Stocks Rising into Final Hour on Euro Bounce, Presidential Debate, Short-Covering, Financial/Commodity Sector Strength

Broad Market Tone:

• Advance/Decline Line: Higher
• Sector Performance: Most Sectors Rising
• Volume: Below Average
• Market Leading Stocks: Underperforming

Equity Investor Angst:

• VIX 15.04 -2.53%
• ISE Sentiment Index 126.0 +14.55%
• Total Put/Call .89 -4.30%
• NYSE Arms .80 -1.66%

Credit Investor Angst:

• North American Investment Grade CDS Index 95.11 bps -.86%
• European Financial Sector CDS Index 185.86 bps -.63%
• Western Europe Sovereign Debt CDS Index 143.78 bps -1.05%
• Emerging Market CDS Index 217.55 bps +1.02%
• 2-Year Swap Spread 13.25 -.25 basis point
• TED Spread 25.5 -1.0 basis point
• 3-Month EUR/USD Cross-Currency Basis Swap -23.0 +3.0 basis point

Economic Gauges:

• 3-Month T-Bill Yield .10% +1 basis point
• Yield Curve 142.0+4 basis points
• China Import Iron Ore Spot $104.20/Metric Tonne unch.
• Citi US Economic Surprise Index 17.70 +.3 point
• 10-Year TIPS Spread 2.55 +7 basis points

Overseas Futures:

• Nikkei Futures: Indicating +27 open in Japan
• DAX Futures: Indicating +17 open in Germany

Portfolio:

• Slightly Higher: On gains in my Biotech/Medical/Retail/Tech sector longs
• Disclosed Trades: Covered some of my (IWM)/(QQQ) hedges and covered some of my (EEM) short, then added them back
• Market Exposure: 50% Net Long

BOTTOM LINE: Today's overall market action is bullish as the S&P 500 trades higher despite rising global growth fears, rising food/energy prices, earnings worries, growing Mid-east unrest, China/Japan tensions and US "fiscal cliff" worries. On the positive side, Coal, Steel, Bank, I-Banking and Education shares are especially strong, rising more than +1.25%. (XLF) has traded well throughout the day. Cyclicals are outperforming. The 10Y Yld is rising +5 bps to 1.67%. Major Asian indices were mostly higher overnight, led by a +1.0% gain in India. The Germany sovereign cds is falling -3.0% to 52.92 bps, the Portugal sovereign cds is down -3.9% to 475.90 bps, the Ireland sovereign cds is falling -4.9% to 301.20 bps and the UK sovereign cds is down -2.9% to 51.35 bps. On the negative side, Computer, Defense, Networking, Computer Service, Hospital, REIT, Gaming and Airline shares are lower on the day. Lumber is falling -.54%, Oil is surging +4.1% and Gold is up +.74%. Major European indices are mostly lower, led down by a -.23% decline in Germany. The Bloomberg European Bank/Financial Services Index is up +.44% today. Brazil is -.3% today and down -2.7% over the last 5 days. The Spain 10Y Yld is rising +1.6% to 5.90% and the Italian/German 10Y Yld Spread is gaining +2.6% to 368.75 bps. The US sovereign cds is gaining +3.1% to 40.67 bps(+25.0% in 5 days) and the Israel sovereign cds is gaining +1.9% to 149.33 bps. The UBS/Bloomberg Ag Spot Index is up +22.7% since 6/1. The benchmark China Iron/Ore Spot Index is down -42.4% since 9/7/11. The China Hot Rolled Steel Sheet Spot Index also continues to trend lower despite the recent bounce. As well, copper, 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 -65.0% from its Oct. 14th high and is now down around -55.0% ytd. Shanghai Copper Inventories have risen +336.0% 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 despite today's pullback. 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, is creating 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 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, profit-taking and US "fiscal cliff" concerns.