Disney is trading up by over $7.65 -- to $143.20 -- on a great sales and earnings per share beat.

I am down to tag-ends on the name, and I am offering the balance slightly above the market.

Disney was placed on my "Best Ideas List" at $93/share on March 30.

Thanks for reading my Diary today. 

I am leaving a bit early to take my dogs to the Vet for routine examinations and shots. 

Enjoy the evening. 

Be safe.

As was the case when I last purchased (SPY) and (QQQ) puts two months ago... my portfolio becomes reactionary and is no longer anticipatory. 

When I took the large put position this afternoon it immediately moved my exposure back to Market Neutral. 

But if equities move lower as they are this afternoon, my portfolio will get shorter. Resultingly, I am now in a net short position. 

Conversely, if stocks move higher, my portfolio would get less short and more long.

After the soft 10 yr auction on Tuesday, today's 30 year was soft as well. The yield of 1.68% was above the when issued of 1.674%. The bid to cover of 2.29 was below the one year average of 2.35 and matches the second lowest in a year. The only salvage was that dealers got stuck with 21.6% of the auction which is the 12 month average. 

So the highest yields since March wasn't enough to entice buyers to any great extent likely due to the election being over and certainly the Pfizer (PFE) news. I do want to be more clear with respect to my belief that inflation is not just here but will pick up in 2021 and say that inflation (like market tops) is ALWAYS a process, not an event. It takes time and thus the groundwork for it must be determined and that I believe is here. And a key theme of mine was the success of a vaccine and the demand side of the economy coming back faster than the supply side can adjust. See the double digit spikes in transportation costs as an example. People tell me there is no inflation now but I'm trying to steer them to where the puck is going upon that vaccine, which is now about here in terms of results and eventual rollout. China is a good tell on how quickly the demand side can come back by the way when consumers get more confident about their health and the spread. The restaurants are full for example. People like to eat out and a pandemic will not alter human nature. 

In the middle of a pandemic that collapsed the economy, it took all of just two months for core CPI to get back what it lost in the prior three months and then some. Quite a rather sharp snap back. A key factor from here will be rents as it makes up about 30% of the CPI. Right now we know rents are softening in the major markets but holding up in the burbs and are spiking in single family homes. This is with only half the jobs recaptured of what was lost. When the U.S. economy bounces back next year, most likely in earnest in Q3 and Q4, when many of those jobs come back, rent increases will resume at the same time goods prices will be surprising to the upside I believe. 

Here is a 10 year chart on the core CPI Index (don't tell me we have deflation):

Here is the chart on the 30 year yield:

Here is a chart on the three year 30 year inflation breakeven:

I don't partake in a regular appetite and use of directional options. 

The last time I took a large (SPY) / (QQQ) put position was almost two months ago: 

* Just in case!

* Watch out for the "gamma trap door" at slightly lower levels!

I am going out to lunch with some friends at noon.

But before I do I want to emphasize that I continue to look for lower highs that could be followed by a pattern of lower lows in the averages.

I continue to see, as mentioned in my opener today, more risk in the Nasdaq relative to the S&P Index.

I have suggested that I would reshort on strength, giving the market a wider berth. And I continue to plan to do so.

But, given my overall negative view for the balance of the year, in the event that equities move lower over the short term, I have just purchased some defined risk out of the money (SPY) and (QQQ) puts (maturities 20-30 days) to move back from a small net long exposure to small (delta adjusted) net short exposure.

I may be ripping up these tickets as valueless in a few weeks but the small dollar cost, and defined risk, is acceptable to me as I look at the continued market weakness.

Finally, I would note a possible "gamma trap door" at around current levels that could hasten an imminent market drop:

Dow slipping to just below levels it traded before vaccine announcement on Monday morning. Should they drift lower and, perhaps break 29000, it could spooked certain of the technical traders, whom we warned you were already on nervous alert.

So, now it is all in the hands of the bulls, basically to try to defend 29000 and maybe to pull above 29200 and get back above the vaccine announcement levels.

The game is on the table.

Stay safe.

Arthur

Buying Nov 20 (QQQ) $290 puts, and December 18 QQQ $285 puts.

I am taking some protective action.

Buying (SPY) puts - November 20s $354, $355, and December 18s $354, $355.

* It's a process

* Breadth 2-1 negative today

* No trades

This week I sold down to small-sized from large-sized on a number of longs: (VTV) , (VBR) , (MS) , (GS) , (DIS) , (GM) , etc. 

I sold at good prices and I am comfortable with that decision. 

I will be posting "Levels" in the next 1-2 days which will outline where I would be buying and adding back to these small positions.

Nearly 2-1 negative breadth on the NYSE. 

I continue to see a topping process - per my opener.

The October CPI was unchanged m/o/m, below the estimate of up +0.1% headline and +0.2% core. Versus last year the headline print is up +1.2% vs +1.4% in the prior month while the core CPI was higher by +1.6% vs +1.7% in September. Weighing on prices was a 4 tenths drop in medical care costs (due to a fall in drug prices, both prescription and nonprescription) and a two tenths fell in core goods prices (although are still up +1.2% year over year which is a big upward change of pace) driven by apparel prices. Energy prices rose +0.1% month over month but are still down -9.2% year over year. Food prices were up by +0 .2% month over month while higher by +3.9% year over year. 

Medical care costs were still up +2.9% year over year and the other big swing factor for services prices is rents and they rose+0.2% month over month for both Rent of Primary Residence and Owners' Equivalent Rent and higher by +2.7% year over year and +2.5% respectively. Weighing on rents are the drops being seen in the big cities like NY, SF and Chicago but that is being offset by gains in the suburbs. As for rent growth in single family homes, said in the WSJ yesterday, "asking rents for available properties owned by big home rental firms jumped 7.5% in October, according to real estate analytics frim Green Street." This will eventually show up in OER and actual rents. As less people are driving compared with pre Covid levels, auto insurance prices fell -2.3% month over month and are down -7.1% year over year.  

On the goods side, after a +5.4% jump in August and +6.7% spike in September, used car prices fell a hair, by -0.1% in October. They are up +11.5% year over year. New vehicle prices rose +0.4% month over month and +1.5% year over year. Apparel prices fell by -1.2% month over month and -5.5% year over year. This could be due to the continuing aftermath of a poor back to school season with so many kids not going back to school. 

The rising goods prices story is still intact as the two tenths month over month drop follows gains of +0.8%, +1% and +0.7% in the prior 3 months and a +1.2% rise year over year is a clear change in trend to the upside. Keeping a lid on the core rate was the drop in drug prices but medical care costs have gone and will go only in one direction, higher. Rent price gains are hanging in there outside of the cities. In 2021 with the rollout of the vaccines, that is when inflation begins to really kick in as demand rushes back and which overwhelms the supply side of the economy in terms of capacity. I'll say this, when it comes this summer to concerts, sporting events, hotels, airplanes, the pent up demand is enormous and that means these businesses will have pricing power again to use as an example. 

On the CPI miss relative to estimates, bond yields are lower by 2 bps as are inflation breakevens. 

Here is a six year chart on core CPI:

Initial jobless claims fell to 709k from 757k and that was below the estimate of 731k. Continuing claims continued to fall and this week to 6.79 million  vs the estimate of 6.83 million and down from 7.22 million last week. Also positively, those filing for Pandemic Unemployment Assistance (week ended 11/7) fell to 298k from 362k and for the week ended Oct 16th, those receiving PUA on a continuing basis fell by almost 1 million to 9.3 million. Those receiving Pandemic Emergency UC totaled 3.9 million for the week ended Oct 16th but this and the continuing PUA are about to get updated. 

It's encouraging to see the continued fall in both initial and continuing claims, along with PUA benefits but with a tough winter ahead, progress will likely slow from here. But, after we get thru this and with the vaccines about to be rolled out, 2021 will resume the positive path as life returns more to normal. 

Here is a two year chart on initial claims: 

Here is a two year chart on continuing claims: 

I discuss this in my opener as does Peter Boockvar:

* Bidenomics. 

* Bryson! 

* Social media makes politics worse. 

(Wednesday's comments and update appear at the end.)

As you can see from the midday update reprinted below, the market began seeing some internal challenges as afternoon trading commenced.

The Dow did close negatively but only marginally so. But this morning's futures action seems to confirm the traders early assumption. The fact that advances and declines were nearly equal would appear to underscore the indecisiveness of yesterday's action. That will raise certain technical points.

The Cocktail Napkin Chartist Association is wondering whether all of these moves, vaccine, etc., have done little more than return us to a crest of multiple tops based on the September 3rd highs. Certainly, the next few days will begin to give us the answer to that. It certainly does look like a bit of a rectangular test area.

Internals and amateur technicals aside, the market does appear sensitive to headlines and news developments. The overnight action in the futures and, its continuing follow-up this morning, seems to be a response to the rather sharp increase in Covid cases reported and, the increase in hospitalizations. We can see that the different sectors have begun to revert to earlier postures. Things like stay at home/work at home beginning to come back and, the post-vaccine celebration may well be over.

I was interested in how little follow-up there was to the Russian claim of a vaccine and, little commentary even in Europe, where one would have thought that might have brought some attention.

Interestingly, the Presidential election/transition question, with which the media pundits appear to be obsessed, has not been a major factor in market trading. As we noted yesterday, Pompeo's comments about the world is watching and everything will be done carefully appeared to mollify some of the early concerns of the market. But he seemed to throw a curve ball later when he talked about working toward a transition to a second Trump term. It raised a few eyebrows but was not a major factor in the market.

So, for today, we will watch the headlines. See if we get any help in the Covid mess and begin to allow the cocktail napkin chartists to make their case as to whether we are in a rectangular topping testing area or whether we are just gathering strength for an upside breakout on further good news.

Our friend, the always insightful, Peter Boockvar, points out that the latest Investors Intelligence polls indicate the psychology of investors is heavily bullish with bearish shrinking to levels sometime raise alarms. That would appear to add credibility to the amateur technicians thesis that we may be facing a rectangular top testing area. The next several days of trading may become very important.

Back on the political front, Republican leadership is reluctant to cast Trump aside since, amazingly, he received more popular votes than any other candidate in the history of the United States with the obvious exception of this year's vote for Joe Biden.

The huge turnout in Trump's behalf seems to cast strong doubt on the long-held thesis that he represented an ardent but small base. They realize that big a turnout will certainly aid in making him a factor over the next several years as he continues with his megaphone. It does not appear to be impacting the market either way.

So, let's look at the testing see if they work on the downside of the rectangle. Keep your cocktail napkin's handy and maybe have a pencil or two with an eraser.

Apparently Covid may be transmitted by Vampires since, apparently, curfews from 8:00 p.m. and 9:00 p.m. being issued around the country.

HOUSEKEEPING

THERE WILL BE NO NOTE ON FRIDAY. WONDER WOMAN ON SPECIAL MISSION. SO, WE WILL BE RADIO SILENT ALL DAY.

Stay Safe.

Have a good weekend!

Arthur

__________

As you can see from the midday update reprinted below, the post-vaccine rally looked like it might be getting into trouble as we swung into afternoon trading.

Some felt that the anxiety was a result of concerns that personnel shifts, particularly in the Defense Department might presage new considerations by Trump in not having an orderly transfer of power. That concern never took hold completely or, gained enough strength to influence the market.

Comments from Secretary of State Pompeo that the world was watching seemed to mollify many of those fears and, the Dow regrouped and, the rally resumed.

As dawn hits Manhattan, the action in the overnight futures would appear to indicate that the markets are shrugging off an apparent crackdown in China on some of their high-tech players and, also a new push against the independents in Hong Kong.

Markets may be taking solace from President-elect Biden's emphasis that we have one President at a time and, that Trump will still be making the decisions until January 20th. We will see if that continues to work as other foreign diplomacy issues begin to arise.

The post-vaccine rally leg has certainly been good and, the breadth of the market indicates a rather well-rounded sponsorship. The movement in the sectors has everyone and their sibling trying to attribute this to a rotation. There is some of that in the sense of the stay at home/work at home stocks that moved out of high popularity.

Traders will look to see if we can manage to push above recent intraday highs. That would be somewhere around Dow 29,950 and the S&P 3650 and, if they will move further.

Even though yesterday's anxiety about the orderly transfer of power never really took hold, nonetheless, traders will be very alert to any further movement in the personnel in the "outgoing" Trump Administration.

For now, bulls have the ball and the momentum. Let's see how far they want to take it.

Today is Veteran's Day (formerly Armistice Day). The Bond Market is closed as are several banks, and some insurers. That traditionally suggests rather light trading, which by nature brings the possibility of volatility. So, we will be extra sensitive to staying close to the newsticker.

Late reports that Russia has developed a Covid vaccine with 90% efficacy may aid global markets, depending on details. Putin has apparently named the vaccine Sputnik in a rather conscious or obvious attempt to tweak the nose of the U.S. More details to follow.

Stay alert and stay safe.

Arthur

__________

Midday Update

The post-vaccine rally appears to be entering a reassessment phase. Russell shoots to record, only to reverse and move lower. Nasdaq reverses and begins to rally after several of the tech favorites have been beaten for a few days.

So, this does not look like a very clear rotation. A lot more like a reassessment after a burst of short covering, etc.

It will be important for the Dow again to try to hold onto plus territory just as it was yesterday afternoon.

Stay safe.

Arthur

In my opener I talked about how in the process of making a market top, complacency and bullish sentiment generally sets in. Peter discusses this in his commentary: 

Seen in yesterday's Investors Intelligence sentiment data, the Bulls are back with a rise to 59.2 from 53.6 and bears shrunk below 20 at 19.4 from 20.6 last week. As I've mentioned before, a Bull read 60+ is extreme and we are obviously close. Well, we can now add the individual investor that has completely thrown in the towel on the Bear side. AAII said Bears fell 6.6 pts to 24.9, the lowest amount since January 23rd 2020. The Bulls spiked 17.9 pts to 55.8, the most since early January 2018 when we were coming off the corporate tax cut package passing. Before that you have to go back to November 2014 to see a Bull read that high. Keep in mind that since March, the Bears exceeded the Bulls up until just a few weeks ago so this is quite a sea change in the mood of the individual investor. Bottom line, the end of the election and the vaccine news (vaccine news not captured in II but was in AAII) has sentiment ebullient again, particularly on the part of the individual investor. Thus, purely from a contrarian standpoint, this is a negative for the short term.

AAII BULLS over BEARS

We'll go thru the overseas data but the numbers for the next few months will all be pre-vaccine and I believe the tough winter ahead will be given a free pass in terms of the market reaction. September machinery orders in Japan fell 4.4% m/o/m, more than the estimate of down 1% and follows a slight gain of .2% in August. This number is very volatile month to month and thus is never market moving. The Japanese economy continues to recover, especially along with the Asian region but this data points that it is still uneven. Meanwhile, the Nikkei closed up another .7% to the highest level since June 1991 but is still 34% below the 1989 bubble peak. I remain bullish on Japanese stocks.

NIKKEI

Pointing to the uneven recovery, industrial production in September in the EU fell by .4% m/o/m, below the forecast of a gain of .6%. That is also down 6.8% y/o/y. We did see gains in Germany, France and Spain to name the big countries in the region but Italy's IP fell 5.6% m/o/m, Portugal by 3.8% and Ireland's fell by 4.7%. As the number is somewhat dated and pre selective shutdowns, it's not market moving. The euro is up slightly but back above $1.18 while bond yields are down after this recent uplift. Stocks are red across the board in the EU.

* Sticking with my medium-sized net long exposure, and in stocks that I view as providing much more value than the overall market
* Monday may have been a "Classic Buying Climax and Top" - but tops are processes, they wear out shorts and build up complacency
* While I continue to lack conviction regarding the near term market prospects this will not likely be a condition that lasts too long!
* By my strict calculus, the S&P is approximately 15% overvalued - providing little "margin of safety"

"Give me a one-handed Economist. All my economists say 'on hand...', then 'but on the other..."
- President Harry Truman 

"Confronted with a challenge to distill the secret of sound investment into three words, we venture the motto, MARGIN OF SAFETY. The function of the margin of safety is, in essence, that of rendering unnecessary an accurate estimate of the future. If the margin is a large one, then it is enough to assume that future earnings will not fall far below those of the past in order for an investor to feel sufficiently protected against the vicissitudes of time."
- Benjamin Graham, The Intelligent Investor

"You have to have the knowledge to enable you to make a very general estimate about the value of the underlying business. But you do not cut it close. That is what Ben Graham meant by having a margin of safety. You don't try to buy businesses worth $83 million for $80 million. You leave yourself an enormous margin. When you build a bridge, you insist it can carry 30,000 pounds, but you only drive 10,000 pound trucks across it. And that same principle works in investing."
- Warren Buffett

Last night's S&P futures action highlights the confusing period we are in over the balance of the year: 

* Overnight, S&P futures declined by as much as -30 handles and at 6 am were only three handles lower while Nasdaq futures +50 handles, after bottoming about 150 handles lower in the late evening session!

* As I have suggested, we are clearly in a heightened regime of volatility - both during the regular trading sessions and in the evenings! 

I am of the view that the odds favor a "Classic Buying Climax and Top" which occurred on Monday and that, in all likelihood the market over the balance of the year will be in a tug of war between the delivery of a vaccine (over the next few months), the prospects for less radical tax policy (in a Divided House), and traditional late year seasonal strength against a market that has advanced smartly from the March, 2020 lows and has discounted a lot of good news, reaching valuation and price levels that substantially exceed my "fair market value". 

I do feel strongly that the marked rally over the last seven months has eliminated the market's "margin of safety." With S&P cash at about 3560, we are a bit more than 15% overvalued relative to my "fair market value" of 3000-3100. 

Remember, tops are processes (while bottoms are usually events) - they tend to wear out the shorts and contribute to bullish investor complacency. My best guess is that is the stage of the market we are at. 

Many disagree. Yesterday Goldman Sach's lynx eyed strategist David Kostin offered a 4300 2021 S&P target (and a 2022 target of 460) which would represent 25x EPS consensus estimates and deliver a total market capitalization relative to GDP of something slightly more than 20%. 

While I am respectful of other more anticipatory approaches, I endorse less pontificating and more proactive trading. My approach is not what Harry Truman described as a two handed view of trading and investing ("on one hand this, on the other hand that") leading to trading inactivity. Rather, I am unabashedly anticipatory and opportunistic and I will continue to be so based on an unemotional and contrarian strategy and the calculus of intrinsic value. 

But, sometimes, one "does not know". And this is one of those times for me. 

I currently have no Index hedges on and my short book is the lowest - in gross terms - than at any time in several years. I am solely short a basket of homebuilding stocks. 

This condition will not likely continue for much longer, but, for now, my conviction level is relatively low. I will respond to changing macroeconomic and profit prospects with an eye towards valuations and value. 

My long book includes some growth - Alphabet (GOOGL) and Amazon (AMZN) , which I have been adding to - and a lot of value. 

Its been a great year but my actions will not be looking backward - they will be looking forward to opportunity. 

Currently I am medium-sized net long, which I define as between 20% and 50%. To many this is understandably a bearish position - that's certainly the case of a traditional plain vanilla investment manager - and mutual fund - who typically has 10% or less in cash. And I get that. 

Given the uncertainties and my lack of conviction I am comfortable where I live now but I am ready to move.

Danielle DiMartino Booth on the interaction of rent, home and car prices:

• Through September Used Vehicles prices via the CPI rose 10.3% YoY, a decade-high; however, light vehicle days' supply rose in October from 16 to 14 days below prior year levels and Markit's Global Auto Demand-Supply spread leveled off, signaling a pricing plateau
• Rent inflation fell to a seven-year low of 2.5% YoY in September, down from 3.4% in February; with 22 of America's 25 largest cities seeing slower rent growth from February to September and 6 outright declines, per Zillow, rent disinflation has yet to finish its run
• Mortgage purchase applications fell in six of the last seven weeks as COVID's urban exodus exhausts itself; meanwhile, median household income for renters is $56,510 in metros with declining rents, with 18% working in finance or IT, versus $42,479 and 14% nationally

The Tibetan Plateau is archetypical, an imposing representation of one of most intriguing formations on earth. Popularly known as the "Roof of the World," it is ensconced by the highest mountain peaks we know - Mount Everest and K2. Closer to home, the Colorado Plateau is more accessible if you need a glorious escape from this pandemic existence. Roughly centered on the Four Corners, the province covers an area of western Colorado, northwestern New Mexico, southern and eastern Utah, northern Arizona, and a tiny fraction in Nevada's extreme southeast. Nine National Parks, a National Historical Park, 16 U.S. national monuments, millions of acres in U.S. National Forests, multiple state parks, dozens of wilderness areas and other protected lands call the Plateau home. The pride of Teddy Roosevelt, the region has the highest concentration of parklands in North America.

You may set out on your road trip in a newly acquired used SUV for which you've paid a pretty penny. Why not indulge, you and so many others mused, endeavoring to break free from your work-from-home life in your new exurban digs. There's a connection here to the consumer price index (CPI) catalyzed by the pandemic. It's yet to fully run its course. The two opposing forces are like heavyweight boxers. In one corner, the undersized contender that's been punching above its weight and just posted the largest monthly gain in 50 years is used vehicle prices. In the other, the reigning heavyweight champion that's lost a step or two in recent bouts - rent prices.

While the exodus to the exurbs generated a new class of car buyers from car-free big cities, the health crisis shuttered auto factories even as auto dealers stayed open. As demand whittled down new vehicle supplies, buyers seized on anything pre-certified with four wheels causing used vehicle prices to spike by the most in a generation. The supply/demand imbalance in the used and new vehicle markets remains.

Through September, the CPI for used vehicles registered 10.3% year-over-year (YoY), a decade high. Three factors point to a plateauing. At 15.9%, 15.2% and 15.4% YoY in August, September and October, respectively, Manheim's used vehicle value index is cresting (green line). Light vehicle days' supply tentatively turned at the end of the third quarter - September 2020 was 16 days shorter than September 2019, while this October was 14 days below last October (yellow line). And signs of stronger global auto output are evident in the demand (new orders)-supply (finished goods inventories) spread which leveled off in October (red line). Further sideways movement and/or cooling in these metrics would signal the end to the positive impulse for underlying core inflation.

Moving out of cities has also generated excess single-family detached homes demand creating a glut of apartments in major metros. House prices have benefited at the expense of rents. The exhaustion of the urban exodus also feeds a plateau narrative. To that end, mortgage purchase applications have fallen in six of the last seven weeks.

Our CPI rent composite that excludes hotel rates slid to a 2.5% year-over-year rate in September, down from February's 3.4% pre-COVID pace and a seven-year low (orange line). Per Zillow's Observed Rent Index (ZORI), rent disinflation has not finished its run. This alternative measure of rent inflation fell to a 0.9% annual rate in September, well off February's 4.0% reading. The compression was incredibly widespread across major cities: 22 of the top 25 saw a slowing in rent inflation from February to September, while six reported outright rent deflation - New York -6.0%, San Francisco -5.9%, Boston -3.6%, Washington, D.C. -1.6%, Chicago -1.2% and Seattle -0.3%.

ApartmentList.com paints an even broader portrait. Of the 100 cities covered in its October report, 63 of the 100 largest cities were registering slower YoY rent growth than at this time last year; 41 have seen rents fall since March. To put this in perspective, in the same months last year, only five cities saw declining rent prices; only two experienced a fall of more than 1%. Among the 50 largest cities, just 26 had seen the median rent increases since March; that compares to 47 last year. Cities hit hardest by the pandemic have also experienced the most extreme price declines, wiping out all of 2019's rent growth.

Using the ZORI data, Construction Coverage connected one more dot to falling big city rents: Median household income for renters at the national level is $42,479 compared to an average of $56,510 for renters in metros with declining rent prices. Moreover, while 14% of workers are employed in finance, information, and technology, an average of 18% of renters in metros with falling rent prices work in those sectors. Yes, it was just a year ago that we were writing about untenable rental inflation in San Francisco and New York.

As for home prices, to get a feel for where they're headed, we will continue to monitor used car pricing. If nascent turns in prices gain downward momentum, we would expect rampant home price appreciation to follow. Meanwhile, a plateauing out in rents' disinflationary trend could flag economic stabilization. The alternative is that home price appreciation levels off while rents remain under pressure. With rents comprising 40% of core inflation, we can only imagine the discussions at the proverbial water cooler inside the Eccles Building, especially if interest rates begin to rise of their own volition.