Morning Market Internals

NYSE Composite Index:

• Volume Running 28.4% Above 100-day average
• 2 Sectors Rising, 8 Sectors Declining
• 36.3% of Issues Advancing, 61.0% Declining
• 40 New 52-Week Highs, 295 New Lows
• 38.1% of Issues Above 200-day Moving Average
• Average 14-Day RSI 40.4
• Vix 13.1
• Total Put/Call 1.28
• TRIN/Arms .65 

Thursday Watch

Evening Headlines 

Bloomberg:

• Lost Decade in Emerging Markets: Investors Already Halfway There. (graph) Just 14 years ago Wall Street fell in love with the BRICs, the tidy acronym for four major emerging economies that, to many, looked like sure winners. Today, after heady runs and abrupt reversals, most of the BRICs -- in fact, most developing nations -- look like big-time losers.The history of emerging markets is a history of booms and busts, but the immediate future may hold something more prosaic: malaise. Investors today confront what could turn out to be a lost decade of returns, with four or five more meager years ahead. “These are very much the lean years after the bonanza decade,” said Harvard Kennedy School economist Carmen Reinhart, one of the world’s top experts on financial crises and developing economies.

• Man Who Called Top of China Stock Rally Says Rout Will Get Worse. More than two decades’ experience poring over stock charts helped Thomas Schroeder lock in profits in April before Chinese companies in Hong Kong went into freefall. Now he’s bearish again, betting the slump in Chinese shares won’t stop anytime soon. The Shanghai Composite Index will decline to as low as 3,100 in two months, Schroeder said, 16 percent below the closing level Wednesday, despite intermittent rallies as the government steps up efforts to stabilize the market. The Hang Seng China Enterprises Index of mainland shares traded in Hong Kong will drop about 10 percent, he said. To Schroeder, slowing Chinese economic growth and collapsing commodities prices are heightening the chance that the indexes will fall below key equity market support levels. 

• China Tightens Grip on Web Firms: Who Will Be Hurt Most? (video)

• Does Apple(AAPL) Have An iPhone Problem in China? (video) 

• Hyundai China Sales Slump to Four-Year Low. Hyundai Motor Co. posted its lowest monthly plant sales in China in four years and said it would reduce prices to entice consumers in the world’s largest auto market. Hyundai produced and sold 54,160 vehicles from its plants in China last month, down 32 percent from a year earlier. That’s the lowest monthly sales since July 2011, when the company sold 52,016 vehicles made in China, its biggest market by volume. Weak demand in China contributed to Hyundai posting its sixth consecutive decline in quarterly profit in the three months ending in June, when plant sales in China slumped 14 percent. To help revive sales, the company said it will cut prices of sport utility vehicles, boost incentive spending and review the mix of models it offers in the country.

• Malaysia Links Reunion Part to MH370 in Clue to Jet Mystery. Malaysian Prime Minister Najib Razak confirmed that a jet part found on an island near Africa came from Malaysia Airlines’ Flight 370, the first physical evidence from the jetliner that vanished 17 months ago. Investigators “conclusively” linked the piece to the missing aircraft, Najib said Thursday. A French prosecutor stopped short of that assessment, saying only that officials have a “strong presumption” that the debris being studied in a government laboratory is from the doomed plane.  

• China Stocks Drop for Second Day as Traders Test State Support. China’s stocks fell for a second day amid growing concern unprecedented government intervention will fail to stop a $4 trillion rout. The Shanghai Composite Index dropped 0.7 percent to 3,699.01 at 9:55 a.m. local time after slumping as much as 2.1 percent. Energy and telecom companies led losses. Trading volume in the index was 50 percent lower than the 30-day average for this time of day.

• Asian Stocks Advance as U.S. Data Boost Confidence, Weaken Yen. Asian stocks rose, following a rebound in global shares, amid optimism over the American economy. Japanese equities climbed as the yen weakened. The MSCI Asia Pacific Index gained 0.4 percent to 141.64 as of 9:02 a.m. in Tokyo.

• Wall Street’s Profit Boost From Asia Derivatives Boom May Stall. Earnings at investment banks including Goldman Sachs Group Inc. and Citigroup Inc. received a boost in the first half as access to China helped increase derivatives sales and trading income from the region. Gains may moderate as the stock rally subsides. Financial statements and post-earnings commentary from Credit Suisse Group AG, UBS Group AG, Societe Generale SA and Deutsche Bank AG also highlighted derivatives and structured products’ impact with the German bank saying in its 2015 interim report that revenues in equity derivatives in the second quarter were “significantly higher than the prior year quarter driven by strong performance in Asia.”

Wall Street Journal:

• Obama Presses Case on Iran Nuclear Deal. President says ‘choice we face is ultimately between diplomacy or some form of war’. President Barack Obama delivered a detailed defense of his pre-eminent foreign-policy objective, arguing Wednesday that a diplomatic agreement to restrict Iran’s nuclear program presents Congress with a fundamental choice between war and peace. Mr. Obama’s nearly hourlong speech at American University was aimed less at winning... 

• Cleveland Debate Offers GOP Hopefuls a Chance to Break Away from the Pack. Largest candidate field in history of televised debates heads to Cleveland for Thursday’s event. Republican candidates will descend on Cleveland for a presidential debate Thursday that obliterates party precedent and tradition: The largest candidate field in the history of televised debates is spilling off the stage, and Donald Trump, a celebrity showman and first-time contender, threatens to steal the show.

• Activist Takes $5.5 Billion Stake in Snacks Giant Mondelez(MDLZ). Ackman thinks Oreo maker needs to cut costs and grow revenue, or sell to rival like Kraft Heinz. 

• Cash for the Revolutionary Guards. The nuclear deal is a financial windfall for Iran’s military wing. President Obama’s Iran deal has been losing support in the polls and on Capitol Hill, and so on Wednesday he tried to reason with his critics. “It’s those hardliners [in Iran] chanting ‘death to America’ who have been most opposed to the deal,” he said in a speech at American University. “They’re making common cause with the Republican Caucus.”

CNBC:

• Tesla(TSLA) beats on top and bottom, but lowers guidance. (video) Tesla reported second-quarter results on Wednesday that beat Wall Street expectations, but it lowered its deliveries guidance for the year. The company said it saw a quarterly loss of 48 cents per share on $1.20 billion in adjusted revenue. Analysts expected Tesla to report a loss of 60 cents per share on $1.18 billion in revenue, according to a consensus estimate from Thomson Reuters. The company lowered its full-year delivery guidance—a key figure—to "between 50,000 and 55,000." Tesla said in May that it expected about 55,000 for its Model S and Model X combined.

Zero Hedge:

• 8 Financial Experts That Are Warning A Great Financial Crisis Is Imminent.

• Chinese Stocks Tumble Despite Margin Debt Rises As Virtu Is Unleashed To Provide "Liquidity" After Citadel Ban. (graph)

• China's Plunge Protection "National Team" Bought 900 Billion In Stocks, Goldman Calculates.

• Iran Refuses UN Inspector Access To Scientists, Caught Trying To "Clean Up" Suspected Nuclear Site.

• Japan's Dire Message To Yellen: "Don't Raise Rates Soon". (graph)

• Scotiabank Warns "The Fed Is Cornered And There Are Visible Market Stresses Everywhere".

• Cash-Strapped Saudi Arabia Hopes To Continue War Against Shale With Fed's Blessing. (graph)

• Hillary Clinton's FBI Investigation Is A "Criminal Probe": Post.

• "Debt Is A Fickle Witch".

• The Damage Is Done... Something Will Have To Give. (graph)

• China Responds To US Declaration Of Cyber War.

• It Really Is Different This Time: It's Worse. (graph)

• Hedge Fund Horrors: First Einhorn Has Worst Month Since 2008, Now Paulson Getting Redeemed.

• Tesla(TSLA) Tumbles On Margins Miss & Deliveries Downgrade - The Quarter In Three Charts.

• Mickey Mouse Market Pops-n-Drops As Crude Carnage Follows VIXtermination. (graph)

Business Insider:

• One of the biggest dealmakers on Wall Street is sounding the alarm on M&A. One of Wall Street's biggest dealmakers is sounding the alarm about the frenetic level of mergers and acquisitions activity. Centerview Partners co-founder Blair Effron highlighted similarities between the current market environment and that of 2007 in an interview with CNBC's David Faber on Wednesday. "You have to step back and look at valuations," Effron said. "The average valuation in the M&A market today is 13 times EBITDA. As a reminder, in 2012 it was 10 times. In fact, the last time we were at 13 times was 2007." "We'll have YTD 40 or so transactions over $10 billion," he continued. "The last time we saw that was 2007."

• KEURIG CRASHES(GMCR). Keurig Green Mountain shares crashed 26% in after-hours trading Wednesday after the company reduced its forecast for sales and announced plans for layoffs.

• Automakers have a chilling message about China's economy.

• A cautionary tale on the dangers of over-indebtedness and excessive dependence on the dark arts of financialization.

• Fitbit(FIT) is tumbling. Fitbit reported second-quarter earnings results on Wednesday evening, and the company absolutely crushed expectations for sales and profits. Shares plunged as much as 10% in after-hours trading. The stock hit an all-time high during the session Wednesday and closed up 4% at $51.74. 

• Why you should avoid stocks with major exposure to China.

• A fundamental weakness is taking hold in the oil market.

Washington Free Beacon:

• Poll: Hillary Clinton Is Even Less Likable Than She Was Prior to Failed 2008 Campaign. (graph)

Washington Post: 

• Bill Clinton called Trump ahead of his 2016 launch. Former president Bill Clinton had a private telephone conversation in late spring with Donald Trump at the same time that the billionaire investor and reality-television star was nearing a decision to run for the White House, according to associates of both men. Four Trump allies and one Clinton associate familiar with the exchange said that Clinton encouraged Trump’s efforts to play a larger role in the Republican Party and offered his own views of the political landscape. The revelation of the call comes as many Republicans have begun criticizing Trump for his ties to Democrats, including past financial donations to the Clintons and their charitable foundation.

Telegraph:

• Saudi Arabia may go broke before the US oil industry buckles. It is too late for OPEC to stop the shale revolution. The cartel faces the prospect of surging US output whenever oil prices rise.

Shanghai Securities News: 

• China's Economy to Further Slow Through 2016. Deflation pressures and recent stock market slump will lead to further economic slowdown at year-end and next year, State Information Center researcher Zhu Baoliang wrote.

Evening Recommendations 

William Blair:

• Raised (ZTS) to Outperform.

Night Trading

• Asian equity indices are -.75% to +.25% on average.

• Asia Ex-Japan Investment Grade CDS Index 112.0 -.75 basis point.

• Asia Pacific Sovereign CDS Index 63.75 -.5 basis point.

• S&P 500 futures -.06%.

• NASDAQ 100 futures -.09%.

Morning Preview Links

Earnings of Note

Company/Estimate

• (DDD)/.08

• (AGN)/4.38

• (APA)/-.26

• (BDX)/2.01

• (EAT)/.96

• (CTB)/.70

• (DUK)/.99

• (ENR)/.47

• (KORS)/.75

• (MBLY)/.08

• (TAP)/1.32

• (ZEUS)/-.02

• (SFY)/-.82

• (TK)/.21

• (VIAB)/1.47

• (CECO)/.00

• (ED)/.63

• (MHK)/2.62

• (MNST)/.91

• (NVDA)/.20

• (SFM)/.22

Economic Releases

7:30 am EST

• Challenger Job Cuts for July. 
  

8:30 am EST

• Initial Jobless Claims are estimated to rise to 272K versus 267K the prior week.

• Continuing Claims are estimated to fall to 2249K versus 2262K prior.

Upcoming Splits

• None of note

Other Potential Market Movers

• The BoE rate decision, weekly Bloomberg Consumer Comfort Index, weekly EIA natural gas inventory report, (LB) July sales call, (VIP) analyst meeting and the (HAR) investor day could also impact trading today.

BOTTOM LINE: Asian indices are mostly lower, weighed down by technology and commodity 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 Higher into Final Hour on Diminished Global Growth Worries, Less European Debt Angst, Short-Covering, Tech/Medical Sector Strength

Broad Equity Market Tone:

• Advance/Decline Line: Higher
  

• Sector Performance: Mixed
  

• Volume: Around Average

• Market Leading Stocks: Performing In Line

Equity Investor Angst:

• Volatility(VIX) 12.45 -4.23%

• Euro/Yen Carry Return Index 142.23 +.61%

• Emerging Markets Currency Volatility(VXY) 9.49 +1.93%

• S&P 500 Implied Correlation 55.91 -1.10%

• ISE Sentiment Index 88.0 unch.

• Total Put/Call .99 +5.32%

• NYSE Arms .93 -8.23% 

Credit Investor Angst:

• North American Investment Grade CDS Index 72.02 -.36%

• America Energy Sector High-Yield CDS Index 1,782.0 -.82%

• European Financial Sector CDS Index 73.43 -.40%

• Western Europe Sovereign Debt CDS Index 22.09 -1.34%

• Asia Pacific Sovereign Debt CDS Index 63.74 -.78%

• Emerging Market CDS Index 324.62 -.24%
  

• iBoxx Offshore RMB China Corporates High Yield Index 120.98 +.04%

• 2-Year Swap Spread 24.75 +1.75 basis points

• TED Spread 25.0 +.75 basis point

• 3-Month EUR/USD Cross-Currency Basis Swap -20.25 +.25 basis point

Economic Gauges:

• 3-Month T-Bill Yield .08% unch.

• Yield Curve 154.0 +5.0 basis points

• China Import Iron Ore Spot $56.78/Metric Tonne +2.69%

• Citi US Economic Surprise Index -8.2 +5.8 points

• Citi Eurozone Economic Surprise Index 18.0 +11.9 points

• Citi Emerging Markets Economic Surprise Index -5.0 +3.8 points

• 10-Year TIPS Spread 1.70 unch.
• # of Months to 1st Fed Rate Hike(Morgan Stanley) 4.71 -.77

Overseas Futures:

• Nikkei 225 Futures: Indicating +178 open in Japan 
• China A50 Futures: Indicating -195 open in China

• DAX Futures: Indicating -27 open in Germany

Portfolio: 

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

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

• Market Exposure: Moved to 50% Net Long

Today's Headlines

Bloomberg: 

• Flight Debris Confirmed to Be From MH370. (video)
• Iran Deal Risks Weakening Arms Embargo With Removal of Experts. As Congress mulls the Iran nuclear accord, one element emerging as a source of deep concern is how to enforce the ongoing embargo on Iran’s non-nuclear missiles. For the past five years, an independent panel of experts has monitored Iran’s arms shipments. But the panel will be disbanded as a concession to Iran, according to three United Nations Security Council diplomats who asked not to be named, citing sensitivity of the matter. While diplomats are searching for new mechanisms, it isn’t clear how violations will be tracked without the panel and whether punitive measures can be introduced on non-nuclear activities without derailing the nuclear deal, they said.
• Brazil Real Falls With Bonds as SocGen Sees Drop to 4 per Dollar. Brazil’s real declined to a 12-year low after Societe Generale SA said the currency will tumble to 4 per dollar as the government’s struggle to pare deficits makes further credit rating downgrades unavoidable. A drop in local bonds pushed yields to the highest level since March. The worst economic contraction in 25 years, an escalating political scandal and a pledge by the Brazilian central bank to refrain from increasing interest rates have helped to push the real down 24 percent in 2015, the biggest decrease among 31 major currencies tracked by Bloomberg. The prospect of reduced demand for exports in China and an expected increase in U.S. borrowing costs by the Federal Reserve are also weighing on the local tender.
• Citigroup(C) Sounding Alarm on $13 Billion of Bank Bonds in Brazil. To Citigroup Inc., traders in Brazil’s bank-bond market are being far too complacent. The country is in danger of having its rating cut to the cusp of junk by Moody’s Investors Service, and that means the nation’s biggest lenders are also in the crosshairs. That’s because banks’ credit grades typically are aligned with those of their home country, given the lenders’ importance to the local economy. A Brazil downgrade will be especially damaging for the riskiest corner of the market, says Citigroup’s Eric Ollom.
• Indonesia’s Economic Risk Persists as Growth Slides Further. Indonesia’s growth slowed for a second straight quarter, underlining the challenge for President Joko Widodo as he struggles to revitalize an economy expanding at the weakest pace since 2009. Gross domestic product rose 4.67 percent in the three months ended June 30 from a year earlier, from a revised 4.72 percent the previous quarter, the statistics bureau said in Jakarta on Wednesday. That compares with the median estimate of 4.64 percent in a Bloomberg survey of 21 economists.
• Emerging-Market Currencies Deepen Slump to Record on Fed Outlook. Emerging-market currencies deepened their slump to record lows and stocks retreated amid speculation that the Federal Reserve will increase U.S. interest rates as soon as next month, curbing demand for riskier assets. The real weakened for a fifth day as Societe Generale SA said the currency will continue to tumble as Brazil’s struggle to cut government budget deficits makes further credit rating downgrades unavoidable. South Korea’s won ended a two-day gain. A Bloomberg gauge of 20 currencies slipped 0.3 percent in its fifth straight decline.
• Rebound in Miners Leads European Stocks Higher as SocGen Jumps. European stocks climbed the most in three weeks, led by a gain in commodity producers and a surge in Societe Generale SA after it reported its highest profit since the financial crisis. Shares of France’s second-largest bank by market value rallied 7.9 percent, the most in two years. Legal & General Group Plc climbed 2.8 percent after the biggest manager of U.K. pension assets posted first-half profit that beat analysts’ estimates amid a jump in inflows. BHP Billiton Ltd. and Rio Tinto Group advanced at least 3.5 percent. The Stoxx Europe 600 Index rose 1.3 percent to 403.93 at the close of trading in London, for a sixth gain in seven days.
• Commodities Are Crashing Like It's 2008 All Over Again. (video) Dear commodities investors: Welcome back to 2008! The meltdown has pushed as many commodities into bear markets as there were in the month after the collapse of Lehman Brothers Holdings Inc., which spurred the worst financial crisis seven years ago since the Great Depression. Eighteen of the 22 components in the Bloomberg Commodity Index have dropped at least 20 percent from recent closing highs, meeting the common definition of a bear market. That’s the same number as at the end of October 2008, when deepening financial turmoil sent global markets into a swoon.
• Shale Boom Propels Propane-Powered Trucks From Dream to Reality. For almost 80 years, Blue Star Gas distributed propane throughout the U.S. West Coast on trucks mostly powered by gasoline. Now the company is working to convert its 55 vehicles to run on the same stuff they deliver. They won’t be alone. United Parcel Service Inc. already has more than a thousand propane-powered delivery trucks on the street, with plans to buy more. The change is propelled by a glut of propane from shale wells. It comes as prices for the fuel trade close to a 13-year low and are 75 percent cheaper than diesel. 
• The Odds of a September Rate Hike Have Surged in the Last Two Days. Likelihood of Fed September rate increase tops 50 percent. Traders have never been more convinced of a September rate hike by the Federal Reserve. The chances of an interest-rate increase next month reached 52 percent Wednesday,  up from just 38 percent just two days earlier. What's fueled the change of heart? Hawkish comments from Fed Bank of Atlanta President Dennis Lockhart on Tuesday, and a surprisingly strong report on U.S. service-sector growth Wednesday morning.
• Corporate-Bond Overload: July’s Sales Deluge Leads to Buyer Fatigue. Bond buyers are getting exhausted after absorbing trillions of dollars of corporate debt in the past few years. While they still gobbled up a record-breaking $135 billion of U.S. investment-grade bond sales in July, they’re getting pickier. They’re now demanding the most extra yield to own the debt instead of government securities in two years. “The high-grade bond market feels satiated with paper,” Bank of America Corp. analysts led by Hans Mikkelsen wrote in an Aug. 3 report. “What this market needs is a break -– either in the form of a slowdown in supply volumes or some healthy inflows.” Dollar-denominated investment-grade bonds have been steadily losing value. Prices on the notes have fallen to an average 104.8 cents on the dollar from 110.4 cents in January, according to Bank of America Merrill Lynch index data.
• SEC Backs Rule Forcing Companies to Compare CEO and Worker Pay. The U.S. Securities and Exchange Commission approved a rule Wednesday requiring companies to reveal the pay gap between the chief executive officer and their typical worker, handing a new weapon to groups protesting rising income inequality. The commission voted 3 to 2 to mandate the disclosure. The agency had delayed progress on the rule for years, with SEC Chair Mary Jo White facing attacks from unions and Democratic lawmakers in recent months for failing to get it done.
• Bank of America Merrill Lynch Downgrades Apple(AAPL) for Six Key Reasons.

Zero Hedge: 

• "I Sure Am Glad There's No Inflation". (graph)
• Varoufakis Tells All: Tsipras Was "Dispirited" With "No" Vote, Referendum Was Meant As "Exit Strategy".
• Housing 2006 Redux - Mortgage Fraud And Speculation Come Roaring Back. (graph)
• John Kerry Pleads To Avoid "Ultimate Screwing" Of Iran's Ayatollah, As Obama Scrambles To Pass Iran Deal. (video)
• There Is Officially No Difference Between Jeb And Hillary, Whose Biggest Donors Are The Same.
• WTI Plunges To $44 Handle, Near 5-Month Lows. (graph)
• Six Warning Signs That The Economy Is In Trouble. (graph)
• Crude Pumps'n'Dumps As Production Surge Trumps Inventory Draw. (graph)
• ISM Services Spikes To 10 Year Highs Despite Markit "Hope" Plunge To 3-Year Lows. (graph)
• US June Trade Deficit Surges 7% To $43.8 Billion As Strong Dollar Slams Exports, Imports Rise. (graph)
• ADP Employment Tumbles Near 2015 Lows, Below Lowest Estimate And Down 20% On The Year. (graph)
• Standard Chartered Profit Collapses, Dividend Halved Amid Commodities Carnage.

Business Insider: 

• Brazil's economy is being blasted back in time.
• The S&P 500 is weaker than it looks. (graph)
• New York City hedge funds are dominating their rivals in London.

China Business News:

• Some China Margin Lenders Boost Business as Market Warms Up. Six out of 10 margin lenders are persuading investors to open new financing accounts with leverage ratio of as much as 10:1, citing interviews with the cos. Some companies seek other software or to develop their own after crackdown by China's securities regulator on information-technology companies that offer share-leading facilities, according to the companies.

Bear Radar

Style Underperformer:

• Small-Cap Value -.15%

Sector Underperformers:

• 1) Hospitals -4.45% 2) Coal -3.87% 3) Homebuilders -1.45%

Stocks Falling on Unusual Volume:

• STON, CSTE, DIS, BOOT, ATRO, TRS, ONCE, AM, TWX, ABCO, CSV, CERN, H, PAGP, PWR, WIX, TGH, VIRT, PZZA, PAA, EPAM, EUN, HCI, BKD, INVN, TREX, MPW, AFSI, MTDR, CBS, HCA, HYH, TTPH, LPNT, OTIC, AM, SUPM, CYH, SEMG, CERN, THC, VIAB, AMCX, SNI, MSG, FOXA, DISCK, HSC, QUAD, LPLA, VIRT, TAL, GTN, PBPB, DWA, ENVA, LL and ETSY

Stocks With Unusual Put Option Activity:

• 1) SEAS 2) LL 3) CDE 4) CBS 5) HCA
  

Stocks With Most Negative News Mentions:

• 1) ETSY 2) CERN 3) DIS 4) H 5) TRMB
  

Charts:

• ETFs Falling on Unusual Volume

• Stocks Falling on Unusual Volume

Bull Radar

Style Outperformer:

• Mid-Cap Growth +.57%

Sector Outperformers:

• 1) Gaming +1.85% 2) Networking +1.69% 3) Steel +1.58%
  

Stocks Rising on Unusual Volume:

• CHUY, AHS, RSPP, ZEN, FSLR, SLH, AMSG, HRB, RATE, ATVI, SMCI, AWAY, PCLN, MASI, PAYC, KATE, XXIA, RTRX, RMTI, AAC, UVE, WCG, MB, ACHC, CTSH, NYLD, QVCA, MSI, TROX, SLH, EA, AVT and HFC

Stocks With Unusual Call Option Activity:

• 1) FOXA 2) ADBE 3) HOT 4) DRI 5) HRB
  

Stocks With Most Positive News Mentions:

• 1) ATVI 2) ALL 3) FSLR 4) PCLN 5) MSI
  

Charts:

• ETFs Rising on Unusual Volume 

• Stocks Rising on Unusual Volume