Stocks Lower into Final Hour on Debt Ceiling Worries, Emerging Markets Debt Concerns, Yen Strength, Homebuilding/Financial Sector Weakness

Broad Equity Market Tone:

• Advance/Decline Line: Modestly Lower
  

• Sector Performance: Most Sectors Declining
  

• Volume: Below Average

• Market Leading Stocks: Performing In Line

Equity Investor Angst:

• Volatility(VIX) 14.24 +8.54%
• Euro/Yen Carry Return Index 139.10 -.76%
• Emerging Markets Currency Volatility(VXY) 9.72 -1.12%
• S&P 500 Implied Correlation 49.36 +4.47%

• ISE Sentiment Index 72.0 -15.29%

• Total Put/Call .96 -8.57%

• NYSE Arms 1.41 -11.31% 

Credit Investor Angst:

• North American Investment Grade CDS Index 80.35 +.57%

• European Financial Sector CDS Index 139.82 -.38%

• Western Europe Sovereign Debt CDS Index 87.0 +.10%

• Emerging Market CDS Index 266.20 +1.45%

• 2-Year Swap Spread 14.50 -1.0 basis point

• TED Spread 24.50 +.5 basis point

• 3-Month EUR/USD Cross-Currency Basis Swap -5.5 +1.0 basis point

Economic Gauges:

• 3-Month T-Bill Yield .00% -1 basis point

• Yield Curve 237.0 -3 basis points

• China Import Iron Ore Spot $132.40/Metric Tonne +.46%

• Citi US Economic Surprise Index 45.90 +1.5 points
• Citi Emerging Markets Economic Surprise Index 3.60 +1.5 points

• 10-Year TIPS Spread 2.26 -2 basis points

Overseas Futures:

• Nikkei Futures: Indicating -63 open in Japan

• DAX Futures: Indicating +9 open in Germany

Portfolio: 

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

Bear Radar

Style Underperformer:

• Mid-Cap Growth -.87%

Sector Underperformers:

• 1) Homebuilders -1.94% 2) Banks -1.91% 3) Internet -1.60%

Stocks Falling on Unusual Volume:

• P, YELP, VNDA, GHDX, C, BCS, KO, ANW, CFNL, E, FST, CRAY, SWIR, DQ, LGND, ABMD, SEE, FLTX, BIOS, CTRX, CYD, TGI, XOOM, NDLS, COL, INVN, GRPN, YY, CSII, ANW, TW, DRI, GHDX, XONE, CVRR, CFNL, AFOP and UBNT

Stocks With Unusual Put Option Activity:

• 1) NVDA 2) GPS 3) SMH 4) XLNX 5) BBBY
  

Stocks With Most Negative News Mentions:

• 1) GMCR 2) BBRY 3) TSLA 4) NFLX 5) FB
  

Charts:

• ETFs Falling on Unusual Volume

• Stocks Falling on Unusual Volume

Bull Radar

Style Outperformer:

• Large-Cap Growth -.66%

Sector Outperformers:

• 1) Steel +.89% 2) Utilities +.87% 3) Gold & Silver +.67%
  

Stocks Rising on Unusual Volume:

• AAPL, SRPT, SIR, ISIS and CRUS

Stocks With Unusual Call Option Activity:

• 1) BA 2) ACHN 3) FXY 4) VHC 5) SWN
  

Stocks With Most Positive News Mentions:

• 1) LMT 2) TGT 3) FSLR 4) GM 5) GRPN
  

Charts:

• ETFs Rising on Unusual Volume 

• Stocks Rising on Unusual Volume

Monday Watch

Weekend Headlines 
Bloomberg:

• Merkel Gets Biggest Victory Since Kohl’s Reunification Vote. Angela Merkel won an overwhelming endorsement from German voters, putting the country’s first female chancellor on course for the biggest election tally since Helmut Kohl’s post-reunification victory of 1990. Merkel’s Christian Democratic bloc took 41.5 percent to 25.7 percent for the Social Democrats of Peer Steinbrueck in yesterday’s election, according to results from all 299 districts. That leaves her short of a majority and needing a coalition partner to govern Europe’s biggest economy.

• Euro Near 7-Month Merkel Election Win, Aussie Gains on China PMI. The euro was 0.3 percent from a seven-month high against the dollar after Angela Merkel won an overwhelming endorsement from German voters, putting her on course for the biggest election tally since Helmut Kohl’s post-reunification victory of 1990. 

• Bears Retreating as European Shorts Drop $80 Billion to 2006 Low. The retreat by European bears is turning into a rout as equity traders reduce bets against the region’s stocks by about $80 billion to the lowest level in at least seven years. Borrowed shares of Euro Stoxx 50 Index (SX5E) companies, an indication of wagers against equities, have fallen to 1.7 percent of the total outstanding from 3.2 percent two years ago and 24 percent at the height of the financial crisis, according to data from Markit, the London-based research firm. Bullish bets on Europe have reached the most since 2007 in a Bank of America Corp. survey of money managers who oversee $518 billion.

• Asia Stocks Rise After China Manufacturing Tops Estimates. Asian stocks rose, with a regional benchmark index trading near a four-month high, after a private measure of Chinese manufacturing jumped more than forecast. Trading on Hong Kong markets was delayed due to a storm. Delta Electronics Inc. a maker of power-supply packs for notebook computers, surged 6.3 percent, leading technology shares higher. Woori Finance Holdings Co. gained 2.4 percent in Seoul amid speculation sales of its regional bank units will succeed. Newcrest Mining Ltd., Australia’s largest gold producer, dropped 6.4 percent after the price of the precious metal slumped on Sept. 20. The MSCI Asia Pacific excluding Japan Index climbed 0.2 percent to 470.35 as of 12:41 p.m. in Sydney.

• Copper Leads Industrial Metals Lower After Chinese Imports Fall. Copper led declines in industrial metals, falling by most in more than a week as lower imports by China suggested demand by the largest consumer may be weaker than estimated. The metal for delivery in three months on the London Metal Exchange dropped 1.3 percent to $7,188.50 a metric ton at 10:09 a.m. in Singapore, the biggest drop since Sept. 12. Nickel slid 1.3 percent and tin fell 1.2 percent.

• Gold Extends Biggest Decline in a Week on Outlook for Fed Taper. Gold extended the biggest drop in more than a week as investors weighed the outlook for stimulus in the U.S. after a Federal Reserve policy maker said a “small taper” may occur next month. Markets in China reopened today after a two-day holiday. Bullion for immediate delivery dropped as much as 0.9 percent to $1,313.69 an ounce and traded at $1,320.33 at 9:56 a.m. in Singapore after climbing as much as 0.5 percent. Prices slumped 3 percent to $1,326.05 on Sept. 20, the most since Sept. 12. Gold for December delivery lost 0.9 percent to $1,320 on the Comex in New York.

Wall Street Journal: 

• Assault on Mall Stuns Kenya. Death Toll Rises to at Least 68, With Dozens Believed Trapped. Kenyan police late Sunday struck to end a two-day terrorist attack at an upscale mall after the death toll rose to 68, with some 40 people believed trapped inside the complex while armed militants remained at large. An explosion and new volleys of gunfire were heard as the sun set. Kenyan police said they had begun a final push aimed at ending the terrorist attack on the Westgate mall. But after the initial explosions the area quieted down and it was difficult to tell as the night wore on whether an operation was under way or not. Early Monday, heavy gunfire was heard from the shopping mall, according to Reuters. The Kenyan military on Sunday said it had freed "most" of those inside but didn't give a figure.

• Yellen Would Bring Tougher Tone to Fed. Some Say Potential Chairwoman's Leadership Style Would Contrast With Bernanke's. Janet Yellen, the lead candidate to succeed Federal Reserve Chairman Ben Bernanke, brings a demanding and harder-driving leadership style to the central bank, in contrast to Mr. Bernanke's low-key and often understated approach. Ms. Yellen, the Fed vice chairwoman, is highly regarded by many central bank staff members, who call her an effective leader with a sharp mind. But she has clashed with others and left some hard feelings in the wake of those confrontations, according to interviews with more than a dozen current and former staff members and officials who worked with her directly in recent years.

• Open-Government Laws Fuel Hedge-Fund Profits. Hedge Funds Are Using FOIA Requests to Obtain Nonpublic Information From Federal Agencies. When SAC Capital Advisors LP was weighing an investment in Vertex Pharmaceuticals Inc., VRTX -0.18% the hedge-fund firm contacted a source it knew would provide nonpublic information without blinking: the federal government.

• Don't Bet the House on Homebuilder Shares. KB Home(KBH), Lennar(LEN) Seen Posting Upbeat Earnings, but the Stocks Look Pricey.

• From Damascus to Tehran. Iran's mullahs see a U.S. President eager for a nuclear deal.

Marketwatch.com:

• Obama Repeats Vow Not To Make Deals On Debt Limit. President Barack Obama on Saturday insisted that he won’t negotiate with House Republicans over the debt ceiling, accusing them of threatening to plunge the U.S. into default and back into recession by tying the debt limit to their effort to defund his health-care law.

Fox News:

• 'Red line' just one of roughly 500 Obama promises that have come and gone.

CNBC:

• GM(GM) planning 200-mile battery car. General Motors plans to more than double the range of the typical electric vehicle—while also sharply driving down the cost, according to a senior official. 

• The aging in Asia face a new decade like no other. Asia is expected to see one clear demographic trend emerge in the next decade: a widening divide between the southeast, where the working-age population is growing at a strong pace, and the northeast, where the labor force is forecast to shrink.

Zero Hedge:

• 6 Things To Ponder This Weekend.

• White House Launches Janet Yellen Blitz PR Campaign.

• If The Economy And The Market Were Still Connected...

• Chart Of The Day: The Fed's "Renormalization" Shock (All 600 bps Of It).

• Is Italy Set To Become Europe's Japan?

• What Bernanke Did.

• JPMorgan(JPM) Says "Buy Gold".

• China's Ghost Cities... Are Multiplying.

• Food Stamp Nation. (video)

• Merkel Wins Federal Election But Coalition Partner Below Bundestag Threshold: Final Outcome Too Close To Call.

• What's In A Bubble?

• "Fed's Neo-Keynesian Clowns... Are Holding The World Hostage".

• What Shadow Banking Can Tell Us About The Fed's "Exit-Path" Dead End.

• Summing It All Up In One Cartoon. (graph)

Business Insider:

• Frightening Pictures Of The Terrorist Attack At Kenyan Mall That Has Killed 39. 

• Why Did Terrorists Strike An Upscale Mall In Kenya? 

• Hedge Funder Stan Druckenmiller Wants Every Young Person In America To See These Charts About How They're Getting Screwed.

• Has The Fed Become An Enabler?

• Tensions Mount After Another Israeli Soldier Killed In The West Bank.

• 3 Investing Billionaires Have Recently Come Out With Warnings About The Stock Market.

• JIM ROGERS: 'The Wolf Is Now At The Door In India'.

• Al Qaeda-Affiliate Chief Killed By Other Rebel Fighters In Syria.

Wall Street All-Stars:

• Indicator Update: Will Washington Gridlock Scuttle Stocks?

CNN:

• Obama's big debt limit deception. As a historian and a former speaker of the House who negotiated successfully through two government shutdowns, a successful welfare reform bill, the first tax cut in 16 years and four balanced budgets, I am offended and a little frightened by President Barack Obama's deliberate dishonesty about the debt ceiling. On Wednesday, speaking to the Business Roundtable, Obama said:

Reuters: 

• China's Xi stamps authority on party with Bo verdict. With ousted senior politician Bo Xilai jailed for life, Chinese President Xi Jinping has stamped his authority on the Communist Party by effectively warning he will not tolerate dissent as he seeks to push through tough economic reforms. 

• German eurosceptics on the rise, liberals in decline. A new anti-euro party narrowly missed entering parliament in a German election on Sunday, drawing millions of voters with a eurosceptic message that may have laid the foundations for a strong challenge in a European Parliament vote next year. 

• U.S. Fed gives Indonesia a brief respite from debt pain. The U.S. Federal Reserve has given Indonesian companies an unexpected window of opportunity to refinance a foreign debt burden that has nearly doubled to $134 billion since 2008. The borrowing binge was a product of Indonesia's strong economic growth and record-low global interest rates. But Southeast Asia's largest economy was hit hard in an emerging market selloff this year as investors prepared for a slowdown in the U.S. central bank's purchases of government debt.  

• Citi(C) had significant drop in trading revenue -FT.  

• Suicide bombers kill 78 Christians outside Pakistani church. A pair of suicide bombers blew themselves up outside a 130-year-old Anglican church in Pakistan after Sunday Mass, killing at least 78 people in the deadliest attack on Christians in the predominantly Muslim country. Islamist violence has been on the rise in Pakistan in past months, undermining Prime Minister Nawaz Sharif's efforts to tame the insurgency by launching peace talks with the Pakistani Taliban.

• Suicide bomber kills 16 in mainly Sunni district of Baghdad. A further 35 people were wounded in the attack in Doura, which came a day after a triple bombing at a funeral in Baghdad's Shi'ite stronghold of Sadr City killed 85 people.

Financial Times:

• The Fed is wrong to put off the return to normality. The US Federal Reserve’s decision last week to delay the start of its so-called “tapering” has confused investors about the reliability of its forward guidance. It has also created a trap that will make it difficult to start the tapering programme in the future unless the Fed changes its basic approach.

Telegraph: 

• Eurozone tensions bubble as Merkel storms to victory. Eurozone tensions are simmering as the bloc faces four more years of tough austerity under the leadership of conservative Chancellor Angela Merkel.

Weekend Recommendations

• None of note

Night Trading

• Asian indices are -.75% to +.50% on average.

• Asia Ex-Japan Investment Grade CDS Index 141.0 +23.0 basis points. (new series)

• Asia Pacific Sovereign CDS Index 98.25 +.75 basis point.

• FTSE-100 futures -.26%.

• S&P 500 futures +.12%.

• NASDAQ 100 futures +.19%.

Morning Preview Links

Earnings of Note
Company/Estimate

• (RHT)/.33

Economic Releases
8:30 am EST

• Chicago Fed National Activity Index for August is estimated to rise to -.05 versus -.15 in July.
  

8:58 am EST

• Preliminary Markit US PMI for September is estimated at 54.0.

Upcoming Splits

• None of note

Other Potential Market Movers

• The Fed's Lockhart speaking, Fed's Dudley speaking, Fed's Fisher speaking, Eurozone PMI data and the (TOT) investor day could also impact trading today.

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

Weekly Outlook

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

BOTTOM LINE: I expect US stocks to finish the week modestly lower on rising energy prices, more Mideast unrest, technical selling, rising long-term rates, debt-ceiling worries and profit-taking. My intermediate-term trading indicators are giving neutral signals and the Portfolio is 25% net long heading into the week.

Market Week in Review

S&P 500 1,709.91 +1.3%*




The Weekly Wrap by Briefing.com.

*5-Day Change