Stocks Reversing Lower into Final Hour on Global Growth Fears, Rising European/Emerging Markets Debt Angst, Escalating Mideast Tensions, Healthcare/Transport Sector Weakness

Broad Equity Market Tone:

• Advance/Decline Line: Substantially Lower
  

• Sector Performance: Most Sectors Declining
  

• Volume: Around Average

• Market Leading Stocks: Performing In Line

Equity Investor Angst:

• Volatility(VIX) 14.59 +6.57%

• Euro/Yen Carry Return Index 146.24 +.16%

• Emerging Markets Currency Volatility(VXY) 7.38 -.40%

• S&P 500 Implied Correlation 53.43 +5.16%

• ISE Sentiment Index 78.0 +32.20%

• Total Put/Call 1.07 +.94%

• NYSE Arms .95 -22.92% 

Credit Investor Angst:

• North American Investment Grade CDS Index 59.98 +2.04%

• European Financial Sector CDS Index 59.66 +3.11%

• Western Europe Sovereign Debt CDS Index 28.29 +6.65%

• Asia Pacific Sovereign Debt CDS Index 64.66 +1.94%

• Emerging Market CDS Index 258.13 +.11%

• China Blended Corporate Spread Index 307.85 +.86%

• 2-Year Swap Spread 24.75 +.25 basis point

• TED Spread 22.75 +.5 basis point

• 3-Month EUR/USD Cross-Currency Basis Swap -8.25 +2.0 basis points

Economic Gauges:

• 3-Month T-Bill Yield .00% unch.

• Yield Curve 200.0 -2.0 basis points

• China Import Iron Ore Spot $79.40/Metric Tonne -.50%

• Citi US Economic Surprise Index 21.10 +.1 point

• Citi Emerging Markets Economic Surprise Index -18.60 +3.2 points

• 10-Year TIPS Spread 2.02 +3.0 basis points

Overseas Futures:

• Nikkei Futures: Indicating -105 open in Japan

• DAX Futures: Indicating -14 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:

• ‘Imminent Attack’ in U.S. Prompted Airstrikes on Khorasan. Airstrikes in Syria against the extremist Khorasan group were prompted by planning for an “imminent” terror attack on U.S. soil, the Pentagon said. “We believe the individuals plotting and planning it were eliminated” in the eight U.S. airstrikes overnight, Rear Admiral John Kirby, the Pentagon spokesman, said today in an interview with ABC’s “Good Morning America” program. Amid attention on the threat from Islamic State in Iraq and Syria, Khorasan has emerged in recent weeks as a more immediate peril in the view of the U.S. intelligence community because it’s more focused on attacking America and Europe.

• Israel Shoots Down Syrian Warplane After Flight Over Golan. Israel shot down a Syrian fighter jet after it flew over the Golan Heights, the Israeli army said today, the first such incident in almost 30 years and the neighbors’ most serious clash since the start of Syria’s civil war.

• U.S. Estimates 1.4 Million Ebola Cases in Worst Scenario. Without better containment of the Ebola outbreak, there may be 550,000 to 1.4 million cases in Liberia and Sierra Leone by January, according to a new estimate published today by the U.S. Centers for Disease Control and Prevention. The range is based on how well cases have been reported and identified, the Atlanta-based CDC said. It also assumes a failure of public health efforts and a lack of additional resources to control the outbreak, aspects governments and international aid agencies are working to improve.

• German Factory Growth at 15-Month Low in Sign of Uneven Economy. German manufacturing expanded at the slowest pace in 15 months in September as new orders fell, signaling uneven momentum in Europe’s largest economy. Markit Economics said its Purchasing Managers Index fell to 50.3 from 51.4 in August, the weakest since June 2013. Economists surveyed by Bloomberg News predicted a drop to 51.2.

• Ready for Rate Riot? Emerging Markets Set to Follow Fed. Investors bracing for higher interest rates from the Federal Reserve in 2015 need to expand their horizons or risk being caught off-guard. Bank of America Merrill Lynch economists suggest 12 of the 16 inflation-targeting emerging-market central banks they monitor will raise rates in the next year, and many will do so by more than markets anticipate. Mexico, Thailand, Hungary, and Israel are among the most likely to surprise, economists Marcos Buscaglia and Ana Madeira said in a Sept. 12 report to clients. Following the Fed, even at the risk of crimping growth, would represent an effort to prevent a spike of inflation and keep attracting foreign cash.

• Europe Stocks Fall Most in 11 Weeks as AstraZeneca Drops. (video) European stocks fell the most in eleven weeks as health-care companies tumbled amid concern tougher American tax rules will erode their takeover appeal and as manufacturing growth slowed in the euro area. All the 19 industry groups on the Stoxx Europe 600 Index declined. Shire Plc and AstraZeneca Plc lost at least 2.5 percent after the U.S. made it harder for companies to move their tax base abroad. Raiffeisen Bank International AG (RBI), the foreign lender with most at risk in Ukraine and Russia, plunged the most since September 2011 after predicting an annual loss. Tate & Lyle Plc (TATE) tumbled the most in almost seven years after forecasting annual profit that missed analysts’ estimates. The Stoxx 600 slid 1.4 percent to 341.89, its biggest retreat since July 8.

• Iron Ore Falls Below $80 to Lowest Since 2009 on China. Iron ore slumped below $80 a metric ton for the first time in five years on speculation that China’s slowing economic growth will curb demand in the world’s biggest user, exacerbating a global surplus. Ore with 62 percent content delivered to Qingdao, China, fell 0.5 percent to $79.69 a dry ton, the lowest level since Sept. 16, 2009, according to data from Metal Bulletin Ltd. The drop followed seven weeks of declines as the steelmaking raw material had the longest run of losses since May.

• Gold Rebounds From Eight-Month Low Amid Syria Airstrikes. Gold futures for December delivery added 0.3 percent to settle at $1,222 an ounce at 1:37 p.m. on the Comex in New York. Prices reached $1,208.80 yesterday, the lowest for a most-active contract since Jan. 2, and ended 2013 at $1,202.30.

• Adding Off-Balance Sheet Leverage to Increase Loan Gains. It’s widely known that corporate-loan buyers want bigger returns. What’s less known is that they’re increasingly using methods that may mask the extra risk they’re assuming. An example can be found in a suddenly popular creation called a senior secured loan program, which allows a couple of investment firms to pool money to lend to speculative-grade companies and then divvy up risk and return. The firms involved range from small -- places like Solar Senior Capital Ltd. and New Mountain Finance Corp. -- to giants like Pacific Investment Management Co. and General Electric Co.’s GE Capital unit. The off-balance sheet facilities also effectively “distort leverage” ratios reported by BDCs, according to a Fitch Ratings report published yesterday. While these firms are restricted in how much they can borrow directly, they can invest in structures such as these loan partnerships that typically use leverage to enhance returns.

• Bullard Says ‘Natural’ to Drop Fed’s Rate Pledge Next Month. Federal Reserve Bank of St. Louis President James Bullard said the central bank may need to drop its pledge next month to keep interest rates low as so-called quantitative easing is brought to a close. “I thought it was premature to try to remove ‘considerable time’ from the statement because QE hasn’t ended yet,” Bullard told reporters at a conference in St. Louis, referring to the last meeting of the Federal Open Market Committee on Sept. 16-17. “A more natural juncture would probably be the October meeting” when “QE is projected to end.”

Wall Street Journal: 

• U.S. Reports Significant Damage in First Wave of Syria Strikes. American, Arab Warplanes Hit Targets Around Iraq-Syria Border.

• New U.S. Inversion Rules Drag Down Shares of Deal Targets. Inversion Deal-Making Has Been Especially Prevalent in the Pharmaceutical Sector.

CNBC: 

• To reduce inequality, end buybacks: Harvard Business Review. (video)

ZeroHedge:

• Russia Holds Massive Military Drill: 155,000 Troops, 4,000 Tanks, 632 Aircraft, 84 Ships.

• America's Politicians Earn $608 Per Hour.

• Blackstone(BX) Slams "Broken Bond Market" Despite Record Bond-Issuance Driven Stock Buybacks.

• Citi(C) Previews How It All Ends, In One Chart. (graph)

• Silicon Valley Insider: "If 2000 Was A Bubble Factor Of 10, We Are At A 9 Right Now".

Business Insider:

• Everyone's Talking About The 'Death Cross' In The Russell 2000.

• Germany's Eurosceptics Are On The Rise And They Could Send The Eurozone Back Into Crisis.

Reuters:

• WTO cuts world trade growth forecasts for 2014 and 2015. Global goods trade will grow less than hoped this year and next, and factors including regional conflicts and the Ebola outbreak are putting a quick return to stronger growth at risk, the World Trade Organization said on Tuesday. Trade in goods will grow by 3.1 percent this year, much less than the 4.7 percent the WTO forecast in April. It cited "weaker-than expected GDP growth and muted import demand in the first half," according to a statement. Trade was likely to grow 4.0 percent in 2015 rather than the 5.3 percent expected previously, still far below the 20-year average of 5.2 percent and "risks abound in the form of geopolitical tensions, regional conflict and health crises (Ebola)".

Bear Radar

Style Underperformer:

• Small-Cap Value -.60%

Sector Underperformers:

• 1) Oil Tankers -2.03% 2) Medical Equipment -1.52% 3) HMOs -1.51%

Stocks Falling on Unusual Volume:

• GEL, ASNA, CRR, KMX, TSRO, DFRG, HCLP, CLX, ABBV, EMES, TNET, VPRT, COV, SNN, MDT, AZN, AN, AVY, TRP, DL, SFL, UVV, GSK, VNOM, ORCL, AVNR, THOR and EMES

Stocks With Unusual Put Option Activity:

• 1) KMX 2) XLK 3) BBBY 4) AMAT 5) CSCO
  

Stocks With Most Negative News Mentions:

• 1) MDT 2) UPS 3) KMX 4) WHR 5) BID
  

Charts:

• ETFs Falling on Unusual Volume

• Stocks Falling on Unusual Volume

Bull Radar

Style Outperformer:

• Small-Cap Growth -.20%

Sector Outperformers:

• 1) Gold & Silver +1.39% 2) Gaming +.73% 3) Coal +.61%
  

Stocks Rising on Unusual Volume:

• CF, SLXP, TKMR, AMBA, GDP and SGMO

Stocks With Unusual Call Option Activity:

• 1) JWN 2) NLY 3) CF 4) CODE 5) CCL

Stocks With Most Positive News Mentions:

• 1) CCL 2) NFLX 3) BTU 4) AAPL 5) DDD
  

Charts:

• ETFs Rising on Unusual Volume 

• Stocks Rising on Unusual Volume

Tuesday Watch

Evening Headlines 
Bloomberg: 

• U.S. Conducts First Airstrikes in Syria on Islamic State. The U.S. conducted its first airstrikes in Syria, a barrage of attacks joined by partner nations in a major expansion of President Barack Obama’s effort to “degrade and ultimately destroy” Islamic State. “U.S. military and partner nation forces are undertaking military action against ISIL terrorists in Syria using a mix of fighter, bomber and Tomahawk Land Attack Missiles,” Rear Admiral John Kirby, the Pentagon press secretary, said tonight in an e-mailed statement. While Kirby said he couldn’t provide any details because “these operations are ongoing,” the partner nations joining in the attacks were Saudi Arabia, Jordan, the United Arab Emirates and Bahrain, the Washington Post said, citing two U.S. defense officials it didn’t identify.
• China Beige Book Shows Economy Stuck in Low Gear. China’s economy remained stuck in “low gear” this quarter, with struggling retail and residential real-estate industries countering improvements in manufacturing and transportation, a private survey showed. Growth in investment slowed further, borrowing costs rose and the share of firms applying for and getting bank loans remained at “rock bottom levels,” according to the China Beige Book, a report published quarterly by New York-based China Beige Book International. In contrast, hiring picked up and corporate profit margins improved, suggesting widespread government efforts to reignite growth are unlikely, it said.
• China Police Equipment Aids Rights Violations: Amnesty. More than 130 Chinese companies are making and selling equipment that can be used for torture, fueling human-rights violations across Africa and Asia, according to a report by Amnesty International and the Omega Research Foundation. The number of companies involved in the production and trade of potentially dangerous law enforcement equipment has risen from 28 a decade ago, according to the report, entitled “China’s Trade in Tools of Torture and Repression.”
• Asia Stocks Pare Drop as Copper Rises on China Flash PMI. Asian stocks pared declines, with a regional index near a four-month low, and copper climbed as a preliminary gauge of Chinese manufacturing unexpectedly climbed. The price of insuring Asian bonds against default increased. The MSCI Asia Pacific excluding Japan Index was little changed by 10:19 a.m. in Hong Kong, trimming a drop of as much as 0.3 percent.
• Commodities Drop Signals Global Growth Concern: Chart of the Day. The slump in commodity prices to a five-year low signals investors are cautious about the strength of the global economy even as U.S. equities rise to a record. The CHART OF THE DAY shows the Bloomberg Commodity Index of 22 raw materials slipped 5.6 percent this year. Brent crude is down 12 percent and touched a two-year low last week, while iron ore at the Qingdao port in China plunged 41 percent to the lowest since 2009.

Wall Street Journal: 

• Obama Resists Linkage of Mideast Goals. U.S., Some Allies See Signs Tehran Seeking to Link Nuclear Talks and Combating Islamic State. The Obama administration's primary objectives in the Middle East—containing the Islamic State militant group and countering Iran's nuclear program—are coming into conflict with each other, U.S., European and Arab officials say. The White House has insisted that the two issues are entirely separate. But while the U.S. is seeking a role for Iran in the fight against the Islamic extremists, Tehran is chafing at what it...
• New Level of Smartphone Encryption Alarms Law Enforcement. Moves by Apple(AAPL) and Google(GOOG) Are Latest Fallout From Snowden's Disclosures. Moves by Apple Inc. and Google Inc. to put some smartphone data out of the reach of police and the courts are raising alarms inside U.S. law-enforcement agencies, current and former officials say. Several officials in Washington said they were bracing for a confrontation with Silicon Valley on the issue, the latest fallout from the revelations by former National Security Agency contractor Edward Snowden about government...
• A Pro-Family, Pro-Growth Tax Reform by Mike Lee and Marco Rubio. Two simple income-tax brackets: 15% and 35%. End the marriage penalty and increase the child tax credit. Too many Americans believe the American dream is slipping away for them and their children. They see their cost of living rise while their paychecks remain stagnant. They see an economy that benefits stockbrokers but not stock clerks.

Fox News:

• US launches first wave of bombing strikes over Syria. The United States launched its first wave of bombing attacks over Syria early Tuesday against an expected 20 to 25 Islamic State targets, U.S. officials said. The operation, expected to last several hours, involved planes launched from U.S.destroyers in the Persian Gulf and Red Sea. Planes from five Arab countries also participated in the strikes. The first explosions from Tomahawk missiles were heard in northern Syria. Targets were expected to include command and control centers, training camps and weapons depots.

MarketWatch.com: 

• The iron ore industry is headed for a brutal shakeout as prices collapse. A bloodbath in iron-ore prices could get much uglier before things turn around. And it’s not all China’s fault, either. While Chinese demand, a major force in the market, has slowed, big iron ore producers, including Brazil’s Vale, BHP Billiton, Rio Tinto  and Fortescue plan to boost production and shipments despite the glut. Australian producers BHP Billiton, Rio Tinto and Fortescue aim to boost output by 170 million tons this year, equal to around 7% of 2013 global supply and 11% of global production outside China, notes Capital Economics. Vale and Anglo-American are also looking to increase output, too. Why are they boosting production in the face of falling demand?

CNBC:

• Treasury takes actions to combat tax inversions. The Treasury and the Internal Revenue Service took action against tax inversions Monday. The issue of what are known as tax inversions—when a company buys a foreign firm to switch its tax domicile to a country with lower rates—has been a major policy point for President Barack Obama over the past few months. 
• NY regulator warns against looming cyber 9/11.
• Despite airstrikes, ISIS appears to hold its ground in Iraq. After six weeks of American airstrikes, the Iraqi government's forces have scarcely budged Sunni extremists of the Islamic State from their hold on more than quarter of the country, in part because many critical Sunni tribes remain on the sidelines.

Zero Hedge:

• They Do Ring A Bell At The Top: Alibaba Proves Wall Street Is Off Its Rocker.
• Ukraine Introduces Capital Controls. (graph)
• "Smart Money" BTFATH At Most Furious Pace In Over A Year, 2Y Short-Squeeze Possible. (graph)
• Facebook(FB) Fraud 2.0: Academic Study Exposes "Like Farms".

Business Insider:

• CHINESE MANUFACTURING SLIGHTLY RISES.

Reuters: 

• Brazil cuts 2014 GDP growth forecast, keeps fiscal goal. Brazil cut its economic growth forecast to 0.9 percent in 2014 but maintained its key annual fiscal goal for the year, according to a government report published on Monday. The government had previously expected the economy to expand 1.8 percent this year. The downward revision remains above market forecasts for growth of 0.30 percent in 2014.
• Some U.S. hedge fund advisers run afoul of advertising rules -SEC. Some newly registered U.S. hedge fund advisers are "cherry-picking" investments to showcase their performance and improperly changing how they value securities, an agency official said on Monday. 
• AutoZone(AZO) sales disappoint as customers prefer new cars to repairs. AutoZone Inc reported weaker-than-expected quarterly revenue as a strengthening U.S. economy encouraged consumers to buy new vehicles instead of repairing existing ones, sending the auto parts retailer's shares down as much as 5 percent.

Obama takes on coal with first-ever carbon limits
Read more at http://www.philly.com/philly/news/politics/20130919_ap_0f857b20e0c144a5a1e1b9dddc9f9d72.html#YRThyDOhArykUeYy.9Brazil cuts 2014 GDP growth forecast, keeps fiscal goal

China Securities Journal:

• China Should Cut Reliance on Property Sector. The country should accept GDP growth of about 7-7.5%, citing IMF Deputy Managing Director Zhu Min. To maintain sustainable growth, China shouldn't overly rely on monetary or fiscal policies to boost economy.

Evening Recommendations

• None of note

Night Trading

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

• Asia Ex-Japan Investment Grade CDS Index 95.0 +4.5 basis points.

• Asia Pacific Sovereign CDS Index 63.50 +1.0 basis point.

• FTSE-100 futures +.04%.

• S&P 500 futures +.03%.

• NASDAQ 100 futures  -.02%.

Morning Preview Links

Earnings of Note
Company/Estimate

• (KMX)/.67
• (BBBY)/1.14
• (CPRT)/.41
• (SCS)/.23
• (AIR)/.38
• (CCL)/1.44

Economic Releases
9:00 am EST

• FHFA House Price Index for July is estimated to rise +.5% versus a +.4% gain in June.
  

9:45 am EST

• Preliminary Markit US Manufacturing PMI for September is estimated to rise to 58.0 versus 57.9 in August.
  

10:00 am EST

• The Richmond Fed Manufacturing Index for September is estimated to fall to 10 versus 12 in August.

Upcoming Splits

• None of note

Other Potential Market Movers

• The Fed's Bullard speaking, Fed's Powell speaking, Fed's George speaking, Eurozone PMI, $29B 2Y T-Note auction, weekly US retail sales reports, (URBN) investor day and the (NSC) analyst conference could also impact trading today.

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

Stocks Falling into Final Hour on Global Growth Fears, Rising Emerging Markets/European Debt Angst, Technical Selling, Commodity/Homebuilding Sector Weakness

Broad Equity Market Tone:

• Advance/Decline Line: Substantially Lower
  

• Sector Performance: Every Sector Declining
  

• Volume: Slightly Above Average

• Market Leading Stocks: Underperforming

Equity Investor Angst:

• Volatility(VIX) 13.82 +14.12%

• Euro/Yen Carry Return Index 145.81 -.20%

• Emerging Markets Currency Volatility(VXY) 7.40 +1.47%

• S&P 500 Implied Correlation 51.64 +15.35%

• ISE Sentiment Index 57.0 -29.63%

• Total Put/Call 1.07 +30.48%

• NYSE Arms 1.13 +24.04% 

Credit Investor Angst:

• North American Investment Grade CDS Index 58.23 +3.75%

• European Financial Sector CDS Index 57.94 +2.43%

• Western Europe Sovereign Debt CDS Index 26.52 -1.03%

• Asia Pacific Sovereign Debt CDS Index 63.23 +1.0%

• Emerging Market CDS Index 223.28 +.90%

• China Blended Corporate Spread Index 305.21 -.05%

• 2-Year Swap Spread 24.50 +.5 basis point

• TED Spread 22.25 -.75 basis point

• 3-Month EUR/USD Cross-Currency Basis Swap -10.25 +1.0 basis point

Economic Gauges:

• 3-Month T-Bill Yield .00% -1.0 basis point

• Yield Curve 202.0 unch.

• China Import Iron Ore Spot $79.80/Metric Tonne -2.33%

• Citi US Economic Surprise Index 21.0 +1.0 point

• Citi Emerging Markets Economic Surprise Index -21.80 -.2 point

• 10-Year TIPS Spread 1.99 -4.0 basis points

Overseas Futures:

• Nikkei Futures: Indicating -95 open in Japan

• DAX Futures: Indicating -12 open in Germany

Portfolio: 

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

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

• Market Exposure: Moved to 25% Net Long