Friday, August 19, 2011

Stocks Dropping into Final Hour on Rising Eurozone Debt Angst, Surging Food Prices, Tech/Financial Sector Pessimism, Margin Selling


Broad Market Tone:

  • Advance/Decline Line: Lower
  • Sector Performance: Most Sectors Declining
  • Volume: Above Average
  • Market Leading Stocks: Underperforming
Equity Investor Angst:
  • VIX 43.48 +1.90%
  • ISE Sentiment Index 70.0 -2.5%
  • Total Put/Call 1.36 -8.72%
  • NYSE Arms 1.35 -37.47%
Credit Investor Angst:
  • North American Investment Grade CDS Index 118.70 +2.35%
  • European Financial Sector CDS Index 226.60 +10.08%
  • Western Europe Sovereign Debt CDS Index 296.17 +1.25%
  • Emerging Market CDS Index 276.11 -.48%
  • 2-Year Swap Spread 29.0 +2 bps
  • TED Spread 30.0 unch.
Economic Gauges:
  • 3-Month T-Bill Yield .00% unch.
  • Yield Curve 187.0 -1 bp
  • China Import Iron Ore Spot $177.30/Metric Tonne +.11%
  • Citi US Economic Surprise Index -82.50 +1.4 points
  • 10-Year TIPS Spread 2.02% +6 bps
Overseas Futures:
  • Nikkei Futures: Indicating -51 open in Japan
  • DAX Futures: Indicating -50 open in Germany
Portfolio:
  • Slightly Higher: On gains in my Biotech/Retail sector longs, Index hedges and Emerging Markets shorts
  • Disclosed Trades: Added to my (IWM)/(QQQ) hedges, then covered some of them
  • Market Exposure: 50% Net Long
BOTTOM LINE: Today's overall market action is very bearish, as the S&P 500 is falling meaningfully with good volume on global growth worries, rising Eurozone debt angst, emerging markets inflation fears, more shorting, forced margin selling, tax hike fears and tech/financial sector weakness. On the positive side, Defense, Biotech, Medical, Drug, Retail, Restaurant and Tobacco shares are up slightly or just mildly lower on the day. Lumber is rising +.95%. On the negative side, Alt Energy, Oil Service, Computer, Disk Drive, Computer Service, I-Banking, Construction, Bank shares are under significant pressure, dropping more than -2.50%. Cyclicals are very weak again today. The Transports continue to trade very poorly and tech/financial shares remain under meaningful pressure. Gold is rising +1.3%, the UBS-Bloomberg Ag Spot Index is jumping +1.72% and Oil is rising +1.0%. Rice is still near a multi-year high, rising +27.0% in about 7 weeks. The US price for a gallon of gas is unch. today at $3.59/gallon. It is up .45/gallon in about 7 months. The Germany sovereign cds is rising +1.34% to 81.0 bps, the France sovereign cds is rising +1.57% to 150.50 bps, the Greece sovereign cds is rising +3.77% to 1,977.68 bps, the Portugal sovereign cds is gaining +2.6% to 900.67 bps, the Spain sovereign cds is gaining +.75% to 364.66 bps, the Italy sovereign cds is rising +1.1% to 356.17 bps, the Israel sovereign cds is jumping +4.63% to 158.93 bps, the China sovereign cds is gaining +3.25% to 112.03 bps and the UK sovereign cds is rising +1.97% to 81.06 bps. Moreover, the European Investment Grade CDS Index is gaining +3.5% to 134.74 bps. The FRA/OIS Spread made a new 52-week high today and is rising +2.55 bps to 43.0 bps. The 3-Month Euro Basis Swap is falling -5.25 bps to -84.62 bps. Asian indices were down substantially overnight and are very near recent lows. Ukraine shares plunged -7.2% today and have collapsed -44.3% from their Feb. 21 high. French, Spanish and Italian stocks fell another -2.0% today and are back near their lows. Germany's DAX made a new 52-week low today and is now down -20.7% ytd. Gauges of investor angst are surging today, which is a positive. The UBS-Bloomberg Ag Spot Index is breaking out of a multi-month trading range and is very close to its record high, which is a huge negative. The market is very oversold again and will likely see another vigorous bounce next week, however too many investors appear to be depending on the Fed, which is a mistake, in my opinion, given recent inflation readings and the surge in food prices. I expect US stocks to trade mixed-to-lower into the close from current levels on tech/financial sector pessimism, rising eurozone debt angst, tax hike fears, more shorting, global growth worries, emerging markets inflation fears, rising food/energy prices and forced margin selling.

Today's Headlines


Bloomberg:
  • Greek Notes Slide on Collateral Demands; ECB Buys Italy Debt. Greek two-year notes slumped after some of the nation’s euro-region partners said they would seek collateral in exchange for new loans, fueling concern attempts to resolve the currency union’s debt crisis will be derailed. Two-year Greek yields climbed above 37 percent for the first time in almost a month. Austria, the Netherlands, Slovenia and Slovakia said yesterday they’d aim to emulate Finland’s deal with Greece, which was criticized by Austria’s finance minister for risking the viability of a rescue. Italian two-year notes erased losses as the European Central Bank was said to be buying the securities. The collateral issue “is something that goes against the logic of the whole bailout package,” said Marius Daheim, a senior fixed-income strategist at Bayerische Landesbank in Munich. “It has the scope to result in a conflict and to topple the whole second bailout package. We’re trading off equities; we’re in a risk-off environment.” The Greek two-year yield climbed 214 basis points to 37.47 percent as of 4 p.m. in London, breaching 37 percent for the first time since July 21. The yield reached a record 40.46 percent on July 20. The 10-year yield rose 65 basis points to 16.65 percent.
  • Europe Banking Shares Tumble for Third Day on Funding, Earnings Concern. European banks tumbled, led by Lloyds Banking Group Plc (LLOY) and Intesa Sanpaolo SpA (ISP), on concern firms will struggle to fund themselves and increase earnings as the region’s sovereign debt crisis strangles economic growth. Lloyds, Britain’s second-biggest government-assisted bank, fell 6.2 percent in London trading, while Intesa slid 5.9 percent in Milan. The 46-member Bloomberg Europe Banks and Financial Services Index tumbled 3 percent after dropping the most in two years yesterday. While “the chances of a genuine liquidity crisis as experienced in 2008 are reasonably remote,” lenders may face a “slower-moving, but still toxic, funding crisis,” Deutsche Bank AG (DBK) analyst Matt Spick said in a client note. Moreover, “the weight of negative earnings momentum as we head into the second half represents a major ongoing risk for the European banks,” he said. The Bloomberg European banks index tumbled 10 percent this week on signs lenders are facing tougher funding conditions. Banks’ sale of long-term debt fell behind again in July and August, which may be the weakest month on record, and that could force firms to further reduce leverage, bad news for banks and the economy, Spick said in the note.
  • Financial Debt Risk Jumps to Record in Europe on Growth Concern. The cost of protecting European financial debt surged to a record on concern global economic growth is faltering and banks will struggle to fund themselves. The Markit iTraxx Financial Index of credit-default swaps linked to senior debt of 25 banks and insurers increased as much as 12 basis points to 243, a record based on closing prices, according to JPMorgan Chase & Co. and was trading at 237 basis points at 10:30 a.m. in London. The Markit iTraxx SovX Western Europe Index of swaps linked to the debt of 15 governments increased for a third day, climbing 1 basis point to 291. Contracts on Spanish government debt rose 6 basis points to 370, according to CMA. Italy swaps added 8 basis points to 362 and France was up 2 to 152. The Markit iTraxx Crossover Index of 40 companies with mostly high-yield credit ratings increased 11 basis points to 655.5. The Markit iTraxx Europe Index of 125 companies with investment-grade ratings rose 2 basis points to 154 basis points.
  • U.S. Corporate Credit Risk Benchmark Increases to Highest Since July 2010. The cost of protecting U.S. corporate debt from default rose to the highest level in more than 13 months as concern grew that the global recovery is slowing and Europe’s debt crisis is spreading. The Markit CDX North America Investment Grade Index, which investors use to hedge against losses on corporate debt or to speculate on creditworthiness, increased 1.7 basis points to a mid-price of 118.7 basis points as of 11:19 a.m. in New York, according to Markit Group Ltd. That’s the highest since July 6, 2010. Credit-default swaps on New York-based Goldman Sachs rose 4.5 basis points to 209.8, according to data provider CMA, which is owned by CME Group Inc. and compiles quoted by dealers in the privately negotiated market. Contracts on Citigroup Inc., also based in New York, climbed 4.2 basis points to 210 basis points, CMA data show.
  • Gold Set for Longest Weekly Rally Since 2007. Gold rose to a record above $1,880 an ounce in New York, poised for the longest run of weekly gains since April 2007, as escalating concern that the global economy is slowing drove equities lower. The metal is set for a seventh weekly advance as worse- than-expected U.S. economic data and Europe’s debt crisis boost speculation that growth will falter. Gold for December delivery gained $27.60, or 1.5 percent, to $1,849.60 on the Comex at 10:40 a.m. in New York, after touching $1,881.40, the highest ever. Before today, prices gained 4.6 percent this week and 12 percent since July 31.
  • Rising Prices May Embolden Fed Dissenters in Opposing Moves to Spur Growth. Signs that consumer prices are rising even as the U.S. economy slows may delay additional moves by Federal Reserve Chairman Ben S. Bernanke to spur growth. The Fed chairman, who is scheduled to speak at a Jackson Hole, Wyoming, conference on Aug. 26, used the annual gathering of economists last year to hint at a second round of so-called quantitative easing, in which the Fed purchased $600 billion of Treasuries from November 2010 to June. “It’s hard to say we have stagflation, but we do have inflation too high for the Fed to do QE3,” said Marc Chandler, global head of currency strategy for Brown Brothers Harriman & Co. in New York.
  • Retailers Raise Prices to Offset U.S. Labor Costs. Retailers and restaurants are raising consumer prices to help compensate for higher labor costs, which increased the most in almost three years during the second quarter. Fifty-three percent of these companies with annual sales of $10 million to $500 million have lifted prices during the last 12 months, up from 32 percent a year ago, according to a quarterly survey by Barlow Research Associates. This comes as U.S. inflation excluding food and energy costs accelerated at an annual pace of 1.8 percent in July, the biggest such gain in more than a year, according to Labor Department data released yesterday. Unit labor costs for nonfarm businesses rose 1.3 percent in the quarter ended June 30 compared with a year ago, as hourly compensation rose while productivity fell, Bureau of Labor Statistics data show. “This is an early sign that even with high unemployment, labor costs are starting to pick up, giving companies an incentive to raise prices,” said Peter Newland, an economist at Barclays Capital Inc. in New York. Labor costs are the biggest component of business expenses, he said. Sixty-one percent of the 149 public and private retailers and restaurants in the Barlow survey said they plan more price increases during the next 12 months. This indicates a “significant change” in attitude from the previous year, when 41 percent had such plans, according to John Barlow, president and founder of the Minneapolis-based business. “Middle-market companies have been aggressive in increasing prices because they’re trying to protect profit margins,” he said.
  • Prices of supertankers carrying about 20% of the world's oil may fall 10% to the lowest level in 8 years as slowing global growth cuts earnings, RS Platou Markets AS said. Owners are contending with a supertanker fleet that's the largest in 29 years and growing at the fastest pace in more than three decades, forcing freight rates to a 14-year low. The vessels will earn about $15,600 a day over the next two years, 40% of the level secondhand vessels need to break even, according to Platou's Frode Morkedal.
  • Emerging-Market Stocks Set for Fourth Weekly Slump Amid Global Concerns. Emerging-market stocks fell for a second day, setting the benchmark index on course for its longest streak of weekly losses since May, as signs the global economy is slowing drove investor outflows from riskier assets. The MSCI Emerging Markets Index slid 2.3 percent to 972.10 at 10:07 a.m. in New York, bound for a fourth straight week of losses. Mexico’s IPC slid 0.4 percent, falling for a second day. South Korea’s Kospi Index (KOSPI) sank 6.2 percent, the biggest drop since November 2008, while Taiwan’s Taiex index plunged 3.6 percent. Emerging-market equity funds posted $2.8 billion of outflows in the week ended Aug. 17, extending the biggest withdrawals since 2008 the previous week at $7.7 billion, Citigroup Inc. analysts led by Markus Rosgen said in a report today, citing figures by EPFR Global. Analysts at Morgan Stanley cut their forecasts for stock indexes in Southeast Asia, after economists from the brokerage lowered their estimates for global economic growth.
  • Syria Kills 25 Protesters After Obama Calls on Assad to Quit. Syrian security forces killed at least 25 protesters and arrested more than 300 people after U.S. President Barack Obama, in concert with European allies, called on Bashar al-Assad to step down.
  • Deutsche Bank AG(DB) put-options volume surged to a record on U.S. exchanges on speculation that Germany's largest lender will extend declines after falling to a two-year low. Almost 24,000 puts to sell changed hands, 11 times the four-week average and 24 times the number of calls to buy, as of 12:18 pm EST.
Wall Street Journal:
  • Buyout Shops Get Mauled by Market. Private equity is being pummeled. Few shares are experiencing the kind of beating that big buyout firms are enduring. Firms like Blackstone Group LP, KKR & Co., Apollo Global Management LLC and Fortress Investment Group LLC have seen their shares fall between 19% and 27% so far this month, compared with a drop of 9.5% for the Dow Jones Industrial Average. On Thursday, the carnage continued, as these stocks fell between 1.6% and 11%, while the Dow average fell 3.7%. The troubles for these shares underscore how disappointing many private-equity companies have been for investors.
  • ECRI Leading Index Goes Negative. (graph) The Economic Cycle Research Institute’s weekly leading index fell again this week, and its four-week rolling average fell into negative territory for the first time since early December.
MarketWatch:
CNBC.com:
  • Fed Needs to Be Monitoring European Banks: Dudley. The U.S. Federal Reserve is keeping an eye on European banks struggling with the continent's debt crisis because of the turbulence in financial markets, one of the central bank's most influential policymakers said on Friday.
  • Foreign Banks Complain of 'Imperialist' US Tax Rule. A U.S. law meant to snuff out billions of dollars in offshore tax evasion has drawn the criticism of the world's banks and business people, who dismiss it as imperialist and "the neutron bomb of the global financial system." The unusually broad regulation, known as FATCA, or the Foreign Account Tax Compliance Act, makes the world's financial institutions something of an extension of the tax-collecting Internal Revenue LinkService—something no other country does for its tax regime.
  • US Can Recover, 'Extreme Action' Needed in Europe: Economist. The US and European Union pose divergent threats to a global economic recovery and despite weak growth in the United States, the euro zone debt crisis is more likely to impede a recovery, Paul Donovan, deputy head of Global Economics told CNBC.
Business Insider:
Zero Hedge:
New York Times:
MIT Technology Review:
Gallup:
Reuters:
  • Hedge Fund Cairn Sees France, Germany Downgrades. France's top AAA credit rating is likely to be downgraded and Germany could easily follow as the costs of bailing out weaker euro zone economies push up their own debt piles, says credit hedge fund firm Cairn Capital's chief investment strategist. London-based Cairn, which has $24.5 billion in assets under management and advice across its business, said either future contributions to the European Financial Stability Facility (EFSF) rescue fund, or France's own economic troubles, could see it lose its coveted rating. "There are very deep economic flaws in the whole euro mechanism," said Graham Neilson, citing high debt levels, weak growth, divergence between member states and the European Central Bank's focus on inflation expectations. "France is likely to be downgraded either on its own metrics but more likely as a result of potentially higher EFSF costs. The bigger the EFSF, the more France is liable (and) the worse France's credit rating the more it could be liable." France's own economics could also lead to a downgrade, said Neilson. "France's banks are three times more exposed to Italy than any other banking system in Europe and France's debt metrics and growth profiles are poor." He added that Germany was also vulnerable to a downgrade, which would likely increase its cost of borrowing and put further stress on the global economy after S&P's downgrade of the United States earlier this month. "Germany could also quite easily be downgraded if the EFSF is forced to be larger, in a scenario where France and Germany end up with debt to GDP ratios of 120-125 percent. That's not good, that's not AAA," he said, adding that was likely to be the reason the EFSF had so far not been increased in size.
  • Jobless Rates Rise in Many U.S. States in July. Unemployment rates increased in more than half of the U.S. states in July as the shaky national economy took its toll on jobs, Labor Department data released on Friday showed. Unemployment rates rose in 28 states and the District of Columbia, while they fell in nine states and were unchanged in 13, according to the data.
  • Bank Funding Costs Rise on Europe Tension. The benchmark for unsecured dollar loans between banks, three-month Libor LIBOR, rose above 30 basis points for the first time since early April.
  • ECB's Stark: Risky to Keep Rates Too Low For Long. European Central Bank heavyweight Juergen Stark said leaving interest rates too low for too long was risky, highlighting reservations at the ECB about reversing policy course despite markets' recession fears.
  • French PM: Euro Bonds Could Threaten French Rating. French Prime Minister Francois Fillon on Friday reiterated his country's opposition to the introduction of common euro zone bonds without further fiscal consolidation in the currency bloc, saying such a move could threaten France's AAA credit rating. "Some people are calling for the creation of European bonds ... which they present as a panacea," Fillon wrote in an editorial published in Le Figaro daily. "But they forget to say that would raise the price of French debt and could even call its credit rating into question."
  • Illinois Tool Works(ITW) Reports Slowdown in Growth. Industrial conglomerate Illinois Tool Works Inc said on Friday that growth at a number of worldwide end markets slowed through the three-month period ended July 31.
Telegraph:
  • Barack Obama's Martha's Vineyard Vacation Looks Like An Act Of Presidential Hara-Kiri. With 14 million Americans out of work, a volatile stock market and a historic downgrade of the country’s credit rating, President Obama is set to begin a 10-day retreat Thursday at a 28-acre Martha’s Vineyard compound called Blue Heron Farm, which costs an estimated $50,000 per week to rent. That divide — and the presumed hypocrisy of a president who has pledged not to rest “until every American looking for a job can find one,” going golfing and biking on an island playground for wealthy celebrities — has been too much for political pundits to resist.
WAZ:
  • S&P's Rating Services' German Unit head Torsten Hinrichs is "skeptical" about a possible issuance of common euro-area bonds, citing an interview. "The main condition for joint euro bonds to work in the long term would be a strong political and economic integration in Europe. We are still far away from that," he said.
Tiroler Tageszeitung:
  • Jean-Claude Juncker, who leads the group of euro-area finance ministers, said the countries sharing the currency must give up sovereign powers for a common "economic government" to make sense, according to an interview. "An economic government without relinquishing national competencies would be dead on arrival," Juncker was quoted as saying.
Expansion:
  • Spanish Prime Minister Jose Luis Rodriguez Zapatero will bring back a wealth tax he suspected in 2008 to attempt to meet his budget deficit-reduction target, citing people familiar with the government's plans. The measure may be reinstated as early as today.
Savon Sanomat:
  • No country is likely to get collateral for their loan guarantees to Greece and thus Finland probably won't participate in the Greek bailout, OP-Pohjola Group CEO Reijo Karhinen said. "For the first time I'm concerned the euro system may fail," Karhinen, who heads Finland's second-biggest banking and insurance group, said.
Kathimerini:
  • Greece's 2011 budget deficit may exceed the 7.6% of GDP target given a higher-than-expected decline in economic growth and rising unemployment. Finance Minister Evangelos Venizelos informed the cabinet yesterday of the possible need to either re-discuss the deficit target with its lenders or consider further fiscal measures worth between 3 billion and 4 billion euros to achieve the original target.
Marbridge Daily:
  • China's MIIT Prepares New Online Search Regulations. According to a source within China's Ministry of Industry and Information Technology (MIIT), relevant MIIT departments have drafted new regulations for the online search industry, including restrictions that would affect Chinese internet company Baidu's (Nasdaq: BIDU) paid search rankings. MIIT is currently seeking feedback on the regulations, according the source, and has no timetable set for implementation. MIIT has reportedly been assessing search engine companies since as early as 2009 in order to accelerate the development of legal oversight mechanisms, but has yet to implement any such regulations. According to the source, MIIT's next step will be to implement its new policies, which will include restrictions on paid search advertising like Baidu's.
Haaretz.com:

Bear Radar


Style Underperformer:

  • Large-Cap Value (-.71%)
Sector Underperformers:
  • 1) Computer -4.01% 2) Computer Services -2.22% 3) Oil Service -2.0%
Stocks Falling on Unusual Volume:
  • HPQ, TD, BMA, IBM, DB, RDS/A, SHLD, HMY, ADSK, ININ, NDSN, OPLK, NTES, ARII, PETM, WPPGY, CPLA, RDEN, SIVB, SYNT, IPCM, PEGA, NWPX, DRIV, ROST, WYNN, PCBC, BKS, IHG, ARO, BHI, SJM, CPX and GET
Stocks With Unusual Put Option Activity:
  • 1) DB 2) RRD 3) BBY 4) NVLS 5) LEN
Stocks With Most Negative News Mentions:
  • 1) SCHW 2) LDK 3) LULU 4) MPC 5) VLO
Charts:

Bull Radar


Style Outperformer:

  • Small-Cap Growth (+.59%)
Sector Outperformers:
  • 1) Gold & Silver +2.69% 2) Restaurants +2.19% 3) Tobacco +1.39%
Stocks Rising on Unusual Volume:
  • NZT, DELL, SGI, INTU, MRVL, SODA, GOLD, ARMH, ANN and FL
Stocks With Unusual Call Option Activity:
  • 1) NWSA 2) UCO 3) HMY 4) CLWR 5) GME
Stocks With Most Positive News Mentions:
  • 1) CRM 2) IBM 3) BA 4) CLWR 5) ANN
Charts:

Friday Watch


Evening Headlines


Bloomberg:

  • Junk Yields Top 10% as Growth Woes Shutter Market: Euro Credit. Junk-rated European company bond yields climbed above 10 percent for the first time in a year as investors demand more compensation for the region’s stalling economic growth. “These psychological levels are quite important, going from nine to 10 is different from going from eight to nine,” said Michael Hampden-Turner, a credit strategist at Citigroup Inc. in London. “You’re seeing outflows of funds but if we went to 11 percent that would certainly attract attention as a buying opportunity.” Yields on speculative-grade debt climbed to as high as 10.1 percent on Aug. 11, the most since June 2010 and 2 percentage points up on the start of this month, according to Bank of America Merrill Lynch’s Euro High-Yield Constrained Index. Borrowers unwilling to pay the higher premiums demanded by investors as the risk of recession looms means there have been no new junk bond sales in Europe since July 26, according to data compiled by Bloomberg. The extra yield buyers demand to own junk bonds instead of benchmark German bunds has almost doubled in the past four months as investors seek havens for their cash, Bank of America Merrill Lynch data show. The spread is at 800 basis points, or 8 percentage points, up from this year’s low of 476 basis points on April 11. Confidence in junk-rated debt is deteriorating as nations such as Italy and Spain tackle the debt crisis by implementing austerity measures that may hamper economic growth and hurt companies’ ability to pay debt. European-based mutual funds reduced holdings of high-yield bonds for the first month this year in June, pulling 1.1 billion euros out of junk-rated debt, according to Fitch Ratings. That compares with a net inflow of 5.1 billion euros in the first half.
  • U.S. GDP Growth Estimates Cut at Citigroup(C). The U.S. economy may expand less than previously forecast in 2011 and 2012 because of potential “political paralysis” and fiscal tightening steps, Citigroup Inc. wrote in a report. The brokerage cut its 2011 gross domestic product growth forecast to 1.6 percent from 1.7 percent and lowered its 2012 GDP growth estimate to 2.1 percent from 2.7 percent, Steven Wieting and Shawn Snyder, analysts at Citigroup, wrote in a report dated yesterday. They also trimmed their estimates for the Standard & Poor’s 500 Index’s earnings-per-share this year to $97 from $98, and to $101 from $105 next year.
  • Hidden Money From Hong Kong Banks Undermining Lending Curbs: China Credit. Chinese companies are borrowing record amounts from Hong Kong’s banks as the central government tries to bring the inflation rate down from a three-year high by reducing access to credit. Financial institutions’ claims on mainland companies rose four-fold to 1.6 trillion yuan ($250 billion) between mid-2009 and the end of May, Hong Kong Monetary Authority data show. “If you borrow in Hong Kong it’s a hell of a lot cheaper than in the mainland,” Jim Antos, a banking analyst at Mizuho Securities Asia, said in a telephone interview from Hong Kong on Aug. 10. “The money is easily repatriated or sent to China.” China’s preference for loan quotas and administrative controls is “becoming increasingly ineffective,” Charlene Chu, a senior director at Fitch in Beijing, said in a telephone interview on Aug. 17. “There are more and more ways around the rules and this is another example of a new channel that’s opened up.” Of Hong Kong banks’ liabilities on the mainland, a total of 74 percent are recorded as claims on mainland Chinese banks and included in Hong Kong banks’ interbank portfolio not their loan holdings, Fitch said. This is because most of these are loans to Chinese companies and the borrower often has a guarantee or letter of credit from a mainland bank, Fitch’s Chu said. Hong Kong banks’ claims on Chinese lenders accounted for 17 percent of their total interbank assets by the end of March, up from 5 percent in mid-2009, according to Fitch. Exposure to mainland China now amounts to about 20 percent of Hong Kong bank assets, Royal Bank of Scotland Group Plc said in a June 22 research note.
  • Municipal Bonds May Face Downgrades Following Fina U.S. Budget, S&P Says. Standard & Poor’s, the credit rating company that cut the U.S. to AA+, said the federal budget deal may lead to downgrades on municipal credits. The company, which said earlier this month that states and local governments could remain AAA even after the U.S. cut, said in a report today downgrades could come after reductions in federal funding or changed policy. Ratings changes would come based on “differing levels of reliance on federal funding, and varying management capabilities,” and, after the Budget Control Act of 2011, will be felt “unevenly across the sector,” S&P said. “Experience tells me I would expect there to be some downgrades,” said S&P credit analyst Gabriel Petek in a telephone interview. “These cuts are coming in addition to the losses of revenue that already came during the recession.”
  • U.S. gasoline demand is heading toward a nine-year low as a faltering economy and unemployment offset the effect of declines in pump prices. Refiners and blenders will supply the smallest amount of gasoline to the market this year since 2002, based on an Energy Dept. forecast. Demand at the pump has trailed year-earlier levels for the past 20 weeks, according to MasterCard Inc.
  • Crude Oil Heads for Fourth Weekly Drop on Growth Downgrades, U.S. Job Cuts. Oil declined in New York, heading for a fourth weekly drop, as investors bet fuel demand will falter amid signs of weaker growth in Europe, the U.S. and China, which account for about half of world crude consumption. Crude for September delivery dropped as much as $1.48 to $80.90 a barrel in electronic trading on the New York Mercantile Exchange and was at $81.04 at 10:03 a.m. Sydney time. The contract yesterday plunged 5.9 percent to $82.38. Prices are down 5.1 percent for the week.
  • Treasury Yields Tumble to Record Lows on Global Growth Concern. Treasuries surged, pushing yields to record lows, as investors seek a refuge in the world's safest securities on concern global growth is slowing and speculation inflation will remain subdued. U.S. government debt was on pace for the best monthly returns since December 2008 a week after the Federal Reserve said it would keep borrowing costs unchanged until at least mid- 2013. Treasuries have returned 1.8 percent since Standard & Poor's lowered the U.S. credit rating for the first time on Aug. 5 and are up 2.9 percent this month. Bank of America Merrill Lynch's Global Government Bond Index, which excludes the U.S., has increased 1.7 percent in August. "The only place to hide is in the U.S.," said James Camp, managing director of fixed income in St. Petersburg, Florida, at Eagle Asset Management Inc., which manages $19.5 billion. "Rates are going to test the lows. It's the anemic or worse economic growth, a benign inflation environment and catastrophe in Europe." Yields on 10-year notes dropped 10 basis points, or 0.10 percentage point, to 2.07 percent at 1:56 p.m. in New York, according to Bloomberg Bond Trader prices.
  • Chinese Protest $5 Billion Losses Tied to U.S. Reverse Mergers. Four wrinkled pieces of paper are all that remain of Xiong Renzhi’s Nasdaq-fueled dream of a comfortable retirement in the southern Chinese city of Nanchang. The certificates gripped in the former electrician’s sinewy hands represent 46,000 shares of Xi’an Xilan Natural Gas Co., which he bought in 2006 for 166,000 yuan ($25,990) by selling his apartment and moving in with his sick mother-in-law. Xiong, 62, said he expected returns many times his outlay when the natural-gas distributor listed on New York’s Nasdaq Stock Market, which it did on June 5, 2009. Like thousands of Chinese who bet their life savings on companies aiming for U.S. listings -- some of them among firms that later cost U.S. investors billions of dollars -- Xiong and his wife are still waiting for a payout. “We put all our eggs in this one basket,” said Xiong, who writes articles online to support protests in the financial capital of Shanghai by others who claim they’ve been cheated. “Is the company going to exploit us for nothing?” Xiong and as many as half a million Chinese who spent an estimated 35 billion yuan ($5.48 billion) on similar investments want authorities to ensure they get their money back. They bought into companies touted by local officials, investors said, only to have their share purchases later deemed illegal by the central government.
  • Noda Pledges to Do 'Utmost' to Stop Strong Yen Hurting Growth. Japanese Finance Minister Yoshihiko Noda said currency-market intervention needs to surprise and he's ready to act to stem gains in the yen that could derail an export-led recovery. "I will keep monitoring markets carefully and I will take bold action when needed," Noda said yesterday in a speech in Chiba, near Tokyo. Intervention "is a measure of last resort -- it would be meaningless if it were not a surprise."
  • Hedge Funds Most Bearish Since July 2009 After Global Equities Retreat 15%. Bets global stocks will fall have surged at hedge funds to the highest level since July 2009 as the economic slowdown and European debt crisis spur the biggest losses in almost three years. An index of hedge fund assets from International Strategy & Investment Group dropped to 45.8 on Aug. 16, showing the most short selling in two years, down from a 2011 high of 54.2 in February. The research company and broker-dealer surveys 35 firms with about $84 billion under management every week. The index from ISI, based in New York, tracks hedge-fund investments on a zero through 100 scale. Readings of zero show “maximum” short selling, the sale of equities with the hope of profiting by buying them at lower prices later, while 100 means “maximum” bullish bets. At 50, hedge funds are deploying a “normal” allocation to short and long investments. The ratio of bullish to bearish investments in U.S. equities has dropped to 11.7 from this year’s peak of 13.2 in May, according to New York-based Data Explorers, which provides research on short sales and stock lending. The measure sank to 6.5 in September 2008 after Lehman Brothers Holdings Inc.’s bankruptcy. History shows the S&P 500 may sink after closing at 1,140.65 yesterday, up 1.9 percent from the 11-month low of 1,119.46 reached on Aug. 8. The index plunged 16 percent between July 25 and Aug. 8. The eight declines of that size over similar amounts of time since 1928 led to additional losses averaging 17 percent, according to data compiled by Bespoke Investment Group LLC, a Harrison, New York-based research company.
  • Netanyahu Says Militants to Pay 'Heavy Price' for Southern Israel Attacks. Prime Minister Benjamin Netanyahu said Palestinian militants who attack Israelis will “pay a very heavy price,” after squads of gunmen killed eight people and wounded 30 in a series of assaults outside the resort town of Eilat. “Those who thought they could hurt us without any response will see there is a price to pay, a very heavy price,” Netanyahu said in broadcast comments late yesterday before meeting top ministers to discuss possible Israeli action.
  • U.S. Fed's Low-Interest-Rate Pledge May Retard Recovery, Fisher Tells CNBC. Federal Reserve Bank of Dallas President Richard Fisher said the central bank’s pledge to keep the benchmark U.S. interest rate near zero through at least mid- 2013 may lead to “unintended consequences” and hurt growth. “Now you know that you can wait to borrow because rates are going to be locked in at very low levels for a two-year period,” the regional bank chief said today in an interview with CNBC. “This might well further retard the recovery.” The Dallas Fed chief joined presidents Charles Plosser of Philadelphia and Narayana Kocherlakota from Minneapolis this month in posing the most opposition in almost 19 years to a Federal Open Market Committee decision. They dissented from the FOMC’s Aug. 9 decision to hold interest rates near zero at least until mid-2013, preferring instead to maintain a commitment to do so for an unspecified “extended period.” “There could be unintended consequences,” Fisher said.
Wall Street Journal:
  • A Shaken Europe Looks for Bolder Fixes. A dramatic selloff in European financial markets on Thursday renewed fears that Europe's banks are too weak to withstand the Continent's debt crisis, increasing the chances that the region's leaders will be forced to pursue radical steps toward fiscal union in order to preserve their common currency.
  • Australia Premier Warns on Debt. Australian Prime Minister Julia Gillard expressed concern Thursday about the outlook for global growth, warning that Europe's sovereign-debt crisis is far from being resolved and the U.S. is only beginning to deal with its fiscal problems. In a wide-ranging interview Thursday, Ms. Gillard said the inability of Europe's leaders up to now to calm markets worried over the economic health of the euro zone was the world economy's biggest challenge.
  • Bank of America(BAC) Set to Slice 3,500 Jobs. Bank of America Corp. is cutting 3,500 jobs in the current quarter and working on a broader restructuring that could eliminate thousands of additional positions, people familiar with the situation said.
  • Japanese Government Tests Show Radiation Exposure in Children. Nearly half the children surveyed in three towns near the stricken Fukushima Daiichi nuclear plant received low-grade internal exposure to radiation during the early days of the accident there, the government said Thursday, fueling concerns about long-term health effects on local residents.
  • Deadlock in Ohio Over Union Rights. Labor unions have rejected an offer by Ohio Gov. John Kasich to seek a compromise on a new law that removes most collective-bargaining rights for the state's 350,000 public employees, as a fight over the legislation heads toward a statewide referendum in November. On Wednesday, Mr. Kasich, a Republican, and the party's leaders in the Ohio Senate and House made a pitch to public-employee union leaders to "avoid the bitter political warfare" over the law, known as Senate Bill 5. In a letter Thursday, however, unions said a "fresh start must begin with a full repeal of Senate Bill 5."
  • Inflation Rise Puts Fed in Bind. U.S. inflation surged in July primarily because of climbing energy and food prices, but those costs are likely to retreat in coming months as prices for oil, grains, and other raw materials fall in a lagging economy. Underlying price pressures remain strong, however, which could constrain the Federal Reserve from taking more action soon to spur economic growth and hiring.
CNBC:
  • High-Frequency Trading 'Negative' for Stocks: Marvin Schwartz. High frequency trading is a "major, major negative for the stock market" and the overall economy, legendary value investor Marvin Schwartz, managing director and senior portfolio manager at Neuberger Berman, told CNBC Thursday.
  • Caution on Main Street: Retailers Fret Ahead of Holiday Season. Caution is the watchword for apparel executives heading into the all-important holiday season and their lack of confidence is scaring investors.
  • Investors Back Hedge Funds Amid Turbulence. The GlobeOp Forward Redemption Indicator — a monthly snapshot of clients giving advance notice they want their money back as a percentage of GlobeOp's assets under administration — was 2.71 percent, the third lowest figure seen this year. Whilst up from July's 2.08 percent, it is still well below the 4.01 percent seen in June and well below the 19.27 percent recorded in November 2008 shortly after the collapse of Lehman Brothers.
  • Apple(AAPL) Overtakes Lenovo in China Sales. Apple’s sales in greater China have for the first time overtaken those of Lenovo, the world’s third-biggest personal computer maker by shipment volume, results from the two companies confirm.
Business Insider:
Zero Hedge:
Forbes:
IBD:
NY Times:
  • Euro-Style Anxiety Spreads. European banks are continuing to show signs of strain, making investors increasingly skittish about American financial institutions. Regulators, bank executives and others continued to play down the risks on Thursday, emphasizing that this would not be a repeat of the 2008 financial crisis. In Europe, political leaders have vowed to prevent a Lehman-like collapse of a major bank, while American firms are better insulated from potential shocks than they were three years ago. But on Thursday, shares of some big Wall Street banks sank to levels nearly as low as that in the months after the downfall of Lehman Brothers.

LA Times:
CME Group:
Reuters:
  • BRIC Funds Bleed; Investors Skeptical About Theme's Future. Funds betting solely on stocks in fast-growing Brazil, Russia, India and China are suffering sustained investor withdrawals due to poor returns, throwing into doubt the future of one of the hottest asset classes of recent times. The 'BRIC' moniker was coined by Jim O'Neill of Goldman Sachs in 2001, and investing in the share markets of the four nations took off in the latter half of the last decade. Money managers such as Templeton, Schroders and Deutsche Bank's (DBKGn.DE) DWS launched successful products. Indeed, assets in BRIC funds surged 1,600-fold from a low base to about $38 billion between 2003 and 2007 as shares in the rapidly growing BRIC economies produced almost a 600 percent return. The tide, however, has turned.
  • Barclays(BCS) Shares and Swaps Battered in US Market. Bank stocks around the world took a beating on Thursday, but investors and traders were scratching their heads over why shares of Barclays PLC (BARC.L) took one of the deepest dives while its credit default swaps widened dramatically.
  • Stock, Bond Fund Outflows Slow in Aug 17 Week - Lipper.
  • North American July Chip-Gear Bookings Fall 15.7% vs. June.
  • LDK Solar(LDK) Cuts Outlook, Shares Slump. Chinese solar wafer maker LDK Solar Co Ltd on Thursday sharply lowered its revenue and gross margin forecasts for the second quarter and full year due to a dramatic drop in the price of its products. The company's shares fell nearly 11 percent in extended trade following the announcement.
  • Salesforce(CRM) Bucks Tech Trend, Boosts Outlook. Web-based software maker Salesforce.com Inc raised its full-year revenue outlook, fueling hopes that cloud computing companies can avoid getting caught up in a possible slowdown in tech spending.
The Economist:
  • Many Unhappy Returns. A difficult year for many hedge funds may prove a fatal one for some. August is on track to be one of hedge funds’ worst months ever. The effects will be felt most by some of the weakest funds, many of which need a quarter or two of good performance to restore the morale of their investors and traders. Should they continue to underwhelm in the coming months, investors are likely to withdraw their money. That could force some smaller funds to be wound down. Others will close before investors have the chance to desert them. Some funds have been hanging on since 2008, trying to claw their way back to their peaks, or “high-water marks”, at which point they can once again earn lucrative performance fees. But as many as 89% of hedge funds may have still been under their 2006 and 2007 high-water marks in June, according to PerTrac, a data aggregator. Given their high costs, most have been barely surviving on management fees from investors, which are usually around 2% of assets. Bigger funds, which have economies of scale, might be able to survive for another few years on these paltry pickings. Smaller ones will not.
Guardian:

Digitimes:
  • Handset Vendors Reportedly Cutting Back Chipset Orders for 4Q11. Some handset solution suppliers have indicated that a number of handset vendors, including Apple and HTC, have scaled down their chipset orders for the fourth quarter as compared with the third on concerns of the global economy, according to sources at Taiwan-based chipset makers. While most smartphone vendors are likely to reach their shipment targets for the third quarter, they have begun to reduce orders for parts and components for the fourth quarter in preparation for a possible impact from changing economic conditions, the sources noted.
China Securities Journal:
  • The rising yields of bills sold by China's central bank this week may indicate the monetary authority will maintain a tight policy stance, but will watch future inflation trends before raising interest rates again, citing analysts. One-year bill yields had remained higher than the one-year deposit rate for three months before the People's Bank of China raised interest rates in July.
China Information News:
  • The global financial turmoil triggered by the European and U.S. debt crises is the biggest uncertainty facing China's economy in the second half of the year, the China Information News said in a front page commentary today. China's export and economic growth may be negatively affected by cuts in fiscal spending in major economies, according to the commentary. The nation's exports may also face challenges from rising protectionism, accelerating yuan appreciation and higher costs, the commentary said.
Economic Daily News:
  • Delta Electronics Inc. plans to eliminate 10% of its workforce in China, or 6,000 workers, as a cost-cutting measure, citing Yancey Hai, chief executive officer of the company.
Economic Observer:
  • Chinese banks may not cope as well with a 50% decline in home prices as CBRC Chairman Liu Mingkang thinks, Fitch Ratings senior director Charlene Chu is being quoted as saying. - NPL ratio at Chinese banks may be as high as 30% in extreme scenario; NPL ratio of 13% very likely, citing Chu. - Stress tests on property loans that Chinese banks conduct are static and isolated. - Related sectors may be affected if home prices fall 50%. - Banks low valuations show investor concern about their local govt. financing, vehicle loans, property loans, wealth- management products and frequent fundraisings. - China's govt. may bail out banks if they pose a risk to the banking system, which could affect China's sovereign rating.
National Business Daily:
  • China should prevent hot money inflows and inflationary pressure that would be triggered by a new round of U.S. quantitative easing, citing central bank adviser Li Daokui. The Asian country should use the U.S. debt turmoil as an opportunity to make China's economic policies more proactive, citing Li. China's Sate Council and the People's Bank of China must realize that the country is facing the danger of a recession, Yuan Gangming, a researcher with Tsinghua University, was cited as saying in the report. The key for China to deal with the global downturn is to firmly stabilize the exchange rate, push forward the yuan's internationalization and promote diversification of global reserve currencies, Xiang Songzuo, a deputy director of the International Monetary Institute at Renmin University said, according to the report.
Evening Recommendations
  • None of note
Night Trading
  • Asian equity indices are -4.0% to -1.25% on average.
  • Asia Ex-Japan Investment Grade CDS Index 153.50 +12.5 basis points.
  • Asia Pacific Sovereign CDS Index 151.25 +13.25 basis points.
  • FTSE-100 futures -.58%.
  • S&P 500 futures -.85%.
  • NASDAQ 100 futures -.60%.
Morning Preview Links

Earnings of Note
Company/Estimate
  • (ANN)/.45
  • (HIBB)/.19
Economic Releases
  • None of note
Upcoming Splits
  • None of note
Other Potential Market Movers
  • The Fed's Dudley speaking and the Fed's Pianalto speaking could also impact trading today.
BOTTOM LINE: Asian indices are sharply lower, weighed down by technology and industrial shares in the region. I expect US stocks to open modestly lower and to rally into the afternoon, finishing mixed. The Portfolio is 50% net long heading into the day.

Thursday, August 18, 2011

Stocks Plunging into Final Hour on Global Growth Fears, Rising Eurozone Debt Angst, Financial/Tech Sector Weakness, Margin Selling


Broad Market Tone:

  • Advance/Decline Line: Substantially Lower
  • Sector Performance: Every Sector Declining
  • Volume: Above Average
  • Market Leading Stocks: Performing In Line
Equity Investor Angst:
  • VIX 42.64 +34.90%
  • ISE Sentiment Index 75.0 -27.2%
  • Total Put/Call 1.52 +11.76%
  • NYSE Arms 2.04 +100.19%
Credit Investor Angst:
  • North American Investment Grade CDS Index 115.98 +5.8%
  • European Financial Sector CDS Index 206.17 +9.54%
  • Western Europe Sovereign Debt CDS Index 292.50 +.11%
  • Emerging Market CDS Index 276.98 +7.23%
  • 2-Year Swap Spread 27.0 +2 bps
  • TED Spread 30.0 +2 bps
Economic Gauges:
  • 3-Month T-Bill Yield .00% -1 bp
  • Yield Curve 188.0 -10 bps
  • China Import Iron Ore Spot $177.10/Metric Tonne +.17%
  • Citi US Economic Surprise Index -83.90 -11.0 points
  • 10-Year TIPS Spread 1.96% -17 bps
Overseas Futures:
  • Nikkei Futures: Indicating -264 open in Japan
  • DAX Futures: Indicating -21 open in Germany
Portfolio:
  • Lower: On losses in my Tech, Medical, Biotech and Retail sector longs
  • Disclosed Trades: Added to my (IWM)/(QQQ) hedges and added to my (EEM) short, then covered some of them
  • Market Exposure: Moved to 50% Net Long
BOTTOM LINE: Today's overall market action is very bearish, as the S&P 500 falls substantially with good volume on global growth worries, rising Eurozone debt angst, emerging markets inflation fears, more shorting, technical selling, forced margin selling, tax hike fears and tech/financial sector weakness. On the positive side, Utility, Tobacco and Telecom shares are holding up relatively well, falling less than 3.0% on the day. Oil is falling -6.62% and the UBS-Bloomberg Ag Spot Index is down -1.06%. On the negative side, Road & Rail, Homebuilding, Construction, Networking, Disk Drive, Computer, Oil Service, Alt Energy and Coal shares are under tremendous pressure, plunging more than -7.0%. Cyclicals and small-caps are relatively weak again today. The Transports have underperformed throughout the day again and tech/financial shares trade very poorly. The 10-year yield is falling -9 bps to 2.07%. Gold is rising +1.92%, Copper is falling -2.55% and Lumber is falling -3.5%. Rice is still near a multi-year high, rising +28.0% in about 7 weeks. The US price for a gallon of gas is falling +.01/gallon today to $3.59/gallon. It is up .45/gallon in about 7 months. The Germany sovereign cds is jumping +6.98% to 79.67 bps, the France sovereign cds is rising +9.06% to 150.33 bps, the Spain sovereign cds is gaining +9.48% to 362.50 bps, the Italy sovereign cds is rising +3.68% to 352.33 bps, the Russia sovereign cds is gaining +7.28% to 192.33 bps, the Brazil sovereign cds is gaining +7.6% to 146.39 bps and the UK sovereign cds is rising +7.56% to 79.83 bps. Moreover, the US Muni cds index is surging +10.77% to 177.21 bps. The FRA/OIS Spread is jumping +5 bps to 41.75 bps. Indian stocks fell -2.2% overnight and are back near their lows, down -19.7% ytd. German, French and Italian stocks plunged over -5% today and are back near their lows. Germany's DAX is now down -19.0% ytd. Gauges of investor angst are surging today, which is a positive. However, the AAII % Bulls rose to 35.56 this week, while the % Bears fell to 39.82, which is a large negative given the backdrop. The number of large hedge funds that are nursing massive losses is becoming another large concern. I still think the odds of a new global recession appear to be higher than investors currently perceive. The huge technical breakdowns in the TIPS spread and yield curve are telling. As well, the Philly Fed has plunged -74.1 points since March, which is the steepest 5-month decline since record-keeping began in May 1968. I expect US stocks to trade mixed-to-lower into the close from current levels on tech/financial sector pessimism, rising eurozone debt angst, tax hike fears, more shorting, global growth worries, emerging markets inflation fears, technical selling and forced margin selling.