Stocks Rising into Final Hour on Global Growth Optimism, Yen Weakness, Earnings, Tech/Financial Sector Strength

Broad Equity Market Tone:

• Advance/Decline Line: Higher
  

• Sector Performance: Most Sectors Rising
  

• Volume: Slightly Below Average

• Market Leading Stocks: Performing In Line

Equity Investor Angst:

• Volatility(VIX) 12.11 -1.38%

• Euro/Yen Carry Return Index 148.38 -.19%

• Emerging Markets Currency Volatility(VXY) 8.58 +1.42%

• S&P 500 Implied Correlation 50.84 +2.54%

• ISE Sentiment Index 175.0 +10.76%

• Total Put/Call .75 +10.29%

• NYSE Arms .85 +36.30% 

Credit Investor Angst:

• North American Investment Grade CDS Index 63.38 -2.31%

• European Financial Sector CDS Index 84.54 -2.10%

• Western Europe Sovereign Debt CDS Index 50.0 -3.84%

• Emerging Market CDS Index 282.18 -.76%

• 2-Year Swap Spread 12.75 +.5 basis point

• TED Spread 20.25 -.5 basis point

• 3-Month EUR/USD Cross-Currency Basis Swap .75 +2.0 basis points

Economic Gauges:

• 3-Month T-Bill Yield .04% +1 basis point

• Yield Curve 249.0 +1 basis point

• China Import Iron Ore Spot $129.60/Metric Tonne +.08%

• Citi US Economic Surprise Index 72.70 +2.4 points

• Citi Emerging Markets Economic Surprise Index .5 -.1 point

• 10-Year TIPS Spread 2.27 +2 basis points

Overseas Futures:

• Nikkei Futures: Indicating +68 open in Japan

• DAX Futures: Indicating +31 open in Germany

Portfolio: 

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

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

• Market Exposure: 50% Net Long

Today's Headlines

Bloomberg:

• Gross Says Brazil No Longer Pimco Emerging-Market Favorite. Pacific Investment Management Co.’s Bill Gross said Brazil is no longer a preferred emerging-market country for the world’s largest fixed-income manager. 

• Bailed-Out Euro Nations See Painful Economic Challenges Remain. Bailed-out euro-area countries are facing “painful” challenges with worse-than-anticipated consequences of economic adjustment, including high unemployment and slow growth, central banks and finance ministries said.

• ECB Said to Favor 6% Capital Requirement in Stress Test. The European Central Bank favors requiring banks to show their capital won’t fall below 6 percent of their assets when it puts them through a simulated recession later this year, said two euro-area officials with knowledge of the matter. 

• Europe Stocks Advance for Fourth Day; Burberry Increases. European stocks rose, with the benchmark Stoxx Europe 600 Index reaching a six-year high, after the World Bank raised its global growth forecast. Burberry Group Plc gained 4.6 percent after the U.K.’s largest luxury-goods maker reported quarterly revenue that topped analysts’ estimates. Peugeot SA and Daimler AG gained as a gauge of European carmakers posted the best performance of 19 industry groups in the Stoxx 600. Chr. Hansen A/S declined 4.8 percent after it said net income missed projections. The Stoxx 600 climbed 1 percent to 334.51 at the close of trading in London.

• Dollar Climbs to Highest in 4 Months as Growth Boosts Taper Bets. The dollar rose to the highest in four months as signs the world’s biggest economy is recovering fueled speculation the Federal Reserve will keep monetary cutting stimulus. The Bloomberg Dollar Spot Index (SAPMI), which measures the currency’s value against 10 major counterparts, gained 0.5 percent to 1,030.03 at 1:18 p.m. New York time and touched 1,030.54, the strongest since Sept. 9. It jumped 0.4 percent yesterday. The dollar rose 0.6 percent to $1.3592 per euro after sliding to $1.3699 yesterday, the weakest since Jan. 2. The U.S. currency gained 0.4 percent to 104.64 yen after jumping 1.2 percent yesterday. The euro dropped 0.2 percent to 142.22 yen.

• WTI Crude Climbs After U.S. Inventories Tumble to 22-Month Low. West Texas Intermediate crude advanced after a government report showed that U.S. inventories tumbled to the lowest level in almost 22 months. Futures rose as much as 2.1 percent. WTI for February delivery climbed $1.82, or 2 percent, to $94.41 a barrel at 12:34 p.m. on the New York Mercantile Exchange. The contract traded at $93.46 before the release of the report at 10:30 a.m. in Washington. The volume of all futures traded was 27 percent above the 100-day average.

• Artic Cold Begins to Sweep Into the U.S. Next Week. Lows of zero degrees Fahrenheit (minus 18 Celsius) for Chicago and single-digit readings from Washington to Boston are possible by next week, said Matt Rogers, president of Commodity Weather Group LLC. Average temperatures in the eastern U.S. are expected to be at least 3 degrees below normal from Minnesota to Alabama and across the East from Jan. 20 to 24, said Rogers, based in Bethesda, Maryland. That would be followed by a more widespread and intense outbreak of cold from Jan. 25 to 29.

• CLOs Should Be Exempt From Volcker Rule Clause, LSTA's Ganz Says. The Loan Syndications and Trading Association is warning regulators that the Volcker Rule may force U.S. banks to sell their holding of collateralized loan obligations and reduce credit to U.S. companies. "The final rule as written would cause banks to recognize significant losses on otherwise safe, high-quality assets, which furthers no regulatory objective," Elliot Ganz, general counsel at the NY-based trade group, said today. The LSTA is asking regulators to modify parts of the rule so CLOs aren't treated as equity securities, which would make them ineligible to be held by banks.

Wall Street Journal: 

• IMF Chief Warns on Rising Risks of Deflation. Lagarde Says 'Growth Stuck in Low Gear', Too Fragile. The head of the International Monetary Fund Wednesday warned that deflation in advanced economies threatens to derail a strengthening, but still fragile global recovery this year, requiring central banks in the U.S. and Europe to keep easy money flowing. "With inflation running below many central banks' targets, we see rising risks of deflation, which could prove disastrous for the recovery," IMF Managing Director Christine Lagarde said in a speech at the National Press Club. "If inflation is the genie, then deflation is the ogre that must be fought decisively," she said.

• Iraq Bombings Kill 41. Explosions Strike Busy Markets and Funeral North of Baghdad.

• Which Countries Are Most at Risk from a Fed Exit? 

• Netflix(NFLX), YouTube Could Feel Effects of 'Open Internet' Ruling. Bandwidth Hogs May Have to Pay Broadband Tolls.

Fox News:

• Senate report: Benghazi attackers tied to Al Qaeda groups. A comprehensive report by the Senate Intelligence Committee definitively declared that individuals tied to Al Qaeda groups were involved in the Benghazi attack, challenging recent claims that the terror network was not a factor. The report was released Monday, nearly one year after then-Secretary of State Hillary Clinton, under congressional questioning over the nature of the attack, shouted at lawmakers: “What difference, at this point, does it make?” 

• Senate Intelligence Committee review of terror attacks on US facilities in Benghazi. (read)

MarketWatch:

• A serious emerging-markets selloff is underway.

• Fitch Solutions: Sears(SHLD) CDS Climb 39%, Now Lag JC Penney(JCP).

• Bank of America's(BAC) 4Q net surges as credit improves. Bank of America Corp.'s fourth-quarter profit surged sharply, beating analyst estimates, as the banking giant bounced back from a year-ago weighed down by one-time charges, while also benefiting from stronger credit quality.

CNBC:

• Jim O’Neill: Global income redistribution could be coming. (video) "I wonder if we could be in the very early stages of a redistribution of wealth from capital back to mass income through government policies, whether it be from taxes or things being done to boost minimum wages," O'Neill told CNBC's "Squawk on the Street" on Wednesday. "But obviously this is something else just as human beings, nevermind investors, that we all have to watch closely." 

• Byron Wien: 10 percent correction looms–here’s why. (video)

ZeroHedge: 

• Confused By The "Artificial Market"? Deutsche Bank(DB) Explains It All.

• This Trend Is Not Your Friend. (graph)

• The Sheer Idiocy Of The Markets In One Chart... Is Back. (graph)

• CB Eases European Bank Stress Test By 25%, Lowers Capital Ratio Requirement From 8% to 6%.

• San Francisco Home Sales Plunge To 6-Year Lows.

• Tell The Fed How You Really Feel About Banks Trading Physical Commodities. (comment form)

• Beige Book Saw "Moderate" Expansion Despite "Harsh Weather", Ongoing Obamacare Concerns.

• Puerto Rico Default "Likely", FT Reports.

ValueWalk:

• ‘Double Irish’ Tax Crackdown On Google(GOOG) – Apple(AAPL), Amazon(AMZN) To Follow? 

Business Insider:

• Netflix(NFLX) Is Sliding.

• BP(BP): The Great American Shale Boom Has At Least Another Decade Before It Peaks.

• Bank Of America Just Confirmed The Fed's Fears About The US Mortgage Market.

• How The Fed Prints Money.

Reuters: 

• Fed's Evans: reasonable to continue to taper unless get 'really offbeat' data. Chicago Federal Reserve Bank president Charles Evans, one of the Fed's most dovish policymakers, told reporters he expects the U.S. central bank to continue to taper its massive bond-buying at a measured pace of perhaps $10 billion at each meeting, unless data comes in unexpectedly weak. "At the moment the plan seems quite reasonable," he told reporters after a speech here. Bond-buying will likely continue until after the first half of the year, he said, although if data comes in better than expected, the Fed could taper the program more aggressively. Asked if the Fed could pause its program of tapering should data weaken, Evans suggested that was unlikely, because the Fed has determined to move away from bond-buying and toward forward guidance on rate policy as its main tool.

Financial Times:

• China’s shadow banking loans leap. Funding from trust companies and other entities in the shadow sector rose to its highest level on record and accounted for 30 per cent of the Rmb17.3tn ($2.9tn) in total credit issued last year, the People’s Bank of China said, up from a 23 per cent share of aggregate financing in 2012.

Bear Radar

Style Underperformer:

• Mid-Cap Value +.04%

Sector Underperformers:

• 1) Airlines -.71% 2) Biotech -.70% 3) Energy -.60%

Stocks Falling on Unusual Volume:

• LKQ, IHS, QIWI, NUS, FAST, MMYT, KOS, GM, XONE, BPT, SBGI, VC, USNA, SPH, HTWR, ABG, PETM, LAD, ORMP, UBNT, BCRX, ULTA, NFLX, UN, INCY, ENOC, ECOM, ICE, AN, NXST, LIN and VEEV

Stocks With Unusual Put Option Activity:

• 1) EWJ 2) FAST 3) ULTA 4) XONE 5) KRE
  

Stocks With Most Negative News Mentions:

• 1) XEL 2) TGT 3) SPLS 4) GRPN 5) CELG
  

Charts:

• ETFs Falling on Unusual Volume

• Stocks Falling on Unusual Volume

Bull Radar

Style Outperformer:

• Large-Cap Value +.49%

Sector Outperformers:

• 1) Coal +2.37% 2) Oil Tankers +2.11% 3) Computer Hardware +1.57%
  

Stocks Rising on Unusual Volume:

• NUVA, FEYE, MWW, KBR, GMED, MDRX, NQ, NTAP, TDC, BAS, MWV, REXX, RHI and IPI

Stocks With Unusual Call Option Activity:

• 1) VNDA 2) NTAP 3) NUS 4) TDC 5) BEAM

Stocks With Most Positive News Mentions:

• 1) T 2) BAC 3) GM 4)  5) GOOG
  

Charts:

• ETFs Rising on Unusual Volume 

• Stocks Rising on Unusual Volume

Wednesday Watch

Evening Headlines 
Bloomberg: 

• China’s Credit Growth Slows. China’s broadest measure of new credit fell in December while money-supply growth and new yuan loans trailed estimates amid a cash crunch and government efforts to curb speculative lending. Aggregate financing was 1.23 trillion yuan ($204 billion), the People’s Bank of China said today in Beijing. That compared with 1.63 trillion yuan a year earlier. China’s foreign-exchange reserves, the world’s largest, rose to a record $3.82 trillion at the end of December from September’s $3.66 trillion. A record decline in new credit in the second half is set to limit the pace of economic expansion this year as policy makers focus on controlling financial risks and implementing the broadest reforms since the 1990s. China’s debt buildup has evoked comparisons to Japan before its lost decade and the run-up to the Asian financial crisis. 

• China Stocks Drop as Financial, Utility Companies Lead Retreat. China’s stocks fell, dragged down by financial and utility companies. Data today showed new bank loans and money supply trailed economists’ estimates, while the government’s broadest measure of credit beat projections. Industrial & Commercial Bank of China Ltd. and Huaxia Bank Co. slid at least 0.9 pecent to pace declines for financial companies. Great Wall Motor Co., the biggest maker of sport-utility vehicles, dropped 1.9 percent, extending losses after it delayed the introduction of a model. Anhui Conch Cement Co. (600585), China’s biggest cement maker, climbed 2.3 percent after it estimated profit increased 50 percent last year. The Shanghai Composite Index (SHCOMP) slipped 0.4 percent to 2,018.17 as of 10:19 a.m.

• Asian Stocks Rebound as Yen Drop Fuels Japan; Won Falls. Asian stocks rose, rebounding from the benchmark index’s biggest drop since September, and the dollar appreciated on optimism the global economy is strengthening. Gold fell for a second day. The MSCI Asia Pacific Index gained 0.4 percent at 10:56 a.m. in Tokyo, following yesterday’s 1.5 percent tumble.

• Hollande Faces Investors Deserting French Debt: Euro Credit. President Francois Hollande’s surest supporters since taking office have been buyers of French bonds. Some of them are now deserting the country's debt. The French government debt auction last week drew the weakest demand in a decade as investors piled into Spanish and Italian securities. The yield on France’s benchmark 10-year bonds is at 2.5 percent now from a record low of 1.74 percent in April last year. French and Belgian bonds are the worst performers among the euro region’s major issuers this year.

• Firms Tripling Junk Returns Lure Most Since '07: Credit Markets. Firms that use borrowed money to lend to the smallest and riskiest companies are attracting cash at the fastest pace since before the crisis, wooing buyers with returns that are triple those of the broader junk-debt market. Investors from retirees to wealthy individuals plowed $4.1 billion into publicly traded business development corporations last year, the most since 2007, as the firms known as BDCs gained an average 16.4%. The entities are juicing returns by borrowing about 50 cents for every dollar raised from equity investors, up from 36 cents in 2011. After shunning funds that used derivatives and leverage in the years after the 208 credit crisis, buyers are returning to pad yields that reached record lows last year.

Wall Street Journal: 

• Apple's(AAPL) China Mobile Deal to Extend Beyond Handsets. Millions of iPhones Already Ordered, Says Asian Wireless Carrier. Speaking in a small media briefing to Chinese media and The Wall Street Journal, Apple Chief Executive Tim Cook said he is "incredibly optimistic" about the outcome of the cooperation with the Chinese carrier. "We've gotten to know each other....today is a beginning, and I think there are lots more things our companies can do together in the future," Mr. Cook said.

Fox News:

• The Benghazi Transcripts: Did White House exaggerate Obama's preparation for 9/11 anniversary? On the eve of the terrorist attacks that killed U.S. Ambassador to Libya Christopher Stevens and three other Americans in Benghazi, the Obama White House may have exaggerated the scope and depth of President Obama's preparation for such attacks, newly declassified documents show. On Sept. 10, 2012 -- the day before Al Qaeda-linked terrorists carried out the bloody assault on the U.S. consulate and a related annex in Benghazi -- the White House Press Office issued a press release entitled "Readout of the President's Meeting with Senior Administration Officials on Our Preparedness and Security Posture on the Eleventh Anniversary of September 11th."

MarketWatch.com:

• ExOne(XONE) shares drop on outlook, 3-D printer shares slide.

Zero Hedge: 

• This Won't End Well. (graph)

• Stocks Reverse Yesterday's Losses On Low-Volume, Carry-Driven Melt Up. (graph)

• Bob Shiller Warns Fed 'Fire-Fighting' Is "Not A recipe For A Happy Ending".

• Unemployment Rate Set To Plunge As Bill To Restore Jobless Benefits Fails To Pass Senate.

• Baltic Dry Continues Collapse - Worst Slide Since Financial Crisis. (graph)

• China Expands Military "With Peace In Mind".

• Gundlach's First Webcast Of 2014: "Let the Race Begin! 2014 Markets: Year of the Horse".

Business Insider:

• Several Retailers Have Reported Horrible Numbers.

• MARC FABER: We're In A Gigantic Financial Asset Bubble That Could Burst Any Day.

Washington Post: 

• Border-patrol drones being borrowed by other agencies more often than previously known. Federal, state and local law enforcement agencies are increasingly borrowing border-patrol drones for domestic surveillance operations, newly released records show, a harbinger of what is expected to become the commonplace use of unmanned aircraft by police.

NY Times:

• N.S.A. Devises Radio Pathway Into Computers. The National Security Agency has implanted software in nearly 100,000 computers around the world that allows the United States to conduct surveillance on those machines and can also create a digital highway for launching cyberattacks. While most of the software is inserted by gaining access to computer networks, the N.S.A. has increasingly made use of a secret technology that enables it to enter and alter data in computers even if they are not connected to the Internet, according to N.S.A. documents, computer experts and American officials.

Reuters: 

• Senate panel to criticize State Dept. over Benghazi response. A report by the Senate Intelligence Committee to be released on Wednesday was expected to criticize the State Department for inadequate security at the U.S. diplomatic post in Benghazi, Libya, when it suffered a deadly attack on September 11, 2012. Sources familiar with the findings said the report, which had bipartisan approval, found that in the previous months U.S. intelligence agencies repeatedly warned about possible attacks in Benghazi, but the State Department paid too little attention.

• (GM) to pay first quarterly dividend in almost six years. 

• Fannie, Freddie watchdog in probe of alleged Wall St front running. A U.S. government watchdog is involved in an investigation of whether bank traders manipulated markets and engaged in front running of orders from Fannie Mae and Freddie Mac in the interest-rate swaps market, according to an FBI intelligence bulletin reviewed by Reuters. Reuters reported on Monday that the FBI had warned regulators and security officers at financial services firms about potential abuse by traders with advance knowledge of large orders submitted by the U.S. government-owned mortgage giants.

• Intel(INTC) shelves cutting-edge Arizona chip factory. Intel Corp, hit by slumping personal computer sales, has put off opening a major chip factory that President Barack Obama once held up as an example of U.S. manufacturing potential.

People's Daily:

• China to Curb Coal-Fired Power Projects to Cut Pollution. China won't approve new coal-fired power plan projects in Shanghai, Tianjin, Hebei province, and the Yangtze River and Perarl River deltas in 2014 to curb air pollution.

Evening Recommendations

• None of note

Night Trading

• Asian equity indices are -.25% to +1.0% on average.

• Asia Ex-Japan Investment Grade CDS Index 140.0 unch.

• Asia Pacific Sovereign CDS Index 108.50 +1.0 basis point. 

• FTSE-100 futures +.25%.

• S&P 500 futures -.03%.

• NASDAQ 100 futures -.04%.

Morning Preview Links

Earnings of Note
Company/Estimate

• (FAST)/.34

• (BAC)/.27

• (FUL)/.75

• (CSX)/.43

• (KMP)/.73 

• (PLXS)/.61

Economic Releases
8:30 am EST

• Empire Manufacturing for January is estimated to rise to 3.5 versus .98 in December.

• The Producer Price Index for December is estimated to rise +.4% versus a -.1% decline in November.

• The PPI Ex Food & Energy for December is estimated to rise +.1% versus a +.1% gain in November.

10:30 am EST

• Bloomberg consensus estimates call for a weekly crude oil inventory decline of -673,000 barrels versus a -2,675,000 barrel decline the prior week. Gasoline supplies are estimated to rise by +2,495,000 barrels versus a +6,243,000 barrel gain the prior week. Distillate supplies are estimated to rise by +1,214,000 barrels versus a +5,826,000 barrel gain the prior week. Finally, Refinery Utilization is estimated to fall by -.31% versus a -.1% decline the prior week.
  

2:00 pm EST

• U.S. Fed's Beige Book release.

Upcoming Splits

• (RLI) 2-for-1

Other Potential Market Movers

• The Fed's Lockhart speaking, Fed's Evans speaking, Eurozone Trade balance, Australia Unemployment, weekly MBA mortgage applications report and the (DPZ) investor day could also impact trading today.

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

Stocks Surging into Final Hour on Diminished Global Growth Fears, Yen Weakness, Earnings, Biotech/Tech Sector Strength

Broad Equity Market Tone:

• Advance/Decline Line: Substantially Higher
  

• Sector Performance: Almost Every Sector Rising
  

• Volume: Slightly Below Average

• Market Leading Stocks: Outperforming

Equity Investor Angst:

• Volatility(VIX) 12.31 -7.30%

• Euro/Yen Carry Return Index 148.62 +1.17%

• Emerging Markets Currency Volatility(VXY) 8.41 +.24%

• S&P 500 Implied Correlation 50.40 -1.66%

• ISE Sentiment Index 158.0 +42.3%

• Total Put/Call .67 -6.94%

• NYSE Arms .75 -62.48% 

Credit Investor Angst:

• North American Investment Grade CDS Index 65.01 -1.73%

• European Financial Sector CDS Index 86.37 -1.1%

• Western Europe Sovereign Debt CDS Index 51.99 +1.95%

• Emerging Market CDS Index 284.53 +.32%

• 2-Year Swap Spread 12.25 +5 basis point

• TED Spread 20.75 -.5 basis point

• 3-Month EUR/USD Cross-Currency Basis Swap -1.25 +1.5 basis points

Economic Gauges:

• 3-Month T-Bill Yield .03% unch.

• Yield Curve 248.0 +1 basis point

• China Import Iron Ore Spot $129.50/Metric Tonne -1.07%

• Citi US Economic Surprise Index 70.30 +4.2 points

• Citi Emerging Markets Economic Surprise Index .6 +.5 point

• 10-Year TIPS Spread 2.25 -1 basis point

Overseas Futures:

• Nikkei Futures: Indicating +328 open in Japan

• DAX Futures: Indicating +26 open in Germany

Portfolio: 

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

• Disclosed Trades: Covered some of my (IWM)/(QQQ) hedges and some of my (EEM) short

• Market Exposure: Moved to 50% Net Long