The needle that may 'pop' the bubble may not be the obvious one in rates or China, or the expanding parameters of the global war against Islamist Jihadist barbarism. It might be any of those, or something totally off the radar screens.

Further we won't proclaim that it has to occur now. In fact, Wall Street is busier than usual trying to convince everyone that the jobs report was superb (which really was not because of the 'drop' in prime-working-age-producing hires, spun as a better number) as the greatest gain was in the over-55 age group. This is more an indication of the inability of many to make ends meet in older years (mostly at 55 successfully productive individuals are 'set', not out in the jobs market). 

So one can argue 'reality' would keep the Fed 'at bay', while the favorable spin cycles analysts to argue bullishly either way that the Fed shouldn't move or conversely that the markets 'can live with' a 'one shot and done' adjustment. Basically that's 'hand-holding', as everything is presented as favorable,  The 'heavy lifting' of markets being done by an ever-narrower universe of stocks leading. That's normally a 'bearish divergence'. 

If I had to guess what other macro risks are out there, my thoughts tend to first drift towards incredible dependence in this era on intertwined internet controls, which basically makes almost everything increasingly vulnerable to disruption. This has to be appealing to any enemy of the civilized world. Or even a natural disaster, of the type we're all aware can occur; but fortunately hasn't so far. Of course you can't trade on those type of 'what if's', but you can keep a leash on exposure when prices and technicals are extended. 

However, putting 'exogenous event' risk aside, a question quickly becomes: can equity market stability muddle through more of a minefield than usual, with or without favorable seasonality (very minor by comparison with some history, as we're coming off an overvalued rather than undervalued time). Can the market convince investors that P/E multiples can still be maintained despite individual stocks blowing up as is frequently seen? 

Some of those 'pops' result from a rotational exit, or competitive devaluations impacting foreign and domestic markets too ( ongoing vis-a-vis Europe and China forthcoming with a possible Renminbi devaluation), oil price movement, and sloppy global business conditions.  

The answer should be that it's unlikely this holds together well; but we know at this time they're trying to deflect the S&P from breaking into or below the 2070 area, which broadly describes the  toehold the bears would have for a new phase of decline. What's been seen so far gives us a good downside gain. But for the very reason we know the bulls will fight to bring back every decline, our approach has been (and remains) taking gains partially off the table to ensure the best moderate trading approach feasible. This will continue; although it's rare for a trader to hold overnight, precisely because this remains a dynamic fluid marketplace. That means it's still not 'trending' or allowing genuine free-market 'price discovery', which the focus on primarily big cap (often momentum stock) leaders seems to occur solely because they can give a firmer tone to the Index irrespective as to whether such a company has investment grade value. 

That's going on in the credit markets too; at least sufficiently that behavior of a significant segment of both IG and HY have been ignored and if anything seen as another reason to get into equities. How much more air can a balloon take? The market will find out.  Increasingly, most of the old hands at markets are taking chips off the table on spikes, not adding to positions. I use a stock like Facebook (FB), or for that matter Apple (AAPL), as examples of stocks we really liked at dramatically lower prices (and said so; 20 for FB or 57 split-adjusted for AAPL); just to make the point of how risky it is to buy into higher level 'bigger fool theory' promotion.  If one bought lower, one simply sells part and hope they're wrong:  bank something, if it goes higher, bank a bit more.

Bottom-line: while open-minded to probable rally attempts; the investment or trading odds are not lined up well for any meaningful upside beyond short-term efforts to 'hold the line' (literally and figuratively). We hold 'partially' short now. 

Monetarily, the Fed has botched things badly by deferring a rate hike so long. It is to the point that economists are now referring to 'what we have' at the low rates for so long as the 'real normalization'; since years at almost zero is what one might say is 'normal'. I don't totally diverge from that perspective in one of the most important ways: in a slow (or almost nil) growth environment overall it is perfectly normal to see low rates. I've pointed out before that in the 1950's a home mortgage was rarely over 3% and savings rates lower; while prosperity and growth steadily increased. Of course, we didn't have the debt issues even after WWII like we do today.  We weren't off the Gold standard; and real estate owners were happy to see 2-3% annual increases in property values. That for sure was a 'sustainable' pace, and occurred organically, without unnatural Fed or other efforts to compel rising prices in some areas while repressing others. 

Charts tell us that the Fed not only botched recovery by their frozen inaction so far; but may have imperiled market responses by allowing asset prices to rise more than they naturally would have (in property not just equities). That the new series of 'stress tests' have been rewritten so that no major bank can failmay itself be a warning of  stealth conditions they don't want understood. It made me smile when pundits proclaimed banks in fabulous shape based upon the jobs number  while ignoring the capitalization and ratings 'watches' less than a week earlier (by the Fed and rating agencies). Again, it's a series of seeming press-releases, not analysis, to placate nervous markets.

Swap spreads, that hardly anyone notices, are an unambiguous indication of a malfunction in credit markets, if not outright distress. Stay cautious or nimble.  

Daily action - Banking 'a bit more', as noted in my remarks above, is what we did with the December S&P short-sale guideline from 2109. On Friday for our intraday members (we presume investors are Daily Briefing 'only' members for the most part) we tightened the 'smoother rather than hit-and-run' guideline up further, while indicating the intraday pattern for scalpers as best able. 

That 'mental stop' did get touched right at day's end; being the Dec. S&P 2094 price level for an absolutely 'no complaints' gain of 1500 or 15 handles. Likely already a portion of a remaining portion (we back-away from quantifying how much is 'part' for any trader; just our view of trying to make sure to not let really good profits get away; while keeping something on the table if the overall drop continues); we have therefore taken more profit; with 'some' still short at 2109 or equivalent levels in whatever surrogate one might utilize. 

We did notice that VIX (Volatility) didn't do much at all while the market jerked in alternating directions (thanks for the couple comments about the call for that type of behavior on Friday). That's probably a function of traders unconvinced as to where this is headed or believing it's so behind  the market can rise. Or it might be hesitation to get involved with VIX due to heavy premium costs.

 

Prior highlights follow: 

Deflationary pressures were hinted at persisting in Europe today yet again. We suspect China  so desperately in need of higher growth levels, plans a further devaluation of the Renminbi, not just because of low average wages in China, but their need to ramp exports at any cost. 

Bearing that cost will be manufacturers in most of the world, which will trigger another bout of competitive devaluations and incidentally, a stronger Dollar's overall upside continuation pattern. What that also does is compel institutions like the IMF to lower global GDP estimate and other measures of economic activity further, while upward wage pressures are resisted by industry, for the same competitive reasons.

Normally this is something that would be called 'deflation', not 'lower inflation'; a favorite term of central bankers, governments, and even financial media. These all are all loathe to call a 'spade a shovel' given broader economic implications. It is pretty obvious to the public and is part of why 'consumers' and 'businesses' alike restrain themselves from major spending ventures; simply because they hear, but apparently don't accept, the recovery cheerleading from government or other sources (including super-bullish market pundits).

This is about a coming-to-grips with reality; not a bullish or bearish bias. That was my point about a reporter interpreting Stanley Druckenmiller's reflections on the economy and markets as 'negative', rather than just looking at the facts (as Mr. Druckenmiller rightly responded is what he intended); and that's been my point as well.

We know there's a 'cottage industry' (essentially hand-holding propaganda) to convince us all that the economic data is less mixed than it really is or to try to suggest productivity improvements are helpful (actually it's weak and hurts job hires and new plant investments without much growth). That 'campaign' really had strong allies between Wall Street, Government, and even financial media; but it's gotten to the point where apologists are running out of ammunition.

The export situation won't improve with the currency wars that are ongoing just as we had to forecast. And the 'service' gains are welcomed but most at levels that allow people to mostly survive, but not thrive. Labor force and participation 'rates' have slowed and that's not going to be as bullish as those suggesting such 'negative' facts will lift equities because of sidelining the Fed. 

First of all, we don't presuppose the Fed will be sidelined; and second, we've indicated the market pundits will both hope for poor numbers (south of 175k in the a.m.) to rally stocks; but if it's stronger (perhaps seasonal service jobs will do that) they'll argue the market 'can live' with a Fed rate increase. The Fed is desiring to make the move; that's pretty clear. And history (and credit markets) suggests it won't be a single 'all and done' move. 

Hence let's minimize how they focus on the jobs number or Fed move; even suggesting that this is not what the market is about, going forward. It needs a modicum of 'real' and vibrant growth, not what is massaged to 'pass' as good economic recovery. 

Yesterday I mentioned how shipping rates (for container loads, truckloads and rail-car loads) were collapsing yet again. That too contributes to Chinese desires to devalue perhaps, while also aiding to commodity price woes (when it costs more to produce or extract than demand will allow in unregulated price markets, well, that doesn't play well for long periods). Our view has been 'deals' and drilling and farming and mining and more... all are structured at cost levels that assume 'regression to the mean' periodically (floating profits and sales of course); but don't presume nearly perpetual business at fairly low levels. 

Today Maersk  (the world's largest carrier) is cutting 4000 jobs and cancelling a lot of new orders. German operator  Hapag-Llpoyd, about to go public, reduced its offering expectations several times due to slowing business. Notice that the 'hype' about 'auto-sales' hasn't made a dent, or if it has, it tells you how soft all the other sectors are that aren't dependent on a low-interest-rate frenzy that's 'temporarily' supported sectors that are sufficiently expensive to be financed by most people (cars). Not to overlook shipping, this year has a fleet of new huge container ships coming onto transPacific markets absent demand.

In sum: We're just not growing as fast as 'officials' proclaim; thus high capacity, lower or sluggish demand, low shipping rates.. they all combine to discourage CapEx investment, and every major business sees this, even if not reported as widely as it deserves. Seaspan and a few others say they're 'confident', but of course are dependent on the North American trade and aren't going to openly talk down prospects. 

This will ultimately turn; but our point (reviewed and updated partially to remind and for new members) is it's as slow as turning a supertanker that's moving at trolling speed. All the rating agencies, institutions, and governments have gradually had to revise their estimates lower; while previously denying all the deteriorating trends ignored but as we argued, have been evident in factual data all year. This leaves an even wider yawning gap between equity prices in a host of big-caps especially, which haven't corrected adequately, or did, but of course subsequently rebounded because they could be lifted, not because the fundamentals had really improved. 

There are exceptions, even in technology; but there many winner harm others; as the problem with technology is technology. To wit: a Facebook success is an arrow in the heart of other advertising mediums (we liked FB at 20; not to buy at high levels of course), while consumer's thrilled that Saudi Arabia is winning a latest version of OPEC's periodic energy wars, might consider the jobs lost in Texas and the Dakota's, as a result. (And incidentally today an OPEC official let slip that OPEC won't reduce production levels in December unless other oil producers in the non-OPEC world do so too. Clearly they're aiming mostly at Russia, not the U.S. We don't think Washington has encouraged this, but you never know, given the agenda some have. Today, Saudi Arabia also cut prices to Europe so as to 'undercut' Russian light-crude prices). 

Again; regression to the mean is fine; but only the equity market is reluctant to engage on that trek. It's showing signs of being frayed; and we'll have to see if stocks can again increase their pace in that direction. If it's like the economy; a risk of a move beyond the median is something to contemplate.   

For now, we continue short Dec. S&P/E-mini from 2109. What we've seen in markets until a couple days ago was as described: short-covering; and bear capitulation from frustration; or to be kind, not substantial money coming in but a form of 'residual' and late-stage forced buying, which wasn't sustainable. 

(Macro) action -  Continue to expect the market ideally to crumble a bit. It's too pat to simply expect another string of advances; the pattern is at risk of not less than the 'accelerated uptrend' being broken; and an S&P drop roughly into the mid-2070's would be the first hint of that (about 20 handles lower for now). 

As to the jobs number initial reaction? We think it's more a non-event, though I would not be surprised if hit-and-run traders (HFT guys too) try to make more of the number either way. If it's up early; look for it to turn down, bounce and to fail; if down early; look for a rebound (because they almost always catch those who short into weakness); and then perhaps another shot to the downside. 

Of course that's our bias, that it declines further, which is why we're holding short overnight again; same guideline since Tuesday; that's for E-mini / December S&P short-sales from 2109 to be retained with a fixed mental stop at 2104; though even if that came out we'd hold a portion with a break-even or 2109 control. Also if they 'jerk' the market up in the opening moments we'd not close a short; or if one is out, consider putting one back on because we'd be a good bit suspicious of any out-of-the-box upward thrust on jobs data.    

The 'global debt bubble' - is really at the heart of multi-market issues, which go way beyond seasonality; or whether or not money managers can 'eke  out' a few percentage points more out of a move showing every sign of withering. 

It's not simply a market that's retraced everything lost since August; but did so in the 'Indexes', especially the more domestic-centric NASDAQ, which doesn't have  the handicap of being loaded with multinationals, impacted by our forecast Dollar strength over these last two years.

That's an ongoing evolution, and matters both to monetary policy wonks.  It matters to export-oriented companies; and also impacts Oil prices. When you get oil up like yesterday concurrent with Dollar strength, it's initially mostly just short-covering (which is partially why it retraced some today). T hen if it moves higher despite a firm Dollar, you know what it means with respect to geopolitics if not demand. Additionally,  a strong Dollar with firm Oil is detrimental to firm S&P's. (Ed: we see Saudi Arabia's drop in price to Europe as a counter to Russia.)

Besides believing this market was in a 'buying climax' frenzy seeking to jump over S&P 2100, while just a handful of momentum stocks carried the weight of that climb, we viewed the nature of the move as departing from a typical upward trek that normally would point higher after retracing lost ground. That's in part because it was accomplished by 'rotation' not a general advance and  was extending the move while the disconnect with factual reality in fact widened. That might be acceptable 'if' we had another correction; but not in absence of a 'pause to refresh'. 

However part of the problem besides a moribund Fed that knows what it wants to do but somehow seeks to shake the blame for what happens to markets, is the reality that economic activity and growth rates are sloppy to mediocre now.  Oddly enough (while pundits claim that will hold back the Fed); that's what I suspect they actually require. 

How so? Because they want to snug up policy in gentle ways (normally it becomes a series of hikes). While they proclaim a desire for 'inflation' (debasing citizen buying power more), they also know that let it happen too fast they'll budge the CPI, unleashing all the forces that influence servicing that 'debt bubble' and aside entitlements or more thus bringing the downside of an incredible stimulus-induced bubble-debt to center stage. That creates a  whole set of additional problems; especially if it fails to ignite the economy into recovery mode which current policy dissuades.

Bottom-line: There are few escape hatches for stimulus carried on far longer than sensible or invoking loose policies when everyone else is doing it too. For two years we argue the bullish case would be to 'normalize' rates or at least back off the excessive stimulus. 

The Fed 'is' embarked on that trek now, retarded by fear of repercussions from letting it go far too long. That's likely why financial pundits say 'they can live with a rate hike' (how benevolent). That they switched their pitch to making it acceptable (while preferring it not occur) reveals the fear it's really coming. It needs to come; it's way overdue. 

Analytically nothing changed from yesterday (please see text below if you missed our discussion of Mssr's. Icahn and Druckenmiller's remarks that echoed my warnings). What changed? More companies 'missing' or being sold-off on earnings reports. It's constructed to decline, with failing rallies intervening and defying pundits who thought November would be a romp in the upside park.  

Could the 'edge of a precipice' return just as the S&P flirts within a percent or so of new highs (despite 'weighting which has really deteriorated with sector rotation trying to sustain the Indexes since May at least)? Perhaps so, while the pundits try to rationalize all upside behavior as attractive, and most professionals that have sound principles are not nearly so complacent.

I've seen this movie before as recently as July  and it normally doesn't end well. Of course, more bears capitulated to either neutral or even bullish or 'despondent' perspectives; while most 'public' bulls seem confident that this is a 'monster' bull market that has years to go. That view relies on 'bad news' and a sloppy economy in most sectors; which perpetuates the idea of low rates as time goes on. 

We think this has more to it than rates.  'Facts' continue unmasking the propaganda intended to convince investors all that matters are rates. A lack of 'supportable' earnings gains (either distorted by accounting gimmicks, or buoyed by buybacks allowing numbers to 'appear' better than they were), is somehow not a deterrent to persistently higher equity levels. 

I mentioned yesterday the Friday night 'massacre' that wasn't reported 'much' either (one might wonder if there's media bias. All we seek is transparency and will look at good or bad data). That massacre was ALL the six largest US banks being put on 'credit watch' for potential downgrade, after the Friday night report. Should a market reversal stick, ponder if the either the Fed report or the 'credit rating watch' will be cited as contributing factors. 

(Tues.) I got a kick out of Stanley Druckenmiller's comments; not just specifics which seemed seriously in-line with some of my views; but also when he cited some facts, and Mr. Sorken said "so you're negative".

Stanley caught that and responded he's not negative, just looking at the facts that ultimately matter. Yup. I couldn't put it better. I can't be bullish in the middle of a minefield, even if there is some chance of getting safely through the obstacles.

Even Carl Icahn warned of a 'Fed minefield'. I am not looking for reinforcement of my concerns, nor fighting the Fed (the bulls actually are fighting the 'revised' Fed policy). However, I think investors who doubt cautions I've shared, or think guys like David Stockman are just taking political postures (he's not), might consider that when big speculators like  Druckenmiller and Icahn are voicing essentially the same macro concerns, there just might be something to it. It was especially smile-inducing to hear Icahn stumble a moment, 'as if' he realized that his criticism of borrowing to underpin earnings reports, massaged by offshore accounting gimmicks and buybacks, might just refer to his beloved Apple (AAPL). Which is beloved here too; but not at high prices. 

Both of these gentlemen hinted at interest on the buy side of some of these 'wonderful' names, but at lower levels. That included  Amazon, Netflix or more. I totally concur as do I with the remarks about building 'buying power' to take advantage of the opportunity as and when (probably not 'if') presented. I think that's the point: I too hold investments I won't entirely liquidate. The idea has been to accumulate cash and partially scaling out on rallies all year and letting fresh funds build up. Yes, there was a trading, albeit not necessarily investing, opportunity in the wake of our August-September purge. But if one entered for a trade then, they should probably already be out. That's to me the takeaway from these 'big boys' who are very nervous about their holdings and unwilling to jump in more, absent a serious decline (though they hint possibly at more).

Bottom-line: (Tues.) They 'stretched' the S&P and we determinedly faded it. As the 2 o'clock effort coincided with (thank you ECB) Super Mario's reiterated statement about doing more because of Europe's stagnant (more than that as a result of the invasion from multiple directions). This triggered an S&P above trend spike (which usually gets sold into, and did), and a leg down for the Euro and up for the Dollar, which we've expected to advance anyway. At the same time Oil ignored more inventory build in the US and rallied (Ed: it's evident that was short-covering; as OPEC comments quelled that quickly).     

Catalysts for October's incredible rally are behind us now whether most Wall Street strategists acknowledge that or not. The momentum craze continues; as it did at the beginning of last month. Will November replicate October? 

A highly unlikely proposition; although surely more investors (bulls and bears alike) are either complacent about the 'never ending rally'; forgetting the past; and at the same time confident there's nowhere else to be but stocks for now. 

(Mon.) there were reports of fund managers lightening up; even shorting where they can. One was a sell of sizable credit market positions. Mostly though, the 'faithful' hang-in and dismiss the idea of a new 'keyhole exit' confronting them.

Ironically that's because they see the weakness; they perceive the attraction of foreign funds because of the global problems; and simply base retention sort of in ways that seems more like a religious zeal to 'not let go' than analysis. We know most of the concerns out there; and seemingly nothing matters. But from history when investors start thinking nothing matters it soon does.