Stocks Falling into Final Hour on Rising Global Growth Fears, Increasing Eurozone Debt Angst, Earnings Worries, Tech/Energy Sector Weakness

Broad Market Tone:

• Advance/Decline Line: Slightly Lower
• Sector Performance: Mixed
• Volume: Below Average
• Market Leading Stocks: Underperforming

Equity Investor Angst:

• VIX 14.06 +.57%
• ISE Sentiment Index 133.0 +23.15%
• Total Put/Call .79 -1.25%
• NYSE Arms 1.01 -35.65%

Credit Investor Angst:

• North American Investment Grade CDS Index 98.16 bps +1.86%
• European Financial Sector CDS Index 186.60 bps +2.11%
• Western Europe Sovereign Debt CDS Index 135.15 +2.23%
• Emerging Market CDS Index 218.76 +2.41%
• 2-Year Swap Spread 13.25 +.25 basis point
• TED Spread 27.0 +.25 basis point
• 3-Month EUR/USD Cross-Currency Basis Swap -22.0 -1.5 basis points

Economic Gauges:

• 3-Month T-Bill Yield .10% unch.
• Yield Curve 146.0 -3 basis points
• China Import Iron Ore Spot $103.70/Metric Tonne -2.54%
• Citi US Economic Surprise Index 20.6 unch.
• 10-Year TIPS Spread 2.46 -3 basis points

Overseas Futures:

• Nikkei Futures: Indicating -62 open in Japan
• DAX Futures: Indicating +19 open in Germany

Portfolio:

• Slightly Higher: On gains in my Medical sector longs and index hedges
• Disclosed Trades: Added to my (IWM)/(QQQ) hedges, then covered some of them
• Market Exposure: 50% Net Long

BOTTOM LINE: Today's overall market action is mildly bearish as the S&P 500 trades slightly lower on rising global growth fears, high food/energy prices, earnings worries, growing Mid-east unrest, increasing China/Japan tensions, US "fiscal cliff" worries and tech/energy sector weakness. On the positive side, Road & Rail and Utility shares are especially strong, rising more than +.75%. The Transports have traded well throughout the day. The UBS-Bloomberg Ag Spot Index is down -.5%, Gold is down -.5% and Oil is down -1.2%. Brazil is +.8% higher on the day. On the negative side, Coal, Alt Energy, Oil Service, Computer, Software, Semi, Biotech and Homebuilding shares are especially weak, falling more than -1.25%. Tech and Energy shares have traded poorly throughout the day. Lumber is falling -1.0 and Copper is down -1.3%. Major Asian indices were mostly lower overnight, led down by a -.5% decline in Australia. The Shanghai Comp(-7.6% ytd) opened at another new multi-year low, but rallied modestly into the close to finish +.3% higher. Major European indices are lower today, led down by a -1.2% decline in Spain. The Bloomberg European Bank/Financial Services Index is -.56% lower. The Germany sovereign cds is jumping +5.9% to 49.79 bps, the France sovereign cds is up +2.9% to 108.0 bps(+12.0% in 5 days), the Japan sovereign cds is up +3.7% to 86.77 bps(+27.6% in 5 days), the Russia sovereign cds is surging +6.2% to 149.87 bps(+15.4% in 5 days), the Saudi sovereign cds is gaining +4.8% to 90.45 bps, the Israel sovereign cds is up +2.5% to 147.99 bps(+13.6% in 5 days) and the Brazil sovereign cds is up +2.2% to 107.31 bps. Moreover, the European Investment Grade CDS Index is gaining +3.0% to 130.47 bps, the Asia Pac Sovereign CDS Index is jumping +4.8% to 116.46 bps and the Italian/German 10Y Yld Spread is up +1.1% to 349.11 bps. The UBS/Bloomberg Ag Spot Index is up +22.0% since 6/1. The benchmark China Iron/Ore Spot Index is down -42.7% since 9/7/11. The China Hot Rolled Steel Sheet Spot Index also continues to trend lower despite the recent bounce. As well, 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%. The Philly Fed ADS Real-Time Business Conditions Index has shown meaningful deceleration since early July. 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 -65.0% from its Oct. 14th high and is now down around -55.0% ytd. Shanghai Copper Inventories have risen +360.0% ytd. Oil tanker rates have plunged, with the benchmark Middle East-to-US voyage down to 27.50 industry-standard worldscale points, which is near the lowest since May, 2009. The 10Y T-Note continues to trade too well with the yield falling -4 bps to 1.71%. 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, rising food prices/labor costs, massive overcapacity in certain key parts of the economy and growing bad loans problem. Little being done 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. Over the intermediate-term the Fed's recklessness greatly increases the chances of hard-landings in key emerging markets and of a serious global stock swoon, in my opinion. Moreover, 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 continues to unravel at an alarming rate. 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. Google(GOOG) is hitting a new all-time high today. While the stock is getting too frothy and extended short-term, I still expect the shares to outperform over the intermediate-term. Long GOOG. 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 and China/Japan tensions and higher-quality stock market leadership. I expect US stocks to trade modestly lower into the close from current levels on rising global growth fears, earnings worries, rising Japan/China/Mideast tensions, quarter-end profit-taking, more shorting, technical selling, tech/energy sector weakness and US "fiscal cliff" concerns.