Thursday Watch

Evening Headlines 
Bloomberg:

• Islamic State Talked of Entering U.S. Through Mexico. Islamic State extremists have discussed infiltrating the U.S. through its southern border with Mexico, a U.S. official said. Francis Taylor, under secretary for intelligence and analysis at the Department of Homeland Security, told a Senate committee today that the Sunni militants have been tracked discussing the idea on social-media sites such as Twitter Inc. (TWTR) “There have been Twitter and social-media exchanges among ISIL adherents across the globe speaking about that as a possibility,” Taylor said in response to a question from Senator John McCain, an Arizona Republican. Islamic State is also known by the acronyms ISIL and ISIS.

• British Business Leaders Join Last-Ditch Effort to Save the U.K. Some of Britain’s best-known companies, including BP Plc (BP/), Standard Life Plc and Kingfisher Plc (KGF), made their strongest intervention yet in the battle against Scottish independence, lending support to the efforts of Prime Minister David Cameron to save the union. Ian Cheshire, chief executive officer of retailer Kingfisher, which employs 3,000 people in Scotland, urged voters not to make a mistake in a “once-in-a-lifetime decision,” arguing that independence would mean higher prices and lower investment. He predicted that other chief executives will make similar statements ahead of the vote on Sept. 18.

• EU Frets Over Russia Sanctions Amid Fragile Ukraine Truce. European Union nations are struggling to agree on a trigger for extra sanctions against Russia over its encroachment in Ukraine as a cease-fire and troop withdrawal bolster the case for holding off. EU ambassadors are due to resume deliberations on the matter today in Brussels after failing to reach a verdict yesterday. The 28-nation bloc on Sept. 8 put on hold for at least a “few days” a second package of economic penalties to assess the viability of the truce without risking further trade retaliation by the Kremlin.

• Japan Leads Asian Stock Gains as Kiwi Retreats With Wheat. Asian stocks rose, with Japan’s Topix (TPX) index extending a six-year high as the yen held losses. New Zealand’s dollar fell after the central bank said it was still unjustifiably strong, while wheat extended declines. The MSCI Asia Pacific Index added 0.1 percent by 9:51 a.m. in Tokyo, with the Topix up 0.4 percent in a fourth day of gains.

Wall Street Journal: 

• U.S. Will Lead Coalition Against Islamic State, Obama Says. President Is Authorizing Start of Airstrikes in Syria, Expanding Bombing Campaign in Iraq. President Barack Obama is authorizing the start of airstrikes in Syria and expanding the monthlong bombing campaign in Iraq to "degrade and ultimately destroy" Islamist militants who recently beheaded two Americans, he told the nation Wednesday evening. The decisions, detailed in a prime-time address on the eve of the 13th anniversary of the Sept. 11 terror attacks, would considerably deepen U.S. military involvement in the Middle East and mark an acknowledgment by Mr. Obama that the intensity of the...

• Live Scrolling Twitter Chatter: President Obama Speaks on ISIS Strategy.

• Washington Trading Probe Broadens to Hedge Funds. SEC Examines Communications Between Investors and Height Securities After Alert on Health-Insurance Policy Shift.

• Regulators Weighing New Rules for Private Trading Venues. Regulators Also Looking at Registration for Algorithmic Trading Developers. Market regulators are considering imposing additional steps to require greater transparency and disclosures by private trading platforms and heightened oversight of computerized trading strategies. The Financial Industry Regulatory Authority will weigh a new set of rules at its Sept. 19 meeting, including a proposal that would require trading platforms, including so-called dark pools, to provide additional details about buy...

• A New Threat Grows Amid Shades of 9/11. The nation remains largely unaware of the potential for disaster from cyberattacks. 

Fox News:

• Obama authorizing US airstrikes in Syria. President Obama is authorizing U.S. airstrikes in Syria, senior administration officials say, as the president used a prime-time address to the nation Wednesday to call for a comprehensive campaign to wipe out Islamic State terrorists “wherever they exist.”

Zero Hedge: 

• How The China Boom Unravels: One Person At A Time.

• Why Rates Will Stay Low (Or What Happens When You Cry "Recovery" For 5 Years In A Row).

• On The Cusp Of Exposing The Full Iceberg.

• Fear Of Terror Attack Soars to 9/11 High.

• For 90% Of Americans: There Has Been No Recovery.

• Deutsche Bank: The Bubble Must Go On To Sustain The "Current Global Financial System".

• What Petrodollar: Russia, China To Create SWIFT Alternative.

• The Era Of Widespread Biometric Indentification And Microchip Implants Is Here.

Business Insider:

• Ebola Fears Hit Australia.

NY Times:

• Short-Seller Carson Block Says He’s Wary of Alibaba. In the world of the short-seller Carson Block, any Chinese company could be a fraud. Even Alibaba. “If Alibaba wanted to defraud investors, it absolutely could,” Mr. Block, the founder of Muddy Waters Research, told an audience of accounting students and aspiring investors at Baruch College in Manhattan on Wednesday.

Financial Times: 

• Majority in China expect war with Japan. China and Japan are heading towards military conflict, according to a majority of Chinese surveyed on ties between the Asian powers in a Sino-Japanese poll. The Genron/China Daily survey found that 53 per cent of Chinese respondents – and 29 per cent of the Japanese polled – expect their nations to go to war. The poll was released ahead of the second anniversary of Japan’s move to nationalise some of the contested Senkaku Islands in the East China Sea.

Evening Recommendations

• None of note

Night Trading

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

• Asia Ex-Japan Investment Grade CDS Index 90.0 -1.0 basis point.

• Asia Pacific Sovereign CDS Index 63.50 +.5 basis point.

• FTSE-100 futures +.12%.

• S&P 500 futures -.15%.

• NASDAQ 100 futures  -.10%.

Morning Preview Links

Earnings of Note
Company/Estimate

• (KR)/.69

• (ULTA)/.83 

Economic Releases
8:30 am EST

• Initial Jobless Claims are estimated to fall to 300K versus 302K the prior week.

• Continuing Claims are estimated to rise to 2490K versus 2464K prior.

2:00 pm EST

• The Monthly Budget Statement for August is estimated at -$130.0B.

Upcoming Splits

• (CLR) 2-for-1

Other Potential Market Movers

• The ECB bulletin, $13B 30Y T-Bond auction, USDA's WASDE report, weekly EIA natural gas inventory report, Bloomberg Sept. US Economic Survey, weekly Bloomberg Consumer Comfort Index, (ZU) analyst day, (BBT) investor day and the (COO) analyst day could also impact trading today.

BOTTOM LINE: Asian indices are mostly higher, boosted by real estate and industrial 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 Rising into Final Hour on Diminishing Scotland Independence Fears, Yen Weakness, Short-Covering, Biotech/Tech Sector Strength

Broad Equity Market Tone:

• Advance/Decline Line: Modestly Higher
  

• Sector Performance: Mixed
  

• Volume: Below Average

• Market Leading Stocks: Performing In Line

Equity Investor Angst:

• Volatility(VIX) 13.06 -3.26%

• Euro/Yen Carry Return Index 143.94 +.33%

• Emerging Markets Currency Volatility(VXY) 7.10 +1.43%

• S&P 500 Implied Correlation 49.58 -2.57%

• ISE Sentiment Index 88.0 +10.0%

• Total Put/Call .92 +4.55%

• NYSE Arms 1.0 -11.63% 

Credit Investor Angst:

• North American Investment Grade CDS Index 58.79 -1.20%

• European Financial Sector CDS Index 59.08 +.64%

• Western Europe Sovereign Debt CDS Index 28.56 +2.49%
• Asia Pacific Sovereign Debt CDS Index 63.63 +.78%

• Emerging Market CDS Index 247.61 -.16%

• China Blended Corporate Spread Index 308.22 +.39%
• 2-Year Swap Spread 22.75 +1.0 basis point

• TED Spread 21.25 -1.0 basis point

• 3-Month EUR/USD Cross-Currency Basis Swap -15.25 +.75 basis point

Economic Gauges:

• 3-Month T-Bill Yield .02% +1.0 basis point

• Yield Curve 197.0 +3.0 basis points

• China Import Iron Ore Spot $82.20/Metric Tonne -1.20%

• Citi US Economic Surprise Index 38.40 -.1 point

• Citi Emerging Markets Economic Surprise Index -12.60 -.9 basis point

• 10-Year TIPS Spread 2.11 -1.0 basis point

Overseas Futures:

• Nikkei Futures: Indicating +127 open in Japan

• DAX Futures: Indicating +33 open in Germany

Portfolio: 

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

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

• Market Exposure: Moved to 50% Net Long

Today's Headlines

Bloomberg:

• Ukraine Sees Russian Pullback as EU, U.S. Mull Sanctions. Ukrainian President Petro Poroshenko said Russia has withdrawn more than two-thirds of its troops from his country as the U.S. and the European Union prepare their toughest sanctions yet against the Kremlin. “According to the latest information from our intelligence unit, 70 percent of Russia’s troops have been recalled across the border,” Poroshenko said in Kiev. “This gives more hope the peace initiatives have good prospects.”
• Cheney Says Obama’s Policies Spurred Rise of Terrorists. President Barack Obama’s “disengaged” foreign policy has contributed to the rise of Islamic State militants in the Middle East and Russian aggression against Ukraine, former Vice President Dick Cheney said today. “There’s a connection between these problems, between a disengaged president and some very volatile situations abroad,” Cheney, a Republican, said during a speech to the American Enterprise Institute, a Washington-based policy research group. “We’re nearing a crisis in the decline of American military power,” he added. “It has to be addressed, and right away.”
• Europeans Once Keen on Obama Now Desert Him, Poll Shows. Europeans once keen on Barack Obama as the bringer of an era of multinational good feelings are having second thoughts about the U.S. president, a poll found. Obama’s European approval rating dropped to 64 percent, sliding for the fifth straight year from 85 percent when he took office, according to a poll released today in Brussels by the German Marshall Fund of the United States. The falling-out was most pronounced in Germany, due to outrage at National Security Agency snooping on Chancellor Angela Merkel. Obama’s numbers also slipped in France and Italy, and were unchanged in Britain.
• Barclays Cuts Euro Forecast to Most Bearish on Economy Slowdown. Barclays Plc lowered its one-year euro forecast to the most bearish of Wall Street banks as the currency union’s economy deteriorates and as increasingly aggressive monetary policy signals further depreciation.
• European Stocks Little Changed as Investors Weigh ECB. Lingering questions about whether the European Central Bank’s stimulus measures will kickstart the region’s stagnant economy outweighed prospects for peace in Ukraine, keeping investors in European stocks on the sidelines. The benchmark Stoxx Europe 600 Index slipped less than 0.1 percent to 344.7 at the close, after falling as much as 0.6 percent in intra-day trading. The gauge has declined 1.2 percent since reaching a two-month high on Sept. 4.
• Commodities Fall to 8-Month Low as Brent Stays Below $100. Commodities dropped to an eight-month low as signs of abundant supplies and slowing economic growth curbed demand for raw materials. The Bloomberg Commodity Index of 22 raw materials fell 0.3 percent by 3:24 p.m. in London after earlier declining 0.4 percent to 122.9665, the lowest since Jan. 10. The gauge declined 2.1 percent this year. Brent oil traded below $100 a barrel for a third day.
• Top LBO Fund Investors Pile on Leverage to Boost Returns. Some of the world’s biggest investors in leveraged-buyout funds are themselves using unprecedented levels of debt to boost returns. “Leverage is a double-edged sword,” said Oliver Gottschalg, a professor at French business school HEC Paris. “It can boost the performance on the upside and rapidly eat into capital on the downside. The more leverage you apply, the more extreme the outcome will be for the investor.”
• Profit-Margin Peak Points to U.S. Stock Shift: Chart of the Day. (graph) Profitability at U.S. companies may have reached its peak for the current economic expansion, according to Sean Darby, Jefferies Group Inc.’s chief global equity strategist. 
• BofA(BAC) Trading Executives Leave Firm as Job Cuts Loom. Bank of America Corp. trading executives David Moore and David Hartney departed as the firm prepares to eliminate fixed-income and equities jobs worldwide, according to people with knowledge of the moves. 

Wall Street Journal:

• Emerging-Market Currencies Slide on Fed Rate Jitters. Investors Brace For Potential Rise in U.S. Interest Rates in 2015.

Barron's:

• Will Hedge Funds Advertise?

ZeroHedge: 

• Russian Retaliation Begins: Gazprom "Limiting EU Gas", Cuts Poland Supplies By 24% In Past Two Days.
• Scotland De-Escalation: Stocks Jump As Latest Poll Reveals Majority "No" Vote.
• Islamic State's Ultimate Goal: Saudi Arabia's Oil Wells.
• Germany Openly Hostile To Putting Frenchman In Charge Of European Financial Affairs.
• Rates Rise By The Tiniest Amount, And This Happens... (graph)
• There Goes GDP: Wholesale Inventories Miss, Weakest Since May 2013. (graph)

Business Insider: 

• Wall Street's Big Brazil Trade Is A Total Farce.
• Another Top Wall Street Strategist Abandons Her Bearish Stock Market Call.

Reuters:

• U.S. mortgage applications fall to lowest since Dec 2000 -MBA. Applications for U.S. home mortgages fell last week to the lowest since December 2000 as interest rates rose for the first time in four weeks, an industry group said on Wednesday. The Mortgage Bankers Association said its seasonally adjusted index of mortgage application activity, which includes both refinancing and home purchase demand, fell 7.2 percent in the week ended Sept. 5. The MBA's seasonally adjusted index of refinancing applications dropped 10.7 percent to the lowest since November 2008, while the gauge of loan requests for home purchases, a leading indicator of home sales, fell 2.6 percent.

Bear Radar

Style Underperformer:

• Mid-Cap Value -.20%

Sector Underperformers:

• 1) Gold & Silver -1.52% 2) HMOs -1.41% 3) Steel -1.26%

Stocks Falling on Unusual Volume:

• VNET, AU, WBAI, AVG, HUBG, ATHM, GTAT, CENX, JMEI, EQR, AVB, FUEL, KKD and VRA

Stocks With Unusual Put Option Activity:

• 1) JNK 2) FXY 3) XLE 4) XOM 5) EWT
  

Stocks With Most Negative News Mentions:

• 1) EBAY 2) KKD 3) MON 4) CAT 5) MBLY
  

Charts:

• ETFs Falling on Unusual Volume

• Stocks Falling on Unusual Volume

Bull Radar

Style Outperformer:

• Large-Cap Growth -.10%

Sector Outperformers:

• 1) Biotech +.98% 2) Banks +.68% 3) Computer Services +.65%
  

Stocks Rising on Unusual Volume:

• LE, NPSP, PANW, CMGE, RCPT, PAY, WMGI, NDLS, PCYC, HUN and SLCA

Stocks With Unusual Call Option Activity:

• 1) MTG 2) NPSP 3) PANW 4) RICE 5) AVNR

Stocks With Most Positive News Mentions:

• 1) ADM 2) WFC 3) PCYC 4) VIAB 5) DG
  

Charts:

• ETFs Rising on Unusual Volume 

• Stocks Rising on Unusual Volume

Wednesday Watch

Evening Headlines 
Bloomberg: 

• EU Considers Russian Penalties Amid Fragile Ukraine Truce. European Union governments meet to consider pulling the trigger on tougher Russian sanctions as the bloc weighs the viability of President Vladimir Putin’s truce in Ukraine. The talks in Brussels among the 28 member nations follow the EU’s abrupt decision this week to put on hold for at least a “few days” a second package of economic penalties against Russia over its encroachment in Ukraine. The delay offered more time to assess the effectiveness of the cease-fire without risking further trade retaliation by the Kremlin.
• PBOC Adrift Without Policy Anchor Amid Credit Slump. China’s central bank chief is learning you can’t control what you can’t cut. The People’s Bank of China’s removal of state controls on borrowing costs last year has left Governor Zhou Xiaochuan struggling to influence rates with tools such as adjusting some banks’ reserve requirements and targeted liquidity injections. Those steps haven’t stopped new credit and money-supply growth from slowing. 
• China Stocks Fall Most in Two Weeks as Money-Supply Growth Slows. China’s stocks fell, sending the benchmark index to its biggest loss in two weeks, after Premier Li Keqiang indicated money-supply growth slowed last month. Shaanxi Coal Industry Co. and Datong Coal Industry Co. slid at least 1.7 percent to lead declines for energy companies. Apple Inc. suppliers Suzhou Anjie Technology Co. (002635) and Han’s Laser Technology Co. slumped more than 3 percent after the iPhone maker introduced new products. Four companies including Hubei Feilihua Quartz Glass Co. and Dirui Industrial Co. jumped on the first day of trading in Shenzhen. The Shanghai Composite Index (SHCOMP) dropped 0.6 percent to 2,312.69 at 9:43 a.m.
• Asian Stocks Drop on China While Dollar Gains. Asian stocks fell, with the regional index dropping the most in a month on concern that China’s growth is slowing and speculation that U.S. interest rates will rise sooner than estimated. The dollar traded near a six-year high to the yen and crude oil rose. The MSCI Asia Pacific Index dropped a fifth day, slipping 0.7 percent by 11:59 a.m. in Tokyo. Hong Kong’s Hang Seng Index retreated 1.7 percent as Chinese Premier Li Keqiang announced money-supply growth that was the slowest in five months.
• Goldman(GS) Calls End to Iron Age After ‘Dramatic’ Drop in Ore Price. Iron ore declined sooner than expected this year as supplies exceeded demand and prices are unlikely to recover, according to Goldman Sachs Group Inc., which said 2014 will mark the end of a so-called iron age. This year “is the inflection point where new production capacity finally catches up with demand growth, and profit margins begin their reversion to the historical mean,” analysts Christian Lelong and Amber Cai wrote in a report today entitled: “The end of the Iron Age.” The 2016 forecast was cut to $79 a metric ton from $82 and the 2017 outlook was reduced to $78 from $85, according to the New-York based bank, which stuck with its forecast for prices to average $80 next year.
• Nickel Tumbles Most in 16 Weeks. Nickel for delivery in three months dropped $1,005 to settle at $18,925 a metric ton at 5:50 p.m. on the London Metal Exchange, the biggest decline since May 15. The dollar’s advance damped demand for commodities as alternative investments, Sanders said. Bloomberg indexes of the greenback against 10 currencies extended a rally to the highest since July 2013 with raw materials at the lowest in eight months. Tin fell 2 percent to $20,950 a ton after touching $20,900, the lowest since Aug. 5, 2013. Copper, aluminum, zinc and lead also fell in London. A gauge of the sixmain metals traded on the LME dropped 2.4 percent, the most since March 7. 
• Private Equity’s Quest for Mines Foundering as Commodities Slide. The push by private equity funds to acquire mining assets is slowing as investors struggle to land major deals while commodity prices slide. The funds have raised $1.1 billion for investments in mining and metals this year, compared with about $8.8 billion in 2013, according to data compiled by Bloomberg.
• Banks to Pay Price for Choice to Be Big, Fed’s Tarullo Says. The biggest U.S. banks must decide whether to voluntarily reduce their size and complexity or face capital charges that are some of the toughest in the world, the Federal Reserve’s top financial-regulation official said today.
• Lew Says Treasury Can Act to Reduce Inversions’ Value. The Obama administration can make tax inversions less economically attractive to U.S. companies if Congress doesn’t act to curb the practice, Treasury Secretary Jacob J. Lew said.

Wall Street Journal:

• WSJ/NBC Poll: Almost Two-Thirds Back Attacking Militants. Public in More Hawkish Mood Ahead of President Obama's Speech to the Nation About Islamic State. President Barack Obama will lay out plans Wednesday to combat Islamic State to an American public that has grown increasingly hawkish in the wake of the militant group's videotaped beheadings of two U.S. journalists. Almost two-thirds of respondents in a new Wall Street Journal/NBC News poll believe it is in the nation's interest to confront the group, known as ISIS and as ISIL, which has swept through Syria and northern Iraq. Only...
• Microsoft(MSFT) Near Deal to Buy Minecraft Maker Mojang. Deal May Come This Week, Value Swedish Company at More Than $2 Billion.
• Fossil Fuels Stir Debate at Endowments. Showdown Between Activists and Schools Over Investments in Coal, Oil and Gas Intensifies, With California in Spotlight.
• CFTC Eases Hedge-Fund Advertising Ban. Move Is Aimed at Aligning the CFTC's Restrictions With Similar Rules Set by the SEC.
• Fighting the Internet Invasion of Childhood. When I heard my daughter's screams from Web deprivation, I knew I was onto something.

Fox News: 

• Saudi anti-Christian sweep prompts calls for US involvement. Dozens of Christians arrested at a prayer meeting in Saudi Arabia need America's help, according to a key lawmaker who is pressing the State Department on their behalf. Some 28 people were rounded up Friday by hard-line Islamists from the Commission for the Promotion of Virtue and Prevention of Vice in the home of an Indian national in the eastern Saudi city of Khafji, and their current situation is unknown, according to human rights advocates.

Zero Hedge: 

• 11 Ways You Know You Live In A Country Run By Idiots.
• Small Business Ownership In America Is At An All-Time Low.
• Ebola Outbreak Doubles In 3 Weeks, WHO Warns "Conventional Means Of Control Not Working".
• Economic Confidence Has Gone Nowhere In A Year. (graph)
• The Buyback Party Is Indeed Over: Stock Repurchases Tumble In The Second Quarter.
• You Know It's Bad In Europe When... (table)
• America's Demographic Crash In One Chart. (graph)
• IceCap Asset Management On Europe: "If You Exclude All The Debt, There's No Debt Problem".

Business Insider:

• HANDS-ON PHOTOS: Here's A Close Look At the iPhone 6 And iPhone 6 Plus.
• An Enemy Far More Threatening Than Elizabeth Warren Could Soon Have Major Power Over Wall Street.
• 1 In 3 German Companies Expect Business With Russia To Decline Sharply This Year.

NY Times:

• Looking Beyond China, Some Companies Shift Personnel. General Motors moved the headquarters of its international division here from Shanghai last month. Archer Daniels Midland, the agribusiness giant, is gradually doing the same with its Asia and Pacific operations. Other multinationals, like IBM, have shifted staff members here from China for a few functions, like treasury operations.

Telegraph:

• Golden age for foreign companies in China 'is over'. Foreign investment in China plummets as companies' double-digit growth becomes a thing of the past.

Di Welt:

• Brok Says EU Must Implement New Russia Sanctions Now. Elmar Brok, chairman of European Parliament Committee on Foreign Affairs, says in interview with Die Welt that further delay will expose EU to ridicule. "There is no reason to wait longer. The cease-fire can hold only if all Russian soldiers leave Ukraine," he said.

Evening Recommendations

• None of note

Night Trading

• Asian equity indices are -1.25% to -.25% on average.

• Asia Ex-Japan Investment Grade CDS Index 91.0 +2.0 basis points.

• Asia Pacific Sovereign CDS Index 63.0 +.75 basis point.

• FTSE-100 futures -.19%.

• S&P 500 futures -.15%.

• NASDAQ 100 futures  -.17%.

Morning Preview Links

Earnings of Note
Company/Estimate

• (VRA)/.19
• (RH)/.64
• (MW)/1.06

Economic Releases
10:00 am EST

• Wholesale Inventories for July are estimated to rise +.5% versus a +.3% gain in June.
• Wholesale Sales for July are estimated to rise +.6% versus a +.2% gain in June.

10:30 am EST

• Bloomberg consensus estimates call for a weekly crude oil inventory decline of -1,033,330 barrels versus a -905,000 barrel decline the prior week. Gasoline supplies are estimated to rise by +16,670 barrels versus a -2,322,000 barrel decline the prior week. Distillate supplies are estimated to rise by +622,220 barrels versus a +605,000 barrel gain the prior week. Finally, Refinery Utilization is estimated to fall by -.29% versus a -.2% decline the prior week.

Upcoming Splits

• (CPK) 3-for-2
• (CLR) 2-for-1

Other Potential Market Movers

• The China CPI, Australia Unemployment Rate, $27B 10Y T-Note auction, weekly MBA Mortgage Applications report, BofA Merrill Real Estate Conference, Goldman Communacopia Conference, (POOL) investor day and the (LM) investor day could also 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.