Stocks Falling into Final Hour on Surging Eurozone Debt Angst, Rising Global Growth Fears, Earnings Worries, Tech/Consumer Discretionary Weakness

Broad Market Tone:

• Advance/Decline Line: Substantially Lower
  
• Sector Performance: Every Sector Declining
  
• Volume: Slightly Below Average
  
• Market Leading Stocks: Performing In Line
  

Equity Investor Angst:

• VIX 19.85 +6.61%
  
• ISE Sentiment Index 80.0 +8.11%
  
• Total Put/Call .91 +7.06%
  
• NYSE Arms 1.47 +72.96%
  

Credit Investor Angst:

• North American Investment Grade CDS Index 116.15 +2.44%
  
• European Financial Sector CDS Index 301.10 bps +2.52%
  
• Western Europe Sovereign Debt CDS Index 284.66 +1.39%
  
• Emerging Market CDS Index 283.43 +2.71%
  
• 2-Year Swap Spread 22.75 -.75 basis point
  
• TED Spread 35.25 -1.25 basis points
  
• 3-Month EUR/USD Cross-Currency Basis Swap -46.50 +1.5 basis points
  

Economic Gauges:

• 3-Month T-Bill Yield .10% +1 basis point
  
• Yield Curve 119.0 -3 basis points
  
• China Import Iron Ore Spot $125.0/Metric Tonne -.57%
  
• Citi US Economic Surprise Index -59.60 +1.2 points
  
• 10-Year TIPS Spread 2.01 -3 basis points
  

Overseas Futures:

• Nikkei Futures: Indicating -118 open in Japan
• DAX Futures: Indicating -70 open in Germany
  

Portfolio:

• Slightly Lower: On losses in my Tech, Medical and Retail sector longs.
  
• Disclosed Trades: Added to my (IWM)/(QQQ) hedges and to my (EEM) short, 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 trades near session lows as it tests its 50-day moving average on surging eurozone debt angst, tech/consumer discretionary sector weakness, high food prices, US "fiscal cliff" worries, earnings concerns, more shorting, profit-taking and rising global growth fears. On the positive side, HMO shares are just slightly lower on the day. The UBS-Bloomberg Ag Spot Index is down -2.8%. On the negative side, Coal, Alt Energy, Energy, Oil Service, Steel, Paper, Internet, Computer, Networking, Hospital, Construction, Homebuilding, Gaming, Education and Airline shares are under meaningful pressure, falling more than -2.0%. Consumer discretionary and tech shares have traded heavy throughout the day again. Copper is falling -.65%, Oil is rising +.3% and Lumber is down -.54%. The UBS-Bloomerg Ag Spot Index is still up +23.7% in about 7 weeks. The 10Y T-Note Yld is falling another -2 bps to 1.41%. The China benchmark Iron/Ore Spot Price Index has broken down again technically, falling -17.7% since April 13th and -32.1% since Sept. 7 of last year. As well, the China Hot Rolled Steel Sheet Spot Index is also picking up downside steam. Major Asian indices were slightly lower overnight, led down by a -.8% decline in Hong Kong. The Shanghai Composite rose +.24%, but is down -24.5% since April 18th of last year despite investor hopes for another massive stimulus package and perceptions of an economic soft-landing. Major European indices are falling again today, led lower by a -3.6% decline in Spain. Italian equities are falling another -2.7% and have plunged -8.7% in 5 days. Italian shares are down -18.1% ytd and are testing their March 9th 2009 low today. Spanish equities hit the lowest since March 2003 today and are down -30.5% ytd, which remains another large red flag. The Bloomberg European Bank/Financial Services Index is falling another -1.3% and is down -4.9% in 5 days. Brazilian shares are falling -1.0% to the low-end of the range they have been in since May. The Germany sovereign cds is rising +3.7% to 85.50 bps, the France sovereign cds is rising +1.6% to 185.51 bps, the Italian sovereign cds is gaining +3.6% to 569.08 bps and the Spain sovereign cds is up 1.8% to 640.91 bps, the Russia sovereign cds is up +2.6% to 212.35 bps and the Brazil sovereign cds is up +4.0% to 154.88 bps. Moreover, the European Investment Grade CDS Index is jumping +2.6% to 179.80 bps, the Italian/German 10Y Yld Spread is gaining +3.8% to 536.02 bps and the Spain 10Y Yld is jumping +4.1% to 6.60%. US weekly retail sales have decelerated to a sluggish rate at +1.7%, which is the slowest since the week of Feb. 2, 2010. US Trucking Traffic continues to soften. The ASA Staffing Index just took a large weekly tumble. Moreover, the Citi US Economic Surprise Index has fallen back to late-Aug. levels. Lumber is -1.0% since its March 1st high despite improving sentiment towards homebuilders and the broad equity rally ytd. Moreover, the weekly MBA Home Purchase Applications Index has been around the same level since May 2010 despite investor perceptions of a strong spring home selling season. The Baltic Dry Index has plunged around -50.0% from its Oct. 14th high and is now down around -40.0% ytd. Shanghai Copper Inventories have risen +109.0% ytd. Oil tanker rates have plunged recently, with the benchmark Middle East-to-US voyage down to 25.0 industry-standard worldscale points, which is the lowest since Oct. 2009. The CRB Commodities Index is now down -17.6% since May 2nd of last year despite the recent surge in food prices. I cautioned recently over the precipitous fall in the German cds versus the Spain/Italy cds. Recent comments by German officials only increase my skepticism regarding investor perceptions that Germany will destroy its own balance sheet to save the euro. The Spain sovereign cds and Spanish 10Y Yld are making all-time highs again today. The Italy sovereign cds is only 33 bps away from its Nov. 15th all-time high and the Italian 10Y Yld has broken out technically. The European Investment Grade CDS Index and Financial Sector Index are close to breaking out technically, as well. This is extremely concerning given the perceived recent can-kicking. Copper and the euro currency remain in intermediate-term downtrends and trade poorly. The 10Y T-Note continues to trade too well as it makes new record highs, which remains a big red flag. There still appears to be a fairly high level of complacency among US investors regarding the still-deteriorating macro backdrop. The Citi Eurozone Economic Surprise Index is at -67.60 points, which is near the lowest since mid-Sept. of last year. Massive tax hikes and spending cuts are still yet to hit in several key eurozone countries that are already in recession. A lack of competitiveness remains unaddressed. The European debt crisis is also really beginning to bite emerging market economies now, which will further pressure exports from the region and further raise the odds of more sovereign/bank downgrades. The odds for QE3 are likely meaningfully lower than investors currently perceive as food prices soar and energy prices rebound. If the Fed embarks on another misguided round of QE, the Ag Spot Index should push through its Aug. 31, 2011 all-time high. This would likely also lead to another surge in energy prices as it would spur another bout of rioting in the Middle-East and other emerging markets. As well, it would greatly curtail any emerging markets stimulus plans, in my opinion. It is unlikely the Fed would take this risk ahead of an election, in my opinion. Uncertainty surrounding the effects on business of Obamacare, the "US fiscal cliff " and the election outcome uncertainty will likely become more and more of a focus for investors as the year progresses. Three of the main reasons US stocks had been rallying were the beliefs that QE3 was imminent, China would embark on another massive easing campaign and Europe had successfully kicked the can once again. However, as I stated above, soaring food prices/rising energy costs make QE3 much less likely, in my opinion. Recent comments by Chinese officials suggest a more subdued approach to easing and an unwillingness to let their real estate bubble begin re-inflating. Soaring food prices also put a large dent in emerging markets easing plans. Finally, the surge in Spanish yields to records, soaring Italian yields and breakouts in other European debt angst gauges suggests the recent European debt crisis can-kicking may have already run its course. There had been a growing disconnect between US equity action and the deteriorating macro environment that was eerily similar to last July, in my opinion. The macro likely must begin improving very soon for equities to avoid a similar fate into the fall. For this year's equity advance to regain traction, I would expect to see a resumption in European credit gauge improvement, a subsiding of hard-landing fears in key emerging markets, a rising 10-year yield, better volume, stable-to-lower energy prices, a US "fiscal cliff" solution and higher-quality stock market leadership. I expect US stocks to trade mixed-to-lower into the close from current levels on surging eurozone debt angst, earnings worries, high food prices, rising global growth fears, more shorting, consumer discretionary/tech sector weakness, profit-taking and US "fiscal cliff" concerns.

Bear Radar

Style Underperformer:

• Small-Cap Value -1.84%

Sector Underperformers:

• 1) Education -8.71% 2) Coal -7.34% 3) Steel -3.81%

Stocks Falling on Unusual Volume:

• BRY, OLN, TEF, FST, LLY, E, TOT, MRK, DECK, ICON, GNTX, BEAV, VLTR, STRA, BECN, CRDN, APOL, APEI, ATMI, ZION, USAP, ZBRA, CSCO, ASTE, USTR, SIAL, LOPE, AMZN, OMI, AXE, ABG, GLF, CSL, NRG, HNT, COL, SFG, UPS, LII, ESI, TDG, WHR, AME, NSM, BTU, LXK, BRKR, VLTR, WBMD and DV
  

Stocks With Unusual Put Option Activity:

• 1) JNPR 2) SPG 3) RF 4) RCL 5) UPS
  

Stocks With Most Negative News Mentions:

• 1) PHM 2) JPM 3) UPS 4) GM 5) LXK
  

Charts:

• ETFs Falling on Unusual Volume
• Stocks Falling on Unusual Volume
  

Bull Radar

Style Outperformer:

• Large-Cap Growth -.26%

Sector Outperformers:

• 1) HMOs +.62% 2) Gold & Silver +.29% 3) Telecom +.28%

Stocks Rising on Unusual Volume:

• UA, SIX, CNC, R, AVY, PCAR, DPZ, PNR, FNB, CYNO and BIDU
  

Stocks With Unusual Call Option Activity:

• 1) CTXS 2) RAX 3) CE 4) CSCO 5) UA
  

Stocks With Most Positive News Mentions:

• 1) TXN 2) CSCO 3) NOC 4) TGT 5) BHI
  

Charts:

• ETFs Rising on Unusual Volume
• Stocks Rising on Unusual Volume

Tuesday Watch

Evening Headlines
Bloomberg:

• Germany, Netherlands Rating Outlooks Cut to Negative by Moody’s. Germany, the Netherlands and Luxembourg had the outlooks for their Aaa credit ratings lowered to negative by Moody's Investors Service, which cited “rising uncertainty" about Europe’s debt crisis. Risks that Greece may leave the 17-nation euro currency and “increasing likelihood” of collective support for European countries such as Spain and Italy were among reasons for the change, Moody’s said yesterday in a statement. “Given the greater ability to absorb the costs associated with this support, this burden will likely fall most heavily on more highly rated member states if the euro area is to be preserved in its current form,” Moody’s said.
• Spain Edges Toward Bailout as Rajoy Rescues Regions: Euro Credit. Spain's bailout of its regions risks pushing the nation closer to needing a full international rescue as it struggles to maintain market access with 10-year bond yields hovering at 7.5%. "It's the straw that broke the camel's back," Lyn Graham-Taylor, a fixed income strategist at Rabobank in London, said in a telephone interview. "It's almost a waiting game now until they seek a sovereign bailout."
  
• Euro Near 11-Year Low Versus Yen on Spain, Italy Concern. The euro was 0.7 percent from an 11- year low against the yen amid signs Europe’s prolonged debt crisis is damping economic growth. Japan’s currency climbed even as the government said its ready to counter excessive moves. The 17-nation currency held a four-day decline versus the dollar after bond yields jumped in Spain and Italy and billionaire hedge-fund manager John Paulson was said to have told clients he sees a 50 percent chance the euro will unravel. Moody’s Investors Service cut its rating outlook for Germany and the Netherlands to negative yesterday, citing increasing chances they’ll have to support indebted European nations. Australia’s dollar gained after a Chinese manufacturing gauge rose. “There are few reasons to buy the euro,” said Junichi Ishikawa, an analyst in Tokyo at IG Markets Securities Ltd. “Investors are worried that the debt crisis is spreading to Spain and Italy.”
• Hollande Transaction Tax Drives Investors’ Quest for Loopholes. French President Francois Hollande’s transaction tax is set to take effect Aug. 1. Not all investors will be paying it. To escape the tax, many institutional investors will turn to so-called contracts for difference, or CFDs, offered by prime brokers that let them bet on a stock’s gain or loss without owning the shares. Traders have used it successfully to skirt the U.K.’s stamp duty.
• China’s Stocks Decline to Lowest Since 2009 on Economy Concern. China’s stocks fell, dragging the benchmark index to its lowest level since 2009, on concern the slowing global growth will hurt earnings. China Coal Energy Co. and Datong Coal Industry Co. dropped among coal producers as oil traded near a one-week low in New York. China Vanke Co. (000002) and Poly Real Estate Group Co. advanced after the China News Service said Nanjing city plans to offer public housing fund loans for first home purchases. A private survey today released by HSBC Holdings Plc and Markit Economics signaled the nation’s manufacturing may contract at a slower pace in July.
• China's Growth Slowdown Is Welcome, Pettis Writes in FT. The decline in China’s growth rate is a good thing for the country and the world, Peking University finance professor Michael Pettis writes in the Financial Times. China appears to be heading for a hard landing, and it must sharply reduce interest rates and expand credit to save itself and the world from disaster, Pettis, a senior associate at the Carnegie Endowment, writes. While Chinese rebalancing -- which will involve raising the consumption contribution to its Gross Domestic Product -- will mean declining growth and rapidly increasing real interest rates, instead of “panicking and demanding that Beijing reverse the process, we should be relieved that China is finally solving its problems,” he writes. Fears that slower growth will lead to social dislocation in China and economic dislocation in the rest of the world will not be realized if the change is managed well, Pettis writes, noting that “if Chinese growth slows even to 3 percent, as I expect it will, but household income continues growing at 5-6 percent, this is far from being socially disruptive.”
• China Shadow Bankers Go Online as Peer-to-Peer Sites Boom. Peer-to-peer lending is taking off in China as traditional methods of private lending among family and acquaintances, part of the country’s unregulated $2.4 trillion shadow-banking system, move online. More than 2,000 websites have been set up nationwide since 2007, China National Radio reported in May. Loans brokered online increased 300-fold to 6 billion yuan in the first half of 2011, the latest figures available, from the full year total in 2007, the report said.
• Europe Heat Wave Wilting Corn Adds to U.S. Drought: Commodities. Heat waves in southern Europe are withering the corn crop and reducing yields in a region that accounts for 16 percent of global exports at a time when U.S. drought already drove prices to a record.
• Cisco(CSCO) Plans to Eliminate 1,300 Jobs in Drive to Cut Costs. Cisco Systems Inc. (CSCO), the biggest maker of computer-networking equipment, plans to eliminate about 1,300 jobs, or 2 percent of the workforce, as Europe’s debt crisis and sluggish corporate spending threaten sales. The cuts are part of a “continuous process of simplifying the company, as well as assessing the economic environment in certain parts of the world,” San Jose, California-based Cisco said today in an e-mailed statement.

Wall Street Journal:

• Paulson: 50-50 Chance Euro Will Fall in 3 Months-2 Years - Source. Billionaire hedge fund manager John Paulson believes there is a 50-50 chance the euro may fall in the next three months to two years, a person familiar with the situation said Monday. The hedge-fund manager, who made billions by betting on the subprime mortgage crisis, made the statement in a conference call with investors reviewing second-quarter performance, the person said. The call is the boldest any hedge-fund manager has made so far on the ongoing European sovereign debt crisis. Bridgewater Associates, the world's largest hedge fund, said in an investor letter sent earlier this month on market outlook that Europe has to do more in terms of default, redistribution and monetization to achieve an orderly deleveraging. "Steps have been taken in this direction, but they remain well short of what is necessary," it said. The fund added that there are "good reasons" to doubt the notion of an orderly deleveraging among European banks and sovereigns. "This fat tail event must be considered a significant possibility," it said, but stopped short of mentioning a possible euro-zone breakup. Mr. Paulson has been bearish on the heavy indebtedness of peripheral European countries, having told investors earlier this year he is shorting European sovereign bonds and buying credit-default swaps on European debt. He has dialed down the net exposure of his funds accordingly. Paulson & Co.'s Advantage Fund has slashed its net long exposure to 11% from 32% at the end of January, while its credit fund has a net short exposure of 9%, down from 27% at the end of January, the person said.
• Libor Probe Expands to Bank Traders. Groups From at Least Nine Institutions Allegedly Banded Together to Rig Key Global Interest Rates. Several groups of traders are under investigation by regulators around the world for allegedly banding together to rig interest rates, people close to the probe said. The continuing criminal and civil scrutiny includes more than a dozen traders from at least nine banks, often allegedly working together in small groups to target different interest rates on separate continents, the people said.
• Syria Says It Has Chemical Weapons. Syria's government acknowledged for the first time Monday that it had weapons of mass destruction, saying it has the capability to use its chemical and biological weapons in case of a foreign attack.
• China Push in Canada Is Biggest Foreign Buy. Deal Could Help China Secure Oil And Gas Supplies. Cnooc Ltd. swept into Canada with China's biggest overseas acquisition yet, a $15.1 billion deal to buy one of that country's largest energy producers that reignites a debate over the role of Chinese state players in North America's energy industry.
• Fed Official Wants Tougher Volcker Rule. A top Federal Reserve official sharpened her public criticism of a draft measure restricting banks' ability to trade with their own money, arguing in a speech Monday that regulators should draw the exemptions to the rule more narrowly. In remarks prepared for a speech in Colorado, Fed governor Sarah Bloom Raskin argued for a stronger version of the so-called Volcker rule that would be more difficult for banks to work around.
• Colorado Suspect Is Silent at His Hearing. The alleged gunman in the shooting spree that killed 12 and wounded 58 others at a cinema appeared in court here Monday, his hair dyed a reddish orange, and seemed to be drifting off as lawyers began to discuss his fate. Carol Chambers, the district attorney for Colorado's 18th Judicial District, said after the hearing that prosecutors may seek the death penalty against suspect James Holmes but first want to discuss the matter with the wounded and families of those killed in the mass shooting in Aurora, a Denver suburb, last week. She said a decision may take several months.
• Spain Blames Mario. It's not the ECB's job to bail out Madrid. Yields on Spanish 10-year debt are hitting new euro-era highs only days after European finance ministers signed off on the country's €100 billion bank bailout. No surprise: The bailout's size and structure rest on highly optimistic assumptions, Spain's GDP forecast is falling, and debt-laden regional governments are petitioning Madrid for rescue. If investors still aren't giving Spanish bonds the benefit of the doubt, it's because the outlook for Spain is no brighter despite exertions in Brussels and Madrid.

Business Insider:

• LIBOR EXPERT: The Fed Has Destroyed LIBOR.
• Here's Why You're So Uncomfortable With Spending Right Now.
• This Ex-IMF Economist Probably Won't Be Asking Christine Lagarde For A Recommendation.
• Migrant Workers In China Are Returning Home As Job Losses Mount.
• Sounds Like Every Ridiculous Thing You Ever Thought About Congressional Hearings Might Be True.
• This Homicide Map Shows How Bad Things Are Getting In Chicago.

Zero Hedge:

• China's Schrodinger Economy Continues To Contract And Expand At Same Time.
• Is Vegas Signaling The Consumer Is Folding?
• Is Spain's 15%+ 'Legal-Arbitrage' 6 Month Return Signaling An Imminent Bailout?

CNBC:

• We Have Entered the World of Disaster Economics. Are the bond markets going mad? It is a question that many investors might ask. For as anxiety has erupted in the eurozone, something striking has occurred with respect to US Treasuries and German Bunds.
• Texas Instruments'(TXN) Earnings Beat; Forecast Falls Short. Texas Instruments reported second-quarter earnings that beat analysts' expectations but its projections for third-quarter earnings and revenue fell short of forecasts. Shares fell in after-hours trading on Monday.
• Typhoon Hits Hong Kong; Hang Seng Delays Opening.

Mediaite:

• Jon Stewart Tears Apart ABC’s Brian Ross For False Tea Party Report On Aurora Shooter. (video)
  

Gallup:

• President Obama Job Approval: Approve 44%, Disapprove 49%. (graph)

Reuters:

• US public pension funds to face calls to set realistic targets. U.S. public pension funds are expected to report poor annual returns in the coming weeks, results that are likely to increase calls for more realistic retirement promises for teachers, police officers and other public workers. At least three of the nation's largest U.S. public pension funds have already announced returns of between 1 percent and 1.8 percent, far below the 8 percent that large funds have typically targeted.
• U.S. tax cut votes prelude to bigger "fiscal cliff" fight. The U.S. Congress is set to begin debating this week whether to extend hundreds of billions of dollars in expiring tax cuts in what amounts to a round of shadow boxing in advance of the real battle after the November elections.

Telegraph:

• Mario Draghi has just weeks to save the euro, but will Germany let him?
• Ten Italian cities at risk of bankruptcy, schools may not reopen. Italy's financial outlook darkened on Monday amid warnings that 10 cities are at risk of bankruptcy and schools may not be able to open in the autumn because of drastic spending cuts.
• Eurozone danger mounts as Spain spins out of control. Spain is battling to avert a fully-fledged sovereign rescue after borrowing costs spiralled out of control, with dangerous knock-on effects in Italy and Eastern Europe.

People's Daily:

• China may introduce new property curbs if prices rebound "out of expectations," People's Daily said in a commentary written by Tian Shan.

China Daily:

• Chinese banks shouldn't give discounts to mortgages below benchmark interest rates, citing a Chinese Academy of Social Sciences report. The central bank has maintained a policy of allowing discounts of up to 30% for first time home buyers, which triggered a change in market expectations, citing Ni Pengfei, who chaired the writing of the report from CASS's National Academy of Economic Strategy. The government should improve current property policies to reverse the recent rising price trend and prevent a "retaliatory rebound," the report said. Mortgage rates for second-home purchases should be raised to 1.2 times the benchmark rate and loans not provided for third homes, the report said.

Shanghai Securities News:

• China's State Council plans to send six teams to inspect property markets and lending in 12 provinces as authorities are "highly concerned" about potential risk. the China Banking Regulatory Commission will continue to strictly control risk for real estate financing.

Evening Recommendations

• None of note

Night Trading

• Asian equity indices are -.50% to unch. on average.
• Asia Ex-Japan Investment Grade CDS Index 174.0 +4.0 basis points.
  
• Asia Pacific Sovereign CDS Index 140.25 +7.25 basis points.
  
• FTSE-100 futures +.36%.
  
• S&P 500 futures +.02%.
  
• NASDAQ 100 futures +.16%.

Morning Preview Links

Earnings of Note
Company/Estimate

• (BEAV)/.68
• (AKS)/.05
• (RAI)/.76
• (BTU)/.53
• (CPLA)/.64
• (APD)/1.41
• (R)/.93
• (LXK)/.88
• (BIIB)/1.56
• (LMT)/1.91
• (JAH)/1.10
• (DD)/1.46
• (WHR)/1.69
• (EMC)/.39
• (UA)/.05
• (MO)/.57
• (SPG)/1.81
• (UPS)/1.17
• (T)/.62
• (ITW)/1.09
• (RHI)/.35
• (NFLX)/.05
• (ALTR)/.39
• (IGT)/.29
• (CHRW)/.71
• (AAPL)/10.37
• (LLTC)/.45
• (ILMN)/.36
• (JNPR)/.16
• (NSC)/1.53
• (PNRA)/1.43
• (RVBD)/.21
• (BRCM)/.69
• (AFL)/1.61
• (WAT)/1.16
• (BWLD)/.68
• (DPZ)/.46
• (GNTX)/.29

Economic Releases
8:58 am EST

• The Preliminary Markit US PMI for July is estimated to fall to 52.0 versus 52.5 in June.

10:00 am EST

• The Richmond Fed Manufacturing Index for July is estimated to rise to -1.0 versus -3.0 in June.
• The House Price Index for May is estimated to rise +.4% versus a +.8% gain in April.
  

Upcoming Splits

• (RAVN) 2-for-1
• (TROX) 5-for-1
  

Other Potential Market Movers

• The Eurozone PMI Data, Spanish bond auction, Itlay's Monti meeting Sicily government, 2Y T-Note auction, German/French/Spain Finance Ministers meeting and the (CPB) analyst day 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 mixed. The Portfolio is 50% net long heading into the day.

Stocks Falling into Final Hour on Surging Eurozone Debt Angst, Earnings Worries, Rising Global Growth Fears, Tech/Consumer Discretionary Weakness

Broad Market Tone:

• Advance/Decline Line: Substantially Lower
  
• Sector Performance: Almost Every Sector Declining
  
• Volume: Below Average
  
• Market Leading Stocks: Performing In Line
  

Equity Investor Angst:

• VIX 18.52 +13.83%
  
• ISE Sentiment Index 67.0 -41.23%
  
• Total Put/Call .86 %
  
• NYSE Arms .75 -52.82%
  

Credit Investor Angst:

• North American Investment Grade CDS Index 113.28 +1.76%
  
• European Financial Sector CDS Index 293.49 bps +3.04%
  
• Western Europe Sovereign Debt CDS Index 281.09 +3.92%
  
• Emerging Market CDS Index 274.17 +4.43%
  
• 2-Year Swap Spread 23.5 -1.0 basis point
  
• TED Spread 36.5 unch.
  
• 3-Month EUR/USD Cross-Currency Basis Swap -48.0 -1.75 basis points
  

Economic Gauges:

• 3-Month T-Bill Yield .09% unch.
  
• Yield Curve 122.0 -3 basis points
  
• China Import Iron Ore Spot $125.0/Metric Tonne -1.1%
  
• Citi US Economic Surprise Index -60.80 +3.7 points
  
• 10-Year TIPS Spread 2.04 -2 basis points
  

Overseas Futures:

• Nikkei Futures: Indicating -13 open in Japan
• DAX Futures: Indicating +9 open in Germany
  

Portfolio:

• Slightly Higher: On gains in my index hedges and emerging markets shorts
  
• Disclosed Trades: Covered some of my (IWM)/(QQQ) hedges and some of my (EEM) short
  
• Market Exposure: Moved to 50% Net Long

BOTTOM LINE: Today's overall market action is bearish as the S&P 500 trades off session lows, but meaningfully lower, on surging eurozone debt angst, tech/consumer discretionary sector weakness, high food prices, US "fiscal cliff" worries, earnings concerns, more shorting, profit-taking and rising global growth fears. On the positive side, Homebuilding and Coal shares are just slightly lower on the day. Oil is down -3.8%, the UBS-Bloomberg Ag Spot Index is down -1.7%, Gold is down -.7% and Lumber is gaining +.3%. On the negative side, Alt Energy, Oil Tanker, Energy, Ag, Steel, Software, Computer, Networking, Medical, Hospital, Construction, Restaurant, Gaming, Education, Airline and Road & Rail shares are under meaningful pressure, falling more than -2.0%. Consumer discretionary and tech shares have traded heavy throughout the day. Copper is falling -2.2%. The UBS-Bloomerg Ag Spot Index is still up +26.9% in about 7 weeks. The 10Y T-Note Yld is falling another -2 bps to 1.44%. The China benchmark Iron/Ore Spot Price Index has broken down again technically, falling -17.3% since April 13th and -31.7% since Sept. 7 of last year. As well, the China Hot Rolled Steel Sheet Spot Index is also picking up downside steam. Major Asian indices fell around -1.75% overnight, led lower by a -3.0% decline in Hong Kong. The Shanghai Comp fell another -1.3% and is testing its early-Jan. lows. This index is down -24.5% since April 18th of last year despite investor hopes for another massive stimulus package and perceptions of an economic soft-landing. Major European indices are falling around -2.5%, led lower by a -3.2% decline in Germany. Italian equities are falling another -2.8% and have plunged -7.8% in 5 days. Italian shares are down -16.5% ytd and close to testing their March 9th 2009 lows. Spanish equities hit the lowest since March 2003 today and are down -29.0% ytd, which remains another large red flag. The Bloomberg European Bank/Financial Services Index is falling another -2.65% and is down -5.5% in 5 days. Brazilian shares are falling -2.4% to the low-end of the range they have been in since May.The Germany sovereign cds is rising +5.5% to 82.48 bps, the France sovereign cds is jumping +7.0% to 182.50 bps, the Italian sovereign cds is gaining +4.47% to 549.66 bps and the Spain sovereign cds is up 4.2% to 630.35 bps, the Russia sovereign cds is up +7.8% to 207.08 bps, the China sovereign cds is gaining +4.5% to 121.05 bps and the Brazil sovereign cds is up +3.5% to 147.83 bps. Moreover, the European Investment Grade CDS Index is jumping +3.8% to 175.35 bps, the Italian/German 10Y Yld Spread is gaining +3.3% to 516.25 bps and the Spain 10Y Yld is jumping +3.7% to 7.50%. US weekly retail sales have decelerated to a sluggish rate at +2.0%, which is the slowest since the week of April 5th of last year. US Trucking Traffic continues to soften. The ASA Staffing Index just took a large weekly tumble. Moreover, the Citi US Economic Surprise Index has fallen back to late-Aug. levels. Lumber is -1.0% since its March 1st high despite improving sentiment towards homebuilders and the broad equity rally ytd. Moreover, the weekly MBA Home Purchase Applications Index has been around the same level since May 2010 despite investor perceptions of a strong spring home selling season. The Baltic Dry Index has plunged around -50.0% from its Oct. 14th high and is now down around -40.0% ytd. Shanghai Copper Inventories have risen +114.0% ytd. Oil tanker rates have plunged recently, with the benchmark Middle East-to-US voyage down to 25.0 industry-standard worldscale points, which is the lowest since Oct. 2009. The CRB Commodities Index is now down -17.3% since May 2nd of last year despite the recent surge in food prices. I cautioned recently over the precipitous fall in the German cds versus the Spain/Italy cds. Comments by German officials over the weekend only increase my skepticism regarding investor perceptions that Germany will put its balance sheet on the line to save the euro. The Spain sovereign cds and Spanish 10Y Yld are making all-time highs today. The Italy sovereign cds is only 53 bps away from its Nov. 15th all-time high. The European Investment Grade CDS Index and Financial Sector Index are close to breaking out technically, as well. This is extremely concerning given the perceived recent can-kicking. Copper and the euro currency remain in intermediate-term downtrends and trade poorly. The 10Y T-Note continues to trade too well, which remains a big red flag. There still appears to be a fairly high level of complacency among US investors regarding the still-deteriorating macro backdrop. The Citi Eurozone Economic Surprise Index is at -57.80 points, which is near the lowest since mid-Sept. of last year. Massive tax hikes and spending cuts are still yet to hit in several key eurozone countries that are already in recession. A lack of competitiveness remains unaddressed. The European debt crisis is also really beginning to bite emerging market economies now, which will further pressure exports from the region and further raise the odds of more sovereign/bank downgrades. The odds for QE3 are likely meaningfully lower than investors currently perceive as food prices soar and energy prices rebound. If the Fed embarks on another misguided round of QE, the Ag Spot Index should push through its Aug. 31, 2011 all-time high. This would likely also lead to another surge in energy prices as it would spur another bout of rioting in the Middle-East and other emerging markets. As well, it would greatly curtail any emerging markets stimulus plans, in my opinion. It is unlikely the Fed would take this risk ahead of an election, in my opinion. Uncertainty surrounding the effects on business of Obamacare, the "US fiscal cliff " and the election outcome uncertainty will likely become more and more of a focus for investors as the year progresses. Three of the main reasons US stocks had been rallying were the beliefs that QE3 was imminent, China would embark on another massive easing campaign and Europe had successfully kicked the can once again. However, as I stated above, soaring food prices/rising energy costs make QE3 much less likely, in my opinion. Recent comments by Chinese officials suggest a more subdued approach to easing and an unwillingness to let their real estate bubble begin re-inflating. Soaring food prices also put a large dent in emerging markets easing plans. Finally, the surge in Spanish yields to records and breakouts in other European debt angst gauges suggests the recent European debt crisis can-kicking may have already run its course. There had been a growing disconnect between US equity action and the deteriorating macro environment that was eerily similar to last July, in my opinion. The macro likely must begin improving very soon for equities to avoid a similar fate into the fall. For this year's equity advance to regain traction, I would expect to see a resumption in European credit gauge improvement, a subsiding of hard-landing fears in key emerging markets, a rising 10-year yield, better volume, stable-to-lower energy prices, a US "fiscal cliff" solution and higher-quality stock market leadership. I expect US stocks to trade mixed-to-lower into the close from current levels on surging eurozone debt angst, earnings worries, high food prices, rising global growth fears, more shorting, consumer discretionary/tech sector weakness, profit-taking and US "fiscal cliff" concerns.

Bear Radar

Style Underperformer:

• Small-Cap Growth -1.62%

Sector Underperformers:

• 1) Steel -3.30% 2) Oil Taners -3.30% 3) Alt Energy -3.02%

Stocks Falling on Unusual Volume:

• E, DTLK, BBD, VIP, IBN, TTC, MTD, MGLN, ACTG, AKRX, ISRG, CPHD, VVUS, AMSG, UFPI, UTEK, AIXG, AMZN, NLNK, PNRA, JDAS, VRSN, DECK, OMPI, CALM, ABAX, CTXS, EWG and GWRE
  

Stocks With Unusual Put Option Activity:

• 1) HIG 2) GT 3) RF 4) ETN 5) JCI
  

Stocks With Most Negative News Mentions:

• 1) DECK 2) MS 3) VLO 4) BAC 5) GLD
  

Charts:

• ETFs Falling on Unusual Volume
• Stocks Falling on Unusual Volume