Stocks Slightly Higher into Final Hour on Short-Covering, Euro Bounce, Global Central Bank Stimulus Hopes

Broad Market Tone:

• Advance/Decline Line: Higher
  
• Sector Performance: Mixed
  
• Volume: Light
  
• Market Leading Stocks: Performing In Line
  

Equity Investor Angst:

• VIX 16.19 -.98%
  
• ISE Sentiment Index 131.0 +33.67%
  
• Total Put/Call .85 -1.16%
  
• NYSE Arms 1.29 -2.04%
  

Credit Investor Angst:

• North American Investment Grade CDS Index 100.79 bps +.53%
  
• European Financial Sector CDS Index 246.33 bps -2.55%
  
• Western Europe Sovereign Debt CDS Index 232.88 unch.
  
• Emerging Market CDS Index 244.72 -.26%
  
• 2-Year Swap Spread 16.75 -1.25 basis points
  
• TED Spread 32.75 -.5 basis point
  
• 3-Month EUR/USD Cross-Currency Basis Swap -30.5 +1.0 basis point
  

Economic Gauges:

• 3-Month T-Bill Yield .10% +1 basis point
  
• Yield Curve 136.0 -2 basis points
  
• China Import Iron Ore Spot $94.80/Metric Tonne -4.6%
  
• Citi US Economic Surprise Index -6.90 -3.5 points
  
• 10-Year TIPS Spread 2.32 +1 basis point
  

Overseas Futures:

• Nikkei Futures: Indicating +21 open in Japan
• DAX Futures: Indicating +6 open in Germany
  

Portfolio:

• Higher: On gains in my Retail/Tech/Biotech/Medical sector longs and Emerging Markets shorts
  
• Disclosed Trades: None
  
• Market Exposure: 50% Net Long

BOTTOM LINE: Today's overall market action is mildly bullish as the S&P 500 trades slightly higher despite eurozone debt angst, rising food/energy prices, US "fiscal cliff" worries and rising global growth fears. On the positive side, Computer Hardware, Networking, I-Banking and Tobacco shares are especially strong, rising more than +.75%. Small-Caps are outperforming. Brazilian equities are rising +.3%. The Germany sovereign cds is falling -5.2% to 60.83 bps(+10.7% in 5 days), the Italy sovereign cds is falling -.4% to 454.66 bps(+14.8% in 5 days) and the France sovereign cds is down -2.3% to 138.33 bps(+12.9% in 5 days). On the negative side, Oil Service, Coal, Steel and Airline shares are especially weak, falling more than -.75%. Cyclicals are lower on the day. Copper is falling -.5%, Lumber is down -2.7%, Gold is up +.3% and Oil is up +.6%. The 10Y Yld is falling -2 bps to 1.63%. Major Asian indices were lower overnight, led down by a -1.4% decline in Taiwan. The Shanghai Comp bounced +.85%, but is down -5.7% ytd, -17.5% over the last 12 months and just off the lowest level since March 2009, which remains a large red flag for the global economy. I continue to believe that China’s large overcapacity, partly as a result of the last stimulus program, will preclude another major stimulus as it would exacerbate an already growing bad loan problem. Major European indices were lower today, led down by a -.9% decline in France. The Bloomberg European Bank/Financial Services Index fell -.7%. The China sovereign cds rose +1.5% to 106.58 bps, the US Muni CDS Index rose +1.1% to 172.87 bps(+9.1% in 5 days) and the Asia Pacific Sovereign CDS Index is rising +1.4% to 126.89 bps. Moreover, the Spain 10Y Yld is rising +1.5% to 6.48%, the Italian/German 10Y Yld Spread is jumping +3.0% to 448.87 bps and the China Blended Corp. Spread Index is gaining +.9% to 440.0 bps. The UBS/Bloomberg Ag Spot Index is up +25.7% since 6/1. The benchmark China Iron/Ore Spot Index is down -47.6% since 9/7/11. The China Hot Rolled Steel Sheet Spot Index is also picking up downside steam. As well, despite their recent bounces off the lows, the euro, copper and lumber all continue to trade poorly given equity investor perceptions that the Eurozone has successfully kicked-the-can and global central bank stimuli will boost economic growth in the near future. US weekly retail sales have decelerated to a sluggish rate at +1.8%. US Trucking Traffic continues to soften. Moreover, the weekly MBA Home Purchase Applications Index has declined in 5 out of the last 6 weeks and 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 -65.0% from its Oct. 14th high and is now down around -60.0% ytd. Shanghai Copper Inventories have risen +142.6% ytd. Oil tanker rates have plunged recently, with the benchmark Middle East-to-US voyage down to 22.50 industry-standard worldscale points, which is the lowest since May, 2009. The 10Y T-Note continues to trade too well. There still appears to be a fairly high level of complacency among US investors regarding the deteriorating macro backdrop. It remains unclear to me whether or not Germany will destroy its own balance sheet or allow the ECB to monetize debt in an attempt to "save" the euro even as investors have been pricing this outcome into stocks. Focus Magazine reported over the weekend that a poll by TNS Emnid found that 80% of Germans have little-too-no confidence in the ECB’s policy to tackle the debt crisis, while only 10% fully trust the ECB. The Citi Eurozone Economic Surprise Index is at -45.10 points. Massive tax hikes and spending cuts are still yet to hit in several key eurozone countries that are already in recession. A lack of economic competitiveness and growth incentives remain unaddressed problems. 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. I continue to believe that China's problems are much larger than commonly perceived and cannot be solved with another massive stimulus package given their real estate bubble, soaring food prices, massive overcapacity in certain key parts of the economy and growing bad loans problem. 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 US investors as the year progresses. Little if anything being discussed by global central bankers will actually boost global economic growth in any meaningful way over the intermediate-term, in my opinion. I continue to believe QE3 would be a major mistake given the recent surge in stock prices, rising inflation expectations, rising gas prices, worrisome food crisis headlines and less pessimistic US economic data. The quality of the stock rally off the June lows remains poor as breadth, volume, leadership, lack of big volume/gainers and copper/transports divergences all continue to be concerns. Thus, recent market p/e multiple expansion on global central bank stimulus/action hopes, is creating an unstable situation for equities, which could become a big problem this fall unless a significant macro catalyst materializes soon. The explosion higher in the Israel sovereign cds(+31 bps in about 2 weeks to 165.0 bps) is another big red flag. The Mid-east appears to be unraveling again at an alarming rate. For this year's equity advance to regain traction, I would expect to see further European credit gauge improvement, a subsiding of hard-landing fears in key emerging markets, a rising 10-year yield, better volume, stable-to-lower food/energy prices, a US "fiscal cliff" solution, a calming in Mid-east tensions and higher-quality stock market leadership. I expect US stocks to trade modestly lower into the close from current levels on eurozone debt angst, profit-taking, more shorting, rising food/energy prices, US "fiscal cliff" concerns, growing Mid-east unrest, technical selling, a shift into bonds from stocks and rising global growth fears.