Today's Headlines

Bloomberg:

• Israel PM Says Gaza Offensive to Intensify as Rockets Fly. Israeli Prime Minister Benjamin Netanyahu hinted at a possible ground incursion into the Hamas-controlled Gaza Strip as Palestinian casualties mounted from an intensified campaign of air strikes. “We have decided to intensify even further our attacks on Hamas and other terror organizations in Gaza,” Netanyahu said in a text message, as barrages of rockets from Gaza reached as far as 88 miles (142 kilometers) into Israeli territory. “The military is prepared for all options.”

• Obama Sanction Vows Against Russia Scoffed At in Congress. Warnings from U.S. officials that Russia faces the risk of additional sanctions if it doesn’t stop interfering in eastern Ukraine were mocked by lawmakers who said President Barack Obama’s administration has failed to deliver. “Sometimes I’m embarrassed for you, as you constantly talk about sanctions and yet, candidly, we never see them put in place,” Senator Bob Corker of Tennessee, the top Republican on the Senate Foreign Relations Committee, told administration officials testifying before the panel today. “I really feel like the sanctions threats have been very hollow.”

• Germany Cites Deep Rift With U.S. Amid Second Spy Case. German authorities announced the second investigation into espionage within a week as Chancellor Angela Merkel’s spokesman signaled an escalating rift between the U.S. and Germany over intelligence practices. The Federal Prosecutor’s office said it’s investigating a possible espionage case after the Sueddeutsche Zeitung reported that a German working in a military-related area was suspected of spying for the U.S. The chancellery is in contact with U.S. officials, said Steffen Seibert, Merkel’s press secretary. 

• Wall Street Clashes Over Emerging-Market Bonds as UBS Says Sell. Strategists at UBS AG (UBSN)’s wealth management unit turned bearish on U.S. dollar debt of developing nations on June 26. Investors have grown hungrier for higher-yielding assets in far-flung parts of the world, even if they’re more volatile, as yields on junk bonds have fallen to new lows.

• European Stocks Little Changed as Espirito Santo Declines. European stocks were little changed as investors awaited minutes from the Federal Reserve’s most recent meeting and as Banco Espirito Santo SA led Portuguese stocks to this year’s low. Banco Espirito Santo dropped 4.7 percent after parent company Espirito Santo International SA delayed payment on short-term notes. Sodexo slid 1.8 percent after the world’s second-largest catering company cut its full-year revenue forecast. Admiral Group Plc tumbled the most since September after the U.K. car insurer forecast lower margins for business written this year. Seadrill Ltd. rose 1.2 percent after the biggest drilling-rig company canceled a $1 billion convertible-bond sale. The Stoxx Europe 600 Index slipped less than 0.1 percent to 339.96 at the close of trading, its lowest level since May 20.

• Some Fed Officials Saw Investors as Too Complacent on Risks. Some Federal Reserve policy makers were concerned investors may be growing too complacent about the economic outlook and the central bank should be on the lookout for excessive risk-taking, according to minutes of their June meeting. “Signs of increased risk-taking were viewed by some participants as an indication that market participants were not factoring in sufficient uncertainty about the path of the economy and monetary policy,” the minutes showed.

• Copper Seen by Goldman Grinding Lower as Demand in China Wanes. Copper prices will “grind lower” over the next six to 12 months as production costs decline and demand softens in China, the largest consumer, according to Goldman Sachs Group Inc. 

• Corn Falls Below $4 First Time Since 2010 on Bumper Crop. Corn futures dropped below $4 a bushel for the first time in four years on bets that rain will boost yields for crops in the U.S., the world’s biggest grower. Soybeans extended the longest slump since 2009.

Wall Street Journal:

• Teens Are Having the Worst Summer for Jobs Since 2010. (graph)

• CCTV Accuses Bank of China of Money Laundering. Broadcast Claims Bank Helps Clients Skirt the Controls on Cross-Border Fund Transfers.

CNBC:

• India FY15 Growth to Be on Lower Side of Projections. Inflation limits scope for RBI to cut rates, citing economic survey report.

• Obama heads to Texas with no plans to visit border.

• Why tablet sales may not see an upswing. (video)

ZeroHedge: 

• Destroying The "Recessions Can't Happen Without A Yield Curve Inversion" Myth. (graph) 

• Former New Orleans Mayor Ray Nagin Sentenced To Decade In Prison For Bribery.

• Why Tuition Keeps Rising (Spoiler Alert: Government Intervention).

• China President Warns Conflict With America Would Be "Global Disaster".

• Why Housing Will Crash Again - But For Different Reasons Than Last Time. (graph)

• Portugal's Largest Bank Misses Bond Payment; Bonds Collapse. (graph)

• Obama, Meet Horsehead: Caption Contest. (pic)

Business Insider:

• Israel And Hamas Exchange Fire As Fighting Intensifies.

• Gaza Fears The Worst As Israel Ramps Up Armed Offensive.

• Hong Kong's Protests Could Send Its Property Market Into The Worst Slump Since The 1998 Asian Financial Crisis.

• Loan Growth 'Is Crazy, It's The Boom, It's The Gold Rush'. Bank lending has been setting new records since mid-2013. If the prior credit bubble — when too many loans were made helter-skelter by loosey-goosey loan officers before it all blew up in 2008 — was spectacular, this one is even more spectacular.

• The Container Store(TCS) CEO Gives A Shocking Warning About The State Of The Consumer.

Reuters:

• BOJ may cut this fiscal year's growth forecast -sources. The Bank of Japan may slightly cut its economic forecast for the current fiscal year at a quarterly review of its estimates next week, sources familiar with its thinking said, reflecting soft exports and a bigger-than-expected slump in household spending after a sales tax hike in April.

• Abe Adviser Honda Says More BOJ Stimulus Unneeded. Economy on track to hit BOJ 2% inflation target next year.

Telegraph:

• A weaker euro will not solve French problems. France is in trouble economically because it is uncompetitive relative to its eurozone partners, not just relative to non-euro countries.

Bear Radar

Style Underperformer:

• Small-Cap Value -.07%

Sector Underperformers:

• 1) Agriculture -.64% 2) I-Banking -.40% 3) Software -.37%

Stocks Falling on Unusual Volume:

• GIMO, RARE, TCS, CBS, HCSG, LL, MIC, LOGM, BOBE, GRMN, SLXP, MSM, EVHC, ACOR, AGCO, OUTR, DRNA, WDR, DE, CEO, VVC, MU, CNW, AIZ, POT, PBPB and HCSG

Stocks With Unusual Put Option Activity:

• 1) LL 2) EWT 3) HD 4) DE 5) AMAT
  

Stocks With Most Negative News Mentions:

• 1) POT 2) AGCO 3) BG 4) COH 5) GRMN
  

Charts:

• ETFs Falling on Unusual Volume

• Stocks Falling on Unusual Volume

Bull Radar

Style Outperformer:

• Large-Cap Growth +.14%

Sector Outperformers:

• 1) Gold & Silver +1.29% 2) Internet +.79% 3) Homebuilders +.73%
  

Stocks Rising on Unusual Volume:

• AVAV, YPF, AMX, GWPH, ARWR, GPRE, PBR and TSRO

Stocks With Unusual Call Option Activity:

• 1) PHH 2) GNC 3) EA 4) CBSO 5) GME

Stocks With Most Positive News Mentions:

• 1) AA 2) LUV 3) F 4) AVAV 5) TWTR
  

Charts:

• ETFs Rising on Unusual Volume 

• Stocks Rising on Unusual Volume

Wednesday Watch

Evening Headlines 
Bloomberg:

• Israel Strikes Gaza by Air and Sea to Halt Rocket Attacks. Israel struck 150 targets in the Hamas-controlled Gaza Strip and authorized the call-up of 40,000 reservists as it weighed a possible ground operation to quell weeks of Palestinian rocket fire into its territory. Gaza emergency services chief Ashraf al-Qedra said 16 people, including five children, were killed today as Israel’s offensive expanded. Militants raised the stakes by firing rockets in the Tel Aviv and Jerusalem areas for the first time during the latest round of violence. They also infiltrated Israel by sea and battled troops near an army base. 

• Snuffing Out Shisha Alienates Iraqis Bemoaning Islamic Clampdown. Iraqi laboratory technician Younes was smoking a shisha water pipe and playing cards with his friends in the Iraqi city of Mosul last week when a dozen men with Kalashnikov rifles over their shoulders showed up. “They told the cafe owner that allowing such forms of entertainment was sinful and they didn’t leave until he pledged to ban it,” said Younes, 30, who was too scared of reprisals to give his full name. “We’re hurtling fast toward the unknown.”

• Asian Stocks Drop as Corn Extends Slide; Copper Advances. Asian stocks fell, with the regional index declining a second day, extending a global retreat in equities amid concern valuations are too high. The yen held gains as copper climbed while corn futures continued their longest slump since November. The MSCI Asia Pacific Index lost 0.4 percent by 10:06 a.m. in Tokyo, set for the steepest one-day drop in 2 1/2 weeks as Japan’s Topix index slipped 0.5 percent in a third day of declines.

• Republican Bill Seeks Monetary Policy Rule for Fed. House Republicans proposed legislation to limit how the Federal Reserve makes monetary policy, a week before Chair Janet Yellen is scheduled to deliver her semiannual testimony to lawmakers. “It’s broadly consistent with Republicans’ continued anger with the Fed and seems to reflect a continuing concern that it’s time for the Fed to get further down the exit path and start raising rates,” said Sarah Binder, a senior fellow in governance studies at the Brookings Institution in Washington who specializes in studying Congress’s relationship with the central bank.

Wall Street Journal:

• Israel, Hamas Escalate Violence. Gaza Launches Barrage of Rockets, Airstrikes Send Palestinian Death Toll Up. Palestinian militants in the Gaza Strip unleashed their most far-reaching rocket attack ever on major Israeli population centers, as Israel said it was launching a protracted assault on the territory's Islamist rulers. Warplanes hit 150 purported militant sites on Tuesday alone and the Israeli government authorized the call-up some 40,000 army reservists, mobilizing for the third large-scale military operation against Gaza in... 

• Syria Is Breeding Western Terrorists, U.S. Warns. Attorney General Cites 'Global Crisis' of Foreign 'Violent Extremists' in Syria's Civil War.

Fox News:

• Making of an immigration crisis: Obama slammed for missing border mess. (video) The Obama administration, scrambling for billions in emergency funding to address the surge on the U.S.-Mexico border, is facing yet another accusation that it was asleep as a crisis evolved -- this time, the influx of illegal immigrant minors.

MarketWatch.com:

• Citi(C) near multi-billion dollar deal to resolve mortgage probe. The Justice Department and Citigroup Inc. are close to a multibillion-dollar deal to settle allegations the bank sold shoddy mortgages in the run-up to the financial crisis, according to people familiar with the matter. 

CNBC:

• Alcoa(AA) earnings easily beat Street estimates. Alcoa reported quarterly earnings and revenue that handily beat analysts' expectations on Tuesday.

Zero Hedge:

• Is The Fed Going To Attempt A Controlled Collapse?

• Saxo Bank Warns "This Is Not 'Different Times'".

• "Don't Worry, Be Happy" Fed Financial Stress Index At Record Low For 3rd Week. (graph)

• Stock Buyback Shocker: Companies Using Secured Bank Loans To Repurchase Stock. (graph)

• The Immigration Scandal For Dummies.

• Debt: Eight Reasons This Time Is Different. (graph)

• What "Rosy" Job Numbers? Wal-Mart CEO Slams Recovery Mirage. (video)

Business Insider:

• 10 States Where Home Values Have Surged Past Their Housing Bubble Peaks.

• CARSON BLOCK: China's Fake GDP Is Over-Inflated By 25%.

Reuters:

• ICE CEO calls for market-wide purge of order types. In a perfect world, stock exchanges would collectively agree to ban order types that critics allege create complexity and may give certain traders unfair advantages, Intercontinental Exchange Group chief executive Jeffrey Sprecher told lawmakers on Tuesday. 

• Hedge funds attract $72.2 bln in first five months of year -data. Investors poured $72.2 billion into hedge funds worldwide in the first five months of 2014, marking their strongest five-month start to a year since 2007 partly on fears of a downturn in stock and bond prices, data from a survey showed on Tuesday. 

• KLA-Tencor(KLAC) says June quarter booking above expectations. Chip gear maker KLA-Tencor Corp said on Tuesday its bookings in the fiscal fourth quarter were close to $895 million or $900 million, higher than expected and helped by demand from contract chip manufacturers.

Obama takes on coal with first-ever carbon limits
Read more at http://www.philly.com/philly/news/politics/20130919_ap_0f857b20e0c144a5a1e1b9dddc9f9d72.html#YRThyDOhArykUeYy.99

Evening Recommendations

• None of note

Night Trading

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

• Asia Ex-Japan Investment Grade CDS Index 102.50 +2.5 basis points.

• Asia Pacific Sovereign CDS Index 70.75 +.5 basis point.

• FTSE-100 futures -.04%.

• S&P 500 futures +.02%.

• NASDAQ 100 futures  -.04%.

Morning Preview Links

Earnings of Note
Company/Estimate

• (WDFC)/.72

• (GY)/.09

Economic Releases
10:30 am EST

• Bloomberg consensus estimates call for a weekly crude oil inventory decline of -1,744,440 barrels versus a -3,155,000 barrel decline the prior week. Gasoline inventories are estimated to fall by -522,220 barrels versus a -1,235,000 barrel decline the prior week. Distillate supplies are estimated to rise by +877,780 barrels versus a +975,000 barrel gain the prior week. Finally, Refinery Utilization is estimated to rise by +.14% versus a +2.9% gain the prior week.
  

2:00 pm EST

• Fed Minutes from June 17-18 meeting.
  

Upcoming Splits

• (ALK) 2-for-1

• (ACIW) 3-for-1

Other Potential Market Movers

• The China CPI, BoE rate decision, Australia unemployment report, China Trade Balance, 10Y $21B T-Note auction, weekly MBA mortgage applications report and the (SLXP) investor day could impact trading today.

BOTTOM LINE: Asian indices are lower, weighed down by technology and industrial shares in the region. I expect US stocks to open mixed and to weaken into the afternoon, finishing modestly lower. The Portfolio is 25% net long heading into the day.

Stocks Falling into Afternoon on Rising Eurozone Debt Angst, Rate Worries, Rising Mideast Unrest/Russia-Ukraine Tensions, Tech/Biotech Sector Weakness

Broad Equity Market Tone:

• Advance/Decline Line: Substantially Lower
  

• Sector Performance: Almost Every Sector Declining
  

• Volume: Slightly Above Average

• Market Leading Stocks: Underperforming

Equity Investor Angst:

• Volatility(VIX) 12.0 +5.91%

• Euro/Yen Carry Return Index 144.29 -.27%

• Emerging Markets Currency Volatility(VXY) 5.87 -.68%

• S&P 500 Implied Correlation 49.95 +2.52%

• ISE Sentiment Index 80.0 -21.57

• Total Put/Call .89 -11.88

• NYSE Arms 1.48 +3.64% 

Credit Investor Angst:

• North American Investment Grade CDS Index 57.37 +2.56%

• European Financial Sector CDS Index 66.96 +7.22%

• Western Europe Sovereign Debt CDS Index 32.89 +3.79%
• Asia Pacific Sovereign Debt CDS Index 70.86 +.88%

• Emerging Market CDS Index 232.20 -.19%

• China Blended Corporate Spread Index 297.67 +.06%
• 2-Year Swap Spread 14.0 -.75 basis point

• TED Spread 21.25 -1.25 basis points

• 3-Month EUR/USD Cross-Currency Basis Swap -11.25 unch.

Economic Gauges:

• 3-Month T-Bill Yield .012% +1 basis point

• Yield Curve 206.0 -4.0 basis points

• China Import Iron Ore Spot $96.50/Metric Tonne +.63%

• Citi US Economic Surprise Index -13.60 -2.4 points

• Citi Emerging Markets Economic Surprise Index -6.30 +1.3 points

• 10-Year TIPS Spread 2.24 -1.0 basis point

Overseas Futures:

• Nikkei Futures: Indicating -54 open in Japan

• DAX Futures: Indicating +9 open in Germany

Portfolio: 

• Slightly Higher: On gains in my index hedges and emerging markets shorts

• Disclosed Trades: None

• Market Exposure: 25% Net Long

Today's Headlines

Bloomberg:

• EU Mulls More Russia Sanctions as Ukraine Rebels Fight on. Ukrainian rebels seized a town in the Luhansk region today after a retreat from eastern strongholds as European Union states considered expanding a list of Russians facing sanctions as soon as tomorrow. Several hundred rebels seized Popasnaya, a city of 20,000 people, news service Interfax reported, citing the separatists. After the militants shifted thousands of fighters to the provincial capital of Donetsk last week, Ukrainian forces continued to press their campaign, according to Ukrainian Deputy Foreign Minister Danylo Lubkivsky, who said the separatists wouldn’t agree to peace talks.
• Russia Threatens Response If Sectoral Sanctions Imposed. Russia will respond against the U.S. and its European allies if measures targeting entire industries are levied over the crisis in Ukraine, according to Deputy Finance Minister Sergey Storchak. “If the situation continues to develop and sectoral sanctions are imposed, it will be necessary to prepare more serious countermeasures,” Storchak said on the ministry’s Facebook page today. “In particular, there may be difficulties with money transfers if sanctions are applied to big banks and the financial sector.”
• Israel Strikes Gaza by Air, Sea to Halt Rocket Attacks. Israel struck 150 targets in the Hamas-controlled Gaza Strip and authorized the call-up of 40,000 reservists as it weighed a possible ground operation to quell weeks of Palestinian rocket fire into its territory. Gaza emergency services chief Ashraf al-Qedra said 14 people, including three children, were killed today as Israel’s offensive expanded. Targets included senior Hamas operatives as well as militant facilities, the military said. 
• Brazil Inflation Really at 8% Without Rouseff Fiddling. Brazilian President Dilma Rousseff has been fighting inflation by holding down government-regulated prices. The bill will come due next year. The winner of this October’s presidential election will suffer the consequences of policies that have repressed electricity prices by 30 percent, urban bus fares by 20 percent and gasoline prices by 15 percent since 2011, according to data from Rio de Janeiro-based firm Modal Asset Management. Lifting controls will unleash pressures that will keep inflation above the mid-point of the target for a sixth straight year. Consumer prices as measured by the benchmark IPCA index rose 0.4 percent in June, pushing annual inflation to 6.52 percent, the national statistics agency said today. Prices would be rising by almost 8 percent if it weren’t for controls, according to estimates by Alberto Ramos, chief Latin America economist at Goldman Sachs Group Inc., who spoke by phone from New York.
• Commerzbank Said Next to Face Penalties in U.S. Probe. Commerzbank AG (CBK), Germany’s second-largest lender, will probably be the next bank to resolve alleged U.S. sanctions violations, a person with knowledge of the matter said. The Frankfurt-based firm may incur penalties of at least $500 million as part of a deferred-prosecution agreement with authorities as soon as summer in the U.S., the person said, asking not to be identified because the talks are confidential. Such agreements spare companies a felony conviction.
• European Stocks Decline as Air France Warns on Earnings. European stocks fell the most in almost three months, led by travel and leisure companies, after Air France-KLM (AF) Group cut its full-year profit forecast. Air France-KLM slumped the most since October 2011 after saying earnings will be hurt amid overcapacity on North American and Asian routes, poor demand for freight and the fallout from a dispute with Venezuela. Commerzbank AG fell to its lowest price since December after a person with knowledge of the matter said it will probably be the next bank to resolve alleged U.S. sanctions violations. The Stoxx 600 slipped 1.4 percent to 339.99 at the close of trading, for its third day of declines.
• Complacency Breeds $2 Trillion of Junk as Sewage Funded. “It definitely feels like investors are getting overexuberant, and you can stay in overexuberant conditions for a while,” said Fred H. Senft Jr., director of fixed income and equity research for Key Private Bank in Cleveland. “But when it turns it will turn quickly and it will turn very ugly.” Halfway through a sixth year of near-zero interest rates by the Federal Reserve and unprecedented central-bank stimulus from Brussels to Tokyo, almost any borrower is able to raise debt with few questions asked even as the World Bank cuts its outlook for global economic growth. These are boom times for complacency. To gauge just how comfortable the world of debt has gotten, consider:
• Office REITs in U.S. Plan the Most Construction in Decade. Office REITs, led by Boston Properties Inc. (BXP), Vornado Realty Trust (VNO) and Kilroy Realty Corp. (KRC), are planning to plow almost $11 billion into new projects, triple the amount just two years ago and the most in data going back to 2004, according to research firm Green Street Advisors Inc. Much of that is focused on the coasts, including San Francisco and New York, the areas with the most demand from both tenants and investors.
• Jefferies CEO Warns of ‘Bad Behaviors’ Returning. Bankers and investors need to ensure they don’t repeat “bad behaviors” that contributed to the credit crisis as the financial-services industry embraces greater risk, said Richard Handler, chief executive officer of Jefferies Group LLC. “People who take short cuts, are political, prioritize themselves above others, take excessive risks for personal gain, don’t value capital, or are unethical are outright cancers,” Handler, 53, also CEO of Jefferies’s parent company, Leucadia National Corp. (LUK), said in his quarterly letter to clients. “These types of people will not only flourish in the next crisis, but most probably they will cause it.”
• Central Banks Seeking to Spur Supply Side Miracle Come Up Short. Central bankers’ experiment with zero interest rates is falling short on the supply side of their economies. Productivity and labor-force growth are failing to accelerate despite policies Bank of England GovernorMark Carney said should deliver the economic growth needed to generate “supply-side improvement.” “Weaker supply-side performance may dampen the enthusiasm of developed-market central banks to experiment with their growth/inflation trade-off to elicit strong supply,” JPMorgan Chase & Co. economists led by Bruce Kasman said in a July 4 report.
• Option Skew at 2 1/2-Year Low Signals Treasuries Rise, BofA Says. Long-term Treasuries are poised to rally as the skew in option volatility reached the lowest since 2011, signaling wagers for higher yields have become overdone, according to Bank of America Corp.

Wall Street Journal:

• Currency Reserves Swell in Asia. Central-Bank Policy Makers Fight Tide of Cheap Global Capital.

MarketWatch.com:

• Say hello to U.S. economy’s newest bubble.
• This M&A boom is going to end badly.
• Is Germany leading the euro zone toward the no-growth cliff? (graph)

CNBC: 

• Watch out for asset bubbles developing: Sternlicht. (video)

ZeroHedge: 

• Israel Escalates Gaza Assault By Air, Sea; Threatens "Lengthy" Ground Operation.
• How Recession-Proof Is Your Job Sector? (graph)
• European Stocks Plunge Most In 6 Months; Banks Battered. (graph)
• White House Dictates: $3.8 Billion Needed To Stem The Surge Of Immigrants.
• Momo Massacre 2.0 - The Post-Jobs-Report Crash.
• Job Hiring Far Below Pre-Lehman Levels As Yellen's Favorite Labor Metric Redlining. (graph)
• NFIB Small Business Optimism Fades; Outlook For Economy Plunges. (graph)

Business Insider:

• FED PRESIDENT LACKER: Inflation Has Bottomed.
• As ISIS Routs The Iraqi Army, Here's A Look At What The Jihadists Have In Their Arsenal.
• We Are Now In The Fourth And Final Phase Of The Bull Market.
• STRATEGIST: Market At Risk Of 10-12% Plunge.

Reuters:

• China c.bank reinforces interbank lending limits -sources. China's central bank has reinforced the country's controls on interbank lending by instructing the headquarters of banks to keep close tabs on this area, according to two sources with knowledge of the matter. Interbank loans, which are a part of China's fast-growing and sometimes wayward shadow banking market, have come under increased scrutiny on fears that some may sour as the maturing Chinese economy cools.
• Sensex falls over 500 points, marks biggest single-day fall since Sept. The BSE Sensex and Nifty slumped more than 2 percent on Tuesday, marking their biggest single-day fall in over 10 months and retreating from record highs hit earlier in the session, after the railway budget raised worries the government would slash spending.

Financial Times:

• Short selling drops to lowest level since Lehman. Hedge funds have sharply scaled back their bearish bets that the value of stocks is about to fall, with the proportion of shares earmarked for short selling at its lowest level since before the financial crisis despite warnings of renewed market exuberance.