Tuesday, June 16, 2015

Today's Headlines

Bloomberg:      
  • Tsipras Brands IMF Criminal as Merkel Focuses on Greek Solution. Prime Minister Alexis Tsipras hurled criticism at Greece’s creditors, accusing the International Monetary Fund of “criminal” responsibility for his country’s predicament. Addressing lawmakers in Athens on Tuesday, Tsipras gave no sign of backing down in the standoff over Greece’s bailout. Instead, he blasted the IMF’s adherence to austerity and accused the European Central Bank of using tactics that were akin to “financial asphyxiation.” “The situation in which we find ourselves today is that IMF positions prevail when it comes to the strictness of austerity measures asked, while at the same time EU positions prevail when it comes to the denial for any discussion about Greek debt sustainability,” Tsipras, 40, said.
  • Euro Risk Signals Flash Red for a Third Day as Greek Talks Stall. Indicators of risk surged for a third day across the euro zone as a Greek standoff with its creditors continued. The Markit iTraxx Crossover index of credit-default swaps on high-yield companies climbed as much as 18 basis points, the biggest daily gain since April, and was up 12 basis points to 335 basis points at 12:35 p.m. in London. An index linked to the subordinated debt of financial companies rose to 176 basis points, the highest in almost eight months.
  • French Bonds Infected as Greek Crisis Swells Euro-Region Spreads. Europe’s bond selloff is spreading to markets traditionally viewed as safer, with only Germany remaining unscathed by Greece’s impasse with creditors. The extra yield, or spread, that investors get for holding French or Belgian 10-year bonds rather than benchmark German debt surged above 50 basis points for the first time this year. Even bonds of the Netherlands and Finland, which have top AAA grades from at least two of the three major ratings companies, are suffering as the fallout from the Greek debacle spreads beyond the euro-zone periphery. “The semi-core is selling off,” said Piet Lammens, head of research at KBC Bank NV in Brussels. “On the other hand, the gains the bunds have made have also been rather disappointing. With the Greek story you could have expected the bund to make more ground.” The 10-year yield spread between French and German debt widened three basis points, or 0.03 percentage point, to 48 basis points as of 10:38 a.m. in London. It climbed as high as 54, the most since March 2014, up from 33 as recently as June 11.
  • Spanish 10-Year Bond Yield Rises Above 2.5% Amid Greece Impasse. Spanish government bonds dropped, pushing the 10-year yield above 2.5 percent for the first time since August, as Greece signaled it won’t make further concessions this week to unlock the bailout funds needed to avoid default. Irish and Portuguese bonds also declined as concern over the turmoil in Greece increased investor perceptions of risk in other peripheral euro-area nations. Greece has no plans to present new proposals at a meeting of European finance ministers in Luxembourg on June 18, Finance Minister Yanis Varoufakis told Bild newspaper. German 10-year bunds rose for a fourth day, boosted by demand for the assets as a haven.
  • I Knew Italy's Economy Was Bad, but the Truth May Be Even Grimmer. (graph)
  • German Investor Confidence Drops as Greece Clouds Outlook. German investor confidence fell for a third month as the risk of a Greek debt default stoked uncertainty in Europe’s largest economy. The ZEW Center for European Economic Research in Mannheim said its index of investor and analyst expectations, which aims to predict economic developments six months in advance, slid to 31.5 in June from 41.9 in May. That’s the lowest level since November. Economists had forecast a decline to 37.3, according to the median of 36 estimates in a Bloomberg survey.
  • China Bubble Debate Turns to When, Not If, Stocks Will Tumble. It’s no longer a question of whether China’s stock-market rally is a bubble, but when the bubble will burst. That’s the refrain from a growing number of analysts as valuations climb to levels that by some measures already exceed the peak of China’s last equity mania in 2007. A market crash may come within six months, Bocom International Holdings Co. said Tuesday, citing an analysis of global bubbles over 800 years that shows the speed of gains in China mirroring past market peaks. Macquarie Investment Management, whose Asian stock fund is outperforming 97 percent of peers in 2015, has already eliminated exposure to mainland shares after turning bearish for the first time in seven years. The government may engineer a correction if valuations rise much further, according to CLSA Ltd. “We are probably going to be in a very volatile trading period before a crash eventually happens,” Hao Hong, the chief China strategist at Bocom International in Hong Kong, said in an interview with Bloomberg Television. “It is plain that China is in a bubble.
  • Real Cost of Chinese Stocks Dwarfs 2007 Bubble. Chinese stocks are getting a lot more expensive than the benchmark Shanghai Composite Index suggests. Using the most-watched mainland equity gauge as a guide, an investor might conclude that valuations are pricey, though still within reason: the index trades near a five-year high of 19 times estimated earnings -- well below the level of 36 reached during the 2007 bubble -- and in the same ballpark as the Standard & Poor’s 500 Index’s multiple of 17. The problem with the Shanghai Composite is that 94 percent of Chinese stocks trade at higher valuations than the index, a consequence of its heavy weighting toward low-priced banks. Use average or median multiples instead and a different picture emerges: Chinese shares are almost twice as expensive as they were when the Shanghai Composite peaked in October 2007 and more than three times pricier than any of the world’s top 10 markets. “The market rally is more fragile than in 2007,” Francis Cheung, a strategist at CLSA Ltd. in Hong Kong, wrote in a June 12 report. “With the de-rating of banks and other large SOEs that make up the largest part of the index, it is likely more accurate to compare valuation with median PE.” The Shanghai index lost 3.5 percent at the close Tuesday, taking its decline this week to 5.4 percent. 
  • Guotai Junan Targets $4.8 Billion in Biggest China IPO Since ’10. Guotai Junan Securities Co., China’s largest brokerage by revenue, is capitalizing on a world-beating stock rally by seeking $4.8 billion in the nation’s biggest initial share sale in almost five years. Guotai Junan will sell shares at 19.71 yuan each to raise as much as 30.1 billion yuan ($4.8 billion), the brokerage told Shanghai’s stock exchange on Tuesday. It will be the biggest domestic initial offering since China Everbright Bank Co. raised $3.2 billion in August 2010, data compiled by Bloomberg show.
  • Europe Stocks Halt 2-Day Drop as Swiss Shares Rise; Greece Falls. European stocks rebounded from their biggest two-day drop since April, helped by a rally in German shares. Greek shares fell amid a debt impasse. The Stoxx Europe 600 Index added 0.6 percent to 385.49 at the close of trading. It reversed losses of 1.1 percent after the European Commission said it would restart talks with Greece if offered new proposals. Germany’s DAX Index also swung to gains, rising 0.5 percent as a drop in the euro helped exporters. Spanish and Portuguese shares erased declines exceeding 1.5 percent.
  • Copper Falls to 3-Month Low as Metals Sag on Growth Woes. Copper fell to a three-month low on concern that a cooling economy in China and Greece’s debt turmoil will stymie global growth, cutting demand for raw materials. Investors this month pulled $37.6 million from U.S. exchange-traded funds backed by industrial metals, a 10 percent drop that is the biggest of any commodity group, data compiled by Bloomberg show. Money managers have turned net-bearish on copper for the first time since February, U.S. government data show.
  • CBO Warns on Growing U.S. Debt. (video)
Wall Street Journal:
ZeroHedge: 
Telegraph: 

Bear Radar

Style Underperformer:
  • Mid-Cap Growth +.19%
Sector Underperformers:
  • 1) Coal -2.06% 2) Gold & Silver -1.15% 3) Hospitals -.91%
Stocks Falling on Unusual Volume:
  • CAPL, AAVL, TAHO, OSK, SXCP, LAKE, CMT, CI, GBX, BLCM, SUPN, HUM, MEI, CNSI, WLDN, ZPIN, DOOR, LECO, MMLP, SSTK, ATRA, XNET, ONCE, URI, TEX, URI and KEYW
Stocks With Unusual Put Option Activity:
  • 1) CAG 2) HLT 3) ADBE 4) MGM 5) ETN
Stocks With Most Negative News Mentions:
  • 1) AAVL 2) URI 3) AIG 4) SPF 5) GBX
Charts:

Bull Radar

Style Outperformer:
  • Small-Cap Value +.33%
Sector Outperformers:
  • 1) HMOs +1.08% 2) Foods +.86% 3) REITs +.74%
Stocks Rising on Unusual Volume:
  • COTY, CDK, ALKS, POZN, BCC and AERI
Stocks With Unusual Call Option Activity:
  • 1) CAG 2) HLT 3) AXLL 4) LYB 5) TBT
Stocks With Most Positive News Mentions:
  • 1) EBAY 2) AERI 3) LMT 4) UA 5) COTY
Charts:

Morning Market Internals

NYSE Composite Index:

Monday, June 15, 2015

Tuesday Watch

Evening Headlines 
Bloomberg: 
  • Merkel Flirts With Failure as Greek Showdown Risks Teflon Legacy. The Teflon chancellor may be vulnerable after all. The specter of insolvency in Greece poses the biggest threat to the legacy of German Chancellor Angela Merkel whose political longevity rests on her crisis-fighting diplomacy. From the threat of the U.K. leaving the European Union to the festering conflict in Ukraine, Merkel’s credibility as the continent’s most powerful leader and her guiding philosophy of a more united, competitive Europe risks unraveling. And it might just be Greece, an economy a fraction the size of Germany’s, that could deal the most painful blow. “This does look a bit like a tipping point,” Ulrike Guerot, founder of the European Democracy Lab at the European School of Governance in Berlin, said in an interview. “If Greece leaves, then she’s taking the first step toward the end. This is what she wants to stop.”
  • Why Original Sin Is Returning to Haunt Southeast Asian Borrowers. The last time Southeast Asia mixed a heady cocktail of foreign borrowing with weakening currencies the hangover was a financial crisis. Now, Indonesia and Malaysia are at risk of repeating the mistakes that led to the 1997-98 meltdown. After the crisis, economists Barry Eichengreen and Ricardo Hausmann coined the term ‘original sin’ to describe the difficulties encountered by developing nations borrowing overseas. This year, Indonesian and Malaysian governments and companies have sold more foreign-currency debt than they did in the whole of 2014 as a global bond rout pushes up yields and their currencies weaken. “There are worrying signs that original sin is returning,” said Hak Bin Chua, head of emerging Asia economics at Bank of America Merrill Lynch in Singapore. “Governments are forced to opt for more foreign-currency debt financing, as local bond yields surge and foreign appetite diminishes.”
  • Economists Push Back BOJ Easing Calls After Kuroda’s Yen Missive. Barclays Plc to Standard Chartered Plc are among a wave of economists pushing back their calls for a boost in stimulus by the Bank of Japan after Governor Haruhiko Kuroda put the brakes on a weak yen last week, a survey shows. Sixteen of 35 economists surveyed by Bloomberg June 8-15 see the BOJ adding to its unprecedented easing by the end of October, down from 21 of 36 polled in May. While a majority still forecast eventual action, 13 now say the central bank will forgo further stimulus, up from 10 last month.   
  • China Stocks Headed for 'Notable Crash': BoCom's Hong. (video)
  • Audi China Sales Fall For First Time in Two Years. Audi posted its first sales decline in China, its largest market, in more than two years last month, joining BMW AG in recording a slide in demand for premium autos amid a slowing economy. Audi, the best-selling luxury brand in China, saw sales decline 1.6 percent from a year earlier, the first drop since February 2013. BMW and Mini sales fell 4 percent in May, the first decrease in a decade.
  • RBA Restates Need for Aussie Drop as Growth Below Average. Australia’s central bank reiterated the need for deeper currency declines to balance economic growth that’s predicted to remain below average until the latter part of 2016. “A lower exchange rate would have an immediate beneficial effect on some sectors such as tourism,” the Reserve Bank said in minutes of its June policy meeting in Sydney Tuesday. “It would need to be lower for a sustained period to have a significant effect on large investment decisions in other trade-exposed sectors.”
  • China Stocks Fall as ChiNext Posts Worst Two-Day Drop Since 2012. China’s stocks fell, dragged down by the ChiNext index’s steepest two-day loss in three years, amid concern a flood of share sales may lure funds away from existing equities. Technology, phone and industrial companies, the best performers this year, led declines. East Money Information Co., CRRC Corp. and ZTE Corp. slumped at least 2.6 percent. Huayi Brothers Media Corp. slid 4 percent, paring gains over the past year to 114 percent. Citic Securities Co., China’s biggest brokerage by market value, rose 2.1 percent after saying it plan to sell new additional shares in Hong Kong. The ChiNext index of small-company shares dropped as much as 3.4 percent and was down 2.6 percent at 9:53 a.m., extending losses to 7.7 percent over the past two days.
  • Asian Stocks Fall as Investors Weigh Greece Standoff, Await Fed. Asian stocks fell as investors awaited an update from the Federal Reserve on U.S. monetary policy and a meeting of euro-area finance ministers with Greece. The MSCI Asia Pacific Index retreated 0.1 percent to 147.26 as of 9:01 a.m. in Tokyo. The gauge lost 0.5 percent on Monday after the latest round of negotiations between Greece and its creditors fell apart.
  • The World Is Facing Its Longest Oil Glut in at Least Three Decades. The world is on the brink of the longest-lasting oil glut in at least three decades and OPEC’s quest for market share makes it almost unavoidable. Oil supply has exceeded demand globally for the past five quarters, already the most enduring glut since the 1997 Asian economic crisis, International Energy Agency data show. If the Organization of Petroleum Exporting Countries were to keep pumping at current rates it would become the longest surplus since at least 1985 by the third quarter, the data show.
  • Hidden Hero of Stock Bull Market No Match for Higher Rates. The unsung hero behind the six-year-long bull market in U.S. stocks is at risk of becoming a villain. Record-low interest rates means the cost of servicing debt for companies in the Standard & Poor’s 500 Index fell to an all-time low of 3.5 percent of sales over the past 12 months, according to data compiled by Bloomberg. The decline from 7.4 percent in 2007 represents $310 billion in savings and contributed to a doubling of profits and a three-fold increase in stock prices. The concern now is that Federal Reserve Chair Janet Yellen will reinforce the notion this week when the central bank meets that interest rates will rise before year-end. Seldom have low financing costs lasted long following the start of tighter monetary policy. Analysts already see profit growth of less than 2 percent in 2015.
Wall Street Journal: 
MarketWatch.com:
  • China’s MSCI reality check is too big to ignore. In the same week that Chinese A-shares failed to be included in MSCI’s emerging-market benchmark, it was also revealed that global investors pulled $7.9 billion out of Asia. This was the biggest weekly withdrawal in almost 15 years, according to data provider EPFR Global, and the majority reportedly related to China.
Zero Hedge: 
Business Insider:
Telegraph:
Evening Recommendations 
  • None of note
Night Trading
  • Asian equity indices are -1.25% to +.25% on average.
  • Asia Ex-Japan Investment Grade CDS Index 112.0 unch.
  • Asia Pacific Sovereign CDS Index 63.5 +1.0 basis point.
  • S&P 500 futures -.16%.
  • NASDAQ 100 futures -.20%.

Earnings of Note
Company/Estimate
  • (FDS)/1.56
  • (JW/A)/.79
  • (ADBE)/.45
  • (BOBE)/.41
  • (LZB)/.38
Economic Releases
8:30 am EST
  • Housing Starts for May are estimated to fall to 1090K versus 1135K in April.
  • Building Permits for May are estimated to fall to 1100K versus 1143K in April.
Upcoming Splits
  • (PPG) 2-for-1
  • (IDXX) 2-for-1
Other Potential Market Movers
  • The German CPI report, UK CPI/Retail Sales reports, Australia RBA June minutes, weekly US retail sales, RBC Mining/Materials Conference, Stifel Industrials conference and the (GPS) investor meeting could also impact trading today.
BOTTOM LINE: Asian indices are mostly lower, weighed down by real estate and technology 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 Lower into Final Hour on Greek Debt Deal Fears, Surging European/Emerging Markets/US High-Yield Debt Angst, China Bubble Concerns, Tech/Commodity Sector Weakness

Broad Equity Market Tone:
  • Advance/Decline Line: Lower
  • Sector Performance: Almost Every Sector Declining
  • Volume: Below Average
  • Market Leading Stocks: Performing In Line
Equity Investor Angst:
  • Volatility(VIX) 15.21 +10.38%
  • Euro/Yen Carry Return Index 145.36 +.09%
  • Emerging Markets Currency Volatility(VXY) 9.46 +1.07%
  • S&P 500 Implied Correlation 61.96 +1.34%
  • ISE Sentiment Index 77.0 -33.04%
  • Total Put/Call .87 -17.14%
  • NYSE Arms 1.50 -19.06% 
Credit Investor Angst:
  • North American Investment Grade CDS Index 69.73 +3.20%
  • America Energy Sector High-Yield CDS Index 1,617.0 +1.28%
  • European Financial Sector CDS Index 83.65 +6.53%
  • Western Europe Sovereign Debt CDS Index 27.98 +8.95%
  • Asia Pacific Sovereign Debt CDS Index 63.34 +1.29%
  • Emerging Market CDS Index 320.88 +2.67%
  • iBoxx Offshore RMB China Corporates High Yield Index 120.42 +.14%
  • 2-Year Swap Spread 27.0 -.25 basis point
  • TED Spread 27.75 -.25 basis point
  • 3-Month EUR/USD Cross-Currency Basis Swap -19.75 +.5 basis point
Economic Gauges:
  • 3-Month T-Bill Yield .00% -1.0 basis point
  • Yield Curve 166.0 unch.
  • China Import Iron Ore Spot $64.25/Metric Tonne -1.35%
  • Citi US Economic Surprise Index -30.40 +2.6 points
  • Citi Eurozone Economic Surprise Index 3.3 -1.4 points
  • Citi Emerging Markets Economic Surprise Index -16.30 -.5 point
  • 10-Year TIPS Spread 1.87 +1.0 basis point
Overseas Futures:
  • Nikkei 225 Futures: Indicating -12 open in Japan 
  • China A50 Futures: Indicating -268 open in China
  • DAX Futures: Indicating +3 open in Germany
Portfolio: 
  • Slightly Higher: On gains in my index hedges and emerging markets shorts 
  • Disclosed Trades: Covered some of my (IWM)/(QQQ) hedges, then added them back
  • Market Exposure: 25% Net Long