Tuesday, September 18, 2012

Stocks Slightly Lower into Final Hour on Rising Eurozone Debt Angst, Global Growth Fears, Rising China/Japan Tensions, Mid-east Unrest

Broad Market Tone:

  • Advance/Decline Line: Lower
  • Sector Performance: Most Sectors Declining
  • Volume: Light
  • Market Leading Stocks: Performing In Line
Equity Investor Angst:
  • VIX 14.43 -1.23%
  • ISE Sentiment Index 115.0 -1.71%
  • Total Put/Call .79 -7.06%
  • NYSE Arms 1.60 +35.40%
Credit Investor Angst:
  • North American Investment Grade CDS Index 86.08 bps +1.0%
  • European Financial Sector CDS Index 196.78 bps +4.1%
  • Western Europe Sovereign Debt CDS Index 175.25 +1.25%
  • Emerging Market CDS Index 198.52 +1.86%
  • 2-Year Swap Spread 13.5 +.75 basis point
  • TED Spread 27.75 -1.25 basis points
  • 3-Month EUR/USD Cross-Currency Basis Swap -22.25 -3.25 basis points
Economic Gauges:
  • 3-Month T-Bill Yield .10% +1 basis point
  • Yield Curve 156.0 -3 basis points
  • China Import Iron Ore Spot $109.60/Metric Tonne +4.3%
  • Citi US Economic Surprise Index 20.0 +.9 point
  • 10-Year TIPS Spread 2.56 -3 basis points
Overseas Futures:
  • Nikkei Futures: Indicating -23 open in Japan
  • DAX Futures: Indicating +3 open in Germany
  • Slightly Higher: On gains in my Biotech/Medical sector longs and index hedges
  • Disclosed Trades: Covered some of my (IWM)/(QQQ) hedges
  • Market Exposure: Moved to 50% Net Long
BOTTOM LINE: Today's overall market action is mildly bearish as the S&P 500 trades slightly lower on high food/energy prices, earnings worries, growing Mid-east unrest, increasing China/Japan tensions, US "fiscal cliff" worries and rising global growth fears. On the positive side, Hospital, Education and Tobacco shares are especially strong, rising more than +.75%. The UBS-Bloomberg Ag Spot Index is down -1.4% and Oil is down -.8%. The Germany sovereign cds is down -2.0% to 47.33 bps. The Spain 10Y Yld is down -1.3% to 5.90%. On the negative side, Coal, Oil Tanker, Oil Service, Homebuilding, REIT, Retail and Airline shares are especially weak, falling more than -1.25%. Homebuilding shares have traded poorly throughout the day again. Consumer cycilicals, in general, are weak. Gold is rising +.83% and Lumber is falling -.72%. Major Asian indices were lower overnight, led down by a -.91% decline in China. The Shanghai Composite is down -2.9% in 5 days and down -6.4% ytd. Major European indices are lower today, weighed down by a -2.4% decline in Italy. The Bloomberg European Bank/Financial Services Index is down -1.7%. The Spain sovereign cds is gaining +3.8% to 369.82 bps, the Italy sovereign cds is rising +3.4% to 329.33 bps, the Portugal sovereign cds is rising +5.1% to 475.60 bps, the Japan sovereign cds is soaring +13.9% to 77.43 bps and the Israeli sovereign cds is jumping +7.8% to 140.41 bps. Moreover, the European Investment Grade CDS Index is rising +2.3% to 123.13 bps and the State Bank of India cds is jumping +3.3% to 265.0 bps. The UBS/Bloomberg Ag Spot Index is up +22.8% since 6/1. The benchmark China Iron/Ore Spot Index is down -39.4% 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%. US Trucking Traffic continues to soften. 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 -70.0% from its Oct. 14th high and is now down around -60.0% ytd. Shanghai Copper Inventories have risen +440.0% 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 -3 bps to 1.81%. 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. The Fed’s QE3 will likely continue to boost stocks for awhile longer, as designed. However, 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. As I have been warning for awhile, the Mid-east is unraveling again 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. 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 higher into the close from current levels on global central bank action/stimulus hopes, investor performance angst and short-covering.

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