Tuesday, December 04, 2012

Stocks Slightly Lower into Final Hour on Rising Global Growth Fears, Increasing Fiscal Cliff Worries, Technical Selling, Consumer Discretionary Weakness

Broad Market Tone:
  • Advance/Decline Line: Modestly Lower
  • Sector Performance: Mixed
  • Volume: Below Average
  • Market Leading Stocks: Underperforming
Equity Investor Angst:
  • VIX 17.20 +3.37%
  • ISE Sentiment Index 80.0 -15.79%
  • Total Put/Call 1.05 +28.05%
  • NYSE Arms .97 -27.93%
Credit Investor Angst:
  • North American Investment Grade CDS Index 99.81 -.03%
  • European Financial Sector CDS Index 152.72 -1.36%
  • Western Europe Sovereign Debt CDS Index 102.50 bps -.83%
  • Emerging Market CDS Index 224.96 bps -3.41%
  • 2-Year Swap Spread 12.0 unch.
  • TED Spread 22.0 -1.0 basis point
  • 3-Month EUR/USD Cross-Currency Basis Swap -25.25 -1.5 bps
Economic Gauges:
  • 3-Month T-Bill Yield .09% +1 bp
  • Yield Curve 136.0 -1 bp
  • China Import Iron Ore Spot $117.10/Metric Tonne +1.56%
  • Citi US Economic Surprise Index 33.0 -2.1 points
  • 10-Year TIPS Spread 2.44 unch.
Overseas Futures:
  • Nikkei Futures: Indicating -11 open in Japan
  • DAX Futures: Indicating +9 open in Germany
  • Slightly Higher: On gains in my Tech/Medical sector longs 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 mildly bearish as the S&P 500 is just slightly lower, below its 50-day moving average, despite rising global growth fears, eurozone debt angst, earnings worries, technical selling and increasing US "fiscal cliff" fears. On the positive side, Education, Computer, Networking and Disk Drive shares are especially strong, rising more than +1.0%. Tech stocks have outperformed throughout the day. Oil is falling -.5%, gold is down -1.1%, Lumber is up +.4% and the UBS-Bloomberg Ag Spot Index is down -.64%. Major European indices were mostly higher, led by a +1.0% gain in Italy. The Bloomberg European Bank/Financial Services Index is rising +.6%. On the negative side, Oil Tanker, Bank, Gaming and Restaurant shares are under pressure, falling more than -.75%. Consumer Discretionary shares have traded poorly throughout the day. The 10Y Yld is -1 bp to 1.61%. The Citi US Economic Surprise Index is rolling over technically and is down -27 points since 11/13. The Germany sovereign cds is rising +1.1% to 30.16 bps, the Spain sovereign cds is up +1.2% to 275.67 bps, the Ireland sovereign cds is gaining +3.1% to 181.67 bps and the China sovereign cds is jumping +6.2% to 61.17 bps. The benchmark China Iron/Ore Spot Index is down -34.9% since 9/7/11. As well, copper and oil continue to trade poorly given investor perceptions that the Eurozone has successfully kicked-the-can, US housing has hit a major bottom, China's economy is rebounding, Mideast tensions are rising and Hurricane Sandy will spur rebuilding. Shanghai Copper Inventories have risen +391.0% ytd. US weekly retail sales are rising at a +2.1% sluggish rate. 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 -50.0% from its Oct. 14th high and is now down around -40.0% ytd. US rail traffic is weakening too much. Oil tanker rates have plunged, with the benchmark Middle East-to-US voyage down to 30.0 industry-standard worldscale points. 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 and any fiscal cliff deal "solution". The recession in Europe is worsening even before more tax hikes and spending cuts hit next year. A lack of economic competitiveness and growth incentives remain unaddressed problems in the region. 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. As well, little being done by global central bankers that will help 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. The most likely outcome for the US fiscal cliff crisis is our own can-kicking or "small bargain" after a complete breakdown in talks occurs sometime before year-end, which would boost stocks in the short-run and leave much investor uncertainty over the intermediate-term. Moreover, any of the likely fiscal cliff "solutions" being bandied about would hurt economic growth, which would more than offset the benefits to investors from less uncertainty going forward. Moreover, uncertainty surrounding the effects on businesses of Obamacare and more regulations will likely become pronounced economic headwinds 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/oil relative weakness all continue to be concerns. For this year's equity advance to regain traction, I would expect to see further European credit gauge improvement, a further 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 eurozone debt angst, rising global growth fears, increasing US fiscal cliff fears, more shorting, technical selling, profit-taking and consumer discretionary weakness.

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