Tuesday Watch

Evening Headlines 

Bloomberg: 

• The $6.5 Trillion China Rally That’s Making Stock-Market History. It’s enough money to buy Apple Inc. eight times over, or circle the Earth 250 times with $100 bills. The figure, $6.5 trillion, sums up the value created in just 12 months of trading on Chinese stock exchanges -- and why some see a rally that’s gone too far, too fast. As China’s boom surpasses the headiest days of the U.S. Internet bubble, signs of excess are everywhere. Mainland speculators have borrowed a record $348 billion to bet on further gains, novice investors are piling into shares at an unprecedented pace and price-to-earnings ratios have climbed to the highest levels in five years. The economy, meanwhile, is mired in its weakest expansion since 1990. “We have a wonderful bubble on our hands,” said Michael Every, the head of financial markets research at Rabobank International in Hong Kong. “Of course, there’s short-term money to be made. But I fear it will not end well.” Chinese shares face their next big test on Tuesday, when MSCI Inc. decides whether mainland securities are eligible for indexes used by $9.5 trillion of funds worldwide.

• China Deflation Risks Linger, Underscoring Weak Domestic Demand. China’s consumer prices rose at a slower pace in May and factory-gate deflation extended a record stretch of declines, underscoring tepid demand at home and abroad. The consumer-price index increased 1.2 percent last month from a year earlier, according to China’s National Bureau of Statistics. That compared with the 1.3 percent median estimate in a Bloomberg survey of analysts and the 1.5 percent increase in April. The producer-price index fell 4.6 percent, extending a record stretch of declines.  

• Macau Casino Stocks Tumble as Analysts Slash Gambling Forecasts. Macau’s casino stocks tumbled after several analysts slashed their forecasts for June gambling revenue in the world’s largest gambling hub. Analysts said overnight that June’s casino revenue will be below their initial estimates because of weaker-than-expected figures in the first week of the month.

• Indonesia Default Risk Jumps Most in Asia on Fund Outflow Fears. The cost to insure Indonesia’s sovereign bonds against default rose to a five-month high as the falling rupiah and accelerating inflation heighten outflow risk. Five-year credit default-swaps on the country’s debt advanced 17 basis points to 175 in the two weeks through Friday, the most in Asia. Central bank Governor Agus Martowardojo said Monday that the authority sees opportunities to buy government notes when yields, already at a 15-month high, increase as the U.S. prepares to raise borrowing costs. 

• Most Asian Stocks Retreat as Yen Gain Weighs on Japanese Shares. Most Asian stocks fell as a rebound in the yen hurt Japanese shares and investors weighed the outlook for U.S. interest rates and Greece’s debt talks. About three shares dropped for each that gained on the MSCI Asia Pacific Index, which traded little changed at 147.44 as of 9:01 a.m. in Tokyo. Japan’s Topix index slid 0.8 percent after the yen gained 0.9 percent against the dollar on Monday, when the Standard & Poor’s 500 Index fell to a two-month low.

• U.S. Stocks on Wrong Side of History With Rate Rise in Sight. Never before has a rally in the U.S. stock market gone on this long without a Federal Reserve interest-rate increase. Expecting valuations to keep rising once one comes is asking too much, if history is any guide. While Standard & Poor’s 500 Index price-earnings ratios are far from records, they’ve shown no ability to expand after the U.S. central bank starts raising rates, according to data compiled by Goldman Sachs Group Inc. and Bloomberg. In the quarter after the last 12 tightening cycles began, P/Es contracted by an average of 7.2 percent.

• Terror Links Found to 73 Workers in Secure U.S. Airport Jobs. Investigators found 73 people were cleared by the Transportation Security Administration to work in sensitive jobs at U.S. airports despite possible links to terrorism in their backgrounds, according to a government report made public on Monday. The lapse was partly due to the TSA not having access to all names on the federal government’s terrorist watchlists, the Department of Homeland Security inspector general said. In addition, local criminal background checks on employees at 467 airports were even “less effective,” the report concluded.

Wall Street Journal: 

• Home-Equity Lines of Credit See Jump in Delinquencies. Banks face another post-crisis hangover as bills come due on lines of credit extended during property boom.

• Chrysler Boss Recruits Activists to Prod GM(GM) Into a Merger. Sergio Marchionne believes hedge funds can sway rival’s board to accept his entreaties.

• Return of the Speech Police. In 2012 it was the IRS. This election watch the Justice Department.

Fox News:

• Obama under fire for saying no ‘complete strategy’ yet for training Iraqis. (video) President Obama took heat Monday for admitting he doesn't yet have a "complete strategy" in hand for training Iraqis to fight the Islamic State -- months into the coordinated campaign to defeat the deadly terrorist network. "When a finalized plan is presented to me by the Pentagon, then I will share it with the American people," Obama said, adding, "We don't yet have a complete strategy."

  MarketWatch.com:

• Clintons donated to New York Times fund the year newspaper endorsed Hillary, report says.

CNBC:

• US will erase student debt for Corinthian students. The federal government will erase much of the debt of students who attended the now-defunct Corinthian Colleges, officials announced Monday, as part of a new plan that could cost taxpayers as much as $3.6 billion.

Zero Hedge:

• Markets, Not Janet Yellen, Should Set Interest Rates.

• America's Housing Problem: Buying And Renting Are Both Unaffordable. (graph)

• What Keeps A Billionaire Awake At Night: "Envy, Hatred, Social Warfare" And The "Destruction Of The Middle Class".

• First Fed Rate Hike Timing Expectations Plunge To Lowest In 5 Years. (graph)

• Why Stocks Are Not "Cheap Relative To Bonds".

• The US Recovery Is Strong... In "Loan Shark" Terms. (graph)

• Dow Red In 2015 As S&P Takes Out Key Support: Trannies Tank, Crude Clipped, Dollar Dumped. (graph)

• Major Medical Journal Retracts Numerous Scientific Papers After Fake Peer-Review Scandal.

• China's Deficient Deflator Math Is One More Reason To Distrust Data.

• "One Belt, One Road" May Be China's 'One Chance' To Save Collapsing Economy.

• Saudi Ambassador Warns West On Iran Deal: "All Options On Table..." Including Nukes.

• When It Rains It Pours: Shares Of Chinese Umbrella Manufacturer Rise 2,700%. (graph)

Business Insider:

• Apple(AAPL) finally found a way to boost iPad sales — and it's going to make a lot of people angry.

• The MERS outbreak could have a big impact on Korea's economy. (graph)

• HSBC is getting ready to cut thousands of jobs.

• The US government paid millions of dollars in Medicaid benefits to dead people. 

• 4 charts of the 'largest housing bubble on record'. (graph)

• Putin just made more revealing comments about his opinions of NATO.

• There isn't much Chinese authorities can do to crank up this troubling economic indicator.

• Retiring Cisco(CSCO) CEO delivers dire prediction: 40% of companies will be dead in 10 years.

• OPEC is going to play the waiting game.

Financial Times:

• Paul Volcker warns on health of US state finances. Paul Volcker, former chairman of the Federal Reserve, has warned that US states rely on faulty practices to balance their budgets, masking the true nature of their finances and leading to poor policy making.

Evening Recommendations 

• None of note

Night Trading

• Asian equity indices are -1.5% to -.5% on average.

• Asia Ex-Japan Investment Grade CDS Index 110.5 -.5 basis point.

• Asia Pacific Sovereign CDS Index 63.0 +3.25 basis points.

• S&P 500 futures +.08%.

• NASDAQ 100 futures +.08%.

Morning Preview Links

Earnings of Note

Company/Estimate

• (BURL)/.41

• (HDS)/.29

• (HOV)/-.06

• (LULU)/.33

• (ZQK)/-.12

• (OXM)/1.21

Economic Releases

6:00 am EST

• The NFIB Small Business Optimism Index for May is estimated to rise to 97.2 versus 96.9 in April.

10:00 am EST

• Wholesale Inventories for April are estimated to rise +.2% versus a +.1% gain in March.

• Wholesale Sales for April are estimated to rise +.6% versus a -.2% decline in March.

• JOLTS Job Openings for April are estimated to rise to 5044 versus 4994 in March.

Upcoming Splits

• (MPC) 2-for-1

• (ROST) 2-for-1

Other Potential Market Movers

• The Japan GDP report, weekly US retail sales reports, Deutsche Bank Consumer conference, Piper Jaffray Consumer conference, Goldman Sachs Healthcare conference, William Blair Growth Stocks conference, Morgan Stanley Financials conference, (TSLA) shareholder meeting, (CSCO) investor day and the (BBY) annual meeting  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 Declining into Final Hour on Greek Debt Deal Worries, Rising Eurozone/Emerging Markets Debt Angst, Oil Drop, Tranport/Tech Sector Weakness

Broad Equity Market Tone:

• Advance/Decline Line: Lower
  

• Sector Performance: Almost Every Sector Declining
  

• Volume: Below Average

• Market Leading Stocks: Underperforming

Equity Investor Angst:

• Volatility(VIX) 15.41 +8.44%

• Euro/Yen Carry Return Index 146.77 +.65%

• Emerging Markets Currency Volatility(VXY) 9.70 +.83%

• S&P 500 Implied Correlation 64.99 +2.33%

• ISE Sentiment Index 98.0 +1.03%

• Total Put/Call .98 -4.85%

• NYSE Arms 1.11 +37.17% 

Credit Investor Angst:

• North American Investment Grade CDS Index 68.14 +1.91%

• America Energy Sector High-Yield CDS Index 1,170.0 +.66%

• European Financial Sector CDS Index 79.06 +2.46%

• Western Europe Sovereign Debt CDS Index 23.39 +.88%

• Asia Pacific Sovereign Debt CDS Index 62.84 +1.81%

• Emerging Market CDS Index 315.52 +2.75%
  

• iBoxx Offshore RMB China Corporates High Yield Index 120.21 +.08%

• 2-Year Swap Spread 25.5 +.75 basis point

• TED Spread 26.50 -.5 basis point

• 3-Month EUR/USD Cross-Currency Basis Swap -17.75 +1.5 basis point

Economic Gauges:

• 3-Month T-Bill Yield .01% unch.

• Yield Curve 170.0 +2.0 basis points

• China Import Iron Ore Spot $64.34/Metric Tonne -.17%

• Citi US Economic Surprise Index -44.60 +3.3 points

• Citi Eurozone Economic Surprise Index 6.20 +.2 point

• Citi Emerging Markets Economic Surprise Index -17.60 +3.9 points

• 10-Year TIPS Spread 1.88 unch.

Overseas Futures:

• Nikkei 225 Futures: Indicating -22 open in Japan 

• China A50 Futures: Indicating -225 open in China

• DAX Futures: Indicating -45 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:

• Large-Cap Growth -.81%

Sector Underperformers:

• 1) Gaming -4.93% 2) Airlines -2.88% 3) Semis -2.22%

Stocks Falling on Unusual Volume:

• EHIC, DEO, TCX, QIHU, TSE, LC, SHLD, CBPO, LE, TANH, AAL, FNHC, AAL, FNHC, TRUE, HLT, MRTN, MFLX, LULU, XNET, BUD, ESL, VCYT, JNS, LABL, LONG and EXCU

Stocks With Unusual Put Option Activity:

• 1) ZOES 2) SMH 3) EWA 4) HEDJ 5) VMW
  

Stocks With Most Negative News Mentions:

• 1) UAL 2) WEX 3) UNP 4) OC 5) DDS
  

Charts:

• ETFs Falling on Unusual Volume

• Stocks Falling on Unusual Volume

Bull Radar

Style Outperformer:

• Small-Cap Value -.40%

Sector Outperformers:

• 1) Foods +.01% 2) HMOs -.05% 3) Utilities -.07%
  

Stocks Rising on Unusual Volume:

• BRLI, AMBA, CYBR, OPK, DB, FGEN and NWBO

Stocks With Unusual Call Option Activity:

• 1) CCL 2) HUM 3) BX 4) VIAB 5) BX
  

Stocks With Most Positive News Mentions:

• 1) ANET 2) LMT 3) FFIV 4) T 5) NDLS
  

Charts:

• ETFs Rising on Unusual Volume 

• Stocks Rising on Unusual Volume

Morning Market Internals

NYSE Composite Index:

• Volume Running 19.8% Below 100-day average
• 1 Sector Rising, 9 Sectors Declining
• 34.3% of Issues Advancing, 62.9% Declining
• 65 New 52-Week Highs, 96 New Lows
• 49.4% of Issues Above 200-day Moving Average
• Average 14-Day RSI 41.1
• Vix 15.04
• Total Put/Call .89
• TRIN/Arms .86

Monday Watch

Today's Headlines 

Bloomberg: 

• If You Think Greece’s Crisis Will End Any Time Soon, Think Again. Frustrated by Greece’s cat and mouse game with its creditors? Get used to it. Even if Prime Minister Alexis Tsipras clinches the 7.2 billion euros ($8 billion) that creditors are withholding, he’s going to need another cash infusion shortly thereafter. What will ensue is a renewed battle after almost five months of trench warfare. The beleaguered country requires a third bailout of about 30 billion euros, according to Nomura International Plc analysts Lefteris Farmakis and Dimitris Drakopoulos. Tsipras says any aid must be on his terms rather than those of governments whose taxpayers have forked out billions in the past five years to keep Greece in the euro.

• Chinese Are Piling Money Into Stocks Instead of Buying Cars. The stockbroker is beating the car salesman in the battle for Chinese wallets. With China’s stock market more than doubling in the past year, consumers like Tom Zhang are deferring big-ticket purchases to chase the rally. The Beijing resident was deciding between a Buick and a Volkswagen Passat before concluding his 300,000 yuan ($48,000) would be better off in equities. He was right, as his holdings soared to 800,000 yuan in value in little more than a year. “I feel like I am good at this, that I can make more,” Zhang, 26, said as he left a branch of Qilu Securities Co. in Beijing. “Why would I kill the hen when there are more eggs on the way? I can always buy my car later.” 

• Hedge Funds Seek Returns in Japan as China Bubble Concerns Mount. 

• Emerging Stocks Head for Longest Slide Since 1990; Oil Retreats. Emerging-market equities headed for their longest decline since 1990 as China’s imports slumped and U.S. jobs data bolstered the case for interest-rate increases. Bonds and oil fell. The MSCI Emerging Markets Index slid an 11th day, dropping 0.4 percent by 11:32 a.m. in Hong Kong. U.S. index futures slipped 0.1 percent. Government debt from Indonesia to Thailand declined, as Malaysia’s ringgit touched its weakest level since 2006. Turkey’s lira sank to a record low after the ruling party failed to win a majority in elections. U.S. oil decreased 1 percent while gold rallied. Chinese imports dropped 18 percent, confirming cooling investment that is putting economic growth targets at risk.

• OPEC’s Open Oil Spigots Spur Retreat for Bulls and Bears Alike. Oil speculators accelerated their retreat from both bullish and bearish wagers before OPEC ministers held firm in their plan to pump ever more crude. Speculators reduced short wagers in West Texas Intermediate crude by 8.6 percent and long bets by 2 percent, for an overall 0.2 percent contraction in the net-long position, U.S. Commodity Futures Trading Commission data through June 2 show. OPEC stuck to its strategy of defending market share rather than prices at a meeting in Vienna June 5. The group is pumping the most oil since 2012, even with prices 45 percent below last year’s peak. The supply glut persists because even though U.S. producers idled a record number of rigs and global drillers slashed spending plans, output has yet to collapse. 

• Shrinking Iron Ore Imports by China Highlight Demand Concern. Iron ore imports by China contracted in May from April and the same month a year earlier, highlighting weakening demand in the largest buyer as policy makers seek to shift the economy away from investment-led growth. Cargoes fell 12 percent from April to 70.87 million metric tons, and were 8.4 percent lower than a year earlier, according to customs data on Monday. That’s the lowest monthly total since February. Adjusted for the number of days in the month, the imports in May were at the slowest pace since November.

• Bond-Market Game of Chicken With Fed Is More Dangerous Than Ever. If the Federal Reserve is really so intent on raising interest rates this year, why is Wall Street chopping its forecasts for bond yields? For all the hand-wringing over the recent selloff that wiped out about $1.2 trillion in value from the global bond market, the fixed-income market’s best and brightest have actually taken down their year-end estimates for Treasuries in four of the past five months. It amounts to a dangerous game of chicken, in which many analysts and investors are betting the Fed won’t lift rates too fast because of the damage it may inflict on the economy -- even after last week’s stronger-than-expected jobs report. And the stakes have never been higher for holders of debt globally, who are more exposed to the potential for big losses than at any time in history, based on a metric known as duration.

• Billionaire Zell ‘Most Concerned’ About Dollar If Fed Lifts Rate. Billionaire investor Sam Zell said he’s concerned an interest-rate increase by the Federal Reserve may roil global currency markets. “The bigger impact might be on the dollar,” he said in an interview with Maria Bartiromo on the Fox News show “Sunday Morning Futures” when asked whether a rate boost could hurt real estate prices. He’s “most concerned about” the impact on currencies.

Wall Street Journal:

• U.S. Is Awash in Glut of Scrap Materials. A strong dollar, slowing Chinese economy cut into demand abroad for salvaged metal and paper. American companies have complained for the past year that the headwinds of a strong dollar and a slowing Chinese economy are hurting their earnings. For sellers of scrap metal, used cardboard boxes, and other waste, those headwinds are more like a hurricane. 

• Dow Theory Has Investors Skittish on Market’s Next Leg. Century-old stock-market tool is signaling a correction could be coming.

• Trade Pacts Face Growing Pushback. The decades-old argument that trade agreements boost both exports and jobs at home is losing its political punch. 

• New Housing Headwind Looms as Fewer Renters Can Afford to Own. Some forecast demographic changes will help lead to a decline in homeownership rate. 

• GE(GE) Nears Deal to Sell Private-Equity Lending Unit to CPPIB. Deal would be for more than $10 billion in buyout loans.
  

• The Chinese Have Your Numbers. The U.S. government gives up personal data secrets with barely a fight. U.S. government incompetence seems to grow by the month, and now we know it’s becoming a threat to national, and even individual American, security. The Obama Administration announced last week that Chinese hackers made off this year with personnel files that may have included those of all 2.1 million federal employees, plus former employees going back to the 1980s. This is no routine hack. The Office of Personnel Management (OPM) lost background-check data to the Chinese nine months before this breach and still hadn’t...

CNBC:

• New toys for flash boys in China's fledgling derivatives market. The rapid liberalization of Chinese derivatives markets has attracted a new breed of creative traders employing complex trading strategies that can generate quick profits - and an extra dollop of risk - in China's runaway stock boom.

Zero Hedge:

• The Central Banks Are Losing Control Of The Financial Markets.

• A Professor Speaks Out: How Coddled, Hyper Sensitive Undergrads Are Ruining College Learning.

• Citi Clients "Complain How Difficult It Is To Make Money", "Everyone Is Worried About Liquidity Shocks". (graph)

• Another Bubble Alert: Home Down Payments Hit Three-Year Low.

• Citi: Euro Bond Market Faces "Historic" Levels Of Risk. (graph)

• Should We Raise The Voting Age? 

• Deutsche Bank Co-CEOs To Resign Amid Shareholder Frustration.

Business Insider:

• Al Qaeda is becoming an even more important part of the Syrian rebellion.

• Greece's plans have no support from its creditors.

• China May imports down 18.1% to 803.33 bln yuan: govt.

Reuters:

• American Airlines(AAL) CEO cites capacity growth risks. American Airlines Group Inc (AAL.O) Chief Executive Doug Parker voiced concern on Sunday about the risk that capacity growth among airlines could depress profits, but told Reuters that in contrast with past cycles, the rise in capacity "feels different."

Telegraph:

• Greece told to strike a deal or face 'dramatic consequences'. Time is running out for Syriza and Greece's lenders to find common ground, European leaders warn.

The Guardian:

• Juncker vents fury over Greek bailout talks at G7 summit. Irate European commission president accuses Greek PM of undermining negotiations, and leaders agree to maintain Russia sanctions.

Night Trading

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

• Asia Ex-Japan Investment Grade CDS Index 111.0 +2.5 basis points.

• Asia Pacific Sovereign CDS Index 59.75 + basis points.

• S&P 500 futures -.06%.

• NASDAQ 100 futures -.10%.

Morning Preview Links

Earnings of Note

Company/Estimate

• (SHLD)/-2.59

• (HRB)/2.68

• (PBY)/.03

• (UNFI)/.85

• (CASY)/.85

Economic Releases

10:00 am EST

• Labor Market Conditions Index for May.
  

Upcoming Splits

• (MPC) 2-for-1

Other Potential Market Movers

• The China inflation data, (QSII) analyst day, (MCD) May sales report, (AAPL) Worldwide Developers Conference and the (GPRO) annual meeting could also impact trading today.

BOTTOM LINE: Asian indices are mostly lower, weighed down by industrial and financial 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 week.