Stocks Falling into Final Hour on Rising Eurozone Debt Angst, Rising Global Growth Fears, Technical Selling, Homebuilder/REIT Sector Weakness

Broad Market Tone:

• Advance/Decline Line: Lower
  

• Sector Performance: Most Sectors Declining
  

• Volume: Below Average

• Market Leading Stocks: Underperforming

Equity Investor Angst:

• VIX 14.76 +1.93%

• ISE Sentiment Index 98.0 +36.11%

• Total Put/Call .82 -14.58%

• NYSE Arms .44 -39.64%

Credit Investor Angst:

• North American Investment Grade CDS Index 76.65 +1.07%

• European Financial Sector CDS Index 142.98 +4.49%

• Western Europe Sovereign Debt CDS Index 82.0 +1.13%

• Emerging Market CDS Index 267.18 +1.71%

• 2-Year Swap Spread 16.25 -1.25 bps

• TED Spread 24.0 +.25 bp

• 3-Month EUR/USD Cross-Currency Basis Swap -14.5 -.25 bp

Economic Gauges:

• 3-Month T-Bill Yield .04% unch.

• Yield Curve 182.0 -4 bps

• China Import Iron Ore Spot $112.90/Metric Tonne -4.16%

• Citi US Economic Surprise Index -15.50 -1.2 points

• 10-Year TIPS Spread 2.21 -6 bps

Overseas Futures:

• Nikkei Futures: Indicating -306 open in Japan

• DAX Futures: Indicating +21 open in Germany

Portfolio: 

• Slightly Lower: On losses in my medical/biotech and retail sector longs

• Disclosed Trades: None

• Market Exposure: 50% Net Long

Today's Headlines

Bloomberg:

• ECB Warns Financial Weakness Could Break Best Lull in Two Years. The European Central Bank said weakness in the euro-area economy and the fragility of the region’s banks risk ending what it describes as the calmest period in financial markets since 2011. “The main message is that financial stability has improved since the last issue,” ECB Vice President Vitor Constancio said today in Frankfurt as he presented the ECB’s twice-yearly Financial Stability Review. “But the situation remains fragile. The year 2012 was not good at all for banks.” “Particularly vulnerable are banks that are confronted with a significant deterioration of asset quality with high and rising non-performing loan levels,” the ECB said in the report. “Continued and prompt progress in proactively tackling bank balance sheet problems is required.”
• German Unemployment Increased Four Times Forecast in May. German unemployment rose more than four times as much as economists estimated in May as the euro area’s sovereign debt crisis and a long winter took their toll on Europe’s largest economy. The number of people out of work climbed a seasonally adjusted 21,000 to 2.96 million, the Nuremberg-based Federal Labor Agency said today. That’s the fourth straight monthly gain. Economists predicted an increase of 5,000, according to the median of 35 estimates in a Bloomberg News survey.
• Hollande Says EU Can’t Dictate French Economy Policy, Monde Says. President Francois Hollande said the European Commission isn’t in a position to decree French economic policy, Le Monde reported. The commission isn’t there to “dictate what we have to do,” Hollande was quoted as saying by the newspaper. “We have to respect our European commitments on deficit reduction,” he said, according to the report. “As for structural reform, it’s up to us and us alone to decide what path to take to obtain the objective.”
• European Stocks Fall on Concern Fed Will Pare Stimulus. European stocks fell, after the Stoxx Europe 600 Index rallied the most in a month, on concern that the U.S. Federal Reserve will reduce debt purchases as the world’s biggest economy strengthens. PSA Peugeot Citroen declined 4.2 percent following a French newspaper report that Europe’s second-biggest automaker may sell new shares to raise cash. Evraz Plc fell to a record low after Stoxx Ltd. said it will remove the commodity producer from its benchmark Stoxx 600 next month. Hennes & Mauritz AB dropped 2.5 percent as Goldman Sachs Group Inc. recommended investors sell the shares. The Stoxx 600 retreated 1.9 percent to 302.5 at the close of trading.
• Latin America Disappoints After Squandering Commodity Boom. Latin America is disappointing investors, economists and businesses with slower-than-forecast growth as waning commodity prices and strong currencies hit nations that failed to diversify and become more competitive. The five biggest investment-grade markets in the region -- magnets for foreign capital as rich countries stalled --expanded below projections or show signs of weakness. Mexico’s and Brazil’s gross domestic product missed estimates in a Bloomberg survey. Economists polled by Brazil’s central bank cut the country’s 2013 outlook this week for the second time in seven days, anticipating the worst three-year period in a decade.
• Lumber Futures Fall Most in 17 Months as Output Rebounds. Lumber futures fell the most in 17 months on speculation that North American mills from Texas to Alberta are boosting output. 
• Copper Declines on German Jobs Data, IMF's China Forecast. Copper futures fell for the third time in four sessions after German unemployment rose more than expected and the International Monetary Fund cut its forecast for economic growth in China, the world’s top metal consumer. 
• Rosengren Says Significant Fed Accommodation Still Needed. Federal Reserve Bank of Boston President Eric Rosengren said the Fed should press on with record stimulus to speed economic growth, reduce 7.5 percent unemployment and boost inflation running below 2 percent. “While we have seen some improvement in labor market conditions, significant accommodation remains appropriate at this time,” Rosengren said today in remarks prepared for a speech in Minneapolis. “Core inflation remains at the very low end of recent experience, and the unemployment rate is close to the cyclical peaks of the past two recessions.”
• Technology Puts Reach Five-Year Low. The cost of options hedging against losses in U.S. technology shares fell to an almost five-year low. Puts with an exercise price 10% below the Technology Select Sector SPDR Fund cost 6.45 points more than calls betting on a 10% gain, according to three-month data compiled by Bloomberg. The price relationship known as skew slid to 5.19 on May 22, the lowest level since October 2008.

Wall Street Journal:

• OPEC Axes Production Monitoring Committee. OPEC has decided to ax a key committee that monitored its members' compliance with oil production targets and made recommendations on output policy, people familiar with the matter told The Wall Street Journal Wednesday.

Fox News:

• UN gets new info on alleged chemical weapons use in Syria. Britain said Thursday it has sent a letter to Secretary-General Ban Ki-moon with new information on three further incidents of alleged chemical weapons use by the Syrian government. Britain's U.N. Ambassador Mark Lyall Grant said his government has continued to provide new information to the secretary-general and the head of the U.N. team Ban appointed to investigate alleged chemical weapons attacks in Syria.
• House Republicans challenge Holder testimony on reporter surveillance. Top Republicans on the House Judiciary Committee openly challenged Attorney General Eric Holder on Wednesday over his testimony two weeks ago in which he claimed to be unaware of any "potential prosecution" of the press, despite knowing about an investigation that targeted a Fox News reporter. 

MarketWatch: 

• Consumer confidence index is a contrarian indicator.

CNBC:

• FDIC: Banks Net Income in 1Q Hits All-Time High of $40.3 Billion.
• Rising Mortgage Rates, Home Prices a Lethal Brew.

Zero Hedge:

• Meanwhile, Big Investors Quietly Slip Out The Back Door On Housing.
• EU Extends Deficit Deadlines For Most European Countries, Admits Structural Adjustment Failure, Kills Austerity. Translation: the theatrical spectacle of Europe's austerity, which never really took place, is finally over.
• European Credit Contraction Accelerates, Spanish Loan Creation Craters. (graphs)
• Cash And Tarry: Mortgage Applications Plunge At Fastest Rate Since 2009. (graph)
• The Casino At The End Of The Universe. In the end it is almost always leverage that touches off the rush to the exit door and I would say that the financial markets are now levered past what we have ever known before. 

Business Insider:

• Fannie And Freddie Are Getting Smoked — Down 40% Today.
• HARVARD LAW STUDENT: Liberal Law Schools Are Making Students Dumber.
• One Critical Commodity Is Having A Worse Year Than Gold.
• CHINA'S HUAWEI: Get Used To Governments Hacking And Spying On You.
• USA Today Has A Huge Front Page Story About The Bull Market And All The Wealth That's Getting Created.

New York Times:

• Smithfield(SFD) to Be Sold to Chinese Meat Processor. Shuanghui International of China agreed on Wednesday to buy the American meat processor Smithfield Foods for about $4.7 billion, in one of the biggest moves by a Chinese company into the United States to date. It will likely draw close government scrutiny over Chinese food standards, especially amid a number of incidents like a recent scare over bird flu. Though Smithfield has argued that the deal is meant to sell American pork outside of the country and not import Chinese products, regulators are likely to ensure that the company does not lower its quality standards. Shuanghui, also known as Shineway, is China’s largest pork producer and is owned in part by an investment firm run by Goldman Sachs(GS).
• Google(GOOG) Overhauls Gmail to Take On E-Mail Overload.

CBS:

• Apple's(AAPL) Tim Cook talks wearable tech, mum on Apple TV.

Reuters: 

• Volcker warns on limits of U.S. Fed's easy money. Former Federal Reserve Chairman Paul Volcker on Wednesday waded into the debate over when to reduce today's ultra-easy U.S. monetary policies, arguing that the benefits of bond-buying are "limited and diminishing" and warning that central banks are too often late in removing stimulus. 
• Brazil economic growth disappoints again. Brazil's economic growth fell short of forecasts once again in the first quarter as President Dilma Rousseff's numerous stimulus packages failed to aid manufacturers while consumers, frightened by rising inflation, grew more conservative. Even a record corn and soy harvest and a rebound in investment were not enough to avoid disappointing gross domestic product growth of just 0.6 percent compared with the fourth quarter, according to government data released on Wednesday. Analysts expected 0.9 percent growth.
• Brazil will not tolerate high inflation -Finmin Mantega.
• Luxury spending drives Michael Kors(KORS) profit. Upscale accessories maker Michael Kors Holdings Ltd reported a better-than-expected quarterly profit as shoppers spend more on luxury goods, and the company said it would double the number of its stores in Europe, where its sales are booming. The company, formed and owned by fashion designer Michael Kors, has grown at a blistering pace since it went public in 2011, underlining shoppers' appetite for luxury items even in a tough economy.

Telegraph:

• High street feels squeeze as sales fall. Britain's high street was dealt a blow on Wednesday as a poll revealed that retail sales this month sank at their fastest pace in more than a year.
• OECD warns of zero growth in eurozone this year. Pier Carlo Padoan, chief economist at the OECD, says there will be no growth in the eurozone in 2013 and warns of high unemployment in the EU. 

Die Welt:

• Draghi Loses Support in ECB Executive Board. ECB Executive Board members Joerg Asmussen and Yves Mersch oppose ABS purchases, citing central bank officials. Bundesbank President Jens Weidmann also against ABS-purchase program. Mersch is against any further use of non-standard measures.

Bild:

• EU's Ottinger Says Europe Needs a Revamp. European Energy Commissioner Guenther Oettinger is concerned about the economic situation within the European Union, citing Oettinger at an event in Brussels. Oettinger says Brussels hasn't fully realized how bad the situation is, he said. Says especially France isn't prepared; needs a pension reform, longer working life time, less govt spending. Says is concerned about countries like Bulgaria, Romania, Italy that are hardly governable. Says Germany is about to lose part of its competitiveness through minimum wage, women quota, childcare subsidy, its no to fracking. Says Germans are hypocritical, import Russian gas with no concern for environment, but don't want fracking at home, they should at least test it, he said.

TVB: 

• Hong Kong Govt Won't Be Worried If Home Prices Fall 20%. Recent signs showing property market stabilizing is short term, and the govt wouldn't be concerned if prices fell 20%, citing govt officials. Interest rates will definitely climb in the future, dragging down property prices, the official said. The govt doesn't expect huge amount of negative assets cases like in 1998 and 2003, should property prices drop as much as 40% in the long term, the report said.

Bear Radar

Style Underperformer:

• Small-Cap Value -1.50%

Sector Underperformers:

• 1) Homebuilders -3.40% 2) REITs -3.01% 3) Steel -2.41%

Stocks Falling on Unusual Volume:

• SKM, ERF, CLMT, TAYC, IBN, KO, LGCY, GWR, TRN, ASCA, AEC, IRC, PCN, PTY, PHK, JMI, PHT, MRC, LPLA, UTG, MITT, PDT, GOF, CHS, KMM, TSLA, CYBX, ACWX, EQM, EFC, RNP, RQI, WPC, PCI, CLNY, O, CCI, AOL, NNN, HAS, CNQR, DOLE, PCL, ENOC, EPR, N, PHK, WPC, SNH, FAF, MPW and SBRA

Stocks With Unusual Put Option Activity:

• 1) HL 2) HYG 3) DVY 4) OIH 5) IYR
  

Stocks With Most Negative News Mentions:

• 1) MXIM 2) CMA 3) CQP 4) NSC 5) X
  

Charts:

• ETFs Falling on Unusual Volume

• Stocks Falling on Unusual Volume

Bull Radar

Style Outperformer:

• Large-Cap Value -.75%

Sector Outperformers:

• 1) Gold  & Silver +1.29% 2) Networking +.39% 3) Oil Tankers +.09%
  

Stocks Rising on Unusual Volume:

• STEI, SCI, SFD, TFM, PWRD, SLM, AEGR, TTM, INFI, BWS and SLM

Stocks With Unusual Call Option Activity:

• 1) ADI 2) ATHN 3) MCHP 4) EMN 5) MON
  

Stocks With Most Positive News Mentions:

• 1) BK 2) TXN 3) LLY 4) MAKO 5) LMT
  

Charts:

• ETFs Rising on Unusual Volume 

• Stocks Rising on Unusual Volume

Wednesday Watch

Evening Headlines 
Bloomberg: 

• BOJ Seen Failing to Tame Volatility as Sale Slumps. Expectations for the widest bond price swings in more than four years and the weakest demand at an auction in nine months added to signs of waning debt market confidence in Bank of Japan Governor Haruhiko Kuroda. Implied volatility of Japan’s 10-year note futures, a measure of expected moves used to price options, climbed to 7.23 percent yesterday, the highest since November 2008, according to data compiled by Bloomberg. A sale of 20-year debt yesterday drew the lowest demand since August 2012. Expected price fluctuations for U.S. Treasury futures rose to 5.06 percent from 3.61 percent on April 30. 

• Abe Adviser Tells S. Korea to Cope With Yen Not Blame Japan. Koichi Hamada, an economic adviser to Japanese Prime Minister Shinzo Abe, told South Korea to adjust its own monetary policies if officials are concerned at the effects of a yen weakened by unprecedented easing. 

• Shadow Bank Crackdown Halts Record Junk Narrowing: China Credit. The yield premium investors demand to buy China's riskiest bonds is widening, ending a record five-quarter run of declines, after a crackdown on shadow banking strained corporate finances. The yield gap on three-year AA- notes over AAA debt jumped 15 basis points to 137 since March 31, after narrowing 147basis points from the end of 2011, Chinabond indexes show. Chinese regulators are forcing trust funds and wealth management plans to shift assets into publicly traded securities, robbing property developers and local-government finance vehicles of so-called shadow banking funds.

• China Credit-Bubble Call Pits Fitch Against S&P. Chinese banks are adding assets at the rate of an entire U.S. banking system in five years. To Charlene Chu of Fitch Ratings, that signals a crisis is brewing. Total lending from banks and other financial institutions in China was 198 percent of gross domestic product last year, compared with 125 percent four years earlier, according to calculations by Chu, the company’s Beijing-based head of China financial institutions. Fitch cut the nation’s long-term local-currency debt rating last month, in the first downgrade by one of the top three rating companies in 14 years. “There is just no way to grow out of a debt problem when credit is already twice as large as GDP and growing nearly twice as fast,” Chu, 41, said in an interview. Her views have struck a nerve. “Everyone is talking about credit -- about the credit cycle, leverage and credit-quality problems,” said Stephen Green, head of Greater China research at Standard Chartered Plc in Hong Kong, adding that there’s not enough good data available. “It’s a big black box, and it’s quite scary.”    

• China Growth Outlook Cut by IMF as ‘Decisive’ Reforms Urged. The International Monetary Fund lowered its forecasts for China’s growth and said making “decisive” policy changes would put the economy on a more sustainable path.

• Asian Stocks Advance for Second Day on U.S. Data. Asian stocks rose for a second day after improving U.S. consumer confidence and home-price data bolstered optimism in the world’s largest economy. The Australian dollar weakened and the yen strengthened. The MSCI Asia Pacific Index added 0.2 percent by 11:33 a.m. in Tokyo. Japan’s Topix Index advanced 1 percent.

• Rebar Trades Near Lowest in 6 Months on Weak Iron Ore Prices. Steel reinforcement-bar futures were little changed near the lowest level in six months after iron ore prices fell and Chinese Premier Li Keqiang indicated a shift from rapid expansion to stable growth. Rebar for delivery in October on the Shanghai Futures Exchange fell as much as 0.7 percent to 3,465 yuan a ($565) a ton, the lowest level for a most-active contract since Nov. 30, and was at 3,489 yuan at 10:15 a.m. local time. Futures are set for a fourth monthly decline.

• Russia’s Syria Missile Sale Signals Protracted Conflict. Russia’s decision to sell advanced anti-aircraft missiles to Syria complicates efforts to find a swift diplomatic resolution to that country’s civil war and underscores the persistent strains in U.S.-Russian relations. Moscow’s announcement yesterday came less than 24 hours after U.S. Secretary of State John Kerry met Russian Foreign Minister Sergei Lavrov to discuss plans for peace talks on Syria and a day after the European Union lifted its arms embargo on Syrian rebel groups.

Wall Street Journal: 

• Apple's(AAPL) Cook Hints at Wearable Devices. Apple Inc. Chief Executive Tim Cook, defending its prowess as a tech trend-setter, hinted that wearable devices may play a role in future product plans.

• Curious IRS Timing. Did the tax agency also target groups that support Israel? The IRS has admitted targeting groups that wanted to speak on issues during the 2012 election season. But did the agency also target tax-exempt groups that opposed Administration policy priorities?

Fox News: 

• California Dems push anti-fracking bills, aim to curb potential oil bonanza. California is on the verge of a new gold rush. Expanded hydraulic fracturing -- or "fracking" -- at the Monterey Shale formation is sparking estimates that 15 billion barrels of oil could be accessed, along with millions of jobs and huge contributions to the domestic energy supply. Even the state's green-friendly Democratic governor, Jerry Brown, says "the potential is extraordinary." But standing in the way is a flurry of anti-fracking bills. At last count, 10 were on the table, all introduced by Democrats seeking tighter controls over the controversial technology. 

• Issa subpoenas State Department for Benghazi documents. Republican Rep. Darrell Issa issued subpoenas Tuesday for a host of State Department emails and other communications on the Benghazi terror attack, signaling that the Obama administration's recent document dump would not satisfy congressional investigators. Issa, chairman of the House Oversight and Government Reform Committee, claimed in a letter to Secretary of State John Kerry that the department is still "withholding documents."

CNBC: 

• The Fed vs. Congress: Who Is Enabling Whom? The dominant narrative about economic policy has it that the Federal Reserve's easy money policies are enabling congressional intransigence and partisanship. But this might be exactly backward. 

• Australia's Dollar Slides to 19-Month Low. The Australian dollar tumbled to its lowest level since October 2011 in early Asia trade on Wednesday, extending this month's sharp slide against a broadly-stronger U.S. currency. The latest catalyst for move in the Aussie dollar was stronger U.S. economic data overnight that pushed the greenback higher against all major currencies. Data published on Tuesday showed consumer confidence rose in May to its highest level in more than five years.

Zero Hedge: 

• Chart Of The Day: Crushed US Consumer + All Time High New Home Prices = Record Housing Bubble. (graph)

• Haunted By The Last Housing Bubble, Fitch Warns "Gains Are Outpacing Fundamentals". (graph)

• Which Asset Would You Rather Hold As Collateral? (graph)

• NYSE Margin Debt Rises To New All Time High. (graph)

• Hugh Hendry Latest Investments And Outlook.

• JOMO Arigato Mr. Kuroda. (graphs)

Business Insider: 

• Bitcoin Users Will Freak Out When They See The Cruise Missile The Justice Department Just Fired Against Another Digital Currency.

• CONFIRMED: Somalian Extremists Have Captured A US Drone.

• Israel Threatens To Attack Russian Missile Deliveries To Syria.

Reuters:

• Another investor to pull money from SAC as probe continues. Ironwood Capital Management plans to pull about $100 million from embattled hedge fund SAC Capital Advisors, adding to the list of problems for billionaire trader Steven A. Cohen. 

• Money from China? Then "Made in China", shipowners told. Chinese banks have sharply increased loans to global shipowners as European lenders retreat from the market but some are driving a hard bargain: the finance often comes with the condition that vessels be built in China.

Financial Times: 

• US housing lift could crimp Fed buying. The largest rise in house prices for seven years and a surge in consumer confidence have added to a fast-improving US economic outlook, increasing the chances the Federal Reserve will slow its $85bn-a-month in asset purchases.

China Securities Journal:

• China May Expand Property Tax Trial by Large Scope. China's property tax trials may be expanded by a "relatively large scope" targeting newly purchased homes, citing a person familiar with the matter. The effects of a property tax in Shanghai and Chongqing isn't clear after two years of trials, the person said.

Evening Recommendations 

• None of note

Night Trading

• Asian equity indices are -.25% to +.50% on average.

• Asia Ex-Japan Investment Grade CDS Index 107.0 -2.5 basis points.

• Asia Pacific Sovereign CDS Index 90.75 -3.0 basis points.

• FTSE-100 futures -.65%.

• S&P 500 futures -.04%.

• NASDAQ 100 futures +.02%.

Morning Preview Links

Earnings of Note
Company/Estimate

• (CHS)/.36

• (TFM)/.44

• (BWS)/.22

• (DSW)/.89 

Economic Releases

• None of note

Upcoming Splits

• (WFM) 2-for-1

Other Potential Market Movers

• The Fed's Rosengren speaking, 5Y T-Note auction, Bank of Canada rate decision, Germany Unemployment/CPI data, weekly MBA mortgage applications report, weekly retail sales reports, Sanford C. Bernstein Strategic Decisions Conference, Cowen & Company Tech/Media/Telecom Conference, KeyBanc Industrial/Auto/Transports Conference and the Citi Consumer Conference could also impact trading today.

BOTTOM LINE: Asian indices are mostly higher, boosted by financial and technology shares in the region. I expect US stocks to open modestly higher and weaken into the afternoon, finishing mixed. The Portfolio is 50% net long heading into the day.

Stocks Rising into Final Hour on Less Eurozone Debt Angst, US Economic Data, Short-Covering, Financial/Healthcare Sector Strength

Broad Market Tone:

• Advance/Decline Line: Higher
  

• Sector Performance: Most Sectors Rising
  

• Volume: Light

• Market Leading Stocks: Underperforming

Equity Investor Angst:

• VIX 14.38 +2.79%

• ISE Sentiment Index 72.0 +2.86%

• Total Put/Call 1.02 -19.69%

• NYSE Arms .74 -36.72%

Credit Investor Angst:

• North American Investment Grade CDS Index 75.25 -.73%

• European Financial Sector CDS Index 136.82 -4.11%

• Western Europe Sovereign Debt CDS Index 81.08 -1.12%

• Emerging Market CDS Index 263.66 +1.42%

• 2-Year Swap Spread 17.50 +1.5 bps

• TED Spread 23.75 unch.

• 3-Month EUR/USD Cross-Currency Basis Swap -14.25 -.25 bp

Economic Gauges:

• 3-Month T-Bill Yield .04% unch.

• Yield Curve 186.0 +10 bps

• China Import Iron Ore Spot $117.80/Metric Tonne -2.56%

• Citi US Economic Surprise Index -14.30 +1.0 point

• 10-Year TIPS Spread 2.27 +2 bps

Overseas Futures:

• Nikkei Futures: Indicating +139 open in Japan

• DAX Futures: Indicating -13 open in Germany

Portfolio: 

• Slightly Higher: On gains in my medical/tech/biotech sector longs 

• Disclosed Trades: None

• Market Exposure: 50% Net Long