"I am going to write a good Diary on Real Money Pro today... and I am going to help people. Because I am good enough, I am smart enough and doggone it, people like me."

-- Daily Affirmations with Dougie Kass

Monday's Daily Affirmations related to having a high level of conviction.

Today's Daily Affirmations relates to Mr. Market's sometimes punitive lessons (from my old pal Wally Deemer):

"The market will do whatever it has to do to embarrass the greatest amount of people to the greatest extent possible."

I am not a licensed therapist, though.

"I deserve good things. I refuse to beat myself up. I am an attractive person. I am fun to be with."

jesusishereFred Washington

Doug, JTG, and I all bought SDS within the last 24 hours. That's why the market is up big today.

The investment performance differential between the haves ( (MSFT) , FANG and Other Tech) vs. the have nots (value) continues to move towards historic wides.

Predicting a pivot has proven impossible thus far.

Buy anyone who can forecast the "eventual" inflection point will make beaucoup Benjamins.

* As night follows day

"Prepare for the unknown by studying how others in the past have coped with the unforeseeable and the unpredictable." 
- George Patton

Ns (Nasdaq) Over Ss (S&P Index) - with a continued lift in speculative stocks.

With all the OTC fanfare, we are still about -3% below the early June highs in the S&P Index.

Danielle DiMartino Booth on the UK's economy: 

• Weakness in the U.K.'s external demand contrasts with increased optimism for its domestic economy; retail and manufacturing industries have rebounded off the lows with an acceleration expected in industrials out over the next three months
• As is the case in the U.S., the U.K. consumer will determine the trajectory of the recovery with government stimulus packages providing support; that said, the risk is nine million temporary furloughs become permanent layoffs stalling the recovery
• In May, U.K. public debt surpassed 100% of GDP for the first since 1963; British rates will be low for some time to support the Bank of England's asset purchase and stimulus programs presenting a real possibility of negative yields along the gilt curve in coming months

The 19th installment of the James Bond movies slid to 22nd on Rotten Tomatoes' ranking of 26 in the iconic spy series. In the event you've purposefully missed, The World is Not Enough (1999) dispatches Bond to resolve a potentially deadly power struggle between two unstable nations with control of the world's oil supply hanging in the balance. Pierce Brosnan's least loved portrayal of MI5's hottest secret agent 007 involved a casting error. To politely paraphrase the critics, as endearing as Denise Richards is in other roles, her portrayal of Bond Girl Christmas Jones fell flat. In the end, despite stellar moments here and there, the film was pilloried for its mediocre writing, uneven acting, and predictable plot. The saving graces were a handful of classic Bond-worthy action sequences.

Bond movies aren't the only things that inadvertently attain mediocrity. The Confederation of British Industry (CBI) revealed yesterday in its Industrial Trends Survey that the world was not enough to save the near-term outlook for Britain's manufacturing sector. CBI touts this survey as the longest running and most influential manufacturing survey in the U.K. In June, export order books fell to their lowest level in the history of the survey; the -79% (blue line) was the largest net negative balance since 1977. Eighty-one percent responded "below normal" to just two percent answering "above normal."

The worsening global impulse was flagged by a sharp deterioration in expected wholesale sales from the CBI's sister Distributive Trades Survey. The wholesale sector sits at the intersection of domestic factory activity, domestic retailing and global trade. Ergo, it echoes each part of the production and distribution chain inside and outside the country. The weakest of the three was external demand. This narrative was foreshadowed by the collapse in expected wholesale sales (purple line) to a record low in May (net -81%) and its second worst ever print in June (net -76%).

The weak export links contrast with the waning pessimism from consumer and industrial sectors, signaling relative optimism for U.K.'s domestic economy. Both the retail and manufacturing industries have sent signals of a bounce off the bottom. Expected industrial output over the next three months has ascended from a net -67% in April to -49% in May and -30% in June. Expected retail activity climbed from a net -54% in May to -41% in June.

Better domestic readings do not make for good growth prospects just yet. The risk for backsliding remains palpable. The U.K. still has over 300,000 confirmed cases of COVID-19. Thankfully, the rate of virus spread has backed off April's and May's 146,000 and 100,000 respective increases to an additional 32,000 so far in June (yellow bars). Case counts will continue to guide the pace of economic recovery until further notice.

Government support helps explain the juxtaposition between worsening export and wholesale gauges and hopeful industrial and retail indicators. According to the collective of U.K. economists, the post-COVID recovery will be determined by the consumer sector.

The good news is the government's support packages are making a real difference, with more shops reporting that jobs have been furloughed, rather than lost. As is the case with the United States, furloughs may just be delaying the inevitable. The nearly nine million workers staying on payrolls via furlough program contrast with a drop off in job vacancies that implies a second wave of layoffs when the fall arrives. Many workers risk being laid off with little hope of finding new work.

As is the case stateside with a plethora of pleas for further stimulus, the CBI also communicated that retailers may need more support from the government if demand falters. Crossing the 100% of GDP Rubicon, however, could place at risk the U.K.'s 'AA' sovereign credit rating (orange line). As shown in today's inset, public sector debt now exceeds the size of the economy. As is the case with other countries, fiscal support to combat the coronavirus is behind this development.

That said, as you see, public debts got a jump start in the aftermath of the financial crisis. The latest leap simply builds on a trend in motion. For the record, in May, public sector net debt rose to £1,950bn, representing 100.9% of gross domestic product (GDP), the first time it's breached this level of GDP since 1963.

As it upped its asset purchase program last week to £745bn, the Bank of England's mantra was clearly, "Bonds, buy bonds." Outsiders observed that it was none too soon given government's rising borrowing requirements. Will the BoE's asset purchase program expand should the public debt burden continue to rise? Will yield curve control be adopted, thus capping rates and making tax rates the main policy transmission to the general public? Regardless, British rates will be lower for longer to provide easier financial conditions for the government, businesses and households. Negative yields at the five-year tenor should continue to migrate out the gilt curve.

Another +125 on the Nasdaq and +30 on the S&P Index.
Breadth still a bit under 2-1 positive.
I am seeing a lot more speculative names ripping, again.
My only trade has been an (SDS) buy at $18.90.

On Predictit.com, AOC is odds on to be MC2 in today's House primary.

* Disappointments relative to expectations

There was improvement in the Markit's June US manufacturing and services PMI but they were a bit below expectations. Manufacturing rose to 49.6 from 39.8 while services grew to 46.7 from 37.5. Again, direction not degree is the driver here as things reopen. With this composite index still below 50 at 46.8, it reflects a situation where "the overall pace of decline eased among goods producers and service providers", according to Markit, rather than reflecting an expansion at least right now. 

Markit estimates a full year 2020 GDP decline of 8% and, "The coming months will therefore see the focus turn to just how much recovery momentum the economy can muster to recoup this lost output." The economy will naturally improve the more businesses reopen, employees get their jobs back and people spend again. But, the caveats in this current bizarre world we're in will still surround us in coming quarters. To this Markit said, "Any return to growth will be prone to losing momentum due to persistent weak demand for many goods and services, linked in turn to ongoing social distancing, high unemployment and uncertainty about the outlook, curbing spending by businesses and households. The recovery could also be derailed by new waves of virus infections."

Bottom Line

We shutdown, economic activity collapsed, we reopen, business activity bounces back. The difference in what was and what will be is now the big question that will hopefully be answered in coming months.

As I summarized in my "broken window" post recently:

* We are just fixing broken windows right now -- not seeding future growth.
* It is my view that a lot of earnings capacity is being removed from the economy by the virus and riots.
* A new Democratic Administration (and blue wave) is highly likely -- it will prioritize redistribution over growth.
* The markets are overextended and wholly dependent on the Fed stimulus and liquidity.
* However that stimuli -- being used to stabilize businesses/the economy, employees' incomes -- is not likely to provide much of a catalyst for the future growth dynamic.
* That federal largesse has countered the Covid-19 economic shock by serving to weigh small businesses and large corporations with even more debt -- and that's a governor to growth.
* Meanwhile, paradigm shifts signal some permanence of job losses, a far slower than expected economic recovery and reduced economic potential and business "earnings power."

Here is the three year chart of Market's Manufacturing and Services PMI:

New home sales in May, measuring contract signings thus much more up to date than existing home sales, totaled 676k, 36k more than expected but April was revised down by 43k to 580k, so call it a push relative to expectations. 

Regionally, we should not be surprised that sales down South and out West saw the best m/o/m increases in absolute numbers. The median home price was up +1.7% year over year but this figure is very volatile month to month due to price mix. As the number of homes for sale shrunk, months' supply fell to 5.6 from 6.7. 

Smoothing out the difficult few months for the economy has the three month average at 623k vs. the six month average of 682k, and the 12 month average of 693k. With the supply of existing homes low and families looking to move out of cities to the burbs, we know the level of demand for new homes has been pretty good. The key question for housing though is after this sort of pent up demand gets satiated, will the level of employment and wages reassert itself as the main driver of the market. The other dynamic for sure will be the spending behavior of millennials as they are the key demographic group to watch for the housing market in the years to come. 

Also of note, see the chart of lumber below and the recent spike. 

Here is the 15 year chart of new home sales:



Here is the two year chart on lumber: 

I will be travelling most of Wednesday thru Friday.

I will be writing - albeit less frequently than usual - on Wednesday but will be out the rest of the week.

Some negative market reaction to disappointing domestic economic data.

After strong Eurozone data, Markit's US business surveys disappointed:

* US Markit Manufacturing came in at 49.6 compared to 50.0 expected.
* US Markit Services printed at 46.7 compared to 48 anticipated.

I added small to (SDS) at $18.90 this morning.
Now small-sized from very small-sized.

This morning bank stocks are the beneficiary of rising rates and inflation breakevens.

With the futures market so strong, it looks like the Nasdaq will be up eight of the last eight trading days, and the S&P will be up in six of those eight trading days.

I would guess that we could get a bit of a mean reversion lower - but not positioned for it yet.

Break in!
The US dollar index just moved abruptly lower again.
The USDJPY is back below 107- and has taken out last week's lows.
S&P futures gave up 1/4 (or ten handles) of its pre-market gain.

Below is a copy of Monday's note:

Overnight, markets whip-sawed initially on comments by Navarro that the trade deal might be dead then resurrected by comments from Trump and others that the deal was still in effect, although there was some trust problem. That has resulted in a good deal of short covering.

Overnight, futures now indicate that the bulls may reassert control and may in fact decide to step out of the zigzag pattern and move back into a rally mode. So for now, it is up to them to prove and they need to rally the Dow slightly more than 450 points to take full control.

We will see how it works out.

Stay safe.

Arthur

* Because we might be on the eve of destruction
* But, first, we might have another speculative blowoff to the upside
* I still remain net long with my eyes on the red tickets

Yeah, my blood's so mad, feels like coagulatin',I'm sittin' here, just contemplatin',I can't twist the truth, it knows no regulation,Handful of Senators don't pass legislation,And marches alone can't bring integration,When human respect is disintegratin',This whole crazy world is just too frustratin',And you tell me over and over and over again my friend,Ah, you don't believe we're on the eve of destruction.
- Barry McGuire, Eve of Destruction
Last night captured the market's recent lunacy.
A quick -40 handle drop in the S&P futures (from +15) accompanied a "report" that Navarro said the Chinese trade deal was dead.
A pushback from both Kudlow and Trump heralded an abrupt recovery in the futures - which at 7 am were +25 handles!
This market is getting downright whacky with leadership narrowing, speculative stocks being manipulated, and complacency and bullish confidence regained. At the same time, the fundamental economic and profit pictures, expressed daily in my Diary, are growing worrisome. Finally, the White House is in rare form - I will leave it at that! - that is arguably leading to a likely Democratic victory in November (with some possible market unfriendly ramifications).
Many, including some on our site, believe they can continue to dance while the music (the Cyrkle's Red Rubber Ball) is playing:
And I think it's gonna be all rightYeah, the worst is over nowThe mornin' sun is shinin' like a red rubber ball
- Cyrkle, Red Rubber Ball
Bravo.
Warren Buffett famously said that, in the short run, the market is a voting machine - that, in the long run, the market is a weighing machine.

Recent days are a dramatic affirmation of The Oracle's quote.

Importantly, the price momentum has been abetted by the changing market structure - and the proliferation of ETFs, the dominance of risk parity and the growing role of Robinhood-like traders - in which the voters focus more on price than value (over value) than at any time in history.
So, for me, I simply can't (or refuse to ) be that presumptive and confident with a portfolio of uber aggressive and speculative names. Indeed I remain short a package of worthless securities that since put on, is down (which means up for me!) by nearly 25%.

But I can watch, stay small long and prepare for a different marketplace - in recognition of the historical influence that speculation and narrowing ultimately will have on equity prices.
In June I had two successful forays shorting the Indices as described in my Diary.
With the markets displaying volatility, breadth divergences, narrowing leadership, speculative characteristics and now elevated by nearly 15% above "fair market value" (S&P 2750) - all the ingredients for a market fall and an increase in the VIX are coming into place.
This time, as mentioned, I am "playing the game" and I am still net long of exposure - albeit small - as I fully recognize and sorta respect the market's strong upward momentum.
I write sorta because I am cognizant of how abruptly the current price momentum can fade.
I write sorta because market participants are fully aware that current outperformance has been achieved by either retention of the generals ( (MSFT) and FAANG) at the top or speculative soldiers somewhere on the bottom.
I see little middle ground - which, historically, is the sign of a very mature market.
I remain small net long, but, as I wrote on Monday, my red tickets are right in front of me.
And one of those tickets is for (TVIX) (2x long VIX) - that I recently profitably traded.

* Unlikely and speculative stocks soar.
* Farewell yield.
* What we know about the future of Covid vaccines.

Loose lips sink markets: Tariff fan Peter Navarro put the S&P futures on quite the wild ride last night with his comments at around 7pm est that the China deal was dead only to have Trump in a tweet to walk it back about 3 hours later, "The China Trade Deal is fully intact. Hopefully they will continue to live up to the terms of the Agreement!" The Chinese wasted no time in calling Navarro "habitual liar" and "He has a habit of talking out of his hat. There is no credibility to what he said." I'll say this, regardless of what one feels about China, in all aspects, and the economic relationships with the US, having the two biggest economies going at it constantly is not a good thing for global business activity. Asian markets closed almost all in the green with the Shanghai comp up .2% and the H shares higher by 1.2%.

Before I talk about the PMI's reported today, I want to mention inflation for a second here. I repeat my belief that either later this year or in 2021, higher inflation is coming our way as demand comes back at the same time supply chains have been majorly disrupted. Of course add in all the monetary and fiscal easing as well and the general higher cost of doing business in this post Covid world. Yesterday, the 10 yr inflation breakeven jumped 4 bps to 1.33% and is now at the highest level since early March. This also means REAL yields are also falling and it's why gold is getting close to $1800. The CRB index will open today at the highest level since mid March.

10 YR INFLATION BREAKEVEN

GOLD in orange, REAL 10 yr yield in white

CRB index

June manufacturing services data is beginning to roll out of Markit and we are creeping closer, in terms of time, to the news really mattering as more things reopen around the world. Australia's manufacturing and services composite index almost doubled m/o/m to 52.6 from 28.1 with services back above 50 and manufacturing just shy of it at 49.8. An impressive rebound driven by not just a low patient count in Australia and its economic reopening but also helped by the reopening in China, their largest trading partner. The Aussie $ is higher, just below .70 vs the dollar and yields jumped too on the number. I like the Aussie$, especially if I'm right about inflation.

Japan also saw an improvement in its stats but is still very far away from that 50 breakeven line. manufacturing was basically flat at 37.8 vs 38.4 last month while services jumped to 42.3 from 26.5 which drove the combined index to 37.9 from 27.8. Here is what Markit said about the differential: "The rate of decline in manufacturing order books remained severe, hinting that the shape of the recoveries in the services and manufacturing sector could be very different. A two-speed recovery would undermine a sustainable return to pre Covid levels of economic activity."

Japanese companies, for years blasted by hording cash and being skimpy with wage increases for their workers, now have the best balance sheets in the world in this time most needed. The Nikkei was up by .5%.

European stocks are rallying after better than expected PMI's. The manufacturing and services PMI rose to 47.5 from 31.9 and that was better than the estimate of 43. Both components remain below 50 but got close with manufacturing at 46.9 and services at 47.3. Simply, "The Eurozone economic downturn eased markedly for a 2nd successive month in June as lockdowns to prevent the spread of Covid were further relaxed." Again though, what matters is not what is occurring during the reopenings, it is what things look like AFTER the reopenings. Notwithstanding the beat and stock rally, bond yields are barely higher, by 1.5 bps and the same is said for US Treasuries.

The UK manufacturing index got to the 50 level at 50.1 from 40.7 in May and 5 pts above the estimate. Services jumped to 47 from 29 and that was 7 pts higher than forecasted. The composite index is now at 47.6 from 30 vs expectations of 41.2. Something any of us could have written: "Survey respondents mainly noted that the easing of restrictions related to the pandemic had a favorable impact on economic activity, with business operations gradually resuming in a number of sectors and staff brought back from furlough. However, there were also widespread reports that underlying demand remained very subdued and cutbacks to client spending had acted as continued drag on overall business activity."

Bottom line to all these figures, they are measuring the direction of economic change, not the degree. Thus as things reopen, businesses say things are getting better. At some point in coming months though, I believe markets will shift the focus to the degree of improvement. Stocks are obviously focused on the direction while sovereign bond yields, that remain very low, are more honed in on what they think the degree will be.