Monday, October 08, 2012

Stocks Falling into Final Hour on Rising Global Growth Fears, Rising Eurozone Debt Angst, Earnings Jitters, Tech/Homebuilder Sector Weakness

Broad Market Tone:
  • Advance/Decline Line: Lower
  • Sector Performance: Most Sectors Declining
  • Volume: Light
  • Market Leading Stocks: Underperforming
Equity Investor Angst:
  • VIX 15.26 +6.49%
  • ISE Sentiment Index 111.0 +29.07%
  • Total Put/Call .82 -9.89%
  • NYSE Arms 1.02 -17.38%
Credit Investor Angst:
  • North American Investment Grade CDS Index 95.25 bps +.15%
  • European Financial Sector CDS Index 182.50 bps +2.16%
  • Western Europe Sovereign Debt CDS Index 135.93 bps -1.15%
  • Emerging Market CDS Index 214.50 bps +.06%
  • 2-Year Swap Spread 14.25 +.25 basis point
  • TED Spread 25.5 unch.
  • 3-Month EUR/USD Cross-Currency Basis Swap -23.75 -1.5 basis points
Economic Gauges:
  • 3-Month T-Bill Yield .10% unch.
  • Yield Curve 148.0 unch.
  • China Import Iron Ore Spot $110.40/Metric Tonne +5.95%
  • Citi US Economic Surprise Index 43.40 -.1 point
  • 10-Year TIPS Spread 2.57 unch.
Overseas Futures:
  • Nikkei Futures: Indicating -51 open in Japan
  • DAX Futures: Indicating +13 open in Germany
  • Slightly Higher: On gains in my retail sector longs, index hedges and emerging markets shorts
  • Disclosed Trades: Covered some of my (IWM)/(QQQ) hedges, then added them back
  • Market Exposure: 25% Net Long
BOTTOM LINE: Today's overall market action is bearish as the S&P 500 trades lower on rising global growth fears, high food/energy prices, earnings worries, growing Mid-east unrest, China/Japan tensions, rising US election uncertainty and US "fiscal cliff" worries. On the positive side, Coal, Steel, Retail and Restaurant shares are especially strong, rising more than +.5%. The Transports are also relatively firm. Oil is falling -.2%, gold is down -.3% and the UBS-Bloomberg Ag Spot Index is down -.45%. Brazilian shares are bouncing +.9% today after recent losses. On the negative side, Oil Tanker, Semi, Biotech, Construction and Homebuilding shares are especially weak, falling more than -1.0%. Lumber is falling -.6% and Copper is falling +1.3%. Major Asian indices were lower overnight, led down by a -1.21% decline in India. Major European indices are lower today, weighed down by a -2.0% decline in Italy. The Bloomberg European Bank/Financial Services Index is -1.7%. The Spain 10Y Yld is rising +.5% to 5.71% and the Italian/German 10Y Yld Spread is gaining +1.95% to 360.31 bps. The US sovereign cds is down -.4% to 41.5 bps, but has soared +53.4% since 9/19. The UBS/Bloomberg Ag Spot Index is up +21.6% since 6/1. The benchmark China Iron/Ore Spot Index is down -39.0% since 9/7/11. The China Hot Rolled Steel Sheet Spot Index also continues to trend lower despite the recent bounce. As well, copper, oil 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 +2.4%. 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 -60.0% from its Oct. 14th high and is now down around -50.0% ytd. Shanghai Copper Inventories have risen +343.0% ytd. Oil tanker rates have plunged, with the benchmark Middle East-to-US voyage down to 22.50 industry-standard worldscale points, which is very near the lowest since May, 2009. The 10Y T-Note continues to trade too well during the recent equity rally. 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 continue to price 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 after the US election. 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 rising 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, 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, has created an unstable situation for equities, which could become a big problem 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, less US election uncertainty 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, Japan & China/Mideast tensions, more shorting, more shorting, rising US election uncertainty, profit-taking and US "fiscal cliff" concerns.

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