Wednesday Watch

Evening Headlines 
Bloomberg:

• Euro-Area Prices Seen Falling as Risk of Deflation Spiral Mounts. Consumer prices in the euro area probably fell for the first time in more than five years last month, pushing the European Central Bank closer to adding stimulus as it battles to revive inflation. Prices dropped an annual 0.1 percent in December, according to the median forecast of economists in a Bloomberg survey. That would be the first decline since October 2009. 

• Shorts in Tokyo Soars to Record on Abenomics Skepticism. Bearish bets on Japanese stocks surged to a record because foreign investors are increasingly skeptical that Prime Minister Shinzo Abe will succeed in reviving the world’s third-biggest economy, said Reorient Group Ltd. Short-selling of shares on the Tokyo Stock Exchange accounted for 37.8 percent of trading value yesterday, the highest ratio since the bourse began keeping daily records in 2008. The Topix index sank 2.9 percent yesterday. Investors pulled $245 million out of the biggest U.S.-listed exchange-traded fund that tracks Japanese shares on Jan. 5, the second-largest daily outflow since May 2013, data compiled by Bloomberg show.

• There's a Leadership Crisis in Chinese Property Firms -- They're Defaulting. Who's Next to Go? The loan default by Kaisa Group Holdings Ltd., after the second surprise exit of a Chinese property tycoon in six months, is prompting investors to ask who’s next. The 2019 notes from the builder, based in the southern city of Shenzhen, have tumbled 38.4 cents on the dollar to a record low of 25.3 cents, after the resignation of the developer’s chairman triggered a loan default Dec. 31. The perpetual securities of Agile Property Holdings Ltd. dropped 17 cents to 67 since its billionaire chairman was placed under control of prosecutors in September before being released last month without details of the detention. China’s junk dollar notes have lost 3.9 percent in 2015, the worst start to a year ever in Bank of America Merrill Lynch indexes, after Kaisa Chairman Kwok Ying Shing resigned days after two other executives left their positions. Developers that rely on personal relations in securing land from the government are among the most at risk from President Xi Jinping’s local-government financing shakeup and anti-graft drive.

• Asian Stocks Extend Drop, Led by Energy Companies on Oil Plunge. Asian stocks fell, after yesterday sinking the most in nine months, as U.S. equities extended declines and the slump in crude oil deepened. The MSCI Asia Pacific Index (MXAP) declined 0.3 percent to 134.57 as of 9:03 a.m. in Tokyo, with energy companies dropping the most. The Asian gauge slumped 1.7 percent yesterday and the Standard & Poor’s 500 Index fell for a fifth day, extending the longest losing streak in 13 months. West Texas Intermediate oil sank below $48 a barrel in New York amid speculation data on U.S. supplies today will fuel concern over a global glut. “With the U.S. markets again under pressure, the lead for Asia looks bleak,” Evan Lucas, a markets strategist in Melbourne at IG Ltd., wrote in an e-mail to clients today. “Until oil finds bottoms, the markets will remain in a downward trajectory.” Japan’s Topix index dropped 0.5 percent. Short-selling on the Tokyo Stock Exchange reached 37.8 percent of total trading value yesterday, the highest since at least October 2008, when bourse data became available.

• Copper, Aluminum Hold Losses as Oil’s Slump Fuels Growth Concern. Copper held near a four-year low while aluminum languished near the weakest in seven months on fears oil’s slump signals a slowdown in economic growth and weaker commodities demand. Oil in New York traded near $48 a barrel and the euro area is poised to post its first drop in consumer prices since 2009, fueling pessimism over the global economy.

• Obama Picks Ex-Bank of Hawaii CEO Landon to Be Fed Governor. President Barack Obama plans to nominate Allan Landon, the former chief executive officer of Bank of Hawaii Corp. (BOH), to be a Federal Reserve governor after months of pressure to select a policy maker with community banking experience.

Wall Street Journal:

• Deep Debt Keeps Oil Firms Pumping. Producers Have Increased Their Borrowings by 55% Since 2010. American oil and gas companies have gone heavily into debt during the energy boom, increasing their borrowings by 55% since 2010, to almost $200 billion. Their need to service that debt helps explain why U.S. producers plan to continue pumping oil even as crude trades for less than $50 a barrel, down 55% since last June. But signs of strain are building in the oil patch, where revenue growth hasn’t kept pace. 

• Mercedes-Benz Moving U.S. Headquarters to Atlanta. Daimler’s U.S. Luxury Car Offices Have Been Based in New Jersey Since 1972.

• A City of Mourning and Demonized Police. Shunned by cops, allied with Al Sharpton, incensed by criticism: New York’s mayor begins his second year.

MarketWatch.com:

• Micron Tech(MU) shares fall after revenue miss. 

Zero Hedge:

• Worst Start To A Year Ever, Stocks Down 5 Days In A Row.

• Europe's Monetary Madness. (graph)

• The Last Bubble. (graph)

• ISIS Now Hiring Bankers: In Bid For Legitimacy, Rogue State Opens Bank.

• Analyzing The Secular Bull Market Thesis. (graph)

• Spot The Ridiculous Outlier. (graph)

• How Do You Say "Death Cross" In French? (graph)

Business Insider:

• A Sharp Recession Is Coming To The Global Oilfield.

Telegraph:

• Russia faces 'perfect storm' as reserves vanish and derivatives flash default warnings. BNP Paribas says Russia no longer has enough reserves to cover external debt and enters this crisis 'twice as levered' as it was before the Lehman crash.

Bild:

• German Govt Preparing for Possible Greek Euro Exit. Chancellery sees risk of bank collapse in the event of possible election of leftwing alliance Syriza, citing government officials. If alliance wins and cancels reform program, final installment of EU10b in aid won't be transferred to Athens. Concern that if Greece leaves the euro, there may be a customer deposit run to secure euros that could lead to a banking collapse and possibly oblige the European banking union to spend billions.

National:

• Oil Oversupply Could Take Years to Fix, Mazrouei Says. Oversuppy in crude markets "needs time to be absorbed," U.A.E. Energy Minister Suhail Al Mazrouei says. Oil prices could see correction this year, depending on production growth from non-OPEC members; oversupply could take "months or years" to be absorbed depending on reaction from non-OPEC producers. UAE not changing oil industry development plans due to crude price fluctuations; plans to boost country's output to 3.5m b/d under way, won't be changed.

Evening Recommendations 
Cowen:

• Rated (JWN) Outperform, target $91.

• Rated (SIG) Outperform, target $150.

Night Trading

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

• Asia Ex-Japan Investment Grade CDS Index 123.50 +8.5 basis points.

• Asia Pacific Sovereign CDS Index 74.25 +3.75 basis points.

• S&P 500 futures +.29%.

• NASDAQ 100 futures  +.26%.

Morning Preview Links

Earnings of Note
Company/Estimate

• None of note

Economic Releases
8:15 am EST

• The ADP Employment Change for December is estimated at 225K versus 208K in November.

8:30 am EST

• The Trade Deficit  for November is estimated at -$42.0B versus -$43.4B in October.

10:30 am EST

• Bloomberg consensus estimates call for a weekly crude oil inventory build of +911,110 barrels versus a -1,754,000 barrel decline the prior week. Gasoline supplies are estimated to rise by +3,666,670 barrels versus a +2,951,000 gain the prior week. Distillate inventories are estimated to rise by +1,972,220 barrels versus a +1,874,000 barrel gain the prior week. Finally, Refinery Utilization is estimated to fall -.04% versus a +.9% gain the prior week.

2:00 pm EST

• Fed Minutes from 12/17 meeting.

Upcoming Splits

• None of note

Other Potential Market Movers

• The Fed's Evans speaking, Eurozone CPI, China Trade Balance, weekly MBA mortgage applications report, Goldman Sachs Energy Conference, (LLY) guidance call and the (ROVI) analyst day could also impact trading today.

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

Stocks Falling into Afternoon on Surging European/Emerging Market/US High-Yield Debt Angst, Global Growth Fears, Yen Strength, Transport/Financial 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) 22.52 +13.4%

• Euro/Yen Carry Return Index 147.59 -1.03%

• Emerging Markets Currency Volatility(VXY) 10.71 -.46%

• S&P 500 Implied Correlation 71.07 +4.78%

• ISE Sentiment Index 66.0 -2.94%

• Total Put/Call 1.21 +2.54%

• NYSE Arms 1.14 -47.44% 

Credit Investor Angst:

• North American Investment Grade CDS Index 71.05 +2.45%
• America Energy Sector High-Yield CDS Index 700.0 +4.99%

• European Financial Sector CDS Index 71.48 +3.65%

• Western Europe Sovereign Debt CDS Index 28.45 +5.0%
• Asia Pacific Sovereign Debt CDS Index 74.66 +5.89%

• Emerging Market CDS Index 385.67 +1.92%

• China Blended Corporate Spread Index 359.04 +3.88%
• 2-Year Swap Spread 23.0 +.25 basis point

• TED Spread 23.50 unch.

• 3-Month EUR/USD Cross-Currency Basis Swap -14.75 +1.0 basis point

Economic Gauges:

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

• Yield Curve 132.0 -5.0 basis points

• China Import Iron Ore Spot $71.49/Metric Tonne +.87%

• Citi US Economic Surprise Index 22.80 -4.8 points
• Citi Eurozone Economic Surprise Index 10.90 -1.5 points

• Citi Emerging Markets Economic Surprise Index -13.90 +.4 point

• 10-Year TIPS Spread 1.58 -7.0 basis points

Overseas Futures:

• Nikkei Futures: Indicating -243 open in Japan

• DAX Futures: Indicating -21 open in Germany

Portfolio: 

• Slightly Higher: On gains in my index hedges and emerging markets shorts 

• Disclosed Trades: None

• Market Exposure: 25% Net Long

Bear Radar

Style Underperformer:

• Small-Cap Growth -1.72%

Sector Underperformers:

• 1) Gaming -3.01% 2) Road & Rail -2.63% 3) Alt Energy -2.47%

Stocks Falling on Unusual Volume:

• IDTI, ZION, WATT, KORS, KITE, QGEN, CEMP, SSL, WBAI, AAVL, PVH, URI, CLDN, GPC, IOC, PLOW, GEVA, HEES, DEO, WTW, CNSL, VRNS, OCN, IMKTA, IPHI, SE, PLOW, NSC, MDCO, RDUS, CSX, CMC, HTH, ARCB, PVH, NDLS, HLX, CYBX, ISIS, VNCE, NBIX, GEVA and ICPT

Stocks With Unusual Put Option Activity:

• 1) EA 2) CBS 3) CREE 4) CSX 5) AKS
  

Stocks With Most Negative News Mentions:

• 1) KORS 2) CSX 3) FFIV 4) URI 5) CAT
  

Charts:

• ETFs Falling on Unusual Volume

• Stocks Falling on Unusual Volume

Bull Radar

Style Outperformer:

• Mid-Cap Value +.02%

Sector Outperformers:

• 1) Gold & Silver +3.12% 2) Steel +2.34% 3) Utilities +1.76%
  

Stocks Rising on Unusual Volume:

• AOL, ALKS, LOCO, EBIX and BLUE

Stocks With Unusual Call Option Activity:

• 1) HBAN 2) ACAS 3) AEO 4) INFN 5) HL
  

Stocks With Most Positive News Mentions:

• 1) WAG 2) STZ 3) HUM 4) SLXP 5) CNC
  

Charts:

• ETFs Rising on Unusual Volume 

• Stocks Rising on Unusual Volume

Tuesday Watch

Evening Headlines 
Bloomberg: 

• Global Sovereign Bonds Rally as Yields Fall to Record Low 1.28%. Global sovereign bonds rallied, pushing yields to a record low, after oil tumbled and traders prepared for the European Central Bank to start buying government debt as soon as this month. Bonds in the Bank of America Merrill Lynch Global Broad Market Sovereign Plus Index had an effective yield of 1.28 percent as of yesterday, an all-time low based on data starting in 1996. Stock declines are fueling demand for the relative safety of debt. From Japan to Australia to Germany (GDBR10), yields are dropping to records. 

• Singapore Alert to Risks as Cracks Emerge for Junk: Asean Credit. Demand for higher returns in Singapore bonds from the city’s swelling private banking industry has brought with it greater risks. Three out of every 10 notes sold last year are yielding more than 6 percent. Halcyon Agri Corp. (HACL) went to debtholders last month asking them to waive interest cover requirements before it’s even had to stump up a coupon payment. Bloomberg’s default model shows that VTB Capital SA has an almost 50 percent chance of reneging on its debt. “The recent swings have been a good wake-up call,” said Vishal Goenka, the Singapore-based head of local currency trading in Asia for Deutsche Bank AG. “Investors need to analyze the credit quality of issuers more thoroughly.”  

• Asian Stocks Extend Selloff With Oil Near $50; Yen Climbs. Asian stocks fell the most in seven weeks, extending a global selloff after crude oil plunged to the lowest level since 2009. The yen rose and a gauge of government bond yields fell to a record as investors sought haven assets. The MSCI Asia Pacific Index sank 1.4 percent by 10:11 a.m. in Tokyo.

• Oilfield Writedowns Loom as Market Collapse Guts Drilling Values. Tumbling crude prices will trigger a flood of oilfield writedowns starting this month after industry returns slumped to a 16-year low, calling into question half a decade of exploration. With crude prices down more than 50 percent from their 2014 peak, fields as far-flung as Kazakhstan and Australia are no longer worth pumping, said a team of Citigroup Inc. (C:US) analysts led by Alastair Syme. Companies on the hook for risky, high-cost projects that don’t make sense in a $50-a-barrel market include international titans such as Royal Dutch Shell Plc and small wildcatters like Sanchez Energy Corp. 

• Biggest Oil-Rig Drop Since 2009 Spells Tough Year Ahead. U.S. oil drillers laid down the most rigs in the fourth quarter since 2009. And things are about to get much worse. The rig count fell by 93 in the three months through Dec. 26, and lost another 17 last week, Baker Hughes Inc. (BHI) data show. About 200 more will be idled over the next quarter as U.S. oil explorers make good on their promises to curb spending, according to Moody’s Corp. Drillers are already running the fewest rigs in nine months after a 46 percent drop in U.S. benchmark West Texas Intermediate oil in 2014, the steepest decline in six years and the second-worst since the commodity began trading in 1983.

• Hedge Funds Resume Bullish Gold Bets as Greece Vote Looms. Hedge funds are stepping back onto the gold bandwagon as political turmoil in Greece and government actions in Asia helped send prices to their biggest monthly advance since June. Bullish wagers on the metal increased for the first time in three weeks and have more than doubled since mid-November, U.S. government data show. Short holdings dropped for the sixth week in seven. Bullion rose for a second straight month in December.

• Trahan Pauses 39-Month Bull Call Citing Contagion Risk. Francois Trahan, a three-year U.S. equity market bull who was ranked top portfolio strategist by Institutional Investor in 2014, is turning cautious on stocks. U.S. shares are “at risk” because oil’s decline makes a crisis in a crude-producing nation “inevitable,” wrote Trahan, the head of strategy for Cornerstone Macro LP in New York, in a note to clients. Slowing growth in China and the possibility of a financial meltdown in Japan also pose threats to American equities, he wrote. 

Wall Street Journal:

• IG to Play Starring Role in Review of Fed. Inspector General’s Office Will Be Front and Center in Look at Whether the Central Bank Goes Easy on Wall Street. The Federal Reserve’s inspector general, a little-noticed presence outside the central bank, is poised to play a starring role in a high-profile review of the Fed’s ability to regulate Wall Street.

Barron's: 

• Emerging Market Fund Outflows Hit $23 Billion, 3-Year Record.

CNBC: 

• Verizon(VZ) approached AOL(AOL) about possible takeover, joint venture: Report.

Zero Hedge: 

• "We Are Extremely Over-Retailed" Picturing The Death Of America's Malls. (pics)

• "Something Is Not Right" Jeff Gundlach Is "Concerned About Health Of The Economy & Financial System".

• In Japan, Top Tuna Sells Below ¥5 Million For The First Time In Eight Years, Down 22% From A Year Ago.

• Sayonara Global Economy. (graph)

• Scotiabank's Haselmann: "The 30 Year Will Trade With A One Handle In 2015".

• As We Enter 2015, Charts "Bulls" Should Consider. (graph)

• Obamacare Architects At Harvard Furious After Learning They Are Not Exempt From Obamacare.

Business Insider:

• The S&P 500 Just Broke An 87-Year Streak.

• Europe May Not Be Ready For Another Greek Crisis.

• There's Been A Staggering Drop In Arrests In New York For The Second Week In A Row.

Telegraph: 

• Greece vs Europe: who will blink first? The eurozone stands on the brink of another crisis as Athens confronts Brussels and Berlin.

China Business News:

• China Local Debt Estimates May Rise 'significantly'. Debt that local govts owe with fiscal funds may stand at as much as 15t yuan, compared with 10.9t yuan as of end-June in 2013 reported by the National Audit Office, citing a person familiar with the matter.

Evening Recommendations 

• None of note

Night Trading

• Asian equity indices are -2.0% to -1.0% on average.

• Asia Ex-Japan Investment Grade CDS Index 115.0 +6.0 basis points.

• Asia Pacific Sovereign CDS Index 70.5 +2.25 basis points.

• S&P 500 futures -.03%.

• NASDAQ 100 futures  -.08%.

Morning Preview Links

Earnings of Note
Company/Estimate

• None of note

Economic Releases
10:00 am EST

• Factory Orders for November are estimated to fall -.5% versus a -.7% decline in October.

• ISM Non-Manufacturing Composite for December is estimated to fall to 58.0 versus 59.3 in November.

Upcoming Splits

• None of note

Other Potential Market Movers

• The UK Services PMI report, RBC Consumer Outlook Index for January, Final Markit US Services PMI for December, US weekly retail sales reports and CES 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.

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