Monday, September 10, 2012

Stocks Falling into Final Hour on Rising Global Growth Fears, Rising Eurozone Debt Angst, Tech Sector Weakness, US "Fiscal Cliff" Worries

Broad Market Tone:

  • Advance/Decline Line: Lower
  • Sector Performance: Most Sectors Declining
  • Volume: Below Average
  • Market Leading Stocks: Underperforming
Equity Investor Angst:
  • VIX 15.22 +5.84%
  • ISE Sentiment Index 129.0 -25.0%
  • Total Put/Call .77 +5.48%
  • NYSE Arms 1.14 +32.78%
Credit Investor Angst:
  • North American Investment Grade CDS Index 94.65 bps +1.73%
  • European Financial Sector CDS Index 213.66 bps +4.48%
  • Western Europe Sovereign Debt CDS Index 192.88 +2.39%
  • Emerging Market CDS Index 218.52 +1.52%
  • 2-Year Swap Spread 15.25 -.5 basis point
  • TED Spread 30.75 unch.
  • 3-Month EUR/USD Cross-Currency Basis Swap -24.75 +2.0 basis points
Economic Gauges:
  • 3-Month T-Bill Yield .10% unch.
  • Yield Curve 143.0 +2 basis points
  • China Import Iron Ore Spot $95.0/Metric Tonne +6.74%
  • Citi US Economic Surprise Index 18.50 +3.5 points
  • 10-Year TIPS Spread 2.38 +2 basis points
Overseas Futures:
  • Nikkei Futures: Indicating -41 open in Japan
  • DAX Futures: Indicating -13 open in Germany
  • Slightly Lower: On losses in my Biotech/Tech sector longs
  • Disclosed Trades: Added to my (IWM)/(QQQ) hedges
  • Market Exposure: Moved to 50% Net Long
BOTTOM LINE: Today's overall market action is bearish as the S&P 500 trades near session lows on eurozone debt angst, high food/energy prices, US "fiscal cliff" worries and rising global growth fears. On the positive side, Steel, Road & Rail, Construction and Airline shares are especially strong, rising more than +.5%. The Transports have outperformed throughout the day. Copper is gaining +.9%, the UBS-Bloomberg Ag Spot Index is down -.4% and Gold is falling -.6%. Major Asian indices were mostly higher overnight, led by a +.34% gain in China. The Shanghai Comp is up +3.7% in 5 days, but still down -2.93% ytd. On the negative side, Energy, Semi, Internet, Computer, Software, Disk Drive, Networking, Bank, I-Banking, Biotech, Hospital, HMO, Homebuilding, REIT and Education shares are especially weak, falling more than -.75%. Tech and Financial shares have traded poorly throughout the day. Major European indices are mostly lower, led down by a -.3% decline in Spain. The Bloomberg European Bank/Financial Services Index is +.17%. The Germany sovereign cds is gaining +1.4% to 53.66 bps, the France sovereign cds is rising +2.7% to 121.55 bps, the Spain sovereign cds is jumping +9.2% to 378.83 bps, the Italy sovereign cds is gaining +10.0% to 344.22 bps, the UK sovereign cds is gaining +2.6% to 46.84 bps and the Israeli sovereign cds is gaining +2.3% to 145.66 bps. Moreover, the Spain 10Y Yld is rising +1.3% to 5.7%, the European Investment Grade CDS Index is gaining +2.8% to 129.62 bps and the Italian/German 10Y Yld Spread is rising +2.75% to 363.60 bps. The UBS/Bloomberg Ag Spot Index is up +26.2% since 6/1. The benchmark China Iron/Ore Spot Index is down -47.5% since 9/7/11. The China Hot Rolled Steel Sheet Spot Index also continues to trend lower despite the recent bounce. As well, the euro, copper and lumber continue to trade poorly given equity investor perceptions that the Eurozone has successfully kicked-the-can, housing has hit a major bottom and global central bank stimuli will boost economic growth in the near future. US weekly retail sales have decelerated to a sluggish rate at +2.5%. US Trucking Traffic continues to soften. Moreover, the weekly MBA Home Purchase Applications Index has declined in 6 out of the last 7 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 -70.0% from its Oct. 14th high and is now down around -60.0% ytd. Shanghai Copper Inventories have risen +124% ytd. Oil tanker rates have plunged, with the benchmark Middle East-to-US voyage down to 25.0 industry-standard worldscale points, which is very near 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 a major way in an attempt to "save" the euro even as investors have been pricing this outcome into stocks. Massive tax hikes and spending cuts have 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 affecting emerging market economies now, which will further pressure exports from the region and further raise the odds of more sovereign/bank downgrades over the intermediate-term. 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. 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. Little being discussed by global central bankers will actually boost global economic growth to an extent that overcomes the growing macro headwinds over the intermediate-term, 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 US investors into the fourth quarter. The Mid-east appears to be unraveling again at an alarming rate, as well. The quality of the stock rally off the June lows remains poor as breadth, volume, leadership, lack of big volume/gainers and copper/lumber/transports relative weakness 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. Some market leaders, including (AAPL), are relatively weak today. This report from Bloomberg last Friday could be weighing on the shares. I remain long (AAPL), but have taken some profits recently for the first time in a long time. Long AAPL. 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 rising eurozone debt angst, profit-taking, more shorting, high food/energy prices, US "fiscal cliff" concerns, growing Mid-east unrest and rising global growth fears.

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