Stocks Rising Modestly into Final Hour on Less European/Emerging Markets Debt Angst, Seasonal Strength, Yen Weakness, Defense/Transport Sector Strength

Broad Equity Market Tone:

• Advance/Decline Line: Modestly Higher
  

• Sector Performance: Most Sectors Rising
  

• Volume: Below Average

• Market Leading Stocks: Performing In Line

Equity Investor Angst:

• Volatility(VIX) 15.81 -4.12%

• Euro/Yen Carry Return Index 153.22 +.39%

• Emerging Markets Currency Volatility(VXY) 11.04 +.36%

• S&P 500 Implied Correlation 63.97 -.34%

• ISE Sentiment Index 102.0 +50.0%

• Total Put/Call .79 -9.20%

• NYSE Arms 1.46 +57.25% 

Credit Investor Angst:

• North American Investment Grade CDS Index 64.76 +.44% 
• America Energy Sector High-Yield CDS Index 613.0 -2.20%

• European Financial Sector CDS Index 63.28 -4.10%

• Western Europe Sovereign Debt CDS Index 26.72 -9.33%
• Asia Pacific Sovereign Debt CDS Index 65.11 -4.05%

• Emerging Market CDS Index 317.99 -2.60%

• China Blended Corporate Spread Index 344.54 +.38%
• 2-Year Swap Spread 23.5 +.75 basis point

• TED Spread 22.75 +1.75 basis points

• 3-Month EUR/USD Cross-Currency Basis Swap -14.75 -.75 basis point

Economic Gauges:

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

• Yield Curve 150.0 -4.0 basis points

• China Import Iron Ore Spot $67.90/Metric Tonne -1.84%

• Citi US Economic Surprise Index 32.70 +1.2 points
• Citi Eurozone Economic Surprise Index 1.90 +2.7 points

• Citi Emerging Markets Economic Surprise Index -12.80 unch.

• 10-Year TIPS Spread 1.67 +4.0 basis points

Overseas Futures:

• Nikkei Futures: Indicating +195 open in Japan

• DAX Futures: Indicating +39 open in Germany

Portfolio: 

• Slightly Lower: On losses in my biotech sector longs and emerging markets shorts

• Disclosed Trades: None

• Market Exposure: 50% Net Long

Today's Headlines

Bloomberg:

• Russian Rating May Fall to Junk in Economic Crisis, Kudrin Says. Russia’s sovereign debt rating will tumble into junk territory next year as the country plunges into a “full-fledged economic crisis,” former Finance Minister Alexei Kudrin said. Gross domestic product may contract by at least 2 percent in 2015, while inflation will accelerate to 12 percent to 15 percent, Kudrin told reporters in Moscow today. Russia failed to make changes to the economy during “quiet years” and now must face the current crisis unprepared, said Kudrin, who served as finance minister for more than a decade until 2011. 

• Bank of Russia Pledges to Bail Out Trust as Ruble Crisis Hits. Russia’s central bank pledged as much as 30 billion rubles ($531 million) to support National Bank Trust after the ruble plunged and liquidity tightened. The central bank is selecting an investor to help shore up the lender, and the Deposits Security Agency will take over its management, Bank of Russia said in a statement today. The ruble has depreciated 38 percent against the dollar since June, and volatility has soared to the highest since Russia defaulted on local-currency debt 16 years ago, stoking concern that Russian lenders’ asset quality has deteriorated.

• Ruble’s Rescue Comes With Cost for Russian Economy. Russian policy makers are signaling they’re prepared to sacrifice economic growth in order to stabilize the ruble. The Bank of Russia raised its benchmark interest rate by the most in 16 years last week and created a money-market cash squeeze, helping the ruble strengthen 45 percent from a record low on Dec. 16. The consequence of this means the oil producer’s economy may shrink 7.9 percent in 2015, Danske Bank A/S said on Dec. 19, revising a view for a 1.8 percent contraction. 

• China Stock-Manipulation Probe Spurs Concern on Small-Cap Rally. An investigation into stock market manipulation in China is spurring concern of further losses for shares of smaller companies after a benchmark gauge plunged by the most in a year. The China Securities Regulatory Commission is probing companies and individuals involved in suspected market manipulation on 18 stocks and has set up a task force, the regulator said in a Dec. 19 statement on its microblog, citing an unnamed spokesman. Most of these stocks are small companies listed in Shenzhen, according to the statement.

• Brazil Economists Cut GDP and Raise Inflation Forecasts for 2015. Brazil economists cut their gross domestic product forecast and raised their inflation estimate above the official target range as deteriorating confidence will present a challenge for the government’s new economic team. Analysts reduced to 0.55 percent their GDP estimate for 2015 from 0.69 percent the previous week, according to the Dec. 19 central bank survey of about 100 analysts published today. Analysts also cut to 0.13 percent the estimate for growth this year, from 0.16 percent last week.

• European Stocks Advance for Fifth Day as Lenders Lead. European stocks advanced for a fifth day, with banks contributing the most to the gains. The Stoxx Europe 600 Index rose 0.5 percent to 341.97 at the close of trading in London, after earlier adding as much as 0.9 percent.

• Copper Futures Fall on ‘Disappointing’ Drop in U.S. Home Sales. Copper futures for March delivery fell 0.4 percent to settle at $2.8725 a pound at 1:10 p.m. on the Comex in New York. This year, the price has declined 15 percent amid concern that global mined supplies will top demand as the economy cools in China, the largest user.

CNBC:

• Nat gas collapses—‘This is panic selling’. (video)

ZeroHedge:

• Belarus In Full-Blown Hyperinflation Panic: Blocks News, Online Stores; Bans All FX Trading For 2 Years. (graph)

• Bloomberg's Commodity Index Drops To Lowest Since 2009: What Does It Mean?

• Bank Revenues Plummet 17% In October And November According To Citi.

• The Fed Is Running On The Final Fumes Of Its Credibility.

• Existing Home Sales Collapse Most Since July 2010, Downtick In Stock Market Blamed. (graph)

• Grow Your Way Out Of Debt? Don't Make Us Laugh...!

• WTI Crude Plunges Back Below $56, Nasdaq Red On Gilead Weakness. (graph)

• Treasury Surge Set To Continue: Hedge Funds Most Short The 10-Year In Three Years.

Business Insider: 

• South Korea's Nuclear Plant Operator Has Been Hacked.

• Western Journalist: ISIS Is 'Much Stronger And Much More Dangerous' Than People Realize.

MEES:

• Saudi's Naimi Says $20 Oil 'Irrelevant' to OPEC Policy. "Whether it goes to $20/b, $4-0/b, $50b, $60/b, it is irrelevant," Saudi Arabian Oil Minister Ali Al-Naimi said when asked what price would prompt OPEC to cut output. Naimi was asked in interview whether OPEC would maintain output even if prices were to drop to $40-$30/bbl. Naimi said Russia indicated it was unable to cut production during talks with Saudi, Mexico, Venezuela last month. Naimi said Saudi oil production costs are $4-$5/bbl at most.

Bear Radar

Style Underperformer:

• Large-Cap Value -.2%

Sector Underperformers:

• 1) Gold & Silver -5.57% 2) Oil Service -2.39% 3) Biotech -1.86%

Stocks Falling on Unusual Volume:

• OCN, ASPS, GILD, OTIC, FINL, LJPC, RESI, BIIB GLP, USAC, TCRD, ISIS, AR, BBL, STMP, VNRCP, ALDW, WLL, NBR, SSLT, HQH, MVO, UPL, BTE and SDRL

Stocks With Unusual Put Option Activity:

• 1) EXAS 2) VRX 3) OCN 4) GILD 5) IBB

Stocks With Most Negative News Mentions:

• 1) FINL 2) STX 3) JPM 4) C 5) OCN
  

Charts:

• ETFs Falling on Unusual Volume

• Stocks Falling on Unusual Volume

Bull Radar

Style Outperformer:

• Large-Cap Value -.07%

Sector Outperformers:

• 1) Road & Rail +1.25% 2) Airlines +1.16% 3) Internet +1.03%
  

Stocks Rising on Unusual Volume:

• ACHN, RDUS, CUBA, ENTA, CZR, CHL, TASR, KN and WNC

Stocks With Unusual Call Option Activity:

• 1) VHC 2) ARCP 3) SIRI 4) NFX 5) GILD
  

Stocks With Most Positive News Mentions:

• 1) RTN 2) BWS 3) AAPL 4) PFE 5) QCOM
  

Charts:

• ETFs Rising on Unusual Volume 

• Stocks Rising on Unusual Volume

Monday Watch

Weekend Headlines 
Bloomberg:

• North Korea Threatens Greater Pain If Punished Over Sony Hacking. North Korea warned that any U.S. punishment over the hacking attack on Sony Pictures Entertainment would lead to damage “thousands of times greater,” with targets including the White House and Pentagon. Hackers including the “‘Guardians of Peace’’ group that forced Sony to pull a comedy about the assassination of Kim Jong Un ‘‘are sharpening bayonets not only in the U.S. mainland but in all other parts of the world,’’ the Kim-led National Defense Commission said in a statement published yesterday by the official Korean Central News Agency. Even so, North Korea doesn’t know who the Guardians are, the commission said. 

• North Korea: 1.2 Million Troops, Nukes and a 3,000-Strong Cyber-Elite. North Korea’s alleged ability to hack into Sony Pictures Entertainment is extending Kim Jong Un’sreach far beyond the range of his missiles. While North Korea has kept Western defense officials guessing for years about a nuclear program that it may or may not ever use, the regime’s ability to wage cyber war adds a new dimension to its standing abroad.

• Poroshenko Meets Belarus Leader as Ukrainian Peace Efforts Stall. Ukrainian President Petro Poroshenko met the leader of Belarus, whose country hosted negotiations that clinched a cease-fire in September, as efforts faltered to agree on a new round of talks with pro-Russian separatists. The agreements reached in Minsk are the “basis of the peace process in Ukraine,” Poroshenko told Belarusian President Aleksandr Lukashenko yesterday in Kiev. “There’s now no alternative model to de-escalate the situation.”

• China Offers Enhanced Cooperation as Russia Struggles. China offered enhanced economic ties with Russia at a regional summit this week as its northern neighbor struggled to contain a currency crisis. “To help counteract an economic slowdown, China is ready to provide financial aid to develop cooperation,” Premier Li Keqiang said at a Dec. 15 gathering in Astana, Kazakhstan. While the remark applied to any of the five other nations represented at the meeting of the Shanghai Cooperation Organization group, it was directed at Russia, according to a person familiar with the matter who asked not to be named as the plans weren’t public. 

• Guide to 2015: Global Hotspots. 

• U.S. Soldiers Fight Islamic State in Iraq, Kurds Advance. U.S. soldiers clashed with Islamic State militants, helping the Iraqi army repel attacks against the town of al-Baghdadi in the western Anbar province, Al Jazeera TV reported, as Kurdish forces advanced in the north. The U.S. troops were from al-Assad military base, the biggest in Anbar, First Lieutenant Muneer al-Qoud from the Iraqi police said by phone. Meanwhile, a U.S. senior military official said there are no U.S. ground troops fighting in Iraq, though forces can engage in self-defense if required. 

• U.S. to Release Four Guantanamo Bay Prisoners to Afghanistan. Four prisoners from the U.S. detention facility at Guantanamo Bay, Cuba, are to be repatriated to Afghanistan, the Defense Department said. Shawali Khan, Khi Ali Gul, Abdul Ghani and Mohammed Zahir were to be released as part of an effort by President Barack Obama to accelerate transfers and close the facility. An interagency task force reviewed their cases to determine whether the prisoners met the standards for release and examined issues including security before unanimously approving the transfers. 

• South Korea Cuts 2015 Growth Forecast, Warns on External Risks. South Korea lowered its growth forecast and said it will revise capital controls to guard against higher U.S. interest rates and other external risks to Asia’s fourth-biggest economy. The economy will expand 3.8 percent next year, less than a July estimate of 4 percent, the finance ministry said, citing weaker-than-expected domestic demand. The ministry may revise rules in 2015 on currency forwards and foreign currency liabilities to prevent abrupt outflows, a statement showed. 

• Asian Stocks Rise as Crude Extends Gains While Kiwi Drops. Asian stocks rose, with the regional index headed for its steepest three-day advance in almost two months, as commodity shares climbed amid a rally in crude oil. New Zealand’s dollar dropped while Japanese bonds extended gains. The MSCI Asia Pacific Index climbed 0.6 percent by 11:04 a.m. in Tokyo, bringing its gain since Dec. 18 to 3 percent. 

• Iron Ore Price Outlook Cut 33% by Australia as Glut Expands. Australia cut its iron ore price estimate for next year by 33 percent as surging output in the world’s top exporter outpaces Chinese demand growth, adding to a surplus. Prices will average $63 a metric ton, the Department of Industry said today. That compares with $94 a ton forecast in September by the Bureau of Resources and Energy Economics, which is now part of the department. The commodity is set to average about $88 this year, today’s quarterly report says.

• Age of Plenty Seen Over for Gulf Arabs as Oil Tumbles. The boom that adorned Gulf Arab monarchies with glittering towers, swelled their sovereign funds and kept unrest largely at bay may be over after oil prices dropped by almost 50 percent in the last six months. The sheikhdoms have used the oil wealth to remake their region. Landmarks include man-made islands on reclaimed land, as well as financial centers, airports and ports that turned the Arabian desert into a banking and travel hub. The money was also deployed to ward off social unrest that spread through the Middle East during the Arab Spring. 

Wall Street Journal: 

• White House Weighs Options Against North Korea. Moves Include Financial Sanctions, Restoring to List of Terror Sponsors. The White House is considering an array of options for responding to North Korea’s alleged hacking of Sony Pictures, including measures that would intensify financial pressure on Pyongyang by targeting banks and trading companies controlled by leader Kim Jong Un and his ruling elite, according to senior administration officials.

• Killings of New York Police Officers Spark Backlash to Protests. The assassination of two New York City police officers this weekend has emboldened police and their supporters to lash out at weeks of nationwide protest and criticism that they say have left officers more vulnerable.

• Obama Plans More Gitmo Transfers in Coming Weeks. President Aims to Shift National Debate by Framing Guantanamo’s Closure as a Fiscal Issue, Putting Pressure on Lawmakers.

CNBC:

• Why 2015 could bring the surprising return of risk. (video)

• Castro thanks US in speech but reaffirms Communism. President Raúl Castro declared victory for the Cuban Revolution on Saturday in a wide-ranging speech, thanking President Obama for “a new chapter” while also reaffirming that restored relations with the United States did not mean the end of Communist rule in Cuba.

Zero Hedge:

• Just What Is China Buying? (graph)

• The Baltic Dry Index Has Never Crashed This Fast Post-Thanksgiving. (graph)

• Junk Bonds Are Going To Tell Us Where The Stock Market Is Heading In 2015. (graph)

• I'm Not Buying It - Not The Wall Street Rip, Nor The Keynesian Rap. (graph)

• China's Stocks Worth 50% More Than Rest Of BRICS Combined. (graph)

• The Housing Bubble Explained in One Little Gem of an Excerpt... (graph)

• Former BIS Chief Economist: "The System Is Dangerously Unanchored; It Is Every Man For Himself".

• 5 Things To Ponder: Variegated Contemplations.

• Why The US Is About To Be Flooded With Record Oil Production Due To Plunging Oil Prices.

• Central Banks Are Now Uncorking The Delirium Phase. (graph)

• Two NYPD Cops Murdered In "Execution Style" Ambush, Shooter Commits Suicide - Live Coverage.

• Judge Rules Obama's Abuse Of Executive Orders Is "Unconstitutional".

• China Tests Nuclear ICBMs, US Analyst Warns "Arms Control Is Failing To Increase American Security".

• 150 Years Of Global Monetary Policy Summed Up In One Word (And 1 Chart). (graph)

• Credit Doesn't Care What the FOMC Says: The "Recovery" That Never Was Is Over.

• Bond Yields Set To Plunge In 2015: Next Year Global Treasury Supply Will Tumble By 20% As ECB Joins The Party.

• 2014 Year In Review (Part 1): The Final Throes Of A Geopolitical Game Of Tetris.

• The Biggest Economic Story Going Into 2015 Is Not Oil.

• 2014 Year In Review (Part 2): Will 2015 Be The Year It All Comes Tumbling Down?

• "Houston, You Have A Problem" - Texas Is Headed For A Recession Due To Oil Crash, JPM Warns. (graph)

• Police Reportedly Rage, De Blasio's "Hands Are Dripping With Blood".

• Two Months After Saying "Deflation Isn't Going To Happen" ECB Warns "Negative Inflation" Is Coming.

• Saudi Arabia Refuses To Cut Oil Output Even If Non-OPEC Members Do.

• Two More Cops Shot After Yesterday's Brutal New York "Execution".

• Wall Street Gets A Merry Christmas Main Street Gets Keynesian Coal. (graph)

• The Hidden Leverage In "Shiny Objects" - Banks Sell Record Amount Of Equity-Linked Structured Notes. (graph)

• Why Germany Objects To ECB QE (In 1 Crazy Chart). (graph)

Business Insider:

• SONY FIRES BACK AT OBAMA: 'We Are Still Looking Into Release On Other Platforms'.

• How The Hackers Broke Into Sony And Why It Could Happen To Any Company.

• Protesters Shut Down America's Largest Mall.

• Technology firms: Frothy.com.

• NYPD Officers Turn Their Backs On Mayor De Blasio.

• Public Pensions Are America's Greece.

• Things Could Get Much Worse For Russia.

• A Currency Trader And $200 Million Worth Of His Clients' Money Have Vanished.

• There's A Problem With Russia's Foreign Currency Reserves.

• How The US's Syria Policy Stalled Under The 'Analyst In Chief'.

• China’s Landmark Hong Kong-Shanghai Stock Link Has Not Been Nearly As Successful As Hoped.

Financial Times:

• US regulator probes ETF pricing structures. Extreme movements in the prices of bonds, commodities and other assets have prompted regulators at the Federal Reserve Bank of New York to take a closer look at the inner workings of exchange traded funds. Wall Street’s top regulator has been talking to the firms responsible for ensuring the smooth functioning of such ETFs as it seeks to gauge the resilience of the structures to sharp fluctuations in the underlying market they track.

Telegraph: 

• QE addiction has made us too complacent. If and when enthusiasm for extreme monetary policy as the cure for all ills dries up, we don’t have many options left. 

Wirtschaftswoche: 

• ECB's Constancio Sees Negative Inflation Rate. Oil Price decline "doesn't create a simple situation for us in the short-term," ECB Vice President Vitor Constancio cited as saying in interview. Sees negative inflation rate in coming months. ECB wants to prevent "dangerous vicious circle of declining prices, rising real wage costs, falling profits, shrinking demand and further declining prices," he said. Given that many economist expect weak economy in euro area until 2018 sees downward pressure on inflation expectations.

Yonhap News:

• N. Korea threatens ultra-harsh action on U.S. soil over hacking allegation. North Korea threatened to carry out ultra-harsh military action on U.S. soil Sunday, one day after U.S. President Barack Obama vowed a proportional response against the North's alleged hacking attack into Sony Picture. In a follow-up to the FBI's recent hacking accusation against Pyongyang, Obama vowed Friday (U.S time) to "respond proportionally," hinting at retaliatory action over the communist country's alleged hacking attack on the distributor of a controversial movie about North Korea, "The Interview."

Kyodo News:

• China building military base on islands near Senkakus: sources. China's military is building large-scale base facilities on islands near the Senkaku Islands southwest of mainland Japan, several Chinese sources said Sunday. Construction is under way in the Nanji Islands in Zhejiang Province, lying about 300 kilometers to the northwest of the Japanese-administered, uninhabited Senkaku Islands in the East China Sea. China claims the Senkakus as Diaoyu.

WantChinaTimes:

• Fall in ruble raises uncertainty over China-Russia currency swap deal.

Night Trading

• Asian indices are +.25% to +1.25% on average.

• Asia Ex-Japan Investment Grade CDS Index 105.0 unch.

• Asia Pacific Sovereign CDS Index 67.75 -.75 basis point.

• S&P 500 futures -.02%.

• NASDAQ 100 futures -.05%.

Morning Preview Links

Earnings of Note
Company/Estimate

• (SCS)/.26

Economic Releases
8:30 am EST

• The Chicago Fed National Activity Index for November is estimated to rise to .25 versus .14 in October.  

10:00 am EST

• Existing Home Sales for November are estimated to fall to 5.2M versus 5.26M in October.
  

Upcoming Splits

• (MARA) 2-for-1

Other Potential Market Movers

• The China Leading Economic Index and the 2Y T-Note auction could also impact trading today.

BOTTOM LINE: Asian indices are higher, boosted by financial and commodity shares in the region. I expect US stocks to open modestly higher and to weaken into the afternoon, finishing mixed. The Portfolio is 50% net long heading into the week.

Weekly Outlook

Week Ahead by Bloomberg. 
Wall St. Week Ahead by Reuters.
Stocks to Watch Monday by MarketWatch.
Weekly Economic Calendar by Briefing.com.

BOTTOM LINE: I expect US stocks to finish the week mixed as global growth worries, rising European/Emerging Markets/US High-Yield debt angst and earnings concerns offset central bank hopes, seasonal strength and short-covering. My intermediate-term trading indicators are giving neutral signals and the Portfolio is 50% net long heading into the week.