Monday Watch

Weekend Headlines 
Bloomberg:   

• Japan Posts Record Annual Trade Deficit as Import Bill Soars. Japan reported a record annual trade deficit last year as energy shipments and weakness in the yen pumped up the nation’s import bill. The shortfall was 11.5 trillion yen ($113 billion), almost double the previous year’s 6.9 trillion yen, a finance ministry report showed in Tokyo today. Imports rose 25 percent in December from a year earlier and exports gained 15 percent, leaving a monthly deficit of 1.3 trillion yen. A record 18 straight monthly deficits show how nuclear plant shutdowns, higher import costs, and limited gains in export volumes are dragging on Prime Minister Shinzo Abe’s efforts to sustain momentum in the world’s third-biggest economy.

• Default-Swap Bets at 14-Month High on Trust Flops: China Credit. Credit traders have taken out the most protection on China's debt in 14 months just as the world's second-biggest economy faces a default test in its $1.7 trillion market for trust products. The net notional amount of credit-default swaps outstanding on Chinese sovereign bonds totaled $9.125 billion on Jan. 17, the most since November 2012, according to figures published by Depository Trust & Clearing Corp. December's 12% jump to $9.066 billion was the biggest monthly gain since October 2011. The cost of the contracts surged 25 basis points since Dec. 31, poised for the largest monthly increase since a record cash crunch in June. Local-government financing vehicles set coupons of more than 9% in two debt sales last week, levels not seen since at least 2012, according to Nomura Holdings. "If the market sees serious credit risks, local governments' financing channels will be closed," Xu Gao, chief economist at Everbright in Beijing, said in a phone interview. "The consequence is not what top leaders can accept and would lead to a hard landing of the economy." 

• Emerging-Market VIX Surges Most in Two Years on Selloff. Equity volatility from India to Brazil and Turkey jumped the most in two years as turmoil spread across global markets amid a selloff in developing-country currencies and growing concern over China’s economy. The Chicago Board Options Exchange Emerging Markets ETF Volatility Index rose 40 percent to 28.26 last week, the biggest increase since September 2011, according to data compiled by Bloomberg. 

• Yen Touches 7-Week High as Emerging-Market Rout Fuels Haven Rush. The yen touched a seven-week high versus the dollar after a selloff in emerging-market assets boosted its appeal as a haven. Japan’s currency held its biggest weekly gain since August against its U.S. peer after Treasury yields posted a fourth weekly decline, damping the relative allure of the greenback. The Federal Reserve starts a two-day policy meeting tomorrow. Argentina led a slump in emerging-market currencies last week as the country devalued its peso. 

• Chinese Stocks Sink to Five-Month Low as Economic Concern Mounts. Chinese stocks fell, with a gauge of mainland companies traded in Hong Kong headed for a five-month low, amid concern an economic slowdown will hurt earnings. China Coal Energy Co. (601898), the nation’s second-largest coal producer, tumbled 5.2 percent in Hong Kong after saying 2013 profit probably fell as much as 65 percent. Anhui Conch Cement Co., the nation’s biggest coal producer, sank 5.3 percent. Gains in all eight companies trading for the first time in Shenzhen triggered trading halts. The Hang Seng China Enterprises Index (HSCEI) lost 2.5 percent to 9,766.60 at 10:01 a.m. in Hong Kong, taking its decline this year to 9.8 percent. The Shanghai Composite Index (SHCOMP) slid 0.9 percent to 2,036.30.

• Asian Stocks Head for Biggest 3-Day Drop in Seven Months. Asian stocks declined, with the region’s benchmark index heading for its steepest three-day loss since June, as concern that the global economic recovery is faltering spurred investors to sell riskier assets. Samsung Electronics Co., the world’s biggest maker of smartphones, fell 1.3 percent in Seoul, while Honda Motor Co. (7267) slipped 1.9 percent in Tokyo, pacing losses among Japanese exporters amid a stronger yen. GCL-Poly Energy Holdings Ltd., the world’s largest maker of polysilicon, sank 7.8 percent in Hong Kong after China set a lower-than-expected target for installed solar-energy capacity this year. The MSCI Asia Pacific Index dropped 2.1 percent to 134.79 by 11:05 a.m. in Tokyo, extending four straight weekly declines and headed for its lowest close since Sept. 6. Japan’s Topix index sank 2.8 percent as the yen touched a seven-week high versus the greenback.

• Rubber Drops to 6-Month Low on Rising China Supply, Yen Advance. Rubber in Tokyo tumbled to a six-month low as growing stockpiles in China signaled a slowdown in demand from the world’s largest consumer, and a strong Japanese currency weakened the appeal of yen-denominated futures. The contract for delivery in June on the Tokyo Commodity Exchange dropped as much as 3.8 percent to 232.3 yen a kilogram ($2,273 a metric ton), the lowest level for the most-active futures since July 16. It was the biggest daily loss since Jan. 14. Prices dropped 4.6 percent last week, capping a sixth weekly decline in the longest losing streak since October 2008. 

• Gold Bulls Boost Bets Amid Longest Rally Since 2012: Commodities. Hedge funds got more bullish on gold for a fourth straight week before prices capped the longest rally in 16 months on mounting global growth concerns. The net-long position in gold climbed 0.2 percent to 43,353 futures and options in the week ended Jan. 21, U.S. Commodity Futures Trading Commission data show. Long wagers declined 0.2 percent, while short bets slid 0.4 percent. Net-bullish holdings across 18 U.S.-traded commodities increased 5.6 percent, led by natural gas and copper.

• Venice Prices Sink in Italian-Style Deflation: Euro Credit. Consumer prices in Venice are following the sinking city’s downward trajectory, and costume maker Stefano Nicolao says it’s just another symptom of the debilitating economic environment. “The truly characteristic activities that defined Venice through the centuries have been absolutely flattened,” said Nicolao. “It’s war among poor people.”

• Lagarde Cautions Davos on Global Deflation Risk. When Christine Lagarde arrived in Davos in 2008 as French finance minister, the battle was just beginning against a financial crisis that would bring the world economy to its knees. Six years later, as head of the International Monetary Fund, she warned the World Economic Forum at the Swiss mountain resort that the fight isn’t over, just before a currency crisis 7,000 miles away in Argentina reinforced her view. She urged policy makers to remain alert for asset bubbles and prevent a looming threat to prosperity: deflation.

• Ukraine Violence Ups Ante at Kiev Camp as Opposition Sway Fades. For demonstrators at Kiev’s Independence Square, the uprising against Ukraine’s rulers has also become a battle for their own freedom. On permanent alert against a police attack and with the threat of years in prison looming over them, protesters carry plastic shields and don green metal army helmets over the woolen hats that stave off temperatures of as low as minus 20 Celsius (minus 4 Fahrenheit). Guards at tent camp entrances wield baseball bats. Car tires burn nearby, creating a thick black smoke that hinders vision and movement for police.

• JPMorgan(JPM) Seen Paying Dimon $34 Million Award This Year. JPMorgan Chase & Co. (JPM) Chief Executive Officer Jamie Dimon, who got a 74 percent raise for his work in 2013, stands to reap a separate and bigger payday within months. The bank’s board of directors, having delayed a decision for more than a year, has yet to say whether Dimon, 57, can collect 2 million stock options originally granted in 2008 and now worth about $34 million. Last week, the board increased his annual pay to $20 million from $11.5 million a year ago, when he was penalized for faulty oversight of botched derivatives bets.

• U.S. East Set for Another Arctic Blast as Snow Heads for Texas. The U.S. East will get another blast of freezing Arctic air this week, with snow and sleet reaching parts of southeast Texas.

• Gold Mint Runs Overtime in Race to Meet World Coin Demand. Austria’s mint is running 24 hours a day as global mints from the U.S. to Australia report climbing demand for gold coin.

Wall Street Journal: 

• Needed in Europe: More Inflation. Stagnant Prices Restrain Recovery in Weaker 'Peripheral' Countries Such as Spain, Italy. As Europe's economy recovers from its crisis, afflicted countries such as Spain and Italy are trying to pare their debts while also becoming more internationally competitive. The trouble is, it's hard to do both at once. And the euro zone's weak inflation is making it even harder. So, even as the world's economic elite welcomed a strengthening global recovery at last week's gabfest in Davos, Switzerland, the euro zone's wounds are likely to heal only very slowly—and might even reopen.

Marketwatch.com: 

• Strange bedfellows no more: Google(GOOG) cozies up to Republicans. Google and other new-age tech firms have cozied up to Republicans in Washington after years of slanting their support toward progressive causes and politicians. In Google’s case, the company found that its conspicuous support of Barack Obama and Democrats gave it little influence with Republicans when agencies run by leaders appointed by the president challenged the firm on antitrust and other regulatory grounds.

Fox News: 

• The new face of food stamps: working-age Americans. In a first, working-age people now make up the majority in U.S. households that rely on food stamps -- a switch from a few years ago, when children and the elderly were the main recipients. Some of the change is due to demographics, such as the trend toward having fewer children. But a slow economic recovery with high unemployment, stagnant wages and an increasing gulf between low-wage and high-skill jobs also plays a big role.

• 'If Congress doesn’t act, the president will,' says top WH adviser, signaling Obama may bypass Congress.

CNBC:

• ‘Hard to see long-term solution’ to debt ceiling: Mayer. Negotiations over the U.S. debt ceiling are still one of the biggest risks facing the world, according to Davos delegates including Marissa Mayer, chief executive of Yahoo and Judith Rodin, president of the Rockefeller Foundation.

• A ban on autos? Major cities consider going carless. Germany, home of the high-speed autobahn, is perhaps one of the few countries that has had as intense a love affair with the automobile as the U.S. But in an effort to go green, the country's second-largest city is studying ways to eliminate cars by 2034.

• Samsung, Google(GOOG) strike wide-ranging patent cross-license deal.

Zero Hedge:

• Stocks Suffer Worst Week In 19 Months; Dow Gives Up All "Taper" Gains.

• 5 Things To Ponder This Weekend: Valuations, Triggers & Inequality.

• Santelli Slams Central Bank Policies: "The Market Is Rapidly Realizing That They Can't Go On Forever". (video)

• 20 Early Warning Signs That We Are Approaching A Global Economic Meltdown.

• Bank-Run Fears Continue; HSBC Restricts Large Cash Withdrawals.

• Bank Of America(BAC) Caught Frontrunning Clients.

• Why Next Week May Be Pivotal: Introducing The ‘JAJO Effect’.

• Larry Fink Warns There Is "Way Too Much Optimism", We Are Headed For "Much Greater Volatility". (video)

• Furious Backlash Forces HSBC To Scrap Large Cash Withdrawal Limit.

• Where Last Week's Selloff Pain Was Most Acute? (graph)

• Emerging Market FX: The Straw That Broke The Carry-Trade's Back. (graph)

• "We're Living Within A Money Bubble Of Epic Proportions". (video)

• After Davos, The China-Japan 'Cold-War' "Situation Is Getting Worse".

• Citi(C) Warns The Greatest Monetary Experiment In The History Of The World Is Being Wound Down.

Business Insider:

• Apple(AAPL) Is Getting Ready To Roll Out Mobile Payments. 

• How To See All The Companies That Are Tracking You On Facebook — And Block Them.

• Investors Poured Billions Of Dollars Into The Stock Market Last Week Even As Prices Fell.

• This Was A Wake-Up Call From China.

• Wal-Mart(WMT) Is Laying Off 2,300 Sam's Club Workers.

• Turkey Is The Epitome Of What Can Go Wrong In The Emerging Markets.

• Here's What Emerging-Market Leaders Are Saying And Doing As Their Currencies Burn.

• Iraqi Ramp Up Airstrikes In Rebel-Held Fallujah.

• If The Emerging-Market Sell-Off Is A Bubble Bursting, Then The Fed Failed Again. If this bubble is about to burst, then once again Fed officials didn’t see it coming. They’ve been aware of the possibility, but minimized its likelihood. Obviously, they once again are failing to learn from history, which shows that easy credit conditions always lead to speculative bubbles that inevitably burst. Let’s review what Fed officials said (or did not say) on this subject:

• APPLE(AAPL) EARNINGS PREVIEW: Break Out The Big Holiday Numbers.

• 49 Dead As Egypt Explodes Into Protests.

• 12 Dead After Apparent Terrorist Attack In Western China.

• IMF: Taper Of US Stimulus Funds Could Mean Emerging Market Turmoil.

• South Korean Media: Kim Jong-un Ordered The Execution Of His Uncle's Entire Family.

• Investors Have Been Bailing Out Of The Emerging Markets For The Last 13 Straight Weeks. (graph)

Washington Post:

• NY teachers union pulls its support from Common Core, urges removal of state ed chief. The action is a blow to supporters of the Common Core, which was approved several years ago in 45 states and the District of Columbia but which has become increasingly controversial around the country, with a number of states pulling back from the initiative or changing the standards. Some states, such as Florida, are actually changing the name so as not to be seen as being identified with the Core.

FXStreet:

• Hedge Funds Pessimism Over Emerging Markets Mounts - FT. The Financial Times has published an article raising retail market awareness on the gloomy perspective towards emerging markets by hedge funds, noting the selling seen so far might be only in its early stages.

Financial Times:

• US solar power trade war with China heats up. The escalation of a trade war between the US and China over solar power components threatens to do serious damage to the American industry, its leading association has warned. Hostilities rose with a missive issued by the China’s Ministry of Commerce to the United States on Sunday over its anti-dumping measures and counter investigations on Chinese solar products.

Telegraph:

• Optimism there may be, but the road to prosperity is paved with problems. The jobs-rich future we seek cannot be won by monetary policy alone. A hard road of profound structural change lies ahead. 

The Guardian:

• Despite signs of recovery, the next financial crisis might not be that far off. Financial crises come round every seven years on average. There was the stock market crash of 1987, the emerging market meltdown in the mid-1990s, the popping of the dotcom bubble in 2001 and the collapse of Lehman Brothers in 2008. If history is any guide, the next crisis should be coming along sometime soon. The fact that the financial markets are betting on global recovery becoming more firmly established over the next two years does not really signify much.

NZZ am Sonntag:

• Euro-Zone Recovery to Take Decades W/o Haircut, Rogoff Says. Euro-zone not even close to recovery seen in U.S., citing Harvard University Professor Keneth Rogoff as saying in an interview. Growth in periphery will barely be possible as long as there's bank debt, private and public debt. Without debt haircuts recovery phase will take decades.

WirtschaftsWoche:

• German Minimum Wage Risks Tens of Thousands of Jobs. "Several 100.000" low-paid jobs will be lost or move to black economy if government introduces countrywide minimum wage of EU8.50 per hour, citing Christoph Schmidt, head of German Chancellor Angela Merkel's council of economic advisers, in interview. Minimum wage will hurt lower income workers more than it will benefit them.

China Securities Journal:

• China May Release Policies to Support Chipmakers. China may release policies to support the integrated circuit industry soon, citing a person familiar with the matter. The country will support some chipmakers and projects with a focus on equipment and manufacturing through an industrial investment fund.

Weekend Recommendations

Barron's:

• Bullish commentary on (URBN) and (WTR).

Night Trading

• Asian indices are -2.0% to -1.0% on average.

• Asia Ex-Japan Investment Grade CDS Index 155.50 +9.5 basis points.

• Asia Pacific Sovereign CDS Index 119.0 +5.5 basis points.

• FTSE-100 futures -1.04%.

• S&P 500 futures +.16%.

• NASDAQ 100 futures +.05%.

Morning Preview Links

Earnings of Note
Company/Estimate

• (NVR)/16.17

• (RYN)/.52

• (RCL)/.18

• (AEP)/.57

• (CAT)/1.27

• (AAPL)/14.07

• (ASH)/1.31

• (STLD)/.25

• (SWFT)/.35

• (PCL)/.28

• (OLN)/.29

• (X)/-.26

Economic Releases 
10:00 am EST

• New Home Sales for December are estimated to fall to 455K versus 464K in November. 

10:30 am EST

• Dallas Fed Manufacturing Activity for January is estimated to rise to 3.3 versus 3.1 in December.

Upcoming Splits

• None of note

Other Potential Market Movers

• The Germany IFO index and China industrial profits report could also impact trading today.

BOTTOM LINE: Asian indices are lower, weighed down by financial and technology shares in the region. I expect US stocks to open modestly higher and to weaken into the afternoon, finishing modestly lower. The Portfolio is 25% net long heading into the week.

Weekly Outlook

Wall St. Week Ahead by Reuters.
Stocks to Watch Monday by MarketWatch.
Weekly Economic Calendar by Briefing.com.

BOTTOM LINE: I expect US stocks to finish the week modestly lower on earnings concerns, rising global growth fears, a stronger yen, increasing emerging markets/european debt angst, profit-taking and technical selling. My intermediate-term trading indicators are giving neutral signals and the Portfolio is 25% net long heading into the week.

Market Week in Review

S&P 500 1,790.29 -3.01%*




The Weekly Wrap by Briefing.com.

*5-Day Change

Weekly Scoreboard*

Indices

• S&P 500 1,790.29 -3.01%

• DJIA 15,879.10 -3.28%

• NASDAQ 4,128.17 -2.15%

• Russell 2000 1,144.13 -2.47%

• S&P 500 High Beta 29.25 -4.32%

• Wilshire 5000 18,863.93 -2.94%

• Russell 1000 Growth 841.31 -2.67%

• Russell 1000 Value 896.93 -3.30%

• S&P 500 Consumer Staples 426.24 -2.40%

• Morgan Stanley Cyclical 1,411.60 -4.54%

• Morgan Stanley Technology 899.39 -2.20%

• Transports 7,258.72 -2.65%

• Utilities 491.96 -.15%

• Bloomberg European Bank/Financial Services 108.87 -4.51%

• MSCI Emerging Markets 39.14 -2.64%

• HFRX Equity Hedge 1,171.40 -.22%

• HFRX Equity Market Neutral 954.91 -.08%

Sentiment/Internals

• NYSE Cumulative A/D Line 199,214 -.72%

• Bloomberg New Highs-Lows Index 151 -403

• Bloomberg Crude Oil % Bulls 46.81 +22.41%

• CFTC Oil Net Speculative Position 340,049 +3.88%

• CFTC Oil Total Open Interest 1,613,293 -.60%

• Total Put/Call .90 +28.57%

• OEX Put/Call .68 -27.66%

• ISE Sentiment 79.0 -40.15%

• NYSE Arms 1.75 +12.90%

• Volatility(VIX) 18.14 +44.77%

• S&P 500 Implied Correlation 57.37 +10.14%

• G7 Currency Volatility (VXY) 8.34 +7.34%

• Emerging Markets Currency Volatility (EM-VXY) 9.78 +13.99%

• Smart Money Flow Index 11,872.55 -.45%

• ICI Money Mkt Mutual Fund Assets $2.707 Trillion +.24%

• ICI US Equity Weekly Net New Cash Flow $4.237 Billion

• AAII % Bulls 38.1 -2.2%

• AAII % Bears 23.8 +10.6%

Futures Spot Prices

• CRB Index 282.54 +1.48%

• Crude Oil 96.64 +2.64%

• Reformulated Gasoline 266.32 +2.67%

• Natural Gas 5.18 +18.61%

• Heating Oil 313.74 +4.84%

• Gold 1,264.30 +1.78%

• Bloomberg Base Metals Index 191.79 -1.80%

• Copper 327.15 -1.98%

• US No. 1 Heavy Melt Scrap Steel 383.0 USD/Ton unch.

• China Iron Ore Spot 124.30 USD/Ton -2.36%

• Lumber 357.40 -3.07%

• UBS-Bloomberg Agriculture 1,323.65 -.46%

Economy

• ECRI Weekly Leading Economic Index Growth Rate 4.2% +50 basis points

• Philly Fed ADS Real-Time Business Conditions Index .1295 -4.63%

• S&P 500 Blended Forward 12 Months Mean EPS Estimate 120.41 +.07%

• Citi US Economic Surprise Index 62.60 -4.0 points

• Citi Emerging Markets Economic Surprise Index 6.70 +1.9 points

• Fed Fund Futures imply 32.0% chance of no change, 68.0% chance of 25 basis point cut on 1/29

• US Dollar Index 80.46 -.89%

• Euro/Yen Carry Return Index 145.96 -.94%

• Yield Curve 238.0 -7 basis points

• 10-Year US Treasury Yield 2.72% -10 basis points

• Federal Reserve's Balance Sheet $4.055 Trillion +.64%

• U.S. Sovereign Debt Credit Default Swap 27.85 +1.25%

• Illinois Municipal Debt Credit Default Swap 154.0 +2.42%

• Western Europe Sovereign Debt Credit Default Swap Index 53.33 +7.34%

• Asia Pacific Sovereign Debt Credit Default Swap Index 118.97 +11.1%
  

• Emerging Markets Sovereign Debt CDS Index 247.50 +13.01%
  

• Israel Sovereign Debt Credit Default Swap 92.0 -1.08%

• South Korea Sovereign Debt Credit Default Swap 73.50 +7.30%

• China Blended Corporate Spread Index 352.75 +19.25 basis points

• 10-Year TIPS Spread 2.13% -12.0 basis points

• TED Spread 19.0 -1.5 basis points

• 2-Year Swap Spread 15.0 +1.75 basis points

• 3-Month EUR/USD Cross-Currency Basis Swap -4.0 -2.75 basis points

• N. America Investment Grade Credit Default Swap Index 71.98 +11.31%
  

• European Financial Sector Credit Default Swap Index 104.02 +21.66%
  

• Emerging Markets Credit Default Swap Index 337.41 +15.55%
  

• CMBS AAA Super Senior 10-Year Treasury Spread  to Swaps 110.0 +2.0 basis points

• M1 Money Supply $2.660 Trillion +.87%

• Commercial Paper Outstanding 1,018.50 -1.70%

• 4-Week Moving Average of Jobless Claims 331,500 -3,500

• Continuing Claims Unemployment Rate 2.3%unch.

• Average 30-Year Mortgage Rate 4.39% -2 basis points

• Weekly Mortgage Applications 404.10 +4.7%

• Bloomberg Consumer Comfort -31.0 unch.

• Weekly Retail Sales +3.0% +10 basis points

• Nationwide Gas $3.29/gallon -.01/gallon

• Baltic Dry Index 1,271 -9.08%

• China (Export) Containerized Freight Index 1,128.73 +1.18%

• Oil Tanker Rate(Arabian Gulf to U.S. Gulf Coast) 37.50 +2.5%

• Rail Freight Carloads 267,428 +13.32%

Best Performing Style

• Small-Cap Value -2.0%

Worst Performing Style

• Large-Cap Value -3.3%

Leading Sectors

• Gold & Silver +3.2%

• Computer Hardware +1.1%

• Utilities -.2%

• Tobacco -.6%

• HMOs -.7%

Lagging Sectors

• Agriculture -4.6% 

• Insurance -5.8%

• Alt Energy -6.3%

• Steel -8.0%

• Gaming -8.6%

Weekly High-Volume Stock Gainers (25)

• STML, SMCI, FIO, RENT, NTCT, SBNY, ILMN, RCAP, GMT, NLNK, TTWO, VGR, HURN, SWKS, AA, KERX, GPRE, TSRA, XLRN, STWD, NSC, EWBC, PODD, GD and NKTR

Weekly High-Volume Stock Losers (21)

• OCN, COH, IPHI, FUEL, SKX, AOL, PH, AEO, ATI, LKQ, SGNT, EBS, AAWW, ACAT, SLM, PETS, BBSI, HRC, RDEN, SSNI and CANN

Weekly Charts
ETFs

• High-Volume Gainers

• High-Volume Losers

Stocks

• High-Volume Gainers

• High-Volume Losers

*5-Day Change

Stocks Falling into Final Hour on Rising Emerging Markets/European Debt Angst, Global Growth Fears, Yen Strength, Homebuilding/Tranport Sector Weakness

Broad Equity Market Tone:

• Advance/Decline Line: Substantially Lower
  

• Sector Performance: Every Sector Declining
  

• Volume: Above Average

• Market Leading Stocks: Underperforming

Equity Investor Angst:

• Volatility(VIX) 17.06 +23.89%

• Euro/Yen Carry Return Index 145.93 -1.13%

• Emerging Markets Currency Volatility(VXY) 9.77 +6.78%

• S&P 500 Implied Correlation 55.95 +7.19%

• ISE Sentiment Index 84.0 -14.29%

• Total Put/Call .92 +5.75%

• NYSE Arms 1.31 -13.89% 

Credit Investor Angst:

• North American Investment Grade CDS Index 72.58 +7.06%

• European Financial Sector CDS Index 104.55 +10.48%

• Western Europe Sovereign Debt CDS Index 53.33 +6.66%
• Asia-Pacific Sovereign Debt CDS Index 119.0 +5.01%

• Emerging Market CDS Index 337.90 +5.54%

• 2-Year Swap Spread 15.0 +.75 basis point

• TED Spread 20.0 -.25 basis point

• 3-Month EUR/USD Cross-Currency Basis Swap -4.0 -1.5 basis points

Economic Gauges:

• 3-Month T-Bill Yield .04% unch.

• Yield Curve 239.0 -2.0 basis points

• China Import Iron Ore Spot $124.30/Metric Tonne +.32%

• Citi US Economic Surprise Index 62.60 +.1 point

• Citi Emerging Markets Economic Surprise Index 6.7 +1.5 points

• 10-Year TIPS Spread 2.13 -9.0 basis points

Overseas Futures:

• Nikkei Futures: Indicating -391 open in Japan

• DAX Futures: Indicating -6 open in Germany

Portfolio: 

• Slightly Higher: On gains in my index hedges and emerging markets shorts

• Disclosed Trades: None

• Market Exposure: 25% Net Long

Today's Headlines

Bloomberg:

• Contagion Spreads in Emerging Markets as Crises Grow. The worst selloff in emerging-market currencies in five years is beginning to reveal the extent of the fallout from the Federal Reserve’s tapering of monetary stimulus, compounded by political and financial instability. The Turkish lira plunged to a record and South Africa’s rand fell yesterday to a level weaker than 11 per dollar for the first time since 2008. Argentine policy makers devalued the peso by reducing support in the foreign-exchange market, allowing the currency to drop the most in 12 years to an unprecedented low. Investors are losing confidence in some of the biggest developing nations, extending the currency-market rout triggered last year when the Fed first signaled it would scale back stimulus. While Brazil, Russia, India, China and South Africa were the engines of global growth following the financial crisis in 2008, emerging markets now pose a threat to world financial stability. “The current environment is potentially very toxic for emerging markets,” Eamon Aghdasi, a strategist at Societe Generale SA in New York, said in a phone interview yesterday. “You have two very troubling things: uncertainty about the Fed policy, combined with concerns about growth, particularly in China. It’s difficult to justify that it’s time to go out and buy emerging markets at the moment.” 

• UBS Says Market Wants Default as Risks to Pile Up: China Credit. UBS AG’s China securities unit, the leading foreign underwriter of debt sales in the country, says the market wants policy makers to allow the first onshore bond default to reduce long-term hazards to the financial system. “Systematic risk will pile up without any default happening,” Bi Xuewen, head of China debt capital markets at UBS Securities Co., said in an interview in Shanghai. “Market participants would like to see a default in China’s bonds. Only after defaults can the overall risk pricing system be normalized.”

• Jiang Tells CNBC That ICBC Won’t Compensate Trust Investors. Industrial & Commercial Bank of China Ltd. Chairman Jiang Jianqing said the lender won’t compensate investors for losses tied to a troubled trust product distributed by the bank, CNBC reported on its website. The incident will be a lesson for investors on moral hazard and risks associated with such investments, Jiang told CNBC from the World Economic Forum in Davos, Switzerland. The Beijing-based lender won’t take “rigid responsibility” for the losses and will review all its partnerships in entities with which it does business, Jiang said, according to CNBC.

• China Trust Products Gone Awry Evoke Soros ’08 Crisis Echoes. The story of how a 3 billion-yuan ($496 million) Chinese trust investment wound up on the brink of default shows what billionaire investor George Soros has called the “eerie resemblances” between the 2008 global financial crisis and the nation’s debt market. China’s $4.8 trillion in shadow-banking debt, arranged by trusts and fund managers with less transparency than commercial-bank loans, was equivalent to as much as 55 percent of the nation’s 2012 economic output at the end of that year, according to Moody’s latest estimate. Investors argued their case in a meeting at an ICBC Shanghai branch yesterday, an echo of savers’ appeals to Hong Kong lenders after Lehman Brothers Holdings Inc.’s failure undermined securities called minibonds. “This case reminds people of Lehman minibonds because complicated credit-linked products were sold to individual investors via bank channels,” said Christine Kuo, senior credit officer at Moody’s in Hong Kong. “It’s not clear whether misselling was involved due to lack of transparency. It’s also not clear who will share the loss. Regardless, both the product packager and distributor have seen their reputation suffer.”

• China Warns U.S. of Consequences After SEC Bans Accounting Firms. China warned the U.S. of “consequences” after the Securities & Exchange Commission barred the four largest accounting firms from conducting audits of U.S.-listed Chinese companies. The decision to ban the Chinese affiliates of the accounting firms for six months “ignored” China’s efforts and progress made on cross-border regulatory cooperation, the China Securities Regulatory Commission said. “We hope the SEC will take into consideration the big picture of China-U.S. regulatory cooperation, make the right judgement to resolve the situation properly,” the CSRC, the nation’s securities body, said on its microblog. “The SEC should bear all responsibility to possible consequences arising from the decision.”  

• China Bank Regulator Said to Issue Alert on Coal Loans. China’s banking regulator ordered its regional offices to increase scrutiny of credit risks in the coal-mining industry, said two people with knowledge of the matter, signaling government concern about possible defaults. The China Banking Regulatory Commission also told its local branches to closely monitor risks from trust and wealth-management products, said the people, who asked not to be identified as the matter isn’t public. The commission issues such alerts for matters that it judges may pose significant risks to banks, the people said.

• Aussie Drops Below 87 U.S. Cents on China Concerns, RBA Comments. The Australian dollar dropped below 87 U.S. cents for the first time since July 2010 after China’s bank regulator ordered regional offices to increase scrutiny of credit risks in the coal-mining industry, according to people with knowledge of the matter. The Aussie slid versus all 16 major peers after the Wall Street Journal cited central bank board member Heather Ridout as saying around 80 cents would be a fair deal for everybody.

• Ukraine Unrest Spreads From Kiev as EU Warns of Civil War. Anti-government unrest spread from Ukraine’s capital as the European Union warned the protests, which turned deadly this week, could spiral into a civil war. Activists have taken over the headquarters of governors picked by President Viktor Yanukovych in five cities, marking a widening of the two-month protest movement. EU justice chief Viviane Reding told CNBC today that Ukraine must get its “house in order” as it heads in the “direction of a civil war.” 

• Cross-Currency Swap Premium Rises Seventh Day as Banks Pull Back. The premium that European lenders pay to obtain dollar-denominated cash flows increased for a seventh day as global central banks said they’ll wind down emergency funding programs. The rate on a three-month cross-currency basis swap between euros and dollars was negative four basis points, after reaching positive 4.8 basis points Jan. 16. A negative swap rate signals traders are paying a premium to trade euro-based cash flows for comparable flows denominated in U.S. dollars. Investor demand for safety increased amid a deepening selloff in emerging-market currencies. “The realization is settling in that there are still a lot of potential surprises out there, including those in the liquidity mechanisms and with respect to spillover effects from market to market,” Jeffrey Caughron, who advises community banks on investments exceeding $40 billion as an associate partner at Baker Group LP in Oklahoma City, said in a telephone interview.

• Bond Risk Heads for Biggest Weekly Jump Since June in Europe. The cost of insuring corporate bonds against losses in Europe is heading for the biggest weekly rise in seven months on concern a slowdown in emerging-market economies will curb global growth. The Markit iTraxx Europe index of credit-default swaps on 125 companies with investment-grade ratings rose 9 basis points this week to 80 basis points at 10:25 a.m. in London, the biggest jump since the week ending June 21. The Markit iTraxx Crossover Index of 50 companies with mostly speculative-grade ratings climbed 23 basis points to 302 basis points, also the biggest increase since June. Borrowing costs for investment-grade companies in the region fell two basis points this week to 1.97 percent, the lowest since June. 5, while the average yield on speculative- grade notes fell three basis points to a record 4.73 percent on Jan. 21, Bank of America Merrill Lynch index data show.

• European Stocks Drop as Emerging-Market Currencies Fall. European stocks fell the most since June, extending the Stoxx Europe 600 Index’s weekly drop, as investors assessed a tumble in emerging-market currencies amid concern Federal Reserve tapering is hurting growth. Banco Bilbao Vizcaya Argentaria SA dropped 5.1 percent on investor concern that its exposure to Turkey and Argentina will hurt earnings. Novartis (NOVN) AG lost 3 percent after failing to win backing from a European advisory panel for its Serelaxin treatment for acute heart failure. Aberdeen Asset Management Plc slumped 5.7 percent as Morgan Stanley recommended selling the stock. Celesio AG gained 3.7 percent as McKesson Corp. agreed to buy majority-owner Franz Haniel & Cie.’s holding in the company. The Stoxx 600 slid 2.4 percent to 324.75 at the close of trading, for a weekly loss of 3.3 percent.

• Four Bombs Strike Cairo Ahead of Egyptian Uprising Anniversary. At least nine people died in Egypt as four explosions ripped through Cairo and Islamist supporters clashed with police in a spasm of violence a day before the anniversary of the uprising that ousted Hosni Mubarak.

• Colder Weather Forecast for U.S. as Freeze Brings Texas Ice. Parts of southern Texas may get a rare coating of ice as temperatures plunging across the U.S. portend an even sharper cold snap to come. Temperatures across the eastern U.S. and parts of Ontario and Quebec will be at least 8 degrees below normal through Jan. 27, said Matt Rogers, president of the Commodity Weather Group LLC in Bethesda, Maryland. Next week will be colder, he said.

• Starbucks(SBUX) Profit Tops Estimates as U.S. Sales Improve. Starbucks Corp. (SBUX), the world’s largest coffee-shop chain, advanced the most in almost six months after posting earnings that topped analysts’ projections as pumpkin-spice lattes and other seasonal drinks helped boost U.S. sales. The shares rose as much as 3.8 percent.

• JPMorgan(JPM) Increases Dimon’s Total Pay to $20 Million for 2013. JPMorgan Chase & Co. (JPM) gave Chief Executive Officer Jamie Dimon a 74 percent raise to $20 million last year, bringing his pay closer to where it stood before the board faulted his oversight of botched derivatives bets.

Wall Street Journal: 

• Dow Transports Get Shellacked. Transportation stocks–one pocket of the market that avoided much of this week’s malaise–are now feeling the pain. The Dow Jones Transportation Average, a 20-member index of airlines, railroads and trucking companies, slumped more than 3% at session lows Friday. The decline comes after the index set a record high on Thursday, bucking the broader trend of declining stocks, currencies and emerging markets. The divergence raised some eyebrows. 

• John Goodman: The ObamaCare Carnival of Perverse Incentives. Cities with unfunded health-care commitments are getting ready to dump their retirees on the state exchanges. 

Fox News:

• Newspaper chain plans 'state-by-state' concealed weapon databases. A national newspaper chain with nearly 100 publications and 1.6 million readers is considering building “state-by-state databases” on concealed weapons permit holders, according to an internal e-mail.

CNBC:

• Why Puerto Rico needs to borrow money—and soon. (video) The island, a territory of the United States, is in the midst of a debt crisis. With only 3.7 million people, it owes an eye-watering $70 billion in public debt, behind only New York and California. And much of that debt is widely held by American investors in municipal bond funds. 

• Emerging-market currency 'contagion' spreads. Emerging-market currencies continued to take a beating on Friday amid growing worries about political upheaval, slowing growth and U.S. monetary policy, prompting central bankers and policymakers to scramble for a response. Turkey's lira hit a new record low against the dollar, and Argentina's peso was down almost 20 percent on the week against the dollar.

ZeroHedge:

• The Fed's Solution To Income Stagnation: Make Everyone A Speculator.

• China Strikes Back: "Happy To Review World History" With Japan.

• Seven Shocking Statistics On Spain's Surging Joblessness.

• Bank of America(BAC) Head Technician: "Our Bullish View Is Invalidated, Going Neutral; Below 1806 Spells Trouble". (graph)

• European Stocks Collapse Most In 7 Months; Spain's Worst Week Since Sept 2012. (graph)

• The Second Subprime Bubble Is Bursting, Gundlach Warns.

Business Insider: 

• Every American With A Bank Account Should Understand What Jamie Dimon's Pay Raise Says About Wall Street. To review: Let a trader blow a $6.2 billion hole in the bank's balance sheet with the bank's money — pay cut. Pay out $20 billion in lawsuits for various transgressions that took place at the bank under your watch — pay raise. You're just $3 million shy of what you got when JP Morgan was America's golden bank, and you were America's golden boy. Mess with the bank's money, you're toast. Mess with the bank's customers — handle it well, and everything will be fine.

• DRONES: Quickly Navigating Toward Commercial Application. 

• CHART: London's Housing Market Has Gotten Ridiculously Unaffordable.

• The Moment When MSNBC Cut Off A Former Congresswoman For Breaking News About Justin Bieber.

Trucking News:

• Trucking Conditions Soften: FTR. The November reading of 7.01 was 20% lower than the month before, but still reflects a positive environment for truckers. The regulatory drag from hours-of-service changes is reducing capacity, FTR noted, adding the upside economics have yet to translate into real market tightness, mitigating a rise in the index.

Reuters:

• Exclusive:Japan government forecasts show Abe missing budget-balance promise. Japanese government calculations indicate that Prime Minister Shinzo Abe cannot meet his budget-balancing promise in coming years on the current course, suggesting he may come under greater pressure from fiscal hawks for future tax increases. Forecasts by the Finance Ministry, reviewed by Reuters on Friday, show that even in the rosiest of four scenarios, the government will run a primary budget deficit - which excludes debt service and income from debt sales - for the fiscal year to March 2021. Private economists have long considered the government's fiscal-reform goals to be ambitious, but the new forecasts represent the first time that official figures have essentially confirmed that view. "Abe will either have to get serious about spending cuts or raise taxes more than originally planned," Norio Miyagawa, senior economist at Mizuho Securities Research & Consulting Co, said of the new ministry forecasts.

• METALS-Copper hits month low on signs of slowing China growth. Copper fell to its lowest in a month on Friday and struck its biggest weekly fall since mid-November as slowing growth in China's factories fueled worries about demand in the world's top metals consumer. The metal is down 2 percent for the week. 

• EMERGING MARKETS-Latam stocks at 4-year low in emerging markets selloff. 

• U.S. propane shortage hits millions during brutal freeze.

• No negotiations with Republicans on U.S. debt limit -senior Democrat.

• Yen and franc soar on emerging market rout. The yen surged and the Swiss franc hit its highest in a month against the euro on Friday as investors sought safe places to stash the stacks of money being pulled out of stocks and several big emerging markets. Both the dollar and euro fell as much as 1 percent against the yen in a move centred on more worrying signs of a slowdown in China and broad expectations of a tightening of monetary conditions this year by some of the world's biggest central banks.

Telegraph:

• Japan-China war of words goes ballistic in Davos.

Deutschlandradio Kultur:

• Greece Needs Generous Debt Cut, Droutsas. Former Greek Foreign Minister Dimitris Droutsas says only generous debt forgiveness will allow Greece to implement the "radical structural reforms" the country needs for a fresh start.

The Economic Times:

• Gloomy Outlook: India's GDP May Sink Below 5% to an 11-Year Low. India's statistics office is likely to say in two weeks that growth this year will slump further to an 11-year low, undermining the government's optimism that it would at least be flat at 5% on the back of a recovery in the second half. The advanced estimate for FY14 is set to come in below that level, said an official who didn't want to be named.

India's statistics office is likely to say in two weeks that growth this year will slump further to an 11-year low, undermining the government's optimism that it would at least be flat at 5% on the back of a recovery in the second half.

The advanced estimate for FY14 is set to come in below that level, said an official who didn't want to be named.

The economy expanded 4.6% in the first half and would need to rise 5.4% in the second for growth to come in at 5%, which doesn't lo ..

Read more at:
http://economictimes.indiatimes.com/articleshow/29268974.cms?utm_source=hootsuite&utm_campaign=hootsuite&utm_source=contentofinterest&utm_medium=text&utm_campaign=cppst

Gloomy outlook: India's GDP may sink below 5% to an 11-year low

Read more at:
http://economictimes.indiatimes.com/articleshow/29268974.cms?utm_source=hootsuite&utm_campaign=hootsuite&utm_source=contentofinterest&utm_medium=text&utm_campaign=cppst

China.org.cn:

• Dagong lowers Philippines rating outlook. China's domestic rating agency Dagong on Friday downgraded the rating outlook of the Republic of the Philippines from stable to negative. Ratings for the country's domestic currency and foreign currency sovereign credit were both maintained at BB-, the agency said in a statement on its website. "Under the background of the forthcoming tightening of global monetary policy, the Philippines' economic growth mode characterized by substantial capital inflows and fast credit expansion is facing severe challenges," the statement said. The economy of the Philippines will face more downward pressure as interest rates rise in both domestic and overseas markets, Dagong said, forecasting its growth rate at 4.5 percent in 2014 and 3 percent in 2015.

CRIEnglish:

• China Reports 10 New H7N9 Human Cases. Ten human H7N9 bird flu cases were newly reported in China on Friday, including one in Beijing, one in Guangdong Province, one in Fujian Province and seven in Zhejiang Province, forcing cities in Zhejiang to close their live poultry markets. In the first case reported in the city this year, a man in Beijing was confirmed to have contracted H7N9 on Thursday night, according to the Chinese capital's disease control and prevention center.

Bear Radar

Style Underperformer:

• Small-Cap Growth -2.53%

Sector Underperformers:

• 1) Gaming -5.24% 2) Alt Energy -3.66% 3) Education -3.50%

Stocks Falling on Unusual Volume:

• KSU, NSTG, EOPN, EBS, BDE, PTCT, ABCB, DL, MTCN, BBVA, DGII, CLV, COVS, GNRC, TUP, IGT, BIB, TCBI, GWW, ACAT, SMCI, VNQI, HXL, CE, MATW, FEYE, DDD, QSII, ALGN, CW, HXL, WETF, BYI, GNRC, RMD, SWC, ECYT, BABY, ISRG, ACET, CST, CYN, PNK, AVP, AGCO, RS, CY, LOCK, QLTY, FAST, PNR, JAZZ, OZM, AA, MDC, SMCI, BCC, STT, FLS, CAMP, GWW, MCRS, WYNN, BMY, TRW, CMI, MS, MGM, C, GE and LRCX

Stocks With Unusual Put Option Activity:

• 1) EXC 2) XLV 3) HYG 4) XLF 5) OIH
  

Stocks With Most Negative News Mentions:

• 1) IGT 2) DDD 3) KSU 4) CMG 5) CAT
  

Charts:

• ETFs Falling on Unusual Volume

• Stocks Falling on Unusual Volume

Bull Radar

Style Outperformer:

• Large-Cap Value -1.61%

Sector Outperformers:

• 1) Restaurants +.19% 2) Networking -.71% 3) Food -1.03%
  

Stocks Rising on Unusual Volume:

• OTEX, LIVE, JNPR, SYNA, DFS and JNPR

Stocks With Unusual Call Option Activity:

• 1) MET 2) HUN 3) KMB 4) BMY 5) LYB

Stocks With Most Positive News Mentions:

• 1) RL 2) JPM 3) CAT 4) ISRG 5) C
  

Charts:

• ETFs Rising on Unusual Volume 

• Stocks Rising on Unusual Volume

Friday Watch

Night Trading

• Asian equity indices are -1.0% to -.25% on average.

• Asia Ex-Japan Investment Grade CDS Index 146.0 +4.0 basis points.

• Asia Pacific Sovereign CDS Index 113.50 +2.0 basis points.

• FTSE-100 futures +.32%.

• S&P 500 futures +.19%.

• NASDAQ 100 futures +.18%.

Morning Preview Links

Earnings of Note
Company/Estimate

• (BMY)/.43
• (HON)/1.22
• (KSU)/1.10
• (KMB)/1.39
• (PG)/1.20
• (SWK)/1.29
• (STT)/1.20
• (GWW)/2.63

Economic Releases

• None of note

Upcoming Splits

• None of note

Other Potential Market Movers

• The Italian retail sales report could also impact trading today.

BOTTOM LINE: Asian indices are mostly lower, weighed down by financial and technology shares in the region. I expect US stocks to open modestly higher and to weaken into the afternoon, finishing modestly lower. The Portfolio is 25% net long heading into the day.