Stocks Lower into Final Hour on Escalating Equity/Debt Bubble Concerns, Midest Unrest, Global Growth Worries, Biotech/Tech Sector Weakness

Broad Equity Market Tone:

• Advance/Decline Line: Substantially Lower
  

• Sector Performance: Most Sectors Declining
  

• Volume: Below Average

• Market Leading Stocks: Underperforming

Equity Investor Angst:

• Volatility(VIX) 11.88 +.51%

• Euro/Yen Carry Return Index 144.04 -.22%

• Emerging Markets Currency Volatility(VXY) 5.91 +.68%

• S&P 500 Implied Correlation 49.86 +2.28%

• ISE Sentiment Index 86.0 -23.21%

• Total Put/Call .83 -5.86%

• NYSE Arms .75 -20.01% 

Credit Investor Angst:

• North American Investment Grade CDS Index 57.21 -.23%

• European Financial Sector CDS Index 75.52 +4.65%

• Western Europe Sovereign Debt CDS Index 36.38 -1.62%

• Asia Pacific Sovereign Debt CDS Index 71.46 +.75%

• Emerging Market CDS Index 232.87 +2.33%

• China Blended Corporate Spread Index 304.46 n/a

• 2-Year Swap Spread 18.25 +1.25 basis points

• TED Spread 21.75 unch.

• 3-Month EUR/USD Cross-Currency Basis Swap -10.75 +.5 basis point

Economic Gauges:

• 3-Month T-Bill Yield .02% unch.

• Yield Curve 207.0 -1.0 basis point

• China Import Iron Ore Spot $98.0/Metric Tonne +.1%

• Citi US Economic Surprise Index -15.70 +.2 point

• Citi Emerging Markets Economic Surprise Index -3.80 +.6 point

• 10-Year TIPS Spread 2.24 -1.0 basis point

Overseas Futures:

• Nikkei Futures: Indicating +29 open in Japan

• DAX Futures: Indicating +23 open in Germany

Portfolio: 

• Lower: On losses in my tech/biotech/medical sector longs

• Disclosed Trades: Added to my (IWM)/(QQQ) hedges

• Market Exposure: Moved to 50% Net Long

Today's Headlines

Bloomberg: 

• Israel Renews Gaza Bombing After Hamas Rejects Truce Plan. Israel renewed its air raids on the Gaza Strip after a Palestinian rocket bombardment left an Egyptian truce proposal the Israelis accepted in tatters. Hamas, the militant movement that controls Gaza, said it wasn’t consulted on the Egyptian plan, and its military wing rejected it. Within six hours, the cease-fire efforts crumbled after Gaza militants barraged Israel with 50 rockets, according to the Israeli military’s count. The developments heightened the possibility that Israel, which has mobilized 38,000 reservists, would send ground forces to invade Gaza. “If Hamas doesn’t accept the truce proposal -- and that’s how it looks now -- Israel will have the international legitimacy to broaden the military offensive,” Prime Minister Benjamin Netanyahu said shortly before the air campaign resumed.
• Europe Manufacturing a Weak Spot as SKF Sees Stagnant Demand. A recovery in Europe’s manufacturing industry is struggling to gather steam, curbed by subdued demand for factory equipment and automotive parts, according to SKF AB (SKFB), a ball-bearing maker that’s a bellwether for industrial health. While Europe and Latin America face restrained demand in the third quarter, orders from North America and Asia will be “slightly higher,” said Tom Johnstone, who has led the Gothenburg, Sweden-based company for more than a decade. 
• German ZEW Investor Confidence Drops for Seventh Month. German investor confidence declined for a seventh month in July as slower growth and geopolitical risks weighed on the outlook for Europe’s largest economy. The ZEW Center for European Economic Research in Mannheim said its index of investor and analyst expectations, which aims to predict economic developments six months in advance, dropped to 27.1 from 29.8 in June. Economists forecast a decrease to 28.2, according to the median of 36 estimates in a Bloomberg News survey. The gauge has dropped every month since reaching a seven-year high in December.
• China Rate Swap Advances to 12-Week High as Easing Bets Recede. China’s benchmark interest-rate swaps rose to a 12-week high as a pickup in lending cooled speculation the central bank will ease monetary policy. M2 (CNMS2YOY), the broadest gauge of money supply, rose 14.7 percent in June from a year earlier, the fastest pace since August, official data showed today. New yuan loans increased to the highest level in five months.
• Boko Haram Killed 2,053 Civilians in Nigeria This Year. The Nigerian Islamist militant group Boko Haram killed at least 2,053 civilians in the first six months of this year in an increasing number of attacks that may constitute crimes against humanity, Human Rights Watch said. Boko Haram carried out 95 attacks that included bombings on more than 70 towns and villages in northeastern Nigeria, New York-based Human Rights Watch said today in a statement. The figures were based on analysis of media reports and field investigations, it said.
• Global Savings Glut II Leaves Risk Rally Prone to Reverse. It’s been almost a decade since Ben S. Bernanke pointed to a global savings glut to explain low interest rates. One financial crisis and a global recession later, the glut lives on. The currency reserves of developing nations swelled to $11.9 trillion from $6.9 trillion in 2008, led by a $2 trillion boost in China. That has helped absorb bond sales of rich nations, helping send average 10-year yields on Group of Seven government bonds to about 2.5 percent from 15 percent at the start of the 1980s.
• WTI Oil Falls Below $100 a Barrel as Supply Risks Abate. West Texas Intermediate oil fell below $100 and Brent tumbled to a three-month low as supply-disruption concerns eased with Libyan output gains and Iraqi shipments are unaffected by an insurgency.
• Wall Street Wins (Or Doesn’t Lose Much) on Junk Trading. Here’s what went right: Banks from JPMorgan Chase & Co. (JPM) to Goldman Sachs Group Inc. (GS) reported second-quarter earnings that were higher than analysts expected largely on the back of debt-trading revenue that declined less than some of the banks predicted. In particular, they benefited from more transactions in high-yield bonds, a record June for U.S. corporate-debt sales and a couple of decent wagers on Treasuries. Junk-bond trading volumes soared to a daily average of $7 billion in June, a record for the month and 14 percent higher than the period in 2013, according to data from the Financial Industry Regulatory Authority.
• Fed Warns Junk Debt Excess May Lead to Higher Defaults. The Federal Reserve warned that froth in the riskiest parts of debt markets may lead to more defaults. “Signs of excesses that could lead to higher future defaults and losses have emerged in some sectors, including for speculative-grade corporate bonds and leveraged loans,” according to a report published today by the central bank as part of Chair Janet Yellen’s semi-annual testimony to the Senate Banking Committee. A boom in the market for junk-rated loans has drawn the attention of the Fed and the Office of the Comptroller of the Currency, who have been urging banks since last year to curb risky lending. While issuance has been robust, “underwriting standards have loosened,” according to today’s report. There have been $222.7 billion of new loans arranged in the U.S. this year after a record $357.9 billion in 2013, according to data compiled by Bloomberg. Loans helped finance some of the biggest leveraged buyouts during the last credit boom.
• Federal Debt to Reach 106% of Economy in 2039, CBO Says. The U.S. debt held by the public is expected to rise to 106 percent of the economy in 2039 from 74 percent this year, largely driven by increases in the cost of health benefits, the Congressional Budget Office said. To put federal finances on a sustainable path, Congress must boost revenue, cut spending on benefit programs or combine the approaches, the nonpartisan CBO said in its long-term budget outlook released today. “The unsustainable nature of the federal tax and spending policies specified in current law presents lawmakers and the public with difficult choices,” CBO said in the report. “Unless substantial changes are made to the major health-care programs and Social Security, spending for those programs will equal a much larger percentage of GDP in the future than it has in the past.” Higher spending on Medicare and Medicaid will cause the budget deficit to begin increasing in 2016, according to CBO’s projections. As a share of the economy, the budget deficit will increase to 3.7 percent in 2024 and 6.4 percent in 2039, from 2.8 percent in 2014, theagency said today. 

MarketWatch.com: 

• Fund managers are most bullish on stocks since early 2011: Bank of America Merrill Lynch. (graph)

CNBC: 

• Fed slaps stocks with unusually targeted comments on valuation froth. The Federal Reserve's unusually targeted comments that biotech and social media stocks are overheated sucked the wind out of a rally that had taken the Dow to a new high in early trading. In a section of its Monetary Policy report released Tuesday, the Fed noted: "...signs of risk-taking have increased in some asset classes. Equity valuations of smaller firms as well as social media and biotechnology firms appear to be stretched, with ratios of prices to forward earnings remaining high relative to historical norms." The small cap Russell 2000, home to small cap and many speculative names, led the declines, losing more than 1 percent in late morning trading.  
• Here's what the Fed needs to do: STOP IT. Here's a novel solution: DISCONTINUE A FED POLICY THAT HAS DONE NOTHING TO KICKSTART ROBUST ECONOMIC GROWTH NOR SUBSTANTIALLY INCREASE EMPLOYMENT, AND INSTEAD, HAS INFLATED ASSETS HELD MAINLY BY THE WEALTHIEST 1 PERCENT, AND INCREASED THE WEALTH GAP BETWEEN RICH AND POOR TO RECORD LEVELS.
• Alpha addict: The amazing career of Leon Cooperman.
• Why a $60B fund manager is sitting in 20 percent cash. (video)

ZeroHedge: 

• Yellen's "Irrational Exuberance" Moment Arrives As She Pops Momo, Biotech, Social Media Bubble.
• Meanwhile In Europe: Juncker Approved, Hague Out, Lord Hill To Brussels: What Does It Mean?
• The Next Domino: Espirito Santo Holding Company Preparing To File Bankruptcy.
• Why The Status-Quo Is Unsustainable: Interest and Debt (What Yellen Won't Tell You). (graph)
• Wall Street "Throws In The Towel" On Q3/Q4 Revenue Growth Expectations. (graph)
• Goldman(GS) Explains What Yellen Really Said: "Hawkish Shift".
• China Warns US To Stay Out Of South China Sea Dispute.
• BRICS Announce $100 Billion Reserve To Bypass Fed, Developed World Central Banks.

Business Insider:

• Elizabeth Warren Destroys Janet Yellen Over JPMorgan's 'Living Will'.
• This East Ukraine Village Now Looks Post-Apocalyptic. (pics)
• ISIS Militants Captured 52 American-Made Artillery Weapons That Cost $500,000 Each.

Les Echos:

• ECB's Praet Says Investment in France Is 'Acute' Problem. The ECB's chief economist comments in an interview with daily newspaper Les Echos that the pace of recovery in France is "disappointing."

Bear Radar

Style Underperformer:

• Small-Cap Growth -1.40%

Sector Underperformers:

• 1) Gold & Silver -2.30% 2) Coal -2.21% 3) Biotech -1.84%

Stocks Falling on Unusual Volume:

• ALB, LO, KORS, TOUR, WWW, RAI, WLL, CHT, SHPG, BMA, FAST, GPI, USLV, AXDX, MPLX, VJET, ABBV, OAS, HOG, BPT, JNJ, CEO, CBSH, LXK, PRGO, TTS, MO, CLR, NKTR, RUBI, AAN and AXDX

Stocks With Unusual Put Option Activity:

• 1) EWT 2) CSX 3) EEM 4) KSS 5) IBB
  

Stocks With Most Negative News Mentions:

• 1) KORS 2) LO 3) TSLA 4) LXK 5) COH
  

Charts:

• ETFs Falling on Unusual Volume

• Stocks Falling on Unusual Volume

Bull Radar

Style Outperformer:

• Large-Cap Value -.04%

Sector Outperformers:

• 1) Banks +.84% 2) Utilities +.16% 3) HMOs +.15%
  

Stocks Rising on Unusual Volume:

• ROC, LJPC and JPM

Stocks With Unusual Call Option Activity:

• 1) UUP 2) STJ 3) KERX 4) JNJ 5) MA

Stocks With Most Positive News Mentions:

• 1) CMA 2) ROC 3) JPM 4) GPRO 5) MJN
  

Charts:

• ETFs Rising on Unusual Volume 

• Stocks Rising on Unusual Volume

Tuesday Watch

Evening Headlines 
Bloomberg:

• Russia Continues Trying to Destabilize Ukraine, U.S. Says. Russia’s “policy of destabilization” in eastern Ukraine includes providing more heavy weapons to pro-Russia rebels and deploying additional Russian forces near the border with Ukraine, according to the U.S. State Department. The statement issued today, which amounts to an indictment of the actions of Russian President Vladimir Putin, comes as the U.S. and European Union nations are weighing whether to impose substantial new economic sanctions on Russia. The U.S. said Russia is acting in ways that undermine the peace efforts by new Ukrainian President Petro Poroshenko, whose plan includes a promise of amnesty for separatists who lay down their arms voluntarily and are not guilty of capital crimes, decentralization of powers within Ukraine, and protection of the Russian language.

• Ukraine Sees Russia Hand in Downed Plane as Talks Begin. Ukraine’s government said Russian forces may have shot down one of its airplanes to bolster the Kremlin-backed insurgency amid a European push for peace talks that Germany expects to inch forward today. An An-26 transport plane was shot down in eastern Ukraine yesterday by a “powerful weapon” not previously used by the separatists, probably from inside Russia, Defense Minister Valeriy Geletey told President Petro Poroshenko, according to the president’s website. The plane was hit at 6,500 meters, an altitude shoulder-fired missiles can’t reach, he said.

• Israel to Weigh Egypt Plan for Cease-Fire in Gaza. Israeli leaders are set to discuss an Egyptian proposal for a cease-fire to end the week-long conflict in Gaza, as U.S. Secretary of State John Kerry heads for Cairo amid growing international peace efforts. Israel’s security cabinet will consider the plan at a meeting early today, a senior official said, speaking on condition of anonymity to discuss the matter. Prime Minister Benjamin Netanyahu is in favor of accepting, Israeli newspaper Haaretz reported, citing unidentified officials. Hamas hasn’t received any proposals, spokesman Sami Abu Zuhri said, according to Al-Mayadeen television. 

• Sydney Set for Biggest Hotel Boom Since Olympics in 2000. Fourteen years after the last major hotel opened in Sydney’s center, 42 developers are competing to turn two 100-year-old government office buildings into accommodations as demand soars. Elsewhere in the city, developers including China’s Greenland Holding Group Co. and Singapore-based M&L Hospitality Trusts plan to add more than 5,300 rooms over the next five years. If they are completed, the city’s supply of rooms will rise by about 20 percent by the end of the decade, the most since Australia’s largest city hosted the Olympics in 2000, according to broker CBRE Group Inc.’s hotels division.

• Asian Stocks Climb Before BOJ as Brent Declines With Corn. Asian stocks rose, with the regional index headed for a one-week high before the Bank of Japan reports on monetary policy and the head of the Federal Reserve addresses U.S. lawmakers. Corn futures and Brent crude oil resumed declines as South Korea’s won weakened. The MSCI Asia Pacific Index gained 0.6 percent by 10:42 a.m. in Tokyo, as Japan’s Topix Index rose a second day, climbing 0.9 percent.

• Microsoft(MSFT) Said to Announce Job Cuts as Soon as This Week. Microsoft Corp. (MSFT) is planning its biggest round of job cuts in five years, as the software maker looks to slim down and integrate Nokia Oyj’s handset unit, people with knowledge of the company’s plans said.

Wall Street Journal:

• Syria's Allies Are Stretched by Widening War. Lebanon's Hezbollah and Other Shiite Fighters Are Drawn Away by Sunni Rebellion in Iraq, Palestinians' Clash With Israel.

Fox News:

• Forty illegal immigrants returned to Honduras amid massive influx. Some 40 illegal immigrants, including both adults and children, were returned to Honduras from a U.S. detention facility in New Mexico on Monday, Homeland Security officials confirmed to FoxNews.com.

Zero Hedge:

• Global PMIs: France Worst, UK First. (graph)

• Feeling Poorer Through The Power Of Inflation. (graph)

• Phoenix Housing Market Hit By Unprecedented Plunge In Demand.

• David Stockman Sees "Signs Of The Bubble's Last Days". (graph)

• Bubbles Everywhere: Krugman Wrong Again; Austrians And The BIS Are Correct.

• Full-Time Pain: Mort Zuckerman Says Most Americans "Wouldn't Call This A Recovery".

• Michael Pettis Warns China Bulls: "Bad Debt Cannot Simply Be 'Socialized'".

• Japanese GDP "Guesses" Are Collapsing; Here's The 3rd Arrow That Will 'Save' It. (graph)

• "Boring", "Absolutely Dead" Market Leaves World's Largest Trading Floor "Virtually Empty".

Business Insider:

• The Most Extreme Faction Of Al Qaeda Is Winning, And It’s Leading To The Destruction Of Iraq.

Reuters:

• Valero(VLO) sees second-quarter profit below expectations. U.S. refining company Valero Energy Corp on Monday said second-quarter income will be higher than a year ago but profit will fall short of Wall Street estimates on seasonal weakness in its biggest Gulf Coast market. 

• Putin seeks BRICS moves to protect against US "sanction attacks". Russia will press other BRICS emerging market nations to agree measures to prevent "sanction attacks" by the United States to "harass" countries opposing its policies, President Vladimir Putin said. Putin said he would urge Brazil, China, India and South Africa to draw "substantive conclusions" from sanctions imposed on Russia over its role in the Ukraine crisis during a two-day BRICS summit in Brazil starting on Tuesday.

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

Telegraph:

• With mansion taxes, another housing bust becomes inevitable. The only solution to the boom is to let everyone do what they want with their property.

China Securities Journal:

• China PBOC May Hold Monetary Policy Steady in 2H. People's Bank of China may hold monetary policy steady in 2H as there are signs that economic outlook isn't "too pessimistic," according to a front-page commentary, written by reporter Ren Xiao.

Evening Recommendations

• None of note

Night Trading

• Asian equity indices are -.25% to +.75% on average.

• Asia Ex-Japan Investment Grade CDS Index 102.0 -.5 basis point.

• Asia Pacific Sovereign CDS Index 71.0 -1.0 basis point.

• FTSE-100 futures -.10%.

• S&P 500 futures +.08%.

• NASDAQ 100 futures  +.15%.

Morning Preview Links

Earnings of Note
Company/Estimate

• (JNJ)/1.55

• (CMA)/.76

• (WWW)/.27

• (JPM)/1.31

• (GS)/3.09

• (IBKR)/.29

• (CSX)/.52

• (CTAS)/.75

• (YHOO)/.38

• (INTC)/.52

• (ADTN)/.29

• (JBHT)/.79

Economic Releases
8:30 am EST

• Empire Manufacturing for July is estimated to fall to 17.0 versus 19.28 in June.

• Retail Sales Advance for June are estimated to rise +.6% versus a +.3% gain in May.

• Retail Sales Ex Autos and Gas for June are estimated to rise +.5% versus unch. in May.

• The Import Price Index for June is estimated to rise +.4% versus a +.1% gain in May.

• Business Inventories for May are estimated to rise +.6% versus a +.6% gain in May.
  

Upcoming Splits

• (AAON) 3-for-2

• (SFBS) 3-for-1

Other Potential Market Movers

• The German ZEW index and US weekly retail sales reports could 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 maintain gains into the afternoon. The Portfolio is 75% net long heading into the day.

Stocks Rising into Final Hour on Buyout Speculation, Earnings Optimism, Yen Weakness, Tech/Energy Sector Strength

Broad Equity Market Tone:

• Advance/Decline Line: Higher
  

• Sector Performance: Most Sectors Rising
  

• Volume: Below Average

• Market Leading Stocks: Performing In Line

Equity Investor Angst:

• Volatility(VIX) 11.62 -3.81%

• Euro/Yen Carry Return Index 144.42 +.31%

• Emerging Markets Currency Volatility(VXY) 5.80 -.34%

• S&P 500 Implied Correlation 48.43 -3.87%

• ISE Sentiment Index 134.0 +22.94%

• Total Put/Call .92 +4.56%

• NYSE Arms .97 -8.0% 

Credit Investor Angst:

• North American Investment Grade CDS Index 56.92 -2.53%

• European Financial Sector CDS Index 70.1 -2.23%

• Western Europe Sovereign Debt CDS Index 36.98 +.26%

• Asia Pacific Sovereign Debt CDS Index 71.24 -1.0%

• Emerging Market CDS Index 227.26 +.76%

• China Blended Corporate Spread Index 304.46 +.35%

• 2-Year Swap Spread 17.0 +.25 basis point

• TED Spread 21.75 unch.

• 3-Month EUR/USD Cross-Currency Basis Swap -11.25 +.25 basis point

Economic Gauges:

• 3-Month T-Bill Yield .02% unch.

• Yield Curve 208.0 +1.0 basis point

• China Import Iron Ore Spot $97.90/Metric Tonne +1.03%

• Citi US Economic Surprise Index -15.90 -2.8 points

• Citi Emerging Markets Economic Surprise Index -4.40 unch.

• 10-Year TIPS Spread 2.25 -2.0 basis points

Overseas Futures:

• Nikkei Futures: Indicating +56 open in Japan

• DAX Futures: Indicating +2 open in Germany

Portfolio: 

• Slightly Higher: On gains in my tech sector longs

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

• Market Exposure: Moved to 75% Net Long