Stocks Rising into Final Hour on Yen Weakness, Seasonality, Investor Performance Angst, Defense/Gaming Sector Strength

Broad Equity Market Tone:

• Advance/Decline Line: About Even
  

• Sector Performance: Most Sectors Rising
  

• Volume: Light

• Market Leading Stocks: Performing In Line

Equity Investor Angst:

• Volatility(VIX) 12.11 -2.96%

• Euro/Yen Carry Return Index 149.61 +.60%

• Emerging Markets Currency Volatility(VXY) 9.04 +.11%

• S&P 500 Implied Correlation 49.27 -2.03%

• ISE Sentiment Index 151.0 -15.17%

• Total Put/Call .65 unch.

• NYSE Arms .59 -2.48% 

Credit Investor Angst:

• North American Investment Grade CDS Index 61.98 -.64%

• European Financial Sector CDS Index 85.23 unch.

• Western Europe Sovereign Debt CDS Index 60.76 +.02%

• Emerging Market CDS Index 267.44 +.17%

• 2-Year Swap Spread 9.75 -.25 basis point

• TED Spread 18.50 +.5 basis point

• 3-Month EUR/USD Cross-Currency Basis Swap -8.0 -6.25 basis points

Economic Gauges:

• 3-Month T-Bill Yield .06% -1 basis point

• Yield Curve 258.0 unch.

• China Import Iron Ore Spot $132.10/Metric Tonne +.08%
  

• Citi US Economic Surprise Index 49.4 +1.0 point

• Citi Emerging Markets Economic Surprise Index -9.70 +.7 point

• 10-Year TIPS Spread 2.20 +1 basis point

Overseas Futures:

• Nikkei Futures: Indicating +115 open in Japan

• DAX Futures: Indicating +2 open in Germany

Portfolio: 

• Higher: On gains in my biotech/retail/tech sector longs and emerging markets shorts

• Disclosed Trades: Covered some of my (IWM)/(QQQ) hedges, then added them back

• Market Exposure: 50% Net Long

Today's Headlines

Bloomberg: 

• Xi Reply to Abe Shrine Visit Looms as Test for China-Japan Ties. Chinese President Xi Jinping’s reaction to Japanese Prime Minister Shinzo Abe’s visit to a shrine that honors wartime leaders will determine whether Asia’s top two economies come closer to a hostile incident. Xi’s options after Abe’s appearance yesterday at Yasukuni shrine -- the first by a sitting prime minister since 2006 -- range from sticking with verbal condemnation to unleashing public anti-Japanese protests to stepping up naval or air challenges against Japan’s forces in the East China Sea.

• Japan's carmakers brace for China backlash from shrine visit. Japanese automakers are bracing for a potential consumer backlash should tensions with China escalate after Prime Minister Shinzo Abe visited a shrine memorializing those killed by war on Chairman Mao Zedong's birthday. Nissan Motor Co. said it was "closely monitoring" developments in Japan-China ties after Abe's visit. The appearance at Tokyo's Yasukuni Shrine, which honors the war dead including 14 World War II leaders convicted as Class A war criminals, drew a condemnation from China.

• Emerging Stocks Drop as China and Turkey Slump; Baht Weakens. Turkey’s gauge extended a rout after Prime Minister Recep Tayyip Erdogan overhauled his cabinet amid a corruption scandal. The Thai baht weakened for an eighth day. Foreign-currency denominated shares of Chongqing Changan Automobile Co. (200625), the Chinese partner of Mazda Motor Corp. (7261), lost 3.2 percent in Shenzhen. Kasikornbank Pcl (KBANK) decreased 3.6 percent in Bangkok. The Borsa Istanbul National 100 Index slipped 0.6 percent, set for the lowest close since August, after Erdogan replaced 10 ministers in his cabinet. The baht depreciated to the weakest level since March 2010. The Shanghai Composite Index (SHCOMP) dropped 1.6 percent, falling to the lowest level since Aug. 23. Chongqing Changan Automobile fell the most in almost two weeks. Automakers are bracing for a potential consumer backlash should tensions with China escalate after Japan’s Prime Minister Shinzo Abe visited a shrine memorializing war-dead on Chairman Mao Zedong’s birthday. 

• Rebar Drops in Shanghai as Suppliers Cut Prices on Weaker Demand. Steel reinforcement-bar futures fell to the lowest level in more than a month as inventory climbed amid weakening demand while the nation’s second cash crunch this year reduced investment in the commodity. Rebar for May delivery on the Shanghai Futures Exchange lost as much as 0.6 percent to 3,583 yuan ($590) a metric ton, the lowest since Nov. 18. It traded little changed at 3,605 yuan at 10:46 a.m. local time. 

• Gasoline Futures Jump to Three-Month High on Refinery Shutdowns. Gasoline for January delivery rose 2.98 cents, or 1.1 percent, to $2.844 a gallon at 12:54 p.m. on the New York Mercantile Exchange after reaching $2.8463, the highest intraday price since Sept. 9. Trading volume was 47 percent below the 100-day average. The futures have climbed 6 percent this month and 1 percent this year.

• U.S. bond downgrades escalate as leverage climbs. Credit quality for U.S. companies is showing signs of weakening as issuers from Verizon Communications Inc. to Apple Inc. borrow unprecedented amounts of money to expand and reward shareholders. A total of 223 companies had their bond ratings cut by Moody’s Investors Service in the six months ended November, compared with 172 increases, the highest proportion of downgrades since April. Issuers took advantage of borrowing costs that averaged a record-low 3.83% this year to sell an unprecedented amount of bonds, with 15% of offerings funding shareholder payouts, the most in five years. Companies in the U.S. sold US$1.5-trillion of bonds through Dec. 24, with the highest percentage of proceeds used to fund shareholder-friendly transactions since at least 2008, according to data compiled by Moody’s and Bloomberg. About 4% of bond offerings in 2008 were used to reward shareholders, Moody’s data show. Potential downgrades exceeded those of upgrades by Standard & Poor’s on Nov. 29 by 222 to 188, according to a report by S&P analysts led by Diane Vazza, the New York-based head of global fixed-income research.

• Amazon(AMZN) Refunds Shipping After UPS Can’t Deliver by Christmas. Amazon.com Inc., the largest online retailer, offered customers $20 gift cards and refunds on shipping charges after an avalanche of orders caused United Parcel Service Inc. to miss delivery of some packages by Christmas. Amazon cited failures in UPS’s transportation network in messages to customers, saying its own fulfillment centers processed customers’ orders in time for holiday delivery.

Wall Street Journal: 

• Abe Visit to Controversial Japanese Shrine Draws Rare U.S. Criticism. Visit to Yasukuni Raises Concern Premier Shifting Focus From Economy to Nationalistic Goals. Japanese Prime Minister Shinzo Abe's surprise visit to a shrine linked to the country's militarist past threatens to damage ties with the U.S. and has raised concerns that after a year in office, he may be shifting his focus to a nationalist agenda at the expense of his program to revitalize the economy.

• Foreign Investors Face Hurdles in China's Bond Market. High Yields Lure Overseas Investors, but Obstacles Stand in the Way. China's cash crunch is leading to a selloff in onshore bonds, but the resultant high yields in the nation's $4 trillion bond market are drawing in foreign investors in droves. The problem for foreign investors: At a time when Chinese banks, the main buyers of onshore bonds, are selling, their capacity to pile in and buy is limited by government quotas.

• What to Do When ObamaCare Unravels. Health insurance should be individual, portable across jobs, states and providers, and lifelong and renewable. The unraveling of the Affordable Care Act presents a historic opportunity for change. Its proponents call it "settled law," but as Prohibition taught us, not even a constitutional amendment is settled law—if it is dysfunctional enough, and if Americans can see a clear alternative.

• Twitter’s(TWTR) Ballooning Market Cap. The stock has surged 75% this month and is up 180% since the company priced its $26 initial public offering in November. Twitter now sports a $38.1 billion market capitalization, according to FactSet. If Twitter were in the S&P 500, it would be among the top 20% of biggest companies based on market value. By comparison, retail giant Target Corp. has a $39 billion market cap, Yahoo Inc. has a $41.1 billion market value and Time Warner Cable has a market cap of $37.6 billion. The rally has confounded investors and analysts alike, who question whether the unprofitable company warrants such a high valuation.

CNBC: 

• Take some risk off in 2014: Citigroup. (video)

• Big tax surprise looming for high earners. (video) According to Joe Perry, a partner overseeing tax and business services at Marcum, about 1,200 of his clients earning more than $400,000 will see their 2013 tax bills grow by an average of 7 percent compared to 2012. The changes amounted to a total of $250 million more in taxes this year, he told CNBC on Thursday.

• US 10-year yields cross 3 percent. (video)

• Depreciation hits electric cars hard. Plug-in electric cars may be cutting-edge technology, but an analysis suggests that most will depreciate more dramatically over five years than their conventional counterparts.

ZeroHedge: 

• China (And Korea) Blast Abe's "Absolutely Unacceptable" Visit To War Shrine.

• Initial Claims Tumble Even As 1.3 Million Americans Are Set To Stop Collecting Benefits. (graph)

• Turkish Lira Plunges To New Record Low As Government Obstructs "Graft" Probe. (graph)

• This Is Not The European Recovery You Were Looking For. (graph)

• French Hope Dashed As Joblessness Surges Back Towards Record High. (graph)

• Itemizing The Obamacare Fees.

• What Could Go Wrong Here? (graph) US investors have turned the euphoria dial to 11 this week as the percent bullish is the highest since the peak in Fall 2007 and bears are at their lowest percentage since Spring 1987. Thus, the Bull-bear spread (based on AAII's survey) has never been wider.

Business Insider:

• MATT DRUDGE: Twitter's(TWTR) Stock Will Have A 'Horrific' Crash.

• Teens In The UK Are Calling It: Facebook(FB) Is Dead And Buried.

CNN:

• CNN Poll: Opposition To Obamacare Hits Record Highs, Support Crashes To New Lows. (graph)

AAII:

• Sentimnet Survey: Bulls 55.1%, Bears 18.5%.

Echoing fears that European policymakers remain in a state of cognitive dissonance – recognizing the need for root-and-branch overhaul of peripheral banks, but backtracking on joint liability plans – Christopher Flowers, the legendary FIG investor who now runs the £2.3 billion ($3.5 billion) private equity group JC Flowers, sounded the alarm over the negative sovereign-bank feedback loop. In a shot across the bows of market bulls, who cite the return of capital flows to weaker eurozone states, Flowers issued a stark warning: "There is a scenario where we have a Lehman-type event: we wake up some Thursday and a big country is in trouble. "And the ECB will have to decide to support banks x, y, z. And then the ECB will, in fact, decide to own bank x, y, z.


While we want you to share, we ask you use the functions on-site rather than copy/paste. See T's & C's for details. http://www.euromoney.com/Article/3211790/CurrentIssue/88924/Restructuring-Flowers-slams-Europe-over-inaction.html?copyrightInfo=true

Kyodo:

• China's Ambassador Calls Abe Shrine Visit Major Obstacle. Japanese Prime Minister Shinzo Abe's visit to the Yasukuni war shrine creates a "major obstacle" in relations with China, citing Ambassador Cheng Yonghua. Japan must take responsibility for fallout, Cheng said.

Bear Radar

Style Underperformer:

• Small-Cap Value -.34%

Sector Underperformers:

• 1) Utilities -.53% 2) Disk Drives -.43% 3) REITs -.22%

Stocks Falling on Unusual Volume:

• ORMP, TXTR, TKC, WMC, PTY, PCN, PDI, GDP, RLI, BIO, PKO, SHLO, GIII, MR, WX, RTI, QDEL and CLNE

Stocks With Unusual Put Option Activity:

• 1) FCX 2) TWTR 3) TOL 4) XLE 5) XLNX
  

Stocks With Most Negative News Mentions:

• 1) JPM 2) BAC 3) TXTR 4) EV 5) EBAY
  

Charts:

• ETFs Falling on Unusual Volume

• Stocks Falling on Unusual Volume

Bull Radar

Style Outperformer:

• Large-Cap Value +.25%

Sector Outperformers:

• 1) Gold & Silver +1.05% 2) Gaming +.85% 3) Defense +.65%
  

Stocks Rising on Unusual Volume:

• ICLD, NM, BITA and DDD

Stocks With Unusual Call Option Activity:

• 1) TMO 2) CLDX 3) TWTR 4) TASR 5) GOGO

Stocks With Most Positive News Mentions:

• 1) HRB 2) FAST 3) TGT 4) AAPL 5) SCTY
  

Charts:

• ETFs Rising on Unusual Volume 

• Stocks Rising on Unusual Volume

Thursday Watch

Night Trading

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

• Asia Ex-Japan Investment Grade CDS Index 124.0 +2.0 basis points.

• Asia Pacific Sovereign CDS Index 103.0 unch. 

• FTSE-100 futures n/a.

• S&P 500 futures n/a.

• NASDAQ 100 futures n/a.

Morning Preview Links

Earnings of Note
Company/Estimate

• None of note

Economic Releases
 8:30 am EST

• Initial Jobless Claims are estimated to fall to 345K versus 379K the prior week.

• Continuing Claims are estimated to fall to 2827K versus 2884K prior.

Upcoming Splits

• None of note

Other Potential Market Movers

• The China Industrial Profits report, Japan Employment/CPI/Production data and the weekly Bloomberg Consumer Comfort Index could also impact trading today.

BOTTOM LINE: Asian indices are mostly higher, boosted by technology and industrial 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 Higher into Final Hour on Global Growth Optimism, Seasonality, Investor Performance Angst, Homebuilding/Commodity Sector Strength

Broad Equity Market Tone:

• Advance/Decline Line: Higher
  

• Sector Performance: Most Sectors Rising
  

• Volume: Light

• Market Leading Stocks: Underperforming

Equity Investor Angst:

• Volatility(VIX) 12.63 -3.14%

• Euro/Yen Carry Return Index 148.72 +.01%

• Emerging Markets Currency Volatility(VXY) 9.02 -.11%

• S&P 500 Implied Correlation 50.12 -.81%

• ISE Sentiment Index 199.0 +61.8%

• Total Put/Call .55 -9.84%

• NYSE Arms .74 -11.04% 

Credit Investor Angst:

• North American Investment Grade CDS Index 62.42 -.56%

• European Financial Sector CDS Index 85.62 -.09%

• Western Europe Sovereign Debt CDS Index 60.75 -.16%

• Emerging Market CDS Index 267.28 +.68%

• 2-Year Swap Spread 10.0 +.75 basis point

• TED Spread 18.0 -.5 basis point

• 3-Month EUR/USD Cross-Currency Basis Swap -1.75 unch.

Economic Gauges:

• 3-Month T-Bill Yield .07% +1 basis point

• Yield Curve 258.0 +4.0 basis points

• China Import Iron Ore Spot $132.0/Metric Tonne +.08%
  

• Citi US Economic Surprise Index 48.4 +3.5 points

• Citi Emerging Markets Economic Surprise Index -10.40 +.7 point

• 10-Year TIPS Spread 2.19 +2 basis points

Overseas Futures:

• Nikkei Futures: Indicating +85 open in Japan

• DAX Futures: Indicating +3 open in Germany

Portfolio: 

• Slightly Lower: On losses in my biotech sector longs and index hedges

• Disclosed Trades: None

• Market Exposure: 50% Net Long