Thursday, September 12, 2013

Stocks Lower into Final Hour on Rising Syria/Russia Tensions, Reversal Higher in Long-Term Rates, Profit-Taking, Commodity/Transport Sector Weakness

Broad Equity Market Tone:
  • Advance/Decline Line: Lower
  • Sector Performance: Most Sectors Declining
  • Volume: Below Average
  • Market Leading Stocks: Underperforming
Equity Investor Angst:
  • Volatility(VIX) 14.24 +3.04%
  • Euro/Yen Carry Return Index 137.86 -.56%
  • Emerging Markets Currency Volatility(VXY) 10.39 -.48%
  • S&P 500 Implied Correlation 46.30 +5.89%
  • ISE Sentiment Index 92.0 -.20%
  • Total Put/Call .84 -8.70%
  • NYSE Arms 1.10 +54.17% 
Credit Investor Angst:
  • North American Investment Grade CDS Index 77.35 +1.74%
  • European Financial Sector CDS Index 138.09 +3.53%
  • Western Europe Sovereign Debt CDS Index 90.0unch.
  • Emerging Market CDS Index 309.90 +1.07%
  • 2-Year Swap Spread 15.25 unch.
  • TED Spread 24.50 +.5 bp
  • 3-Month EUR/USD Cross-Currency Basis Swap -8.5 unch.
Economic Gauges:
  • 3-Month T-Bill Yield .01% -1 bp
  • Yield Curve 247.0 +1 bp
  • China Import Iron Ore Spot $135.20/Metric Tonne +.07%
  • Citi US Economic Surprise Index 56.80 +3.3 points
  • Citi Emerging Markets Economic Surprise Index 3.80 +7.9 points
  • 10-Year TIPS Spread 2.11 -2 bps
Overseas Futures:
  • Nikkei Futures: Indicating -37 open in Japan
  • DAX Futures: Indicating -7 open in Germany
Portfolio: 
  • Slightly Lower: On losses in my medical/retail sector longs
  • Disclosed Trades: Added to my (IWM)/(QQQ) hedges, added to my (EEM) short
  • Market Exposure: Moved to 25% Net Long

Today's Headlines

Bloomberg:   
  • Assad Sets Conditions as U.S.-Russia Geneva Talks Open. Syrian President Bashar al-Assad set what may be unacceptable conditions for the U.S. in negotiating a chemical-weapons deal, saying it must be a “two-way street” in which the Obama administration drops its military threats and stops arming Syrian rebels. Assad set out his terms as Secretary of State John Kerry told top Syrian opposition figures in a phone call that the option of a U.S. military strike remains on the table and that the U.S. will continue to stand by the rebels, according to a State Department official who asked not to be named because the talks were private.
  • Richemont Sales Growth Misses Estimates on China Sales. Cie. Financiere Richemont SA (CFR), the world’s largest jewelry maker, reported revenue growth for the first five months of its fiscal year that missed estimates because of weak demand in mainland China. Sales rose 9 percent, excluding currency shifts, in the period through August, Geneva-based Richemont said today. Analysts expected 10 percent growth, according to the median of 21 estimates gathered by Bloomberg News. The stock fell as much as 3.7 percent, leading declines in the Swiss SMI Index. Revenue in the Asia-Pacific region, the source of 41 percent of Richemont’s sales last year, is rising more slowly as China cracks down on the use of watches and jewelry as bribes and illegitimate gifts. Growth in that market was 4 percent in the five months, continuing a slowdown in the last fiscal year and compared with a 46 percent gain a year earlier
  • Rupiah Forwards Gain Most Since 2010 as Central Bank Raises Rate. Indonesia’s rupiah forwards gained the most since May 2010 and the onshore spot rate pared losses after the central bank unexpectedly boosted borrowing costs. Stocks and government bonds advanced. Bank Indonesia raised the reference rate to 7.25 percent, from 7 percent, as predicted by only four of 23 analysts surveyed by Bloomberg.
  • Euro-Area Industrial Output Declines More Than Forecast. Euro-area industrial output contracted more than economists forecast in July as manufacturers struggled to shake off the legacy of a record-long recession. Factory production in the 17-nation euro area fell 1.5 percent from June, when it gained 0.6 percent, the European Union’s statistics office in Luxembourg said today. That’s more than the 0.3 percent contraction forecast by economists, according to the median of 33 estimates in a Bloomberg News survey. (EUITEMUM) In the year, output fell 2.1 percent.
  • Italy Industrial Output Unexpectedly Falls as Slump Persists. Italian industrial production unexpectedly fell in July, signaling that the euro region’s third-biggest economy may still be stuck in its longest recession since World War II. Output fell 1.1 percent from June, when it rose a revised 0.2 percent, national statistics office Istat said in Rome today. Economists had estimated a 0.3 percent increase, according to the median of 16 estimates in a Bloomberg News survey. Output fell 4.3 percent from a year earlier when adjusted for working days. “We need to see a considerable upward correction in the following months to see activity gaining momentum over the quarter,” Annalisa Piazza, an analyst at Newedge Group in London, said in a note to investors. “So far, it looks like activity will remain on a downward trend.”  
  • Italy Yield Premium Over Spain Reaches 18-Month High; Bunds Gain. The extra yield investors demand to hold Italian 10-year bonds over Spain’s widened to the most in 18 months as Italy’s cost of borrowing for three years climbed to the highest since October at a debt auction. Italian 10-year yields were about five basis points from a two-month high amid speculation a vote on whether to expel former premier Silvio Berlusconi from the Senate could destabilize Enrico Letta’s coalition government. The Rome-based Treasury sold a combined 5.5 billion euros ($7.32 billion) of securities due in 2016 and 2028. German (GDBR10) 10-year bunds rose along with Finnish and Dutch securities as investors sought the region’s safest assets.
  • Europe Stocks Drop From Five-Year High on Industrial Data. European stocks slipped from the highest level in more than five years as the region’s industrial output contracted more than forecast. Sanofi fell 2.6 percent after withdrawing a U.S. application for a diabetes drug. Cie. Financiere Richemont (CFR) SA dropped 2.3 percent as revenue missed analysts’ estimates. Vivendi SA advanced 2.7 percent after saying it will begin a formal study to separate its French phone unit from its media businesses. Home Retail Group Plc (HOME) surged 5.4 percent to a two-year high as sales exceeded projections. The Stoxx Europe 600 Index slipped less than 0.1 percent to 310.74 at the close of trading, as four stocks declined for every three that gained
  • Crude Rises a Second Day Amid U.S.-Russia Talks on Syria. West Texas Intermediate crude climbed a second day ahead of talks between the U.S. and Russia to resolve the crisis in Syria, a conflict that’s bolstered concern that Middle Eastern oil supplies may be disrupted. Futures rose as much as 1.5 percent as U.S. Secretary of State John Kerry arrived in Geneva to meet with Russian Foreign Minister Sergei Lavrov for discussions on a plan for Syria to surrender its chemical weapons. President Barack Obama has made their use the rationale for a potential attack on Syrian President Bashar al-Assad’s war-making ability. 
  • Copper Reaches One-Week Low on Concern About Outlook for Demand. Copper reached a one-week low in London as reports of slumping prices, reduced industrial production and higher unemployment from Germany to Australia fanned concern about the outlook for demand.
  • Gold Futures Fall Most in Nine Weeks on Fed Stimulus Bets. Gold futures tumbled the most in nine weeks after a report showed U.S. jobless claims last week fell to the lowest since April 2006, boosting speculation that the Federal Reserve will scale back fiscal stimulus soon. First-time claims for unemployment insurance fell by 31,000 to 292,000 in the week ended Sept. 7, government data showed. Analysts forecast 330,000.
  • Consumer Comfort Steadies in U.S. After Four-Week Fall: Economy. (graph) The Bloomberg Consumer Comfort Index (COMFCOMF) rose to minus 32.1 in the week ended Sept. 8 from minus 32.3. The drop was within the survey’s margin of error of 3 percentage points. A measure of households’ assessment of the economy fell to the lowest level since mid-May.
  • Disney(DIS) to Buy Up to $8 Billion of Stock Starting Next Year. Walt Disney Co. (DIS), the world’s biggest entertainment company, plans to buy back $6 billion to $8 billion of its stock starting next year, stepping up efforts to increase investor returns. The company, based in Burbank, California, will borrow to finance some of the repurchases, Chief Financial Officer Jay Rasulo said today at an investor conference in Beverly Hills, California. The company intends to maintain its debt ratings.
Wall Street Journal:
  • Assad Demands End to U.S. 'Threats'. Syrian Leader States Conditions as Envoys Convene in Geneva. Syrian President Bashar al-Assad insisted that the U.S. give up its "policy of threats" and halt arms shipments to rebels before his government turns over its chemical weapons, as U.S. and Russian delegations arrived in Geneva to begin talks aimed at forging a road map for the shutdown of the weapons program. Mr. Assad's comments, in his first public statement on the Russian proposal that Syria hand over its chemical weapons, underlined the distance between Syria and its backers in Moscow on one side and the U.S. and its allies on the other.
  • Economists Expect Tapering Announcement Next Week. Majority in WSJ Survey See Enough Evidence for Fed to Begin Pullback.
Fox News:
CNBC: 
Zero Hedge: 
Reuters: 
Telegraph: 

Bear Radar

Style Underperformer:
  • Small-Cap Value -.54%
Sector Underperformers:
  • 1) Gold & Silver -3.98% 2) Alt Energy -1.56% 3) Road & Rail -1.32%
Stocks Falling on Unusual Volume:
  • BPOP, VLO, NIHD, BCE, PBR, SJR, CARB, UBNT, SFUN, EZCH, UMPQ, MW, KRC, LULU, BITA, WFT, OLED, XONE, MGAM, BRC, IIVI, KND, CZR, CODE and ALDW
Stocks With Unusual Put Option Activity:
  • 1) S 2) MDY 3) FIO 4) DG 5) GDP
Stocks With Most Negative News Mentions:
  • 1) AMD 2) JPM 3) TSO 4) DD 5) ISRG
Charts:

Bull Radar

Style Outperformer:
  • Large-Cap Growth -.16%
Sector Outperformers:
  • 1) Homebuilders +1.13% 2) Networking +.19% 3) Utilities +.12%
Stocks Rising on Unusual Volume:
  • STSA, NTWK, GALT, GOGO, P, SONC, SSH, D, YOKU, SEAS, THRX, BLOX, ECA, LNG, WAG, GRPN, KR and SHLD
Stocks With Unusual Call Option Activity:
  • 1) VRA 2) MDY 3) FIO 4) S 5) GLD
Stocks With Most Positive News Mentions:
  • 1) FCX 2) IBM 3) PII 4) AAPL 5) JCP
Charts:

Thursday Watch

Evening Headlines 
Bloomberg:
  • Thousands Flee in Philippines as Muslim Siege Risks Investments. Clashes between Muslim rebels and Philippine troops forced about 13,000 people to flee their homes in the nation’s south, complicating efforts to bring peace to the region after four decades of insurgency. At least five people have been killed and 36 wounded during three days of fighting between government forces and Moro National Liberation Front rebels, who are holding about 100 hostages, GMA News reported, citing Local Government Secretary Mar Roxas. More than 3,000 families are staying at shelters in the city of Zamboanga, according to the local government’s official Twitter page. 
  • Li Says China Rebound Not Yet on Solid FoundationChinese Premier Li Keqiang said the foundations of a growth rebound aren’t solid while cautioning that stimulus won’t help resolve deep-rooted issues in the world’s second-largest economy. “The foundation of an economic recovery is not solid yet with many uncertain factors,” Li said in a speech yesterday at the World Economic Forum in Dalian, China. 
  • Rupiah Drops Most in Three Weeks as Indonesia Seen Holding Rate. Indonesia’s rupiah fell by the most in three weeks, trading weaker than its one-month forwards, as economists predict the central bank will keep borrowing costs steady after inflation reached a four-year high. The currency plunged 1.5 percent in the biggest drop since Aug. 20 to 11,513 per dollar as of 10:04 a.m. in Jakarta, prices from local banks show. That is 0.6 percent weaker than its its one-month non-deliverable forwards, which rose 0.6 percent to 11,440 in offshore trading, data compiled by Bloomberg show. “Bank Indonesia should raise the reference rate to manage inflation expectations arising from the weaker rupiah,” said Aldian Taloputra, a Jakarta-based economist at Mandiri Sekuritas, a unit of the nation’s largest bank, who predicts the rate will be increased to 7.25 percent.
  • Asia Stocks Swing as Benchmark Trades Near 3-Month High. Asia’s benchmark stock index swung between gains and losses after Japanese machinery orders accelerated less than expected and as investors await the outcome of the Federal Reserve’s meeting next week. Toyota Motor Corp. dropped 1.1 percent, pacing losses among Japanese exporters as the yen rose for a second day. Drugmaker Sino Biopharmaceutical Ltd. tumbled 15 percent in Hong Kong after Credit Suisse Group AG cut its rating on the stock. Qantas Airways Ltd. (QAN), Australia’s largest carrier, climbed 2.5 percent after the Australian Financial Review reported it may share its Sydney terminal with unit Jetstar Airways. The MSCI Asia Pacific Index was little changed at 137.67 as of 12:20 p.m. in Tokyo, trading near a three-month high.
  • Rebar Declines in Shanghai as Property Curbs Damp Demand Outlook. Steel reinforcement-bar futures fell for a third day in Shanghai on concern that more efforts to rein in excessive investment in Chinese property projects will weaken demand. Rebar for delivery in January on the Shanghai Futures Exchange declined as much as 0.3 percent to 3,717 yuan ($608) a metric ton and traded at 3,723 yuan at 10:34 a.m. local time. Chinese banks including large state-owned lenders temporarily halted mortgage loan in cities including Beijing, Shanghai, Guangzhou and Shenzhen to avoid risks from property “bubbles,” according to a commentary in the Securities Times.
  • Fracking Moves U.S. Crude Output to Highest Level Since 1989. U.S. oil production jumped last week to the highest level since May 1989, cutting consumption of foreign fuel and putting the U.S. closer to energy independence. Drilling techniques including hydraulic fracturing, or fracking, pushed crude output up by 124,000 barrels, or 1.6 percent, to 7.745 million barrels a day in the seven days ended Sept. 6, the Energy Information Administration said today. 
  • Call to Change Obama’s Health Law Opens Rift With Labor. The AFL-CIO is asking for changes to the Affordable Care Act, President Barack Obama’s landmark health-care overhaul, potentially opening fissures between the White House and one of its staunch political allies. The labor federation today approved a resolution by voice vote on the final day of the group’s quadrennial convention in Los Angeles. The measure urges amendments to the law. The action by the AFL-CIO, which endorsed the law when it passed in 2010, adds to the political challenges facing the White House as it implements the law.
  • Vera Bradley's(VRA) share tumble on weak outlook. Shares of Vera Bradley fell in after-hours trading Wednesday, after the women's accessories company slashed its outlook because of the uncertain economy. The guidance came after the company posted a 12 percent increase in profit in its fiscal second quarter.
Wall Street Journal:
  • Geneva Talks Mark Big Test for U.S., Russia. Moscow Hopes to Reassert Itself as a Diplomatic Superpower, While Washington Hopes to Defuse a Showdown at Home. The decisions of the U.S. Congress and the United Nations on how to handle Syria's chemical weapons now hinge on two days of meetings starting Thursday between Secretary of State John Kerry and Russian Foreign Minister Sergei Lavrov. The meetings, to be held in Geneva, will represent Moscow's effort to reclaim a superpower's role on the world stage, while the Obama administration is looking for a way to defuse a showdown without being embarrassed either by losing a vote in Congress or the U.N. on action in Syria.
  • Lessons From Destruction of U.S. Chemical Weapons. Process Has Proven to Be Complicated, Lengthy. Even if the international community is able to take control of Syria's chemical weapons, the U.S. experience in destroying its own stockpiles suggests eliminating those from Damascus could be a complicated, lengthy and even risky endeavor.
  • Henninger: The Laurel and Hardy Presidency. After the Syrian slapstick, it's time to sober up U.S. foreign policy. After writing in the London Telegraph that Monday was "the worst day for U.S. and wider Western diplomacy since records began," former British ambassador Charles Crawford asked simply: "How has this happened?"
Fox News:
  • House pulls spending bill amid backlash as government shutdown looms. House Republican leaders pulled their plan Wednesday to temporarily fund the federal government after rank-and-file party members said it sidestepped “defunding” ObamaCare. The action further narrowed Congress’ time to strike a budget deal before an Oct. 1 government shutdown. House Speaker John Boehner and his team pulled the plan, which could have gotten a full chamber vote as early as Thursday, after a conservative backlash led by the Tea Party movement and Heritage Action for America.
MarketWatch.com:
  • Japan machinery-order data disappoint. Japanese core machinery orders stayed flat in July from the previous month, the government said Thursday, following a 2.7% decrease in June, suggesting businesses are still cautious about increasing investment despite a weaker yen and economic stimulus programs in place to support Japan's economic recovery. The result was worse than expected by economists surveyed by Dow Jones Newswires and the Nikkei, whose median estimate came to an increase of 2.4%.
CNBC:
  • Men's Wearhouse(MW) cuts outlook; shares skid. The Men's Wearhouse said Wednesday that its net income fell 28 percent during the fiscal second quarter, hurt by one-time charges and an early Easter that pushed prom tuxedos rentals earlier than usual.
Zero Hedge:
Business Insider:
New York Times:
  • A Plea for Caution From Russia by Vladimir Putin. The CIA has begun delivering weapons to rebels in Syria, ending months of delay in lethal aid that had been promised by the Obama administration, according to U.S. officials and Syrian figures. The shipments began streaming into the country over the past two weeks, along with separate deliveries by the State Department of vehicles and other gear — a flow of material that marks a major escalation of the U.S. role in Syria’s civil war.
  • Companies Embrace Low Interest Rates by Selling Bonds to Raise Billions. For companies looking to raise money through the debt markets, and the bankers egging them on, it seems no sum is too large. Verizon Communications shattered records and shook up the bond world on Wednesday when it sold $49 billion of investment-grade corporate debt at one time. It was the largest deal of its kind, exceeding Apple’s $17 billion bond sale in April and illustrating the degree to which low interest rates are enabling corporations to borrow money inexpensively.
  • Cheaper iPhone Will Cost More in China. The cost of the phone — more than $700 in China — will still keep Apple’s phones beyond the reach of most Chinese consumers. And that predicament only underscores what has become increasingly clear in recent months: that Apple’s fortunes in China largely depend not on any phone, but on reaching a deal with China Mobile, the country’s largest cellphone carrier.
Washington Post:
Reuters:
  • FNB Capital shows banks way past Volcker Rule. American banks, which have been shedding their private equity operations because of the Volcker Rule, can use an exemption in the financial reform law at least to get back into the lower end of the middle market. FNB Corp, a regional banking company based in Hermitage, Pennsylvania, is showing the way. The $12.6 billion-asset company, parent of First National Bank of Pennsylvania, the No. 3 retail bank in Pittsburgh by deposit market share, has spun off its merchant banking arm to form a small business investment company.
  • FTC to scrutinize new Facebook(FB) facial recognition feature. U.S. officials will examine changes to Facebook Inc's privacy policy to determine whether they violate a 2011 agreement with federal regulators, a Federal Trade Commission spokesman confirmed Wednesday after certain changes drew fire from privacy advocates. 
Telegraph:
21st Century Business Herald:
  • China Railway Corp. Reports 1H Loss of 6.5b Yuan. China Railway Corp.'s total liabilities were 2.92t yuan at the end of June, citing an earnings report. Debt-asset ratio was 62.58% at June-end, up from 62.23% at end-2012, the report says.
China Securities Journal:
  • China Should Expand Property Tax Trial Soon. China should expand its property tax trial "as soon as possible" as property markets in some regions are at risk of overheating, says reporter Zhang Min in a commentary.
Evening Recommendations 
  • None of note
Night Trading
  • Asian equity indices are -.25% to +.50% on average.
  • Asia Ex-Japan Investment Grade CDS Index 135.0 unch.
  • Asia Pacific Sovereign CDS Index 113.75 -.25 basis point.
  • FTSE-100 futures +.32%.
  • S&P 500 futures -.03%.
  • NASDAQ 100 futures +.06%.
Morning Preview Links

Earnings of Note

Company/Estimate
  • (KR)/.59
  • (ULTA)/.67
  • (UNFI)/.60
  • (ALOG)/1.35
Economic Releases
8:30 am EST  
  • Initial Jobless Claims are estimated to rise to 330K versus 323K the prior week.
  • Continuing Claims are estimated to rise to 2960K versus 2951K prior.
  • The Import Price Index for August is estimated to rise +.5% versus a +.2%.
2:00 pm EST 
  • The Monthly Budget Deficit for August is estimated at -$146.0B versus -$190.5B.
Upcoming Splits
  • None of note
Other Potential Market Movers
  • The ECB monthly report, Eurozone Industrial Production report, 30Y T-Bond auction, USDA Crop report, Bloomberg Economic Survey for Sept., weekly Bloomberg Consumer Comfort Index, weekly EIA natural gas inventory report, BofA Mining Conference, Goldman Sachs Commodities Conference, (USB) investor day and the (COV) investor meeting could also impact trading today.
BOTTOM LINE: Asian indices are slightly higher, boosted by industrial and commodity 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.

Wednesday, September 11, 2013

Stocks Higher into Final Hour on Lower Long-Term Rates, Diminished Syria Intervention Fears, Global Growth Optimism, Homebuilding/Healthcare Sector Strength

Broad Equity Market Tone:
  • Advance/Decline Line: Modestly Lower
  • Sector Performance: Mixed
  • Volume: Below Average
  • Market Leading Stocks: Performing In Line
Equity Investor Angst:
  • Volatility(VIX) 14.04 -3.37%
  • Euro/Yen Carry Return Index 138.63 -.18%
  • Emerging Markets Currency Volatility(VXY) 10.40 -.67%
  • S&P 500 Implied Correlation 45.17 -1.89%
  • ISE Sentiment Index 118.0 +31.11%
  • Total Put/Call .91 +13.75%
  • NYSE Arms .77 +9.69% 
Credit Investor Angst:
  • North American Investment Grade CDS Index 76.55 -1.86%
  • European Financial Sector CDS Index 139.14 -.03%
  • Western Europe Sovereign Debt CDS Index 90.0 -.39%
  • Emerging Market CDS Index 306.55 -4.09%
  • 2-Year Swap Spread 15.25 unch.
  • TED Spread 24.0 +.5 bp
  • 3-Month EUR/USD Cross-Currency Basis Swap -8.5 +.25 bp
Economic Gauges:
  • 3-Month T-Bill Yield .02% unch.
  • Yield Curve 246.0 -3 bps
  • China Import Iron Ore Spot $135.10/Metric Tonne -.07%
  • Citi US Economic Surprise Index 53.50 unch.
  • Citi Emerging Markets Economic Surprise Index -5.90 +3.6 points
  • 10-Year TIPS Spread 2.13 +2 bps
Overseas Futures:
  • Nikkei Futures: Indicating +50 open in Japan
  • DAX Futures: Indicating +7 open in Germany
Portfolio: 
  • Higher: On gains in my tech/medical/retail sector longs
  • Disclosed Trades: Covered some of my (IWM)/(QQQ) hedges, then added them back
  • Market Exposure: 50% Net Long