Stocks Falling Substantially into Afternoon on China Bubble-Bursting Fears, Global Growth Worries, Emerging Markets Debt Angst, Financial/Technology Sector Weakness

Broad Equity Market Tone:

• Advance/Decline Line: Substantially Lower
  

• Sector Performance: Every Sector Declining
  

• Volume: Above Average

• Market Leading Stocks: Performing In Line

Equity Investor Angst:

• Volatility(VIX) 31.61 +11.19%

• Euro/Yen Carry Return Index 141.43 -.42%

• Emerging Markets Currency Volatility(VXY) 11.67 +.17%

• S&P 500 Implied Correlation 64.37 -.19%

• ISE Sentiment Index 59.0 -45.4%

• Total Put/Call 1.28 +9.4%

• NYSE Arms 2.65 +124.36% 

Credit Investor Angst:

• North American Investment Grade CDS Index 84.05 +2.76%

• America Energy Sector High-Yield CDS Index 1,836.0 -1.77%

• European Financial Sector CDS Index 85.38 +5.17%

• Western Europe Sovereign Debt CDS Index 22.16 -.40%

• Asia Pacific Sovereign Debt CDS Index 83.83 +3.88%

• Emerging Market CDS Index 358.04 +3.50%
  

• iBoxx Offshore RMB China Corporates High Yield Index 116.73 -.20%

• 2-Year Swap Spread 13.25 -2.25 basis points

• TED Spread 27.25 unch.

• 3-Month EUR/USD Cross-Currency Basis Swap -22.0 +.25 basis point

Economic Gauges:

• 3-Month T-Bill Yield .02% +2.0 basis points

• Yield Curve 147.0 unch.

• China Import Iron Ore Spot $56.59/Metric Tonne +.68%

• Citi US Economic Surprise Index -12.6 -4.4 points

• Citi Eurozone Economic Surprise Index 24.8 +9.6 points

• Citi Emerging Markets Economic Surprise Index -18.6 -5.0 points

• 10-Year TIPS Spread 1.58 -5.0 basis points
• # of Months to 1st Fed Rate Hike(Morgan Stanley) 3.83 -.45

Overseas Futures:

• Nikkei 225 Futures: Indicating -335 open in Japan 
• China A50 Futures: Indicating -970 open in China

• DAX Futures: Indicating -61 open in Germany

Portfolio: 

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

• Disclosed Trades: None

• Market Exposure: 25% Net Long

Today's Headlines

Bloomberg: 

• The $2 Trillion Emerging-Stock Drop Fixing All Eyes on China. (video) The August meltdown that wiped more value off emerging-market stocks than at any time since the collapse of Lehman Brothers Holdings Inc. has gotten investors more fixated than ever on China’s economic fortunes. As the shock Chinese yuan devaluation sent at least half of the main developing countries into bear-market territory last month, the capitalization of the 31 largest emerging equity markets slid by $2 trillion, according to data compiled by Bloomberg. The selloff continued on Tuesday as worse-than-expected manufacturing figures out of China sent the MSCI Emerging Markets Index tumbling 2.2 percent by 3:27 p.m. in London.
• Is This the China Hard Landing Investors Fear? (video)
• Is the China Carry Trade Unwinding? (video)
• Lagarde Says Global Growth Outlook Weaker Than IMF July Forecast. International Monetary Fund Managing Director Christine Lagarde said the global expansion outlook is worse than the lender anticipated less than two months ago, with advanced and Asian economies growing more slowly than expected. “We expect global growth to remain moderate and likely weaker than we anticipated last July,” Lagarde said Tuesday in a speech in Jakarta. “This reflects two forces: a weaker than expected recovery in advanced economies, and a further slowdown in emerging economies, especially in Latin America.”
• Brazil's Epic Era of Splurging Is Over. Higher taxes, loss of jobs and lower wages have cut into consumer spending. Gone are the days of Brazilians flooding Miami to spend millions on fast cars and bling.  An era of austerity has dawned in Latin America's largest economy as the country charts a course in fiscal tightening. “The good times are over,” Jankiel Santos, chief economist at BESI Brazil, said by phone. “Brazil is in a difficult situation, and needs to correct the excesses of the past.” These three charts illustrate the end of a decade-long consumption boom.
• Petrobras Sinks With Ibovespa as UBS Cuts Profit Outlook by 80%. Shares of Petrobras extended a plunge over the past year to 62 percent, more than double the slide in the stock benchmark, after the Zurich-based bank said that a weaker currency may sap profitability. The Ibovespa has slumped 4.6 percent over the past three days, while the currency dropped to the lowest level since December 2002.
• Will We See More Crises in Emerging Markets? (video)
• Ruble Weakens as Morgan Stanley Forecasts Recession Through 2016. The ruble snapped four days of gains as oil declined and Morgan Stanley forecast the country’s recession will last another year. Russia’s currency weakened 1.5 percent to 65.1950 against the dollar by 1:52 p.m. in Moscow, starting September on a sour note after four consecutive months of declines. An index of manufacturing activity in August fell to 47.9 from 48.3 in July, the ninth straight month of contraction. The energy-dependent economy will contract 4.2 percent this year, according to Morgan Stanley, which joined Deutsche Bank AG in downgrading its outlook for Russia this week. That’s more than the 3.7 percent decline in gross domestic product forecast by 48 economists surveyed by Bloomberg. 
• Dubai Property Prices Fall Most in the World, Knight Frank Says. Dubai property prices fell by 12.2 percent during the past year, the largest drop in the world, according to real estate consultancy Knight Frank. The decline in the twelve months through June was the biggest in 56 mainstream residential markets and larger than the 12 percent fall in real estate prices in Ukraine, which has been hit by almost two years of protests, a separatist insurgency, and political upheaval, Knight Frank said Tuesday in a report. Prices in Dubai fell 2.8 percent in the second quarter. Hong Kong was the best performing residential market, with prices up by 20.7 percent. 
• Aussie Sinks to 6-Year Low as China Factory Gauge Clouds Outlook. The Australian dollar plunged to a six-year low as a decline in China’s official factory gauge eroded the outlook for commodities demand. The currency dropped as much as 1.1 percent to 70.37 U.S. cents, touching the cheapest since April 2009. China’s official Purchasing Managers’ Index dropped to 49.7 for August, the weakest in three years. Numbers below 50 indicate contraction. Australia’s central bank left interest rates unchanged Tuesday.
• French Factory Drag Intensifies as Germany Leads Europe Recovery. France’s manufacturing industry shrank more than initially estimated last month, leaving Germany to take a greater share of the burden of driving the euro-area recovery. Markit Economics said its Purchasing Managers’ Index for France fell to 48.3 from 49.6 in July, lower than the 48.6 reading reported on Aug. 21. In contrast, the German gauge rose more than estimated and was well above the 50 level that divides expansion and contraction. The measure for the euro zone also signalled growth.
• ECB Asset-Back Debt Holdings Fall Even With Renewed Buying Push. The European Central Bank’s holdings of asset-backed debt fell for the first time since January, even as the bank steps up purchasing efforts to help boost regional lending. The outstanding amount held in the ECB’s asset-backed securities purchase program declined by 106 million euros ($120 million) to 11.1 billion euros in the week ended Aug. 28, the Frankfurt-based institution said Monday. A spokesman declined to comment on the drop in holding of bonds backed by mortgages to auto loans. The decline is probably because the ECB can’t buy enough new bonds to replace maturing debt, said Gareth Davies, head of European asset-backed securities research at JPMorgan Chase & Co. 
• Europe Stocks Selloff Deepens as Global Growth Worries Intensify. The plunge that led Europe’s equities to their biggest monthly losses since 2011 is showing no signs of easing. The Stoxx Europe 600 Index lost 2.8 percent at 4:32 p.m. in London, and dropped as much as 3.3 percent. The measure followed Asian stocks lower after a report showed China’s official factory gauge dropped to a three-year low, while separate data signaled manufacturing in the euro area shrank more than initially forecast and output in the U.S. expanded at the slowest pace since 2013. Miners again were the most hurt among European industry groups, sliding 5.7 percent as commodities resumed their declines. 
• China Seen Driving Commodities Lower as Uncertainty Spreads. China will continue to hurt commodities in coming months as a volatile equity market and political uncertainty add to concern that economic growth is weakening, according to Citigroup Inc. Demand for raw materials will weaken while a spillover from financial markets adds further pressure on prices, analysts including Ivan Szpakowski wrote in a report Tuesday subtitled "Riding the Chinese Rollercoaster." Corruption investigations have also crippled investment by some state companies, particularly power grid operators that support copper demand, according to the bank.
• Just the Mechanics of the Fed's Exit Strategy Could Boost the Dollar. But a stronger greenback could complicate matters. The U.S. dollar has risen 17 percent against the euro over the past year, as the Federal Reserve has drawn closer to raising interest rates for the first time since 2006. There could be further appreciation ahead for purely mechanical reasons, given the unique nature of the upcoming tightening cycle and the new tools the Fed will use to raise rates, according to Zoltan Pozsar, a director of U.S. economics at Credit Suisse Securities USA in New York.  
• BofA Says its Clients Bought a Record Amount of Stocks Last Week. There was "buying across the board". According to Bank of America Merrill Lynch flow data, its clients were net buyers of $5.6 billion in U.S. equities last week, a record dating back to when the survey began in 2008.
• Google(GOOG) Faces New Menace in EU as Hausfeld Eyes Damages Lawsuits. Perceived victims of Google Inc.’s alleged anti-competitive behavior have a new European dial-in number. U.S. law firm Hausfeld & Co. LLP and antitrust consulting company Avisa Partners set up a platform to evaluate potential damages suits as the European Union threatens the search-engine giant with antitrust fines.

Fox News:

• Cops hunt 3 suspects in shooting of Illinois police officer. (video)

CNBC: 

• Art Cashin: Markets could hit retail sales. (video) 
• Here’s why it can get much worse: Technician. (video)
• Fed's Rosengren: Job target for hike 'largely' met. (video)
• Apple(AAPL) has 'really tough' year ahead: Analyst. (video)
• The US stocks with a very real China problem.

Zero Hedge:

• US Manufacturing Plunges To 2-Year Lows As New Orders, Employment Tumble. (graph)
• Peak Construction Spending? (graph)
• The "Great Accumulation" Is Over: The Biggest Risk Facing The World's Central Banks Has Arrived.
• September 2015: We Officially Enter The Danger Zone.
• China: Doomed If You Do, Doomed If You Don't.
• The Best And Worst Performing Assets In August: It Was A Good Month For Pet Rocks, Bad For "Hedge" Funds. (graph)
• Third Greek Bailout Suddenly In Jeopardy: Creditors Warn Cash May Be Delayed If Elections Don't Go As Desired.
• Behold China's 2PM Ramp Capital. (graph)
• WTI Crude Plunges 5.25% - Biggest Drop In A Month. (graph)
• Mysterious Buying And Selling By China Distorts Mid-East Oil Price, Baffles Traders.
• US Equities Are Crashing Again - Dow Futures Down 430, AAPL -2.75%; NYSE Unleashes Rule 48 (Again).
• Two-Thirds Of Global PMIs Deteriorate In August. (table)
• Not "Unequivocally Good" - Canada Enters Recession. (graph)
• Global Trade In Freefall: South Korea Exports Crash Most Since 2009. (graph)
• China Takes "10 Steps Back," Slaps 20% Reserve Requirement On Currency Forwards.

Business Insider:

• China's best hope for its economy is fading.
• A major warning from the most reliable bellwether of the world economy.
• IT'S OFFICIAL: Canada is in recession.
• Several US cities have seen terrifying spikes in their murder rates.

Bear Radar

Style Underperformer:

• Large-Cap Value -3.01%

Sector Underperformers:

• 1) Coal -8.52% 2) Banks -3.88% 3) Energy -3.68%

Stocks Falling on Unusual Volume:

• DLTR, ZIV, SMCI, PTR, VRTS, RSO, WWE, W, OII, HRTX, NP, PAC, BXMT, XIV, GPRO, BR, APAM, TU, BLK, MIDD, ICFI, TARO, IIF, MELI, SAIC, OMER, HLS, RSO, JOY and TDOC

Stocks With Unusual Put Option Activity:

• 1) KBH 2) XHB 3) EWA 4) IYR 5) DE
  

Stocks With Most Negative News Mentions:

• 1) FCX 2) PBR 3) DLTR 4) GILD 5) UTX
  

Charts:

• ETFs Falling on Unusual Volume

• Stocks Falling on Unusual Volume

Bull Radar

Style Outperformer:

• Small-Cap Growth -2.21%

Sector Outperformers:

• 1) Gold & Silver -1.44% 2) Tobacco -1.64% 3) Restaurants -1.66%
  

Stocks Rising on Unusual Volume:

• TRVN

Stocks With Unusual Call Option Activity:

• 1) SYY 2) CVC 3) VNR 4) TJX 5) K
  

Stocks With Most Positive News Mentions:

• 1) SUNE 2) OPK 3) TRVN 4) JCP 5) DOV
  

Charts:

• ETFs Rising on Unusual Volume 

• Stocks Rising on Unusual Volume

Morning Market Internals

NYSE Composite Index:

• Volume Running 23.8% Above 100-day average
• 0 Sectors Rising, 10 Sectors Declining
• 12.5% of Issues Advancing, 86.1% Declining
• 5 New 52-Week Highs, 60 New Lows
• 24.4% of Issues Above 200-day Moving Average
• Average 14-Day RSI 37.3
• Vix 31.3
• Total Put/Call 1.37
• TRIN/Arms 3.26

Tuesday Watch

Evening Headlines 

Bloomberg:  

• China's Stocks Extend Rout as Factory Data Adds to Economy Woes. China’s stocks fell, extending the biggest two-month tumble since 2008, after an official factory gauge slumped to a three-year low and concern grew that government intervention to shore up equities will fail. The Shanghai Composite Index slid 3.2 percent to 3,102.08 at 10:05 a.m. local time. The gauge lost 12 percent last month after declining 14 percent in July. The official Purchasing Managers’ Index was 49.7 for August, down from 50 in July. Numbers below 50 indicate contraction. “The manufacturing index still shows that the economy is in the process of seeking a bottom,” said Wu Kan, a Shanghai-based fund manager at JK Life Insurance. “The market is unlikely to pick up anytime soon.” The CSI 300 Index dropped 3.7 percent. Hong Kong’s Hang Seng China Enterprises Index retreated 1.6 percent. The Hang Seng Index slipped 0.7 percent. The Shanghai gauge plunged 12 percent last month, adding to July’s 14 percent tumble.

• China Orders Banks to Hold Reserves for Currency Forwards. China’s central bank moved to curb speculation in the currency market and limit capital outflows, imposing a reserve requirement on financial institutions trading in foreign-exchange forwards for clients. The People’s Bank of China, effective Oct. 15, will mandate a deposit of 20 percent of sales to be held at zero interest and frozen for a year, according to six people familiar with the matter. The change, which will take effect on Oct. 15, is aimed at preventing macro financial risks, said the people, who asked not to be identified because they aren’t authorized to speak publicly.

• Probes of China's Market Crimes Intensifies. (video)

• China’s Official Factory Gauge Shrinks to Lowest in 3 Years. China’s official factory gauge fell to the lowest reading in three years as monetary easing failed to revive old growth drivers weighed by overcapacity and sliding prices. The official Purchasing Managers’ Index was 49.7 for August, matching the median estimate in a Bloomberg survey and down from 50 in July. Numbers below 50 indicate contraction, with small, medium and large enterprises all below that level last month. "Both domestic and external demand are weak," said Tommy Xie, an economist at Oversea-Chinese Banking Corp. in Singapore. "Market sentiment is bad and it’s too early to say the Chinese economy is bottoming out." Xie said a stock market rout and the yuan devaluation in August have added additional risks for manufacturers.

• Alibaba(BABA) Investors Backpedal as China Slowdown Saps Sales Growth. The rush that drove Alibaba Group Holding Ltd. to a record U.S. initial public offering has turned into a retreat a year later as the Chinese online retailer is beset by the slowest economic growth in 25 years and a domestic stock selloff that has shaken global investor confidence. The American depositary receipts, which surged as much as 75 percent from the initial listing price, tumbled 16 percent to $66.12 in August in their third straight monthly decline in New York. The drop pushed the ADRs below the debut price of $68 as short sellers boosted bearish bets on the stock to the highest since April.

• Concerns Over Asean Default Risks Mount. (video) 

• Southeast Asia's Biggest Companies Risk $392 Billion Debt Burden. Southeast Asia’s biggest companies have increased debt sixfold since the regional financial crisis, stoking concern over default risks as investors draw parallels with the 1998 meltdown. The region’s 100 largest listed companies by assets, including Thailand’s CP ALL Pcl, Petron Corp. of the Philippines and Singapore’s Wilmar International Ltd., had accumulated $392 billion by June 30, data compiled by Bloomberg show. That’s up six times from December 1998. Debt loads as a proportion of assets are climbing back near levels from the crisis at 31.7 percent, up from 29.5 percent in 2010.

• South Korea's Exports Fall Most Since 2009 in August. South Korea’s exports tumbled in August by the most since 2009, as weaker overseas demand hit Asia’s fourth-largest economy. Overseas shipments fell 14.7 percent from a year earlier, an eighth straight monthly decline, the Ministry of Trade, Industry and Energy said on Tuesday. The median estimate of economists surveyed by Bloomberg was for a 5.9 percent drop. South Korea generates about half of its gross domestic product from exports and is the world’s biggest exporter to China. The nation is one of the most exposed to depreciation in the yuan, and is also facing increasing competition from Chinese companies that are moving up the value-added chain, according to the Institute of International Finance last week. 

• Toshiba Says New Accounting Problems Delay Earnings Again. Toshiba Corp. uncovered 10 new cases of accounting problems, including at a U.S. unit, prompting it to miss a regulator’s deadline for submission of its fiscal 2014 earnings release. The Japanese industrial group obtained permission from the securities regulator to postpone the report due Monday until Sept. 7. President Masashi Muromachi, who took charge after three of his predecessors left following a July third-party report showing accounting irregularities at the company, said he may quit if the new deadline was missed.

• Asian Stocks Drop as China Manufacturing Slump Boosts Yen, Gold. Asian stocks showed no sign of shaking off last month’s worst selloff since 2012, sinking with U.S. index futures as a gauge of Chinese manufacturing fell to a three-year low. The yen rallied with gold, while oil pulled back after entering a bull market. Fresh from one of the most volatile trading periods since the global financial crisis, investors are scanning data for signs of China’s impact on the world economy. Factory gauges for Japan to India, Europe and the U.S. are scheduled, along with updates on consumer prices in Thailand and Indonesia. Australia will review interest rates. “Investors are concerned about the strength of the global economy, which is why you’re seeing a selloff in various stock markets,” said Ayako Sera, a strategist at Sumitomo Mitsui Trust Bank Ltd. in Tokyo. The MSCI Asia Pacific Index dropped a second day, losing 0.9 percent by 10:36 a.m. in Tokyo, after sinking the most since May 2012 last month. Japan’s Topix index slid 1.7 percent.

• Barclays: There's a New Oil Glut in Town. And it could make the old glut even bigger. (graph) "The surplus in the petroleum market is increasingly evident in refined products," says the team led by commodities analyst Miswin Mahesh. "Global refinery throughput touched a record high of 80.6 million barrels per day in July, with utilization rates at the highest in eight years."

• Fischer Doesn’t Sway December Camp as 48% See Sept. Fed Liftoff. U.S. central bankers face their toughest policy call in years next month -- raise interest rates or wait a little longer. Whatever the decision, about half of economists will be wrong. Forty-eight percent of 54 economists surveyed Aug. 27-31 by Bloomberg News see a September increase in the benchmark lending rate, the first move up since 2006. That’s down from 77 percent in an Aug. 7-12 survey, though it is still double the 24 percent who say the first move will occur in December. Seventeen percent said October.

Wall Street Journal:

• Renaming of Mount McKinley Roils GOP. Republicans question renaming North America’s tallest peak and one of the few monuments dedicated to the 25th president. Late Sunday, on the eve of his visit to Alaska, President Barack Obama announced that Interior Secretary Sally Jewell had used her authority to rename North America’s tallest mountain from Mount McKinley to Denali, which in the Athabaskan language means “the great one,” the name that was used for centuries by Alaska natives.

• Hillary Clinton vs. Ashley Madison. A website for adulterers faces more accountability than a U.S. secretary of state. What a world we live in when a website promoting adultery is held more accountable than a U.S. secretary of state. Only weeks after a hack exposed the names and other confidential information about Ashley Madison’s mostly male clientele, it’s hard to see how the company can recover. By contrast, Hillary Clinton remains the Democratic Party’s likely 2016 nominee for president, even though we’ve known since at least March 2013 (thanks to a Romanian hacker named Guccifer) that she conducted State Department business over...

CNBC:

• Oil may test $30 again this year: Trader. (video)

Zero Hedge:

• US & China Stocks Are Plunging After PMI Hits 6.5-Year Low, PBOC Strengthens Yuan Most Since Nov 2014. (graph)

• Dow Futures Plunge 240 Points As Oil Drops 4% Ahead Of China PMI. (graph)

• Brazil Throws In Towel On Budget; Citi Compares Fiscal Outlook To "Bloody Terror Film". (graph)

• Recession Odds Surge To 47%, Highest Since 2011. (graph)

• How China Cornered The Fed With Its "Worst Case" Capital Outflow Countdown.

• Is This Man Responsible For China's Stock Market Crash?

• Russian Military Forces Arrive In Syria, Set Forward Operating Base Near Damascus.

• Citi Slams Today's Historic Oil Surge: "Another False Start, Time To Fade The Rally". (graph)

• Saudi Arabia's Stock Market Just Logged Its Worst Month Since Lehman. (graph)

• The Age Of Voodoo Finance.

• China Rocked By Another Massive Chemical Explosion.

• Stocks Suffer Biggest Monthly Drop In Five Years As Oil Spikes Most Since 1990. (graph)

Business Insider:

• Something is hurting morale in police departments all across America.

• 150 more of Hillary Clinton’s emails have now been deemed classified.

• Russia and China could be 'making it impossible for the US to hide' its intelligence activities.

Reuters:

• Einhorn and Loeb's hedge funds both decline 5 pct in Aug. Hedge fund billionaires David Einhorn and Daniel Loeb saw their main funds lose roughly 5 percent in August during a dramatic market sell off, two people familiar with their returns said on Monday. Einhorn's Greenlight Capital fell 5.3 percent, extending the roughly $12 billion firm's loss for the year to 13.8 percent, the sources said. Loeb's Third Point fund dropped 5.2 percent, but is up 1.2 percent for the year. Loeb"s Third Point Ultra fund fell 9.1 percent in August and is essentially flat on the year with a 0.8 percent gain, one of the sources said.

Evening Recommendations 

• None of note

Night Trading

• Asian equity indices are -2.0% to -.5% on average.

• Asia Ex-Japan Investment Grade CDS Index 135.25 +3.0 basis points.

• Asia Pacific Sovereign CDS Index 80.75 +.75 basis point.

• S&P 500 futures -1.69%.

• NASDAQ 100 futures -1.74%.

Morning Preview Links

Earnings of Note

Company/Estimate

• (DLTR)/.68

• (DCI)/.42

• (AVAV)/-.16

• (BOBE)/.30

• (HRB)/-.39

• (SCVL)/.18

Economic Releases

9:45 am EST

• Final Markit US Manufacturing PMI for August is estimated at 52.9 versus a prior estimate of 52.9.
  

10:00 am EST

• Construction Spending for July is estimated to rise +.6% versus a +.1% gain in June.

• The IBD/TIPP Economic Optimism Index for September is estimated to rise to 47.1 versus 46.9 in August. 

• ISM Manufacturing for August is estimated to fall too 52.5 versus 52.7 in July.

• ISM Prices Paid for August is estimated to fall to 39.0 versus 44.0 in July.
  

Afternoon:

• Total Vehicle Sales for August are estimated to fall to 17.3M versus 17.46M in July.
  

Upcoming Splits

• (RAI) 2-for-1

Other Potential Market Movers

• The Fed's Rosengren speaking, Eurozone Manufacturing PMI, UK Manufacturing PMI, Australia GDP report, RBA Meeting, weekly US retail sales reports, KeyBanc Basic Materials/Packaging conference and the (F) US sales conference call could also impact trading today.

BOTTOM LINE: Asian indices are lower, weighed down by industrial and technology shares in the region. I expect US stocks to open lower and to maintain lossses into the afternoon. The Portfolio is 25% net long heading into the day.