bank of America Global Fund Manager Survey for February did not crown Coronavirus as the biggest tail risk, it was a close third behind the number one risk, "outcome of the 2020 U.S. Presidential election," and the number two risk, "bond bubble pops." However, of all the risks on fund managers' collective radar, Coronavirus rose the most from January (0%) to February (21%). Nothing else burst onto traders' screens like that inside one month.

From the get-go, the Coronavirus has been altogether too real from a humanity perspective. But to make it real from a financial viewpoint, it had to impact a bellwether - and one with major ties to China. Enter Apple's announcement Monday that it will not meet revenue guidance for the March quarter. You've now put a corporate face on the health scare. The combined supply and demand shocks have Apple cautioning that worldwide iPhone supply will be temporarily constrained and that the associated supply shortages will mean a "transitory" hit to revenues. (Note: "transitory" is the sell-side's new "It" girl.)

Here's the recession scare writing on the wall. Top-line revenues in the microeconomic world translate to top-line GDP in the macroeconomic world. Apple triggered a re-flattening in the U.S. Treasury curve, marginally reinverting the three-month/ten-year spread for the fourth trading day since Coronavirus went viral.

When one company alerts the investing community to a revenue problem, the Street immediately asks, "Who will follow?" Should other big-name firms warn of revenue downgrades, the yield curve should dive further down the inversion rabbit hole, creating a feedback loop of higher recession risks. Recall, the mechanistic relationship between the three-month/ten-year yield curve and the New York Fed's recession probability model.

Speaking of the New York Fed, yesterday's Empire manufacturing survey brought us our first look at the post-Coronavirus U.S. supply chain. The headline 12.9 handily beat market expectations of 5.0 and knocked the knickers off every one of Bloomberg's 41 estimates. But you know us - we don't take forward guidance current anything.

First, the details had a "grabby" feel to them. Surging current demand and supply and a jump in delivery times were juxtaposed against a falloff in future supply. This last series we illustrated as the blue line above for effect. Empire future inventories turning tail hard in February to -8.3 from January's appreciably more optimistic reading of 9.6 will help guide the next near-term move in new orders. Spoiler alert: It will be down. Fade the surge in February's current new orders of 22.1 to a three-year high.

German investors have also gotten a whiff of the havoc Coronavirus will wreak in its economy given it's so much more exposed to China's supply and demand shock than the U.S. The ZEW macroeconomic expectations index (red line) did an abrupt about-face in February, falling to 8.7, a sharp 18 points below January's 26.7 level. No coincidence, that nearly equaled the negative 17.9-point swing in Empire future inventories.

One of our favorite on-the-ground indicators which complements this morning's discussion is depicted above in yellow: Cass Freight Shipment Volume. January's steep 9.4% year-over-year decline pours lighter fluid on the recession scare narrative. The next nearest comparison for Cass (not shown in the chart above) harkens back to the recession year of 2009. February will only be uglier.

In this context, flows should favor the U.S. dollar over the euro. In fact, that's exactly how the foreign exchange market interpreted the data with the euro falling to a three-year low in yesterday's trading. The precipitous fall-off so far this month speaks volumes to the expectations of the deeper economic underperformance of a more exposed Germany vis-à-vis the U.S.

Curiously, rates traders in the overnight indexed swaps (OIS) market are not pricing in any 2020 ECB rate cuts. At least the euro is doing the ECB's work for it, making exports more competitive and providing a tailwind for European firms' overseas operations. Once Coronavirus crests, that automatic stabilizer is the next writing on the wall.

Irrational exuberance?
Cash balances are at the lowest level in six years: