Stocks Dropping into Final Hour on Surging Eurozone Debt Angst, Domestic Terror Fears, Earnings Worries, Soaring Food Prices

Broad Market Tone:

• Advance/Decline Line: Substantially Lower
  
• Sector Performance: Most Sectors Declining
  
• Volume: Slightly Below Average
  
• Market Leading Stocks: Performing In Line
  

Equity Investor Angst:

• VIX 16.65 +7.77%
  
• ISE Sentiment Index 129.0 unch.
  
• Total Put/Call 1.04 +20.93%
  
• NYSE Arms 1.55 +1.58%
  

Credit Investor Angst:

• North American Investment Grade CDS Index 111.40 +3.12%
  
• European Financial Sector CDS Index 284.80 bps +4.82%
  
• Western Europe Sovereign Debt CDS Index 269.77 +2.91%
  
• Emerging Market CDS Index 262.19 +4.3%
  
• 2-Year Swap Spread 24.5 +.75 basis point
  
• TED Spread 36.5 -1.25 basis points
  
• 3-Month EUR/USD Cross-Currency Basis Swap -46.25 -2.25 basis points
  

Economic Gauges:

• 3-Month T-Bill Yield .09% +1 basis point
  
• Yield Curve 125.0 -5 basis points
  
• China Import Iron Ore Spot $125.0/Metric Tonne -.48%
  
• Citi US Economic Surprise Index -64.50 +.8 point
  
• 10-Year TIPS Spread 2.06 -5 basis points
  

Overseas Futures:

• Nikkei Futures: Indicating -80 open in Japan
• DAX Futures: Indicating -3 open in Germany
  

Portfolio:

• Slightly Lower: On losses in my Medical, Retail, Biotech and Tech sector longs
  
• Disclosed Trades: Added to my (IWM)/(QQQ) hedges and to my (EEM) short
  
• Market Exposure: Moved to 25% Net Long

BOTTOM LINE: Today's overall market action is bearish as the S&P 500 trades near session lows on surging eurozone debt angst, tech/financial sector weakness, rising food prices, US "fiscal cliff" worries, earnings concerns, domestic terror fears and rising global growth fears. On the positive side, Utility, Oil Service and Homebuilding shares are higher on the day. Oil is down -1.2% and Lumber is gaining +3.5%. On the negative side, Alt Energy, Steel, Software, Computer, Semi, Networking, Computer Service, Bank, I-Banking, Medical, Hospital, Insurance, Construction, Restaurant, Gaming, Road & Rail and Airline shares are under meaningful pressure, falling more than -1.75%. Financial and tech shares have traded heavy throughout the day. Gold is rising +.2%, Copper is falling -2.7% and the UBS-Bloomberg Ag Spot Index is rising another +1.3%. The UBS-Bloomerg Ag Spot Index is up +29.2% in about 7 weeks. The 10Y T-Note Yld is falling another -5 bps to 1.46%. The China benchmark Iron/Ore Spot Price Index has broken down again technically, falling -16.3% since April 13th and -30.9% since Sept. 7 of last year. As well, the China Hot Rolled Steel Sheet Spot Index is also picking up downside steam. Major Asian indices were lower overnight, led down by a -1.4% decline in Japan. The Shanghai Property Stock Index fell another -1.0% and is down -6.8% in 5 days. Major European indices are sharply lower, led down by a -5.8% plunge in Spain. Spanish stocks are down -27.1% ytd as they approach their June 4th lows. As well, Italian shares are falling -4.4% and are now down -13.4% ytd. The Bloomberg European Bank/Financial Services Index is dropping -3.6% and is breaking back below its downward-sloping 50-day moving-average. Brazilian equities fell -2.0% today. The Germany sovereign cds is rising +5.4% to 78.17 bps, the France sovereign cds is gaining +2.9% to 170.56 bps, the Italian sovereign cds is gaining +4.2% to 526.18 bps and the Spain sovereign cds is up 4.3% to 604.98 bps, the Ireland sovereign cds is up +3.7% to 569.70 bps and the Russia sovereign cds is up +3.5% to 192.01 bps. Moreover, the European Investment Grade CDS Index is jumping +4.9% to 168.92 bps, the Italian/German 10Y Yld Spread is gaining +4.5% to 499.85 bps and the Spain 10Y Yld is jumping +3.7% to 7.27%. US weekly retail sales have decelerated to a sluggish rate at +2.0%, which is the slowest since the week of April 5th of last year. US Trucking Traffic continues to soften. The ASA Staffing Index just took a large weekly tumble. Moreover, the Citi US Economic Surprise Index has fallen back to late-Aug. levels. Lumber is -1.0% since its March 1st high despite improving sentiment towards homebuilders and the broad equity rally ytd. Moreover, the weekly MBA Home Purchase Applications Index has been around the same level since May 2010 despite investor perceptions of a strong spring home selling season. The Baltic Dry Index has plunged around -50.0% from its Oct. 14th high and is now down around -35.0% ytd. Shanghai Copper Inventories have risen +114.0% ytd. Oil tanker rates have plunged recently, with the benchmark Middle East-to-US voyage down to 25.0 industry-standard worldscale points, which is the lowest since Oct. 2009. The CRB Commodities Index is now down -17.3% since May 2nd of last year despite the recent surge in food prices. The Spanish 10Y Yld is breaking out to a new record high and the Italian/German 10Y Yld Spread has broken free from its recent range and is only 52.0 bps from its all-time high set on Nov. 9th of last year. This is extremely concerning given the perceived recent can-kicking. Copper and the euro currency remain in intermediate-term downtrends and trade poorly. The 10Y T-Note continues to trade too well, which remains a big red flag. There appears to be a fairly high level of complacency among US investors regarding the deteriorating macro backdrop. The European Investment Grade CDS Index, European Financial Sector CDS Index, Spain sovereign cds and Italian cds, among others, have given back little of their April/May gains and appear to be in the initial stages of another push higher. The Citi Eurozone Economic Surprise Index is at -64.0 points, which is near the lowest since mid-Sept. of last year. Massive tax hikes and spending cuts are still yet to hit in several key eurozone countries that are already in recession. A lack of competitiveness remains unaddressed. The European debt crisis is also really beginning to bite emerging market economies now, which will further pressure exports from the region and further raise the odds of more sovereign/bank downgrades. The odds for QE3 are likely meaningfully lower than investors currently perceive as food prices soar and energy prices rebound. If the Fed embarks on another misguided round of QE, the Ag Spot Index should push through its Aug. 31, 2011 all-time high. This would likely also lead to another surge in energy prices as it would spur another bout of rioting in the Middle-East and other emerging markets. As well, it would greatly curtail any emerging markets stimulus plans, in my opinion. It is unlikely the Fed would take this risk ahead of an election, in my opinion. Uncertainty surrounding the effects on business of Obamacare, the "US fiscal cliff " and the election outcome uncertainty will likely become more and more of a focus for investors as the year progresses. Three of the main reasons US stocks had been rallying were the beliefs that QE3 was imminent, China would embark on another massive easing campaign and Europe had successfully kicked the can once again. However, as I stated above, soaring food prices/rising energy costs make QE3 much less likely, in my opinion. Recent comments by Chinese officials suggest a more subdued approach to easing and an unwillingness to let their real estate bubble begin re-inflating. Soaring food prices also put a large dent in emerging markets easing plans. Finally, the surge in Spanish yields to records and breakouts in other European debt angst gauges suggests the recent European debt crisis can-kicking may have already run its course. There has been a growing disconnect between US equity action and the deteriorating macro environment that is eerily similar to last July, in my opinion. The macro likely must begin improving very soon for equities to avoid a similar fate into the fall. For this year's equity advance to regain traction, I would expect to see a resumption in European credit gauge improvement, a subsiding of hard-landing fears in key emerging markets, a rising 10-year yield, better volume, stable-to-lower energy prices, a US "fiscal cliff" solution and higher-quality stock market leadership. I expect US stocks to trade modestly lower into the close from current levels on surging eurozone debt angst, earnings worries, rising food prices, rising global growth fears, more shorting, financial/tech sector weakness, domestic terror fears and US "fiscal cliff" concerns.