Monday, July 30, 2012

Stocks Falling Slightly into Final Hour on Eurozone Debt Angst, Rising Global Growth Worries, Soaring Food Prices, US "Fiscal Cliff" Concerns


Broad Market Tone:

  • Advance/Decline Line: Lower
  • Sector Performance: Most Sectors Declining
  • Volume: Slightly Below Average
  • Market Leading Stocks: Underperforming
Equity Investor Angst:
  • VIX 17.90 +7.19%
  • ISE Sentiment Index 153.0 +15.91%
  • Total Put/Call .79 -10.23%
  • NYSE Arms 1.11 +304.58%
Credit Investor Angst:
  • North American Investment Grade CDS Index 106.35 bps +1.19%
  • European Financial Sector CDS Index 253.70 bps -5.3%
  • Western Europe Sovereign Debt CDS Index 255.11 -2.50%
  • Emerging Market CDS Index 245.84 +.28%
  • 2-Year Swap Spread 19.50 -1.75 basis points
  • TED Spread 34.75 +.25 basis point
  • 3-Month EUR/USD Cross-Currency Basis Swap -45.50 -6.5 basis points
Economic Gauges:
  • 3-Month T-Bill Yield .10% unch.
  • Yield Curve 127.0 -4 basis points
  • China Import Iron Ore Spot $115.20/Metric Tonne -.86%
  • Citi US Economic Surprise Index -49.0 +2.0 points
  • 10-Year TIPS Spread 2.08 unch.
Overseas Futures:
  • Nikkei Futures: Indicating -10 open in Japan
  • DAX Futures: Indicating -15 open in Germany
Portfolio:
  • Slightly Higher: On gains in my index hedges and emerging markets shorts.
  • Disclosed Trades: None
  • Market Exposure: 50% Net Long
BOTTOM LINE: Today's overall market action is mildly bearish as the S&P 500 trades near session lows on eurozone debt angst, soaring food prices, profit-taking, US "fiscal cliff" worries, earnings concerns and rising global growth fears. On the positive side, Coal and Construction shares are are especially strong, rising more than +1.0%. Oil is falling -.5%. Major Asian indices were mostly higher overnight, led by a +1.8% gain in India. However, the Shanghai Composite continues to sit out the global equity rally as it fell another -.9%. This index is now down -4.1% ytd and sits at its lowest level since March 2009, which is a big red flag for global investors. Major European indices are surging today, led by a +2.7% gain in Italian shares. The European Bank/Financial Services Index is jumping +3.0% today. Brazilian equities are rising +.6% today. The Germany sovereign cds is falling -3.8% to 70.37 bps, the France sovereign cds is falling -2.5% to 159.31 bps, the Italian sovereign cds is falling -2.4% to 484.25 bps, the Spain sovereign cds is falling -3.8% to 529.25 bps and the Brazil sovereign cds is falling -2.8% to 133.21 bps. Moreover, the Spain 10Y Yld is falling -1.9% to 6.61%. On the negative side, Alt Energy, Oil Tanker, Steel, Software, Semi, Disk Drive, Bank, Biotech, Homebuilder and Education shares are especially weak, falling more than -1.0%. Tech shares have traded heavy throughout the day. The 10Y Yld is falling -5 bps to 1.5%. The UBS/Bloomberg Ag Spot Index is jumping another +1.9% today and is up +27.5% in about 2 months. The benchmark China Iron/Ore Spot Index is falling another -.9% today and is down -6.8% in 5 days(-36.4% since 9/7/12). There were more hawkish comments from Chinese officials over the weekend regarding their real estate bubble and the China Iron & Steel Association reported inventory at 76 key steelmakers now totals 12.5m tons versus 11.8m tons in early July. Moreover, the China Hot Rolled Steel Sheet Spot Index(graph) continues to weaken. Despite their recent bounces off the lows, the euro, copper and lumber all continue to trade poorly given equity investor perceptions that global central bank stimuli will boost economic growth in the near future. The Italian/German 10Y Yld Spread is rising +2.1% to 465.24 bps and the Italian 10Y Yld is gaining +1.2% to 6.03%. US weekly retail sales have decelerated to a sluggish rate at +1.7%, which is the slowest since the week of Feb. 2, 2010. US Trucking Traffic continues to soften. Moreover, the Citi US Economic Surprise Index, while showing some improvement recently, is still around early-Sept. levels. Lumber is -4.0% 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 big improvement in the nationwide housing market. The Baltic Dry Index has plunged around -55.0% from its Oct. 14th high and is now down around -45.0% ytd. Shanghai Copper Inventories have risen +90.0% 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 10Y T-Note continues to trade too well. There still appears to be a high level of complacency among US investors regarding the deteriorating macro backdrop. It remains unclear to me whether or not Germany will put its own balance sheet on the line to save the euro even as investors appear to be pricing this outcome into stocks. The Citi Eurozone Economic Surprise Index is at -66.50 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. 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. Little if anything being discussed by global central bankers will actually boost global economic growth in any meaningful way, in my opinion. Thus, recent market p/e multiple expansion is creating an unstable situation for equities, which could become a big problem this fall unless a significant macro catalyst materializes soon. In further evidence that the Fed’s ZIRP is pushing institutional investors too far out on the risk spectrum, subprime auto lending is soaring. Moreover, auto stocks trade very poorly given this fact and the current economic “recovery”, which is a red flag for the health of the industry longer-term. 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 mixed-to-lower into the close from current levels on eurozone debt angst, tech sector weakness, profit-taking, soaring food prices, earnings worries, US "fiscal cliff" concerns and rising global growth fears.

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