Friday Watch

Evening Headlines 
Bloomberg:  

• How China Inc.’s Debt Fix Is Piling Risk on Individual Investors. History has been rough for Chinese savers. From hyperinflation in the 1940s to limits on deposit rates in recent decades, they’ve watched their funds get damaged by the policy decisions of overindebted governments. Now, just as authorities ease financial repression by lifting deposit-rate caps, it’s the corporate sector that’s shifting its debt problems onto the balance sheets of Chinese citizens. Amid one of the country’s periodic equity bull markets, companies are selling record amounts of new shares -- much of it to individual investors, some of whom are borrowing to fund their purchases.   

• Shorting China’s Priciest Stocks Is Now Easier With CSOP ETF. CSOP Asset Management Ltd. is handing Hong Kong investors a way to bet against China’s most expensive stocks. The CSOP SZSE ChiNext ETF became the first exchange-traded fund in Hong Kong to track the ChiNext index of small-company shares when it started trading Friday, according to Jack Wang, managing director at CSOP. The ChiNext surged 113 percent in Shenzhen this year through yesterday, versus a 35 percent gain for the benchmark Shanghai Composite Index.

• This Chinese Developer Has 3 Days to Prove It’s Not Kaisa II. Renhe Commercial Holdings Co. faces the glare of the offshore bond market on Monday when the Chinese developer shows its ability to repay debt. The pressure on Renhe comes after Standard & Poor’s called its recent discounted buyback of dollar notes a “distressed exchange” that equaled a default. The mall builder is scheduled to repay $79 million of securities maturing on May 18 to investors who snubbed the December offer.  

• China Shares Fall Most in Asia on Concern IPOs to Drain Funds. Chinese stocks fell, paring a weekly gain, on concern new share sales will lure funds from existing equities and sluggish economic growth will hurt earnings. Hundsun Technologies Inc. slid 4.6 percent as a gauge of technology companies fell. Poly Real Estate Group Co. paced losses for property companies in Shanghai, while New Life China Insurance Co. and Bank of China Co. led a decline in shares of financial companies. The Shanghai Composite Index slipped 1.4 percent to 4,315.46 at 10:11 a.m., trimming this week’s gain to 2.5 percent. Data from factory output to retail sales and new lending all trailed estimates this week, after the central bank raised interest rates for the third time since November to shore up the economy. New equity offerings will probably lock up 2.79 trillion yuan ($450 billion) of liquidity starting next week, according to the median estimate of six analysts in a Bloomberg survey. 

• Asian Stocks Rise to Extend First Weekly Advance in Three Weeks. Asian stocks rose, with the regional benchmark index heading for its first weekly advance in three weeks, after the Standard & Poor’s 500 Index rallied to a record. Healthcare and material shares led gains. The MSCI Asia Pacific Index increased 0.4 percent to 152.68 as of 9:01 a.m. in Tokyo.

• Dollar Pares Weekly Slide as Oil Heads for Record Rising Streak. The dollar pared a fifth straight weekly retreat while most Asian stocks rose, tracking U.S. shares. Bonds followed gains in the U.S. and Europe, while oil headed toward its longest rising streak in 32 years. The Bloomberg Dollar Spot Index trimmed its drop since May 8 to 1.1 percent by 11:15 a.m. in Tokyo.  

• Blowtorches Fail to Ignite Worst Ever Commodity Shipping Market. How bad is the market for shipping commodities across the world’s oceans? Consider that more than 100 vessels will probably be scrapped this year -- a record -- and daily earnings for the industry will still tumble. Having predicted as recently as February that shipping rates this year would jump, forecasters are turning increasingly bearish as China’s coal imports plunge and its iron ore buying expands at the slowest pace on record. The Asian country’s economy, which is the second-largest after the U.S., will expand the least in a generation in 2015, estimates compiled by Bloomberg show.

• Are We Headed for an Egg Shortage? The cost of breaker eggs -- those already cracked and sold in liquid form for use by wholesale bakers and restaurants such as McDonald’s Corp. -- have more than doubled in the past three weeks. The culprit behind the surge: the worst-ever American outbreak of the bird flu virus.

• Netflix(NFLX) Said in Talks to Enter China With Jack Ma-Backed Wasu. Netflix Inc. is in talks with a Chinese media company backed by Jack Ma and other possible partners as it seeks entry into the country’s $5.9 billion online video market, according to people familiar with the matter.

Wall Street Journal: 

• U.S., Arab Allies Find Accord on Iran. Gulf leaders give some support to Iran nuclear talks as Obama bolsters security guarantees. U.S. President Barack Obama strengthened military backing for Arab allies, who in turn offered him support to pursue a “verifiable” nuclear deal with Iran despite their deep skepticism over its possible security consequences. The statement of support by six Persian Gulf countries on Thursday, including Saudi...

• Blackstone(BX) Buys a Piece of Hedge Fund Magnetar. Private-equity standout is adding to stakes in ‘alternative-investment’ firms. The private-equity firm Blackstone Group LP bought a minority stake in Magnetar Capital LLC, an Illinois-based hedge-fund firm that came under regulatory scrutiny for its role creating mortgage securities that soured during the financial crisis, the companies said Thursday.

• How Congress Botched the IRS Probe. Top officials repeatedly misled investigators without consequences. Congress needs to get tougher.

Fox News: 

• Fox News Poll: Voters believe White House incompetent, US still in recession and ISIS has moved next door. Majorities of voters feel the country is still in recession, think terrorists are living in their hometown and rate the Obama White House handling of the government as incompetent.

MarketWatch.com:

• Nordstrom(JWN) profit hurt by acquisition, other costs.

• El Pollo Loco(LOCO) beats forecast, reaffirms outlook.

Zero Hedge:

• Ray Dalio: "If You Don't Own Gold, You Know Neither History Nor Economics". (video)

• How China's Banks Hide Trillions In Credit Risk: Full Frontal. (graph)

• Even The FDIC Admits It's Not Ready For The Next Banking Crisis.

• Market Melts Up To Record Highs, Bonds & Bullion Bid. (graph)

• Caught In The Act: Government Hackers. (cartoon)

• Yet Another Chart That Whimpers "Recession". (graph)

• Seymour Hersh Slams Establishment Media: "I Am Not Backing Off Anything I Said".

• Chinese Tech Company's 3,000% Post-IPO Gain Takes Unthinkable 4% Hit. (graph)

• The Regulatory State: Central Planning & Bureaucracy On A Rampage. (graph)

Business Insider:

• Japan is on its way to a third 'lost decade'.

• ISIS leader tells Muslims they should join the militant group.

• We're now in the 'everything bubble'.

• Things just keep getting worse for Brazil.

Reuters:

• Memory chip demand drives Applied Materials' revenue beat. Applied Materials Inc, the No. 1 maker of machinery used to make semiconductor chips, posted quarterly profit and revenue above market estimates, largely driven by demand from makers of memory chips. Shares of the company, whose customers include Samsung Electronics Co Ltd and Taiwan Semiconductor Manufacturing Co Ltd, rose as much as 3.8 percent in after-market trading on Thursday.

• U.S.-based stock funds attract $3.7 bln in latest week -Lipper.

Sydney Morning Herald:

• The next loan bubble? Peer-to-peer lending soars, threatening banks. Is peer-to-peer lending out of control? There's certainly some cause for concern. Consider these facts: peer-to-peer (P2P) loan volume is poised to hit $US77 billion ($96 billion) this year, a 15-fold increase from just three years ago. LendingClub, the No. 1 player worldwide, is trading at a market value of about $US7 billion even though it lost $US33 million last year. And in a flashback to the subprime mortgage boom, P2P startups have begun bundling and selling off loans through securitisations.

Evening Recommendations 

• None of note

Night Trading

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

• Asia Ex-Japan Investment Grade CDS Index 106.0 -1.25 basis points.

• Asia Pacific Sovereign CDS Index 60.25 unch.

• S&P 500 futures -.04%.

• NASDAQ 100 futures +.03%.

Morning Preview Links

Earnings of Note
Company/Estimate

• (HGG)/-.25 

Economic Releases 
8:30 am EST

• Empire Manufacturing for May is estimated to rise to 5.0 versus -1.19 in April. 

9:15 am EST

• Industrial Production for April is estimated unch. versus a -.6% decline in March.

• Capacity Utilization for April is estimated to fall to 78.3% versus 78.4% in March.

• Manufacturing Production for April is estimated to rise +.2% versus a +.1% gain in March.

10:00 am EST

• Preliminary Univ. of Mich. Consumer Sentiment for May is estimated at 95.9 versus 95.9 in April.

4:00 pm EST

• Net Long-Term TIC Flows for March.
  

Upcoming Splits

• None of note

Other Potential Market Movers

• The UK construction report, (QLGC) analyst day, (SWK) investor day, (JCP) annual meeting, (M) annual meeting, (RIG) annual meeting and the (KSS) annual meeting could also impact trading today.

BOTTOM LINE: Asian indices are mostly lower, weighed down by technology and real estate 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 day.

Stocks Rising into Final Hour on Lower Long-Term Rates, Less European/US High-Yield Debt Angst, Central Bank Hopes, Medical/Tech Sector Strength

Broad Equity Market Tone:

• Advance/Decline Line: Higher
  

• Sector Performance: Most Sectors Rising
  

• Volume: Below Average

• Market Leading Stocks: Performing In Line

Equity Investor Angst:

• Volatility(VIX) 12.89 -6.32%

• Euro/Yen Carry Return Index 141.92 +.43%

• Emerging Markets Currency Volatility(VXY) 9.72 -1.32%

• S&P 500 Implied Correlation 63.08 -.63%

• ISE Sentiment Index 244.0 +141.58%

• Total Put/Call .80 -6.98%

• NYSE Arms 1.46 +38.42% 

Credit Investor Angst:

• North American Investment Grade CDS Index 63.88 -2.22%

• America Energy Sector High-Yield CDS Index 1,060.0 +.15%

• European Financial Sector CDS Index 73.42 -.95%

• Western Europe Sovereign Debt CDS Index 22.07 -3.50%

• Asia Pacific Sovereign Debt CDS Index 61.32 +1.68%

• Emerging Market CDS Index 290.71 -1.35%
  

• iBoxx Offshore RMB China Corporates High Yield Index 118.78 +.13%

• 2-Year Swap Spread 26.75 unch.

• TED Spread 26.0 -.75 basis point

• 3-Month EUR/USD Cross-Currency Basis Swap -18.25 +.25 basis point

Economic Gauges:

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

• Yield Curve 169.0 -1.0 basis point

• China Import Iron Ore Spot $62.30/Metric Tonne -.45%

• Citi US Economic Surprise Index -62.0 +1.8 points

• Citi Eurozone Economic Surprise Index 2.20 -.3 point

• Citi Emerging Markets Economic Surprise Index -19.0 -.4 point

• 10-Year TIPS Spread 1.88 -1.0 basis point

Overseas Futures:

• Nikkei 225 Futures: Indicating +89 open in Japan 
• China A50 Futures: Indicating -136 open in China

• DAX Futures: Indicating -1 open in Germany

Portfolio: 

• Slightly Higher: On gains in my tech/biotech/medical sector longs

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

• Market Exposure: Moved to 50% Net Long

Today's Headlines

Bloomberg:

• Greece Talks Accelerate as Draghi Heads to Meet Lagarde. (video) The debate over what to do about Greece is accelerating. Greek officials will hold talks with the euro area and the International Monetary Fund Thursday and Friday as the rest of Europe urges the administration in Athens to hurry up with work required to access more aid and avert a sovereign default. IMF officials will also talk about Greece in Washington. 
• Ukraine Urges U.S., EU to Coordinate Actions on Minsk Peace Deal. Ukraine urged the U.S. and the European Union to do more to work together on implementing a peace deal to end the conflict in the country’s east. Ukrainian President Petro Poroshenko and EU Council President Donald Tusk agreed to coordinate actions to “de-escalate the situation” in Ukraine’s Donbas region at talks in Aachen, Germany, on Thursday, according to a statement on Poroshenko’s website. 
• Europe Stocks Rise as ArcelorMittal, Salzgitter Gain on EU Probe. European stocks rebounded from a two-day decline, buoyed by a rally in steelmakers. ArcelorMittal and Salzgitter AG jumped more than 5.7 percent after the European Union expanded a competition probe, opening up the prospect of tariffs on non-stainless steels from China and Russia. ThyssenKrupp AG climbed 2.8 percent. The Stoxx Europe 600 Index rose 0.6 percent to 397.99 at the close of trading, reversing a drop of as much as 0.9 percent.
• Andurand Sees Oil Prices Capped by U.S. and OPEC Supply. (video)
• Iron Glut Seen by China Mills as BHP Says Supply Tops Demand. Overcapacity in the seaborne iron ore market will persist through to at least 2019 as the world’s largest suppliers expand production further, according to the China Iron & Steel Association. Growth in low-cost supply will exceed cuts to output made elsewhere, including in China, Vice Chairman Wang Liqun said at conference in Singapore on Thursday. Steel-demand growth in China is seen as flat this year, Wang said. 
• Consumer Comfort in U.S. Declines for a Fifth Consecutive Week. Consumer confidence fell for the fifth consecutive week as attitudes toward the economy dimmed and moods soured at both ends of the income scale. The Bloomberg Consumer Comfort Index decreased to 43.5 in the period ended May 10, the lowest level since early March, from 43.7 the prior week. The last time the gauge declined for as many weeks was in late 2013. Views on the U.S. economy dropped to a five-month low, and confidence also retreated among full- and part-time workers.

ZeroHedge:

• King Of Bahrain Snubs US President, Meets Horse Instead.
• Bundesbank Blasts Draghi For Breaking Bailout Taboo.
• As If 85 Million Avon(AVP) Shares Short Suddenly Cried Out And Were Suddenly Silenced... By A Fake LBO Letter.
• No Bubble Here: $1.5 Million 750 SqFt. Flat; Rent-A-Bed $1,000/Month Or 20 Beds In 7-Bedroom House $21,000/Month.
• Saudis Declare Victory Over Shale Just As US Oil Production Jumps, Bakken Wells Hit Record. (graph)
• In Stunning U-Turn, NBC Retracts Story That Obama Lied About bin Laden.
• Why There Has Been No Recovery (In One Simple Chart): A Harvest Of Corruption. (graph)
• Consumer Comfort Tumbles For Longest Streak In 18 Months. (graph)
• Bund "Stable" As Put-Call Ratio Collapses To 6-Month Low. (graph)
• Kansas City Southern Gives Disastrous Economic Update, Pulls Guidance, Announces Stock Buyback.
• Gold Breaks Key Technical To 3-Month High, Silver Surging. (graph)
• Wholesale Deflation Strikes US Economy: April PPI Has Biggest Annual Drop In 5 Years. (graph)
• Jobless Claims Collapse Near 42 Year Low, But Texas Turmoils. (graph)
• Varoufakis Has Futuristic Greek Debt Plan That "Fills Mario Draghi's Soul With Fear".

Business Insider: 

• The Saudis just went nuclear on their Obama snub.
• Hillary Clinton wants to put Harriet Tubman on the $20 bill. 
• DEUTSCHE BANK: Greece is 'suffering a new exodus' as people scramble to get their cash out.
• 'The eurozone is a complete disaster and Britain needs to leave the EU'.
• A slowdown in the trucking industry is the latest warning sign for the US economy.

Telegraph:

• Germans pile into gold amid Greek eurozone default fears. Economic uncertainty in Europe and fear of a Greek default are turning people to buy gold bars and coins.

Handelsblatt:

• "I don't find it OK that banks without market access get loans to finance bonds of their own country, which is itself without market access," Bundesbank President Jens Weidmann says in interview. Asked whether the ECB would be willing to force a Greek exit by stopping ELA funding, Weidmann says central banks "aren't responsible for the composition of the monetary union or the granting of aid payments". "I'm concerned by the increased politicization of central banks, as well as the constantly rising expectations in us. That's risking a dangerous overstraining of central banks. This is not only against the backdrop of democratic legitimization, but also because we wouldn't even be in a position to solve Europe's problems."

Bear Radar

Style Underperformer:

• Mid-Cap Growth +.54%

Sector Underperformers:

• 1) Oil Service -1.32% 2) Gaming -.62% 3) Retail -.47%

Stocks Falling on Unusual Volume:

• FGEN, PBYI, KSS, MMYT, VIPS, NHTC, KSU, JACK, HOG, GWRE, SGMO, DGLY, FMI, PNM, HYH, LXFT, DDS, TGT, LNKD, SSI, SSP, GWR, KPTI and VSTO

Stocks With Unusual Put Option Activity:

• 1) CAR 2) DHR 3) KSS 4) XRT 5) FSLR
  

Stocks With Most Negative News Mentions:

• 1) WPZ 2) KEX 3) JCP 4) KSU 5) WLL
  

Charts:

• ETFs Falling on Unusual Volume

• Stocks Falling on Unusual Volume

Bull Radar

Style Outperformer:

• Small-Cap Growth +.95%

Sector Outperformers:

• 1) Computer Hardware +1.64% 2) Medical Equipment +1.59% 3) REITs +1.53%
  

Stocks Rising on Unusual Volume:

• ISSI, NTES, QIWI, CTRP, SHAK, CMCM, QUNR, CRTO, CLVS, CROX and OPK

Stocks With Unusual Call Option Activity:

• 1) AVP 2) THC 3) PLD 4) JACK 5) WMB
  

Stocks With Most Positive News Mentions:

• 1) CTRP 2) LLTC 3) SHAK 4) IR 5) QCOM
  

Charts:

• ETFs Rising on Unusual Volume 

• Stocks Rising on Unusual Volume

Morning Market Internals

NYSE Composite Index:

• Volume Running 8.7% Below 100-day average
• 10 Sectors Rising, 0 Sectors Declining
• 77.5% of Issues Advancing, 20.5% Declining
• 59 New 52-Week Highs, 19 New Lows
• 52.8% of Issues Above 200-day Moving Average
• Average 14-Day RSI 42.2
• Vix 12.99
• Total Put/Call .84
• TRIN/Arms 1.37