Tuesday, November 13, 2012

Stocks Lower into Final Hour on Rising Fiscal Cliff Fears, Rising Eurozone Debt Angst, More Global Growth Worries, Tech/Financial Sector Weakness

 Broad Market Tone:
  • Advance/Decline Line: Modestly Lower
  • Sector Performance: Mixed
  • Volume:Below Average
  • Market Leading Stocks: Performing In Line
Equity Investor Angst:
  • VIX 16.35 -1.98%
  • ISE Sentiment Index 98.0 +5.4%
  • Total Put/Call .74 -24.29%
  • NYSE Arms .62 -46.92%
Credit Investor Angst:
  • North American Investment Grade CDS Index 105.32 bps -1.33%
  • European Financial Sector CDS Index 180.37 bps -1.20%
  • Western Europe Sovereign Debt CDS Index 120.59 bps +2.65%
  • Emerging Market CDS Index 237.56 bps -.64%
  • 2-Year Swap Spread 12.0 +.25 basis point
  • TED Spread 22.25 +.5 basis point
  • 3-Month EUR/USD Cross-Currency Basis Swap -28.0 -1.25 basis points
Economic Gauges:
  • 3-Month T-Bill Yield .09% unch.
  • Yield Curve 134.0 -1 basis point
  • China Import Iron Ore Spot $122.30/Metric Tonne +.16%
  • Citi US Economic Surprise Index 60.70 -.1 point
  • 10-Year TIPS Spread 2.42 -1 basis point
Overseas Futures:
  • Nikkei Futures: Indicating +35 open in Japan
  • DAX Futures: Indicating -11 open in Germany
  • Slightly Higher: On gains in my Retail sector longs, index hedges and emerging markets shorts
  • Disclosed Trades: Added to my (IWM)/(QQQ) hedges, added to my (EEM) short
  • Market Exposure: Moved to 25% Net Long
BOTTOM LINE: Today's overall market action is mildly bearish as the S&P 500 was unable to build on a morning reversal higher at its 200-day moving average on rising global growth fears, rising eurozone debt angst, earnings worries and increasing US "fiscal cliff" fears. On the positive side, Retail shares are especially strong, rising more than +1.0%. Oil is falling -.38%, gold is down -.11%, copper is gaining +.29% and the UBS-Bloomberg Ag Spot Index is down -.17%. Major European indices were higher, led by a +1.7% gain in Spain. The Bloomberg European Bank/Financial Services Index is rising +1.5%. Brazil is rising +.75%. The Germany sovereign cds is falling -1.3% to 32.38 bps and the Italy sovereign cds is falling -2.0% to 311.24 bps. The Italian/German 10Y Yld Spread is falling -1.5% to 362.57 bps and the Spain 10Y Yld is falling -.67% to 5.85%. On the negative side, Alt Energy, Software, Networking and I-Banking shares are under pressure, falling more than -1.25%. Financial and Tech shares have traded poorly throughout the day. Lumber is falling -.9%. The 10Y Yld is -2 bps to 1.59%. The Spain sovereign cds is gaining +1.0% to 356.94 bps, the Portugal sovereign cds is rising +1.7% to 621.01 bps, the China sovereign cds is rising +2.2% to 69.16 bps and the Japan sovereign cds is gaining +1.5% to 69.35 bps. The benchmark China Iron/Ore Spot Index is down -32.4% since 9/7/11. As well, copper and oil continue to trade poorly given equity investor perceptions that the Eurozone has successfully kicked-the-can, US housing has hit a major bottom, China's economy is rebounding and global central bank stimuli will boost economic growth in the near future. US weekly retail sales have decelerated to a very sluggish rate at +1.2%. 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 -55.0% from its Oct. 14th high and is now down around -45.0% ytd. Shanghai Copper Inventories have risen +461.0% ytd. Oil tanker rates have plunged, with the benchmark Middle East-to-US voyage down to 25.0 industry-standard worldscale points, which is near the lowest since May, 2009. US Rail Traffic is starting to weaken too much. 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 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, which will further pressure exports from the region and further raise the odds of more sovereign/bank downgrades over the coming months. 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. The most likely outcome for the US fiscal cliff crisis is our own can-kicking, which would leave much investor uncertainty over the intermediate-term. Moreover, any of the likely "solutions" being bandied about would hurt economic growth, which would more than offset the benefits to investors from less uncertainty going forward. As well, 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 will likely become more and more of a focus for US investors next year. The Mid-east continues to unravel at an alarming rate, as well. Overall broad market health remains poor as breadth, volume, leadership, lack of big volume/gainers and copper relative weakness all continue to be concerns. The fact that the S&P 500 is just hovering at its 200-day moving average without being able to sustain a meaningful bounce is a bad sign. 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/can-kicking, 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 more eurozone debt angst, rising global growth fears, US fiscal cliff fears, more shorting and tech/financial sector weakness.

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