Stocks Falling into Final Hour on Soaring European/Emerging Markets Debt Angst, Global Growth Fears, Yen Strength, Energy/Transport Sector Weakness

Broad Equity Market Tone:

• Advance/Decline Line: Substantially Lower
  

• Sector Performance: Almost Every Sector Declining
  

• Volume: Below Average

• Market Leading Stocks: Underperforming

Equity Investor Angst:

• Volatility(VIX) 20.98 +17.99%

• Euro/Yen Carry Return Index 149.06 -1.32%

• Emerging Markets Currency Volatility(VXY) 10.85 +.84%

• S&P 500 Implied Correlation 68.38 +3.81%

• ISE Sentiment Index 84.0 +18.31%

• Total Put/Call 1.14 -5.0%

• NYSE Arms 2.07 +61.69% 

Credit Investor Angst:

• North American Investment Grade CDS Index 69.87 +4.25%
• America Energy Sector High-Yield CDS Index 664.0 +2.43%

• European Financial Sector CDS Index 68.96 +9.34%

• Western Europe Sovereign Debt CDS Index 27.09 +8.51%
• Asia Pacific Sovereign Debt CDS Index 69.90 +2.21%

• Emerging Market CDS Index 380.71 +10.3%

• China Blended Corporate Spread Index 345.65 +.93%
• 2-Year Swap Spread 22.75 unch.

• TED Spread 23.50 +1.0 basis point

• 3-Month EUR/USD Cross-Currency Basis Swap -15.75 -1.0 basis point

Economic Gauges:

• 3-Month T-Bill Yield .01% -1.0 basis point

• Yield Curve 137.0 -9.0 basis points

• China Import Iron Ore Spot $70.87/Metric Tonne -.55%

• Citi US Economic Surprise Index 27.60 -.7 point
• Citi Eurozone Economic Surprise Index 12.40 +3.4 points

• Citi Emerging Markets Economic Surprise Index -14.30 -2.4 points

• 10-Year TIPS Spread 1.65 -6.0 basis points

Overseas Futures:

• Nikkei Futures: Indicating -294 open in Japan

• DAX Futures: Indicating -13 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:

• 'Grexit' Is Back: A Greek Exit From the Euro Raises Fears of Fiscal Contagion. (video) Mario Draghi’s July 2012 pledge to do “whatever it takes” to keep the euro intact has kept speculators at bay for almost three years. Bond yields fell from Dublin to Athens, giving governments room to cut budgets and start revamping their economies. While it’s not been a period of robust growth, the talk of crisis has abated and even Greece’s six-year recession ended. What’s not changed is the risk entailed by Greece’s potential departure from the 19-nation currency bloc. What Citigroup Inc.’s Ebrahim Rahbari termed “Grexit” is back in play and it remains the worst possible outcome in the view of economists at Berenberg Bank and ING-DiBa AG. 

• Samaras Faces Greeks Skeptical of His Euro-Exit Warnings. “It’s all propaganda meant to scare people,” Moschou said on Jan. 2 as she served Greek wine and brandy to customers at Vrettos, a 106-year-old distillery tucked away in the old town of Athens below the Acropolis. “I don’t believe it.”

• Ruble Starts New Year With Plunge as Oil Declines to 2009 Low. The ruble picked up right where it left off last year, weakening as oil prices extended declines. Russia’s currency slid 7.2 percent to 60.37 per dollar at 8:06 p.m. in Moscow, in its first day of trading of 2015 after a 46 percent decline last year. Government bonds fell, with the five-year yield climbing 16 basis points to 15.63 percent.

• EU’s Fractured Politics Is Biggest 2015 Risk, Eurasia Group Says. The success of anti-European Union parties and fraying bonds among EU nations are the biggest risks facing investors in 2015, Eurasia Group said. The stand-off over Ukraine between Russia and the U.S. and its European allies, China’s slowing economy and Islamic State’s designs outside of its Iraqi and Syrian bases are among the New York-based Eurasia Group’s leading threats for this year, according to its annual Top Risks report released today.

• German Inflation, Weakest Since 2009, Raises Pressure on ECB. German consumer prices are close to stagnating, adding to signs that euro-area inflation is turning negative and potentially bolstering the case for more European Central Bank stimulus. Inflation in the region’s largest economy slowed to 0.1 percent in December, the Federal Statistics office said today. That’s the lowest rate since October 2009 and below the median forecast of 0.2 percent in a Bloomberg survey of economists. 

• Get Used to Higher Stock Volatility, Deutsche Bank Says: Options. While unanimity is the buzzword for strategists forecasting gains in the U.S. stock market this year, another consensus is developing among options analysts. Deutsche Bank AG became at least the third major bank telling equity derivatives clients to prepare for more frequent bouts of turbulence in 2015 as the Standard & Poor’s 500 Index (VIX)’s bull market approaches its seventh year. The opinion came before the benchmark gauge plunged as much as 1.9 percent today and the Chicago Board Options Volatility Index increased for the fifth time in six days. 

• Aurelius Pushes Petrobras Debt Claim as Default Odds Soar. Aurelius Capital Management LP’s bid to declare Petroleo Brasileiro SA (PETR4) in default underscores just how far the state-controlled oil producer has fallen in the eyes of bond investors. The cost to protect against a Petrobras non-payment for one year has soared to the highest since the aftermath of the financial crisis, after the New York-based hedge fund said in a letter obtained by Bloomberg News last week that the company had violated debt contracts by failing to report third-quarter results.

• Emerging Stocks Decline With Currencies on Greece; Ruble Weakens. Emerging-market stocks fell for a third day and currencies weakened as speculation that Greece may drop the euro reduced demand for riskier assets. A gauge of 20 developing-nation currencies slid 0.6 percent to a 12-year low. Sasol Ltd. (SOL), world’s biggest maker of motor fuel-from-coal, dropped the most in a month in Johanesberg. Petroleo Brasileiro SA paced a slump in Brazilian stocks. Dubai’s DFM General Index led losses in the Gulf region as Brent crude touched the lowest level since May 2009. The ruble tumbled 6.2 percent. Turkish bonds and stocks climbed after a report showed the nation’s inflation rate dropped more than economists forecast. The MSCI Emerging Market Index slid 1.3 percent to 941.35 at 11:05 a.m. in New York.

• Europe Stocks Slide Most in More Than Three Years on Oil, Greece. A slump in energy shares and concern that Greece may leave the European currency union sent euro-area stocks to their biggest slump in more than three years. The Euro Stoxx 50 Index slid 3.7 percent to 3,023.14, and the Stoxx Europe 600 Index dropped 2.2 percent to 333.99 at the close of trading. Greek lenders posted some of the biggest losses on the Stoxx 600, as the ASE slid 5.6 percent to its lowest close since November 2012. Piraeus Bank SA slumped 5.2 percent, National Bank of Greece SA dropped 7.4 percent, Alpha Bank AE slid 5.7 percent and Eurobank Ergasias SA declined 6.9 percent. 

• WTI Falls Below $50 a Barrel First Time in 5 1/2 Years. WTI slid as much as 5.2 percent in New York. Brent fell below $55 in London for the first time since May 2009. Russia’s output rose to a post-Soviet high while Iraq, the second-largest producer in OPEC, plans to boost crude exports to a record this month. 

• Copper Extends Drop to Lowest in Four Years Amid Greece Concern. Copper futures for March delivery declined 1.8 percent to settle at $2.766 a pound at 1:23 p.m. on the Comex in New York, the biggest drop for a most-active contract since Dec. 15. Earlier, prices reached $2.744, the lowest since June 2010.

• Bears go missing in S&P 500 forecasts. Two years of stocks going straight up have chased just about every skeptic from the U.S. market. Among professional forecasters on Wall Street, none tracked by Bloomberg sees a retreat in 2015, with the average estimate calling for an 8.1 percent advance. At the same time, buyers of exchange-traded funds ended an obsession with bonds last quarter, sending four times as much cash to U.S. shares. Pessimism, the constant companion of a bull market poised to become the second-longest since the Kennedy administration, is suddenly nowhere to be found after the Standard & Poor’s 500 Index climbed 44 percent since 2012. While strategists are predicting a rally that would rank as the smallest in four years, the threat of higher interest rates and weakening prospects for global growth aren’t creating any full-blown bears after the U.S. beat all but four of the largest developed markets in 2014.

Wall Street Journal: 

• France and Germany Push Athens on Bailout Commitments. French President Francois Hollande Raises Possibility of Greece Leaving Eurozone. France and Germany on Monday stepped up pressure on Greece to meet the terms of its two international bailouts, returning to the brinkmanship of the eurozone debt crisis as the shared currency dropped to a nine-year low. 

• As the Euro Takes a Fresh Dive, Here’s What Strategists Think. 

MarketWatch.com:

• 8 technologies that will change the way you do everything.

• Some traders are betting on $20 oil. 

CNBC: 

• Paul Tudor Jones shutting down a fund; here's why. (video)

• Gilead(GILD) fights back: CVS to cover its hepatitis C drugs exclusively.

ZeroHedge:

• Is Citi(C) The Next AIG: 70 Trillion Reasons Why Citigroup And Congress Scrambled To Pass The Swaps "Push-Out" Rule. (graph)

• Jeff Gundlach: "If Oil Drops To $40 The Geopolitical Consequences Could Be Terrifying".

• Blackstone's Byron Wien Unveils 10 Surprises (Non-Predictions) For 2015.

• "There Is Moar Blood" WTI Crude Plunges Into The $40s. (graph)

• 10% Of Morgan Stanley High Net Worth Clients Just Had Their Data Stolen.

• Goldman's(GS) Modest Proposal: It May Be Time To Break Up JPMorgan(JPM).

• 2014 Hedge Fund Hall Of Fame: The 100 Best-Performing Hedge Funds. (table)

Business Insider:

• 2015 Could Be The Year We Witness The 'Weaponization Of Finance'.

• The American Dream Is Dying. (graph)

• This Annotated S&P 500 Chart Gives Investors The Chills. (graph)

• Greek Stocks Are Getting Hammered Again.

• It Isn't Clear Which US Official Is Actually In Charge Of The War Against ISIS.

Telegraph:

• China's reaction to oil prices may be hidden factor behind oil price plunge. Plunging oil price and cyber attacks are the two big risks to global security according to security consultancy Control Risks.

Bear Radar

Style Underperformer:

• Large-Cap Value -2.01%

Sector Underperformers:

• 1) Oil Tankers -6.76% 2) Coal -5.93% 3) Energy -4.85%

Stocks Falling on Unusual Volume:

• IGOV, CHRW, LOCK, NOC, USM, AVX, VNCE, ARMK, SSL, FLS, E, WTW, TOT, CIB, PEO, APOG, BTI, ESL, PHG, SNY, BBL, GDV, BP, NNI, NRX, AB, SEM, CAT, WTW and SCHN

Stocks With Unusual Put Option Activity:

• 1) BBY 2) XLF 3) EWG 4) KRE 5) DO

Stocks With Most Negative News Mentions:

• 1) CAT 2) MS 3) AKAM 4) COP 5) JPM
  

Charts:

• ETFs Falling on Unusual Volume

• Stocks Falling on Unusual Volume

Bull Radar

Style Outperformer:

• Small-Cap Growth -.62%

Sector Outperformers:

• 1) REITs +.17% 2) Gold & Silver -.41% 3) Biotech -.43%
  

Stocks Rising on Unusual Volume:

• CNAT, CEMP, ISIS, KITE, CMCM, LOCO, ICPT and SGMS

Stocks With Unusual Call Option Activity:

• 1) BBBY 2) CSX 3) KO 4) OCR 5) ISIS
  

Stocks With Most Positive News Mentions:

• 1) CME 2) GPS 3) ZMH 4) REGN 5) CEMP
  

Charts:

• ETFs Rising on Unusual Volume 

• Stocks Rising on Unusual Volume

Monday Watch

Weekend Headlines 
Bloomberg:

• Samaras Warns of Euro Exit Risk as Greek Campaign Starts. Greece’s political parties embarked on a flash campaign for elections in less than three weeks that Prime Minister Antonis Samaras said will determine the fate of the country’s membership in the euro currency area. Samaras used a Jan. 2 speech to warn that victory for the main opposition Syriza party would cause default and Greece’s exit from the 19-member euro region, while Syriza leader Alexis Tsipras said his party would end German-led austerity. Der Spiegel magazine reported Chancellor Angela Merkel is ready to accept a Greek exit, a development Berlin sees as inevitable and manageable if Syriza wins, as polls suggest.

• China’s Cities Face Judgment Day on Debts as Costs Soar. China’s local government bond issuers face judgment day as authorities in the world’s second-largest economy decide which debt they will or won’t support. Borrowing costs soared by a record amount last month before today’s deadline for classifying liabilities, on speculation some local government financing vehicles will lose government support after the finance ministry starts reviewing regional authorities’ debt reports. Yield premiums on one-year AA notes, the most common ranking for such issuers, jumped a record 98 basis points in December. Premier Li Keqiang has stepped up curbs on local borrowings just as LGFVs prepare to repay 558.7 billion yuan ($89.7 billion) of bonds this year amid economic growth that’s set for the slowest pace in more than two decades.

• Shanghai Rally Widens Valuation Premium to 5-Year High. Chinese stocks in Shanghai are poised for a temporary retreat after their valuation premium over Hong Kong-traded counterparts surged to a more than five-year high, according to Janney Montgomery Scott LLC.

• Dubai Shares Lead Gulf Declines as Oil Rout Extends Into 2015. Dubai and Abu Dhabi stocks fell on speculation sliding oil prices will curb revenue for a region that accounts for about a third of the world’s crude reserves. Dubai’s DFM General Index (DFMGI) dropped 2.3 percent to close at 3,689.06, its lowest in more than two weeks, as markets reopened after the end-of-year holidays. Emirates NBD PJSC (EMIRATES) and Dubai Islamic Bank PJSC (DIB) led Dubai’s drop. The ADX General Index (ADSMI) in Abu Dhabi, home to about 6 percent of the world’s proven oil reserves, lost 1.7 percent while Qatar’s gauge declined 0.5 percent. Saudi Arabian stocks fell 0.6 percent in Riyadh. 

• Euro Extends Slide on ECB Outlook; Asian Stocks, Oil Slip. The euro weakened to an almost nine-year low, Asian stocks fell and U.S. index futures dropped amid concern Greece will exit the currency union. Oil slumped to its lowest level since 2009, while silver climbed. The euro depreciated 0.4 percent to $1.1957 at 11:01 a.m. in Tokyo, after touching its weakest level since March 2006. The dollar gained against 14 of its 16 major peers, while the yen advanced. The MSCI Asia Pacific Index (MXAP) declined 0.8 percent.

• Euro Drops to Lowest Since March 2006 as ECB Splitting From Fed. The euro slumped to the weakest in almost nine years after the European Central Bank signaled it will embark on large-scale government-bond purchases as the Federal Reserve moves closer to raising interest rates. The 19-nation common currency extended declines today after falling for a third week as ECB President Mario Draghi said he can’t rule out deflation in the euro area. The greenback strengthened versus all 10 major developed-market peers. The Australian dollar fell to a 5 1/2 year low as the yield on the nation’s 15-year bonds dropped to an all-time low.

• Copper Trades Near Four-Year Low on Weaker China Demand Concern. Copper for delivery in three months on the London Metal Exchange slid 0.1 percent to $6,250 a metric ton at 10:25 a.m. in Shanghai. Prices fell 0.7 percent to $6,255 a ton on Jan. 2, the lowest since June 2010. The metal dropped 14 percent in 2014, the biggest annual loss in three years. In New York, copper futures for March declined 0.2 percent to $2.813 a pound. The March contract on the Shanghai Futures Exchange dropped 1.2 percent to 45,250 yuan ($7,276) a ton.

• Mester Says Pace of Tightening More Important Than Liftoff Date. Federal Reserve Bank of Cleveland President Loretta Mester said that while interest rates could rise in the first half of this year, the pace of tightening is more important than the date of the initial increase. “In some sense, when exactly liftoff is -- a meeting here or a meeting there -- is probably not the right question,” she said in an interview in Boston. Mester, who doesn’t vote on policy this year, said she expects the benchmark federal funds rate to rise to 3.75 percent -- the level that fed officials forecast for the longer run -- over the next three years. 

• New York City Police Turn Backs on Mayor at Second Funeral. Police officers again protested against New York Mayor Bill de Blasio by turning their backs as he paid tribute to slain cop Wenjian Liu as a man who represented “the very best” of New York City, at a funeral attended by thousands of mourners.

Wall Street Journal: 

• CFPB Sets Sights on Payday Loans. U.S. officials are taking their first crack at writing rules for payday loans, responding to concerns that the short-term, high-rate debt can trap consumers in a cycle of borrowing they can’t afford.

• Hedge Fund Founder Thomas Gilbert Fatally Shot. Police Official Says Victim’s 30-Year-Old Son Is Being Investigated.

• As Fed Prepares to Raise Rates, Economists Caution of Potential Bumps. As Central Bank Debates Rates, Experts Discuss Possible Fallout at American Economic Association Meeting in Boston.

Fox News:

• FBI chief Comey says at Liu's funeral that number of 2014 police deaths is 'shocking'.

Zero Hedge:

• US Debt Soars By $100 Billion On Last Day Of 2014, Hits Record $18.14 Trillion. (graph)

• China's "Illusion Of Prosperity" Exposed: Forget Ghost Cities, Meet Ghost Factories. (video)

• Why The Stock Market Casino Is Dangerous: The Case Of Looney Tunes In the Sand Dunes. (graph)

• Mario Draghi's Statement: A Fistful Of Keynesian Fallacies.

• Oil & The Looming Canadian Housing Bubble Crash. (graph)

• The Death Of A Nation: Japanese Births Drop To Lowest Ever, Deaths Hit All Time High. (graph)

• US Ally Saudi Arabia Starts Gender Segregation On National Airline.

• The Gloves Come Off: Germany Says Grexit "Manageable" As Tsipras Demands Greek Debt Writeoff.

• What Does The Big Drop On The Last Day Of The Year Mean? (graph_

• The Real Reason Macau's Casinos Are Suddenly Empty.

• "We're Going To Need A Bigger Chart"-Of-The-Day: Bullish Sentiment Edition. (graph)

• Knowing It Will End Badly And Turning A Blind Eye.

• Arctic Polar Blast Coming: Midwest Temperatures To Plunge 35 Below Average, Chicago Facing Record Lows.

• Gundlach Sees 10Y Treasury Testing 1.38% In 2015, Warns Of "Trouble Ahead". (graph)

• "Some Folks Were Overpaid..." Over 3 Million Obamacare Subsidy Recipients Will Owe IRS.

Business Insider:

• 'The Government Is Watching Every Citizen:' The BBC Just Reported From The Most Oppressive Place In China.

• This May Be The Final Straw That Gets The US To Stop Funding Palestine. In initiating a war crimes probe against Israel with the International Criminal Court, Palestinian Authority President Mahmoud Abbas may fall afoul of US legislation that would mandate defunding the PA. The US funds the PA to the tune of some $400 million per year.

• GUNDLACH: The Consensus Is Wrong — Interest Rates Could Sink To Levels We Haven't Seen In Decades.

• Here's What 13 Top Wall Street Pros Are Predicting For Stocks In 2015. 

• Lakshman Achuthan Isn't Encouraged By The Recent Spate Of Improving Economic Data.

• Corruption in Brazil: The big oily.

• The Euro Crisis Is Entering A New, Highly Dangerous Phase.

• Here Comes The Saudi Dynasty Succession Crisis ...

• China's 2014 Slowdown In 7 Charts.

• Fresh Russian Vehicles Are Showing Up In Eastern Ukraine. (video)

• Why The US Forgetting About Crimea Would Be A Huge Mistake.

Financial Times:

• ECB Quantitative Easing May Fail in Euro Area, Economists Tell FT. Growth, inflation to remain weak even with quantitative easing, FT says, citing survey of 32 euro area economists, mainly working in financial sector.

Telegraph: 

• Ten warning signs of a market crash in 2015. Stock markets opened lower on the first day of trading of 2015, and the credit markets that forewarned the 2007 crash are showing signs of strain.

• China's slowdown will see commodities falling 10pc in 2015. IHS forecasts another tough year for commodities prices as China misses economic growth targets.

• Greece must stand by bailout conditions, Germany warns. A spokesman for Chancellor Angela Merkel said the German government expects Greece to abide by bailout terms, whatever the outcome of the looming general election.

Welt:

• Merkel Adviser Bofinger Says Greek Exit Risk to Euro Area. Greek exit from euro area would mean "very high risk" for stability of currency union, citing Peter Bofinger, an economic adviser to German Chancellor Angela Merkel, as saying in an interview. While the situation in Greece isn't comparable to that in other states, an exit would result in a situation that would be difficult to manage, Bofinger says.

Estado:

• Brazil Vehicle Sales Drop 7.1% in 2014, Worst in 12 Years.

Night Trading

• Asian indices are -.5% to +.5% on average.

• Asia Ex-Japan Investment Grade CDS Index 109.0 unch.

• Asia Pacific Sovereign CDS Index 68.25 +1.0 basis point.

• S&P 500 futures +.04%.

• NASDAQ 100 futures +.11%.

Morning Preview Links

Earnings of Note
Company/Estimate

• (SD)/.04

Economic Releases
Afternoon:

• Wards Total Vehicle Sales for December are estimated to fall to 16.9M versus 17.08M in November.

Upcoming Splits

• None of note

Other Potential Market Movers

• The China HSBC PMI, Australia Trade Balance report, RBC Consumer Outlook Index for January, ISM New York for December, (F) Dec. sales conference call and the Citi Internet/Media/Telecom conference could also impact trading today.

BOTTOM LINE: Asian indices are mostly higher, boosted by real estate and financial 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 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 modestly lower on global growth worries, rising European/Emerging Markets/US High-Yield debt angst, earnings concerns, profit-taking, technical selling and yen strength. My intermediate-term trading indicators are giving neutral signals and the Portfolio is 25% net long heading into the week.