Monday, October 20, 2014

Stocks Rising into Final Hour on Central Bank Hopes, Bargain-Hunting, Short-Covering, Retail/Homebuilding Sector Strength

Broad Equity Market Tone:
  • Advance/Decline Line: Higher
  • Sector Performance: Most Sectors Rising
  • Volume: Below Average
  • Market Leading Stocks: Performing In Line
Equity Investor Angst:
  • Volatility(VIX) 19.03 -13.46%
  • Euro/Yen Carry Return Index 142.96 +.41%
  • Emerging Markets Currency Volatility(VXY) 8.58 +1.18%
  • S&P 500 Implied Correlation 65.97 -3.48%
  • ISE Sentiment Index 112.0 +12.74%
  • Total Put/Call .86 -27.73%
  • NYSE Arms .99 +58.88% 
Credit Investor Angst:
  • North American Investment Grade CDS Index 70.20 -.27%
  • European Financial Sector CDS Index 75.50 +2.97%
  • Western Europe Sovereign Debt CDS Index 34.80 +3.40%
  • Asia Pacific Sovereign Debt CDS Index 73.32 -.66%
  • Emerging Market CDS Index 263.20 +.55%
  • China Blended Corporate Spread Index 344.71 -2.58%
  • 2-Year Swap Spread 26.25 unch.
  • TED Spread 20.5 -.25 basis point
  • 3-Month EUR/USD Cross-Currency Basis Swap -9.75 -.25 basis point
Economic Gauges:
  • 3-Month T-Bill Yield .02% -1.0 basis point
  • Yield Curve 183.0 unch.
  • China Import Iron Ore Spot $81.60/Metric Tonne +.97%
  • Citi US Economic Surprise Index 21.20 +.6 point
  • Citi Eurozone Economic Surprise Index -54.1 unch.
  • Citi Emerging Markets Economic Surprise Index -21.60 -.6 point
  • 10-Year TIPS Spread 1.91 -2 basis points
Overseas Futures:
  • Nikkei Futures: Indicating +69 open in Japan
  • DAX Futures: Indicating +25 open in Germany
  • Higher: On gains in my biotech/tech/retail/medical sector longs
  • Disclosed Trades: Covered some of my (IWM)/(QQQ) hedges, then added them back
  • Market Exposure: 50% Net Long

Today's Headlines

  • Islamic State Earns $800 Million a Year From Oil Sales. The Islamic State is earning about $2 million a day, or $800 million a year, selling oil on the black market, IHS Inc. estimated. The terrorist group is producing 50,000 to 60,000 barrels a day, according to an e-mailed release today from the Englewood, Colorado-based information company. It controls as much as 350,000 barrels a day of capacity in Iraq and Syria. 
  • China’s Wealth Gap Threatens Social Stability, Researcher Says. China’s growing wealth inequality may severely damage social stability, a researcher with the ruling Communist Party said. Tax evasion, fraud and corruption are among the reasons for the widening wealth gap, Xie Chuntao, an academic with the ruling Communist Party, said at a briefing today.
  • Philips Profit Misses Estimates on Woes in China, Russia. Royal Philips NV (PHIA) reported quarterly earnings that missed analyst estimates because of unfavorable exchange rates and sluggish demand in China and Russia. Earnings before interest, taxes, amortisation and one-time items dropped 16 percent to 536 million euros ($684 million) in the third quarter, missing a 554 million-euro analyst estimate. The stock dropped as much as 3.2 percent. 
  • Brazil Race Tied Less Than 1 Week Before Vote, MDA Shows. Brazil’s President Dilma Rousseff is statistically tied with candidate Aecio Neves less than one week before a runoff election, according to an MDA poll published today. Rousseffhas 45.5 percent support and Neves 44.5 percent, according to the Oct. 18-19 poll commissioned by the National Transport Confederation that has a margin of error of 2.2 percentage points. Rousseff of the Workers’ Party won 42 percent in the first round of voting on Oct. 5, compared to 34 percent for Neves of the Brazilian Social Democracy Party. 
  • European Stocks Decline After Four-Week Rout as SAP Drops. (video) European stocks fell, following their longest streak of weekly losses in more than a year, as worse-than-estimated financial results added to concerns over the region’s economic recovery. SAP SE lost 5.8 percent after the world’s largest supplier of business-management software cut its full-year earnings forecast. Royal Philips NV declined 3.7 percent after third-quarter sales and profit missed analysts’ estimates. Nutreco NV rallied the most since at least 1997 after SHV agreed to buy the fish-feed maker. The Stoxx Europe 600 Index slid 0.5 percent to 317.01 at the close of trading, after earlier falling as much as 1.1 percent
  • Copper Falls on China Concern; Goldman Sees Higher Supply. Copper futures fell for the third time in four sessions on mounting concern that a slowing economy will curb demand in China, the world’s top metal consumer. In the third quarter, the Chinese economy probably expanded at the weakest pace since 2009, the median estimate in a Bloomberg survey showed before official figures due tomorrow. Inventories monitored by the London Metal Exchange will rise over the next six months while supplies increase,Goldman Sachs Group Inc. said in a report on Oct. 17. “The attention is going to shift to China,” Tim Evans, the chief market strategist at Long Leaf Trading Group Inc. in Chicago, said in a telephone interview. “If we continue to see poor data there, where does the growth come from? That conversation will continue to dominate the copper market moving forward.” 
  • Oil Falls; OPEC Seen Waiting Till Meeting to Curb Output. Brent for December settlement declined 39 cents, or 0.5 percent, to $85.77 a barrel on the London-based ICE Futures Europe exchange at 1:29 p.m. in New York. Futures reached $82.60 on Oct. 16, the lowest since November 2010. Prices are down 23 percent this year.
  • Fed’d Tarullo Warns Banks to Curb Culture of Bad Behavior. Banks may face tougher regulations if they fail to crack down on market misbehavior and other misconduct that’s continued with “disturbing regularity,” Federal Reserve Governor Daniel Tarullo said. “If banks do not take more effective steps to control the behavior of those who work for them, there will be both increased pressure and propensity on the part of regulators and law enforcers to impose more requirements, constraints and punishments,” Tarullo said in the text of his remarks. 
  • IBM(IBM) Plunges as CEO Abandons 2015 Earnings Forecast. International Business Machines Corp. plunged the most in more than four years after abandoning an earnings forecast for 2015, as the company struggles to transform fast enough to handle the shift to cloud computing.
Wall Street Journal:
  • China Growth Seen Slowing Sharply Over Decade. Conference Board Report Sees Productivity Plummet, Leaders at a Loss. China’s growth will slow sharply during the coming decade to 3.9% as its productivity nose dives and the country’s leaders fail to push through tough measures to remake the economy, according to a report expected to come out Monday.
Business Insider:
  • Why Is Russia Getting So Aggressive Toward Sweden? An unnamed Swedish government official told newspaper Svenska Dagbladet that "the actions of the Russians are sometimes aggressive and their behavior against signals intelligence planes has been unnerving. It's like during the Cold War.” When Russia invaded Swedish air space with their fighter jets, Swedish former minister of foreign affairs Carl Bildt wrote on his blog that it was "the most serious air violation from Russia" in a decade. Trespassing in the Baltic Sea isn't the only strange behavior Russia has exhibited lately. Last year the country simulated a nuclear attack against Sweden, and Russian jets have been showing off their weapons by exposing their undercarriages when approaching Swedish aircraft.

Bear Radar

Style Underperformer:
  • Large-Cap Value +.36%
Sector Underperformers:
  • 1) Computer Services -4.93% 2) Coal -1.41% 3) Oil Tankers -1.35%
Stocks Falling on Unusual Volume:
Stocks With Unusual Put Option Activity:
  • 1) TIF 2) KBH 3) IBM 4) XLI 5) LEN
Stocks With Most Negative News Mentions:
  • 1) BTU 2) QEP 3) PBR 4) PETS 5) PRI

Bull Radar

Style Outperformer:
  • Small-Cap Value +.62%
Sector Outperformers:
  • 1) Airlines +1.96% 2) Homebuilders +1.94% 3) Utilities +1.08%
Stocks Rising on Unusual Volume:
Stocks With Unusual Call Option Activity:
  • 1) DNKN 2) HLT 3) SHLD 4) LGF 5) VVUS
Stocks With Most Positive News Mentions:
  • 1) HAL  2) PPG 3) BA 4) CELG 5) QEP

Monday Watch

Weekend Headlines 
  • Russia to reject conditions to end sanctions after Ukraine talks. Russia’s foreign minister said his country will refuse to accept conditions to end sanctions after talks in Italy failed to produce a breakthrough to bolster a truce in the eastern Ukrainian conflict. Russia has been told to comply with various criteria before the U.S. and its allies revoke the limitations, Sergei Lavrov said in the transcript of an NTV interview posted on the ministry’s website yesterday. Explosions in the Ukrainian city of Donetsk were heard throughout the day after shelling had killed four people and wounded nine others earlier, the local authorities said on its website.
  • Russia Rating Cut by Moody’s on Sluggish Economic Growth. Russia’s credit rating was cut to the second-lowest investment grade by Moody’s Investors Service, which cited sluggish growth prospects worsened by the crisis in Ukraine and international sanctions. Moody’s downgraded the government one level to Baa2 from Baa1 and kept a negative outlook on the country’s rating. It is in line with Fitch Ratings Ltd.’s credit grade and one notch above that at Standard & Poor’s, whichlowered Russia to BBB- in April. The extra yield investors demand to own Russia’s dollar-denominated government bonds instead of U.S. Treasuries was 3.23 percentage points yesterday, the highest premium since June 2012, according to data compiled by Bloomberg. The spread has almost doubled from 169 basis points at the end of 2013 as the U.S. and its allies accused Russia of inciting the rebellion in eastern Ukraine, an allegation Putin denies.
  • Ebola Front-Line Doctors at Breaking Point. At 3:30 a.m. in the world’s biggest Ebola treatment center, Daniel Lucey found the outbreak reduced to its essentials: patients lying on mattresses on the floor and vomiting in the dark, visible only by the wavering flashlight beam of a single volunteer doctor. “I don’t see a light at the end of the tunnel,” said Lucey, a physician and professor from Georgetown University who is halfway through a five-week tour in Liberia with Medecins Sans Frontieres, the medical charity known in English as Doctors Without Borders. “The epidemic is still getting worse,” he said by phone between shifts.
  • Saudi Arabia Warns Against Incursions as Houthis Seize Post. Saudi Arabia warned against any breach of its border after Shiite Houthi rebels in neighboring Yemen seized a crossing point into the kingdom. “If anyone comes into the border area, we are ready to engage them,” General Mohammed al-Ghamdi, spokesman for Saudi Arabia’s border guards, said in a phone interview yesterday. “We are always on alert because of the situation on the border.” The swift gains by the Houthis have raised concerns among Gulf Cooperation Council nations that Shiite-led Iran is extending its influence through the well-armed fighters. Saudi Arabia’s Foreign Minister Prince Saud al-Faisal cautioned last month about a “circle of violence” in Yemen.
  • Europe Company Earnings Foreshadow Uncertainty Gripping Region. As investors prepare for some of the busiest earnings days this week, companies from Unilever NV to BASF SE (BAS) will seek to explain the downward trend that’s kept a lock on corporate Europe in the third quarter. Among companies reporting in the region are SAP AG (SAP), Philips Electronics NV (PHIA), Electrolux AB (ELUXB) and drugmaker GlaxoSmithkline Plc. (GSK) Analysts have already responded to a string of negative news, cutting earnings estimates for companies on the Euro Stoxx 50 Index. They project profit of 218.82 euros a share for 2014, down from 237.38 at the beginning of the year, according to data compiled by Bloomberg.
  • Asia Stocks Follow U.S. Rally as Topix Jumps on Yen, GPIF. Asian stocks rose, with the benchmark index rebounding from an almost seven-month low, after U.S. equities rallied. Japan’s Topix (TPX) index surged amid optimism the nation’s $1.2 trillion pension fund will buy more shares. Toyota Motor Corp., the world’s biggest carmaker by market value, jumped 4.1 percent in Tokyo as the yen extended its loss. NEC Corp., a Japanese maker of computers, increased 5.6 percent on a report first-half operating profit rose. Transfield Services Ltd. soared 29 percent in Sydney after the provider of outsourcing services entered into talks with Ferrovial SA after turning down a preliminary offer. The MSCI Asia Pacific Index (MXAP) climbed 1.3 percent to 135.44 as of 9:15 a.m. in Tokyo, buoyed by a 2.8 percent jump for the Topix.
  • Iron Ore Risks Extending Collapse on Supplies, Moody’s Says. The collapse in iron ore prices may have further to run as global supply increases and steel-demand growth slows, according to Moody’s Investors Service, which said it may reduce ratings on producers. About 300 million metric tons of new and expanded supply will come on stream over the next few years, analysts including Carol Cowan said in an e-mailed report received today. Global steel-production growth in 2014 remains muted with China, the key driver of consumption, continuing to slow, Moody’s said.
  • Hedge Funds Cut Bullish Bets on Crude as Prices Tumble. Plunging oil prices spurred hedge funds to cut bullish wagers by the most in six weeks, losing confidence in the willingness of producers to constrict supply. Money managers cut net-long positions in West Texas Intermediate by 8.1 percent in the week ended Oct. 14. Short positions jumped to the highest level in 22 months, U.S. Commodity Futures Trading Commission data show.
  • Leveraged Money Spurs Selloff as Record Treasuries Trade. When markets are buckling and volatility is signaling a crisis, you sell what you can, not what you want. That’s what happened last week on Wall Street, where slowing economic growth in Europe, Ebola anxiety and escalating conflicts in the Middle East and Ukraine tore through the calm with a force not seen in three years. Loath to find out what their record holdings of corporate bonds and leveraged loans were worth as liquidity thinned and markets slid, professional traders turned to stocks and Treasuries to defuse risk.
Wall Street Journal:
  • Federal Reserve Holds Steady Amid Market Volatility. Bond Buying Set to End at October Meeting Despite Global Economic Uncertainties. Federal Reserve officials are taking a steady-as-she-goes stance as they prepare for their policy meeting this month, even though market volatility and uncertainties about the global economic outlook have rattled investors in recent weeks and led to some mixed messages from central bank officials.
    The Fed is highly likely to end its bond-buying program on schedule at the Oct. 28-29 meeting, according to recent interviews with officials and their public statements. Officials also are preparing to debate whether to...
  • Kobani Hit by Fresh Round of Islamic State Assaults. Militants Bombard Kurdish Militia With Mortar Shells, Set Off Car Bombs. Fresh clashes shook the Syrian city of Kobani on Sunday as militant group Islamic State fired repeated mortar shells at Kurdish militia following a brace of car bomb attacks.
  • U.S. Ebola Response Is Slammed by Lawmakers. Obama Considers Appointing Czar After Bipartisan Criticism Mounts. President Barack Obama , after a day of withering criticism over the government’s handling of the Ebola virus, said Thursday he may name a point person to oversee the administration’s response and is open to a travel ban but isn’t planning one.
  • ObamaCare’s Failing Cost Control. The law’s ‘accountable care’ experiment is a bust so far. A major claim of ObamaCare’s political salesmen is that it will reduce U.S. health already evidence is accumulating that it isn't working.
Zero Hedge:
Business Insider:
  • China Bans The Term '50 Cents' To Stop Discussion Of An Orwellian Propaganda Program. The Chinese government doesn't just censor its internet. It also pays people to leave fake comments that make the country and its communist regime look good. As detailed in "Blocked on Weibo" by Jason Q. Ng, one of the many phrases that gets censored in China is "50 cents." This term references a huge set of people hired by the government to post internet comments spinning the news in China's favor — people who are supposedly paid 50 cents of Renminbi for every post. 
  • U.S. hospitals gird for Ebola panic as flu season looms. A young woman complaining of abdominal pain and nausea who had traveled to Africa arrived at a Long Island hospital fearful that she had contracted Ebola. She did not have the virus, but the pregnancy test was positive.
  • Blow to Japan PM as minister resigns over money scandal. Japan's high-profile and telegenic industry minister on Monday resigned over claims she misused political funds, including to buy both votes and make-up, dealing a blow to Prime Minister Shinzo Abe's proclaimed gender reform drive.
Financial Times:
  • Heavy borrowing to buy equities adds investors’ anxieties to skittish market. Investors borrowed a record amount of money to buy US equities during the bull run, a risky strategy now casting a shadow over the S&P 500 amid market turbulence. An upsurge in market volatility as US stocks dropped 6.2 per cent from last month’s record peak has put the spotlight on those investors that borrowed money – known as margin trading – to help boost returns.
  • Japan to Downgrade Economic Assessment for October. Japan government to cut economic assessment for October, the second straight month of downgrade, saying weak production has been prolonged after sales tax increase in April.
Night Trading
  • Asian indices are +.50% to +1.50% on average.
  • Asia Ex-Japan Investment Grade CDS Index 117.0 -9.0 basis points.
  • Asia Pacific Sovereign CDS Index 73.75 -2.75 basis points.
  • FTSE-100 futures +.41%.
  • S&P 500 futures +.50%.
  • NASDAQ 100 futures +.62%.
Morning Preview Links

Earnings of Note

  • (HAL)/1.10
  • (GPC)/1.24
  • (NVR)/20.60
  • (GCI)/.55
  • (HAS)/1.45
  • (VFC)/1.10
  • (BTU)/-.66
  • (CMG)/3.83
  • (TXN)/.71
  • (IBM)/4.32
  • (RCII)/.47
  • (STLD)/.44
  • (BXS)/.32
  • (BRO)/.47
  • (AAPL)/1.30
  • (ILMN)/.56
Economic Releases
  • None of note
Upcoming Splits
  • None of note
Other Potential Market Movers
  • The German PPI and the China Retail Sales/Industrial Production/GDP reports could also impact trading today.
BOTTOM LINE: Asian indices are higher, boosted by industrial and technology shares in the region. I expect US stocks to open modestly higher and to maintain gains into the afternoon. The Portfolio is 50% net long heading into the week.