Stocks Slightly Higher into Afternoon on Central Bank Hopes, Oil Bounce, Less Eurozone/Emerging Markets Debt Angst, Gaming/Homebuilding Sector Strength

Broad Equity Market Tone:

• Advance/Decline Line: About Even
  

• Sector Performance: Mixed
  

• Volume: Slightly Below Average

• Market Leading Stocks: Underperforming

Equity Investor Angst:

• Volatility(VIX) 25.92 -.65%

• Euro/Yen Carry Return Index 139.50 -1.17%

• Emerging Markets Currency Volatility(VXY) 12.26 +.08%

• S&P 500 Implied Correlation 64.32 +4.93%

• ISE Sentiment Index 60.0 -.2%

• Total Put/Call 1.1 -16.0%

• NYSE Arms 1.07 +81.75% 

Credit Investor Angst:

• North American Investment Grade CDS Index 82.33 -.78%

• America Energy Sector High-Yield CDS Index 1,841.0 +.78%

• European Financial Sector CDS Index 81.84 -2.7%

• Western Europe Sovereign Debt CDS Index 21.28 -7.6%

• Asia Pacific Sovereign Debt CDS Index 81.40 -2.05%

• Emerging Market CDS Index 350.52 -2.13%
  

• iBoxx Offshore RMB China Corporates High Yield Index 116.84 +.02%

• 2-Year Swap Spread 14.25 +.75 basis point

• TED Spread 32.25 +3.0 basis points

• 3-Month EUR/USD Cross-Currency Basis Swap -24.0 -.5 basis point

Economic Gauges:

• 3-Month T-Bill Yield .02% -1.0 basis point

• Yield Curve 147.0 -1.0 basis point

• China Import Iron Ore Spot $56.50/Metric Tonne -.35%

• Citi US Economic Surprise Index -14.7 +1.2 points

• Citi Eurozone Economic Surprise Index 27.1 +2.6 point

• Citi Emerging Markets Economic Surprise Index -23.2 +.3 point

• 10-Year TIPS Spread 1.54 -2.0 basis points

• # of Months to 1st Fed Rate Hike(Morgan Stanley) 4.39 +.21

Overseas Futures:

• Nikkei 225 Futures: Indicating +59 open in Japan 

• China A50 Futures: Indicating n/a open in China

• DAX Futures: Indicating -87 open in Germany

Portfolio: 

• Slightly Lower: On losses in my biotech/medical sector longs

• Disclosed Trades: Added to my (IWM)/(QQQ) hedges

• Market Exposure: Moved to 25% Net Long

Today's Headlines

Bloomberg: 

• Draghi Unveils Revamped QE Program as ECB Downgrades Outlook. (video) Mario Draghi unveiled a revamp of quantitative easing and signaled officials might expand stimulus if the rout in financial markets continues to weigh on growth and inflation. The European Central Bank president said in Frankfurt on Thursday that the Governing Council raised the share of bonds the ECB can buy to 33 percent of each issue from 25 percent, and that policy makers are ready to make more adjustments to ensure the full implementation of the 1.1 trillion-euro ($1.2 trillion) program. A weaker global outlook prompted an across-the-board reduction of the institution’s growth and consumer-price forecasts through 2017. The euro slid to a two-week low.

• ECB Bond-Buying Tweak Is Less Than Meets the Eye, ABN Amro Says. European Central Bank President Mario Draghi sparked a rally in euro-area government bonds Thursday when the ECB increased a cap on the amount of securities it’s able to buy under its stimulus program to 33 percent from 25 percent. To ABN Amro Bank NV, this is no game changer. That’s because the increase is only likely to be applied to bonds that were issued before 2013 as they had no collective action clauses, according to Kim Liu, a fixed-income strategist at ABN Amro in Amsterdam. 

• Euro Drops as ECB Adjusts Bond-Buying Cap, Sees Downside Risks. (video) The euro dropped 0.8 percent to $1.1142 at 1:48 p.m. London time and touched $1.1124, its weakest level since Aug. 20. It dropped 0.9 percent to 133.83 yen.

• Is China Growth Number Fiction What Investors Fear Most? (video)

• Are Deteriorating Emerging Markets a Contagion Threat? (video)

• Foreigners Flee Japan Stocks at Fastest Pace Since at Least 2004. Global investors are pulling money out of Japan’s equity market at the fastest pace since at least 2004, according to Mizuho Securities Co. Foreigners last week sold a net 1.85 trillion yen ($15.4 billion) of Japanese stocks and equity index futures, the biggest combined outflow since Mizuho began tracking the data more than a decade ago, said Yutaka Miura, a Tokyo-based senior technical analyst at the brokerage. Investors are fleeing amid concern about China’s economic outlook and the prospect of higher interest rates in the U.S., he said.

• Falling Currencies Raise Debt-Service Fears Across Africa. In the past decade, countries across Africa, encouraged by surging commodity prices and a global appetite for high-risk debt, sold dollar bonds to finance everything from roads to railways to tuna-fishing fleets. Now commodity prices have halved and African currencies are tanking, making the bond payments tougher and raising the possibility of a debt crisis on the world’s poorest continent. The risk of such an outcome is denting the outlook for countries from Ghana to Mozambique. Africa in recent years boasted most of the world’s fastest-growing economies and lured investors hungry for assets yielding more than those in the rich world.

• Global Investment Banks May See Revenue Drop, JPMorgan Says. Global investment banks may see revenue drop 19 percent in the third quarter, lowering earnings per shares across the industry, as a surge in volatility caused by turmoil in China recedes, according to analysts at JPMorgan Chase & Co. “Recent strong turnover, especially in equities, could decline materially once markets settle -- not just in Asia but globally,” analysts led by Kian Abouhossein wrote in a report on Thursday. “Although volatility is good for investment banks,” it “could impact deal completion in the third quarter and potentially the fourth quarter,” they wrote, when cutting their estimates for earnings-per-share by an average of 2 percent to 3 percent through 2017. 

• European Stocks Accelerate Gains as Draghi Rides to the Rescue. The Stoxx Europe 600 Index climbed as much as 2.9 percent, before closing 2.4 percent higher. The gauge halted a rout yesterday, after posting the worst monthly performance in four years and tumbling further earlier this week amid concern over a slowdown in China.

• Aramco Cuts October Crudes to U.S. as Refinery Demand Falls. Saudi Arabia, the world’s largest crude exporter, cut pricing for all October oil sales to the U.S., widening the discount on its Medium grade for the first time in eight months, with refining demand plunging after the end of the summer driving season. State-owned Saudi Arabian Oil Co. cut its official selling price for October. Arab Medium sales to U.S. buyers by 50 cents a barrel, to 55 cents less than the regional benchmark, the company said in an e-mailed statement Thursday. Light crude will sell at a premium of 95 cents a barrel to the regional benchmark, 60 cents below the differential in September. Crude demand at U.S. plants fell below 2014 levels last week for the first time since March. Oil inventories rose by the most in four months as wells are still producing near the highest level in 40 years. The profit margin for making gasoline and diesel along the Gulf Coast, home to more than half of U.S. refining capacity, slid below $10 a barrel for the first time since April as fuel demand wanes. “Refining margins are coming down,” Olivier Jakob, managing director at consultants Petromatrix GmbH in Zug, Switzerland, said by telephone. “They’ve gone from very strong to just strong.” 

• The Impact of Excess Supply on the Price of Oil. (video)

• Crash Could Cost U.S.-Canadian Cities $170 Billion, Lloyd’s Says. A stock-market crash could erase as much as $170.3 billion from major cities’ gross domestic product in the U.S. and Canada and is the biggest threat to their economies, Lloyd’s of London said. The losses, which represent about 2 percent of combined GDP for the 35 cities studied, surpassed estimates for the impact of natural disasters such as floods and earthquakes as well as terrorist attacks, the London-based insurance market said Thursday in a report.

• Consumer Comfort in U.S. Eases as Attitudes on Economy Falter. Consumer confidence in the U.S. eased last week, with Americans becoming more pessimistic about the state of the economy as global financial markets turned south. The Bloomberg Consumer Comfort index fell to 41.4 in the week ended Aug. 30 from 42 the previous period. About half of the survey interviews were collected during the recent stock-market sell-off, said Gary Langer, president of Langer Research Associates, which compiles the data for Bloomberg. The measure of Americans’ views of the economy fell to 32.7 from 34.6, the biggest drop since late February. The index tracking the buying climate, which indicates whether consumers think now is a good time to purchase goods and services, declined to 36.9 from 37.2. The personal finances gauge was little changed at 54.6 from 54.3.

• Almost Half of Homes in New York and D.C. Are Now Losing Value. A new home-price index is a warning sign for some property markets. Almost half of single-family houses in the New York and Washington metropolitan areas are losing value, a sign that buyers' tolerance for high prices in many large U.S. cities may be reaching a limit.The values of 45 percent of houses in both the Washington and New York areas slumped by at least 2 percent in June from a year earlier, according to a new index created by Allan Weiss, co-founder of the Case-Shiller home price indexes. 

• Joy Global(JOY) Plummets After Cutting 2015 Forecasts on Miner Demand.
  Joy Global Inc., the world’s biggest manufacturer of underground mining equipment, fell the most in six years after cutting its forecast for 2015 earnings and revenue amid a global commodity downturn. Joy tumbled 16 percent to $18.64 at 10:23 a.m., after earlier dropping as much as 20 percent, the most intraday since November 2008. It was the biggest decline today in the Standard & Poor’s 500 Index. Joy’s shares have plunged 60 percent this year as struggling miners buy less machinery.

• The IPhone Company. Apple's(AAPL) financial dependence on the smartphone is increasing. (graph) 

Wall Street Journal: 

• Syrian Refugees Take Arctic Route to Europe. More than 150 refugees have entered Norway from Arctic Russia this year.

• Donald Trump Leans Toward Swearing Off Third-Party Run. Candidate meeting with RNC Chairman to discuss signing pledge to support party’s nominee.

MarketWatch.com:

• Netflix's(NFLX) stock drops again, heads toward a fifth-straight loss.

Fox News: 

• Judge orders Kentucky clerk to jail for refusing to issue marriage licenses for gay couples.

CNBC: 

• Most workers actually making LESS than 5 years ago. (video)

• Stop blaming China—the problem is bigger than that. Everyone is blaming China for the recent stock-market rout, but this blame is misguided. China was the beneficiary of global expansion of money supply at the hands of activist central banks. In fact, my view is that Chinese leadership had little to do with the growth "miracle" it experienced over the last decade.

Zero Hedge:

• Why The Rally Just Fizzled: Draghi's "Puff" Was Not Enough. (graph)

• Central Banker Urges Lying To The Public About Bank Health.

• Mapping The Crisis Contagion Process: The Flowchart.

• This Is Not A Retest - It's A Live Bear! (graph)

• This Is What The Historic "Risk Parity" Blow Up Looked Like. (graph)

• Saudi Arabia Just Cut Crude Selling Prices To The US, Europe And Asia. (graph)

• Suddenly The Bank Of Japan Has An Unexpected Problem On Its Hands. (graph)

• US Services Economy 'Solid' In August - Signals September Hike Back On Table. (graph)

• Bob Shiller Fears "Substantial Decline" Sees Dow 'Fair Value' Around 11,000. (video)

• Initial Jobless Claims Jumps Most In 2 Months - Unchanged Since End Of QE3. (graph)

• For The Average American, A Modest 10% Correction Is Now A "Market Crash". (graph)

• Total 2015 Job Cuts To Be Biggest Since 2009: Challenger. (graph)

Business Insider:

• Europe's asylum system is reaching its breaking point.

• THIS IS IT: We're hours away from the jobs report that could change the game for the Fed.

• China is ramping up its military with a show of force in and outside the country. (video) 

• The guy who helped Hillary Clinton set up her email server is pleading the 5th.

Financial Times: 

• US trade contraction adds to global fears. The US economy’s trade with the rest of the world contracted in the first seven months of this year, according to figures that will add to concerns over a slowdown in global trade. The numbers released on Thursday also show how trade between some of the world’s biggest trading blocs — the US, EU and China — have been affected by the slowdown. They also illustrate how even the relatively robust growth in the US has its limitations as an engine of global growth.

Bear Radar

Style Underperformer:

• Small-Cap Growth -.03%

Sector Underperformers:

• 1) Biotech -1.72% 2) Education -.72% 3) Restaurants -.41%

Stocks Falling on Unusual Volume:

• FIVE, JOY, VRNT, KB, CVGW, TRVN, ABM, OXM, BOBE, SAGE, OAK, NICE, CTLT, TVIX, BKE, CAT, OXFD, RSO, BCR, RLYP, PBH, MDCO, CRS, MDT, ITCI and BKE

Stocks With Unusual Put Option Activity:

• 1) JOY 2) DOW 3) EWA 4) CIEN 5) XHB
  

Stocks With Most Negative News Mentions:

• 1) AMBA 2) AAL 3) GOOG 4) BKE 5) WRLD
  

Charts:

• ETFs Falling on Unusual Volume

• Stocks Falling on Unusual Volume

Bull Radar

Style Outperformer:

• Large-Cap Value +.69%

Sector Outperformers:

• 1) Gaming +2.52% 2) Oil Service +1.48% 3) Homebuilders +1.46%
  

Stocks Rising on Unusual Volume:

• PSEM, BGS, MEI, LCI, NCS, VRA, GEF, ACAD, SCOR, FRAN and SUNE

Stocks With Unusual Call Option Activity:

• 1) STLD 2) JOY 3) RAI 4) MSI 5) FTR
  

Stocks With Most Positive News Mentions:

• 1) RAD 2) LCI 3) VZ 4) CPB 5) MDT
  

Charts:

• ETFs Rising on Unusual Volume 

• Stocks Rising on Unusual Volume

Morning Market Internals

NYSE Composite Index:

• Volume Running 2.5% Below 100-day average
• 10 Sectors Rising, 0 Sectors Declining
• 82.2% of Issues Advancing, 15.6% Declining
• 6 New 52-Week Highs, 14 New Lows
• 21.3% of Issues Above 200-day Moving Average
• Average 14-Day RSI 35.2
• Vix 24.3
• Total Put/Call 1.06
• TRIN/Arms .48

Thursday Watch

Evening Headlines 

Bloomberg:    

• China’s Searching for Stock Market Scapegoats. “They don’t quite get how to work with these markets, don’t know what they’re doing”. Xi’s government is struggling to balance a pledge to loosen its grip on the economy with the desire to ensure stability and maintain confidence in the ruling Communist Party. The battle between the invisible hand of the market and the iron fist of the government creates confusion and chaos, making China the biggest threat to the global economy and financial markets. “They don’t quite get how to work with these markets, don’t know what they’re doing—that view is already out there,” says Nicholas Field, emerging-markets strategist at money manager Schroders in London. “It’s one of the reasons why global markets have sold off.”  

• Australian Retail Sales Unexpectedly Fall as Economy Slows. Australian retail sales unexpectedly fell in July, the first drop since May 2014, as highly-indebted consumers put away their pocketbooks. Sales fell 0.1 percent from a month earlier, when they rose a revised 0.6 percent -- lower than first reported, government data showed Thursday. The result compares with the median estimate in a Bloomberg survey of 26 economists for a 0.4 percent gain. The data corresponds with a rise in the household savings rate and suggests little improvement in the economy at the start of the third quarter after growth slowed to an anemic 0.2 percent in the second quarter. The weaker than expected sales could add to the case for the central bank to lower interest rates further from a record-low 2 percent.  

• Mood Darkens in Tokyo as Traders Boost Bearish Stock Bets. If Japan’s options market is any guide, investors see little respite from the stock slump that’s gripping Tokyo. One-month puts that pay out if the Nikkei 225 Stock Average drops 10 percent cost 19 points more than ones betting on a rally, the widest gap since 2011, and traders have amassed the most bearish contracts relative to calls in five years. Bearish sentiment is just as visible in the stock market itself, where short-selling accounted for a record 41 percent of trades on Tokyo’s exchange Tuesday.

• Korea Reserves Fall for Second Month in Sign of Won Intervention. South Korea’s foreign-exchange reserves dropped for a second month in August, a sign the central bank likely intervened to stem a slide in the won. The reserves fell $2.88 billion to $367.94 billion, after a July drop of $3.93 billion that marked the biggest decline in three years, central bank data showed Thursday. The won sank last month to its weakest level since October 2011 as China’s surprise devaluation of the yuan dimmed the outlook for exports, weakening emerging-market currencies across Asia, and a military standoff between North and South Korea heightened tensions on the peninsula.  

• Ringgit Falls on Concern Data to Show Further Reserve Depletion. The ringgit extended the week’s losses on concern the erosion of Malaysia’s foreign-exchange reserves will further hurt investor sentiment in an economy reeling from falling oil prices and a political scandal. The reserve holdings have fallen 19 percent this year to $94.5 billion and data on Friday for the last two weeks of August may show the extent of central bank ringgit purchases to prop up Asia’s worst-performing currency this year. Australia & New Zealand Banking Group Ltd. sees a figure of around $92 billion. Growth in exports may also have slowed in July following June’s rebound from two-months of contraction, according to a Bloomberg survey before tomorrow’s report.

• Brazil Central Bank Holds Steady After Recession Hits. Brazil kept its benchmark interest rate unchanged as policy makers signal they have done enough to bring inflation to target by the end of 2016 in a recession-hobbled economy. The bank’s board, led by President Alexandre Tombini, kept the so-called Selic rate at 14.25 percent, after seven straight increases totaling 3.25 percentage points. Wednesday’s move was forecast by 51 of 56 economists surveyed by Bloomberg. The other five analysts predicted a quarter-point increase. The decision was unanimous and policy makers left the language in the communique virtually unchanged from the July 28-29 meeting.

• Asia Stocks Rise Amid China Holiday Calm; Aussie Drops on Retail. Asian stocks rose for the first time this week as a two-day holiday in China gave investors respite from the market that’s been at the center of recent global volatility. Australia’s dollar weakened toward a six-year low after retail sales unexpectedly fell. Japanese shares advanced from a one-week low, aided by weakness in the yen. Standard & Poor’s 500 Index futures were little changed after U.S. and European stocks rallied. The Aussie dropped with the nation’s equities as the contraction in retail overshadowed an increase in exports. Oil retreated after President Barack Obama secured congressional support for a deal with Iran that may add to a global glut. “A major source of market disruption is sidelined as markets in China are now closed for the week,” Michael McCarthy, chief market strategist in Sydney at CMC Markets, said in an e-mail. “Asia-Pacific investors are anticipating relief today.” With the spotlight off China until next week, attention shifts back to the outlook for U.S. interest rates. The Bloomberg Dollar Spot Index held gains Thursday before a European Central Bank policy meeting that may underscore the diverging outlook for borrowing costs. The MSCI Asia Pacific Index added 0.5 percent by 10:49 a.m. in Tokyo as Japan’s Topix index jumped 1.4 percent.

Wall Street Journal: 

• 5 Points to Watch in the ECB’s September Meeting. 

• Foreign Firms Feel China’s Chill. Market turmoil and Beijing’s crackdown on brokers and investors is complicating the plans of funds and banks.

• Democrats and the Ayatollahs. Obama’s party is now accountable for Iranian behavior. Maryland’s Barbara Mikulski on Wednesday became the 34th Senate Democrat to announce her support for President Obama’s nuclear deal with Iran, enough to sustain a veto on a resolution of disapproval. So the deal will proceed, and Democrats had better hope it succeeds because they are taking responsibility for Iran’s compliance and imperial ambitions. Politically speaking, they now own the Ayatollahs.

• Hillary Parties Like It’s 1938. Clinton’s capital-gains tax proposal has been tried before—by FDR, with disastrous results. Hillary Clinton’s most memorable economic proposal, debuted this summer, is her plan to impose a punishing 43.4% top tax rate on capital gains that are cashed in within a two-year holding period. The rate would drift down to 23.8%, but only for investors that sat on investments for six years.

Zero Hedge: 

• In Dramatic Escalation, China Sends Five Navy Ships Off Alaska Coast For First Time Ever.

• The QE End-Game Decision Tree: Not "If" But "When" Central Banks Lose Control.

• Second Largest US Pension Fund To Sell 12% Of Stocks Holdings In Advance Of "Another Downturn".

• "What If China Devalues To 8?" BofA Warns Of "Profound" Consequences For Commodities, Financial System.

• Is It A Correction Or A Bear Market? (graph)

• eVIXeration & Gartman Send Stocks Soaring "Back To Normal". (graph)

Business Insider: 

• China finds itself in a no-win situation.

• It's the yen, stupid.

Evening Recommendations 

• None of note

Night Trading

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

• Asia Ex-Japan Investment Grade CDS Index 138.75 unch.

• Asia Pacific Sovereign CDS Index 83.0 -1.75 basis points.

• S&P 500 futures +.06%.

• NASDAQ 100 futures +.01%.

Morning Preview Links

Earnings of Note

Company/Estimate

• (CPB)/.43

• (CIEN)/.33

• (GCO)/.24

• (JOY)/.61

• (MDT)/1.00

• (COO)/1.95

• (MRVL)/.11

• (BLOX)/.10

• (PAY)/.46

• (VNCE)/.22

Economic Releases

7:30 am EST

• Challenger Job Cuts for August.
  

8:30 am EST

• Initial Jobless Claims are estimated to rise to rise to 275K versus 271K the prior week. 

• Continuing Claims are estimated to fall to 2255K versus 2269K prior.

• The Trade Deficit for July is estimated at -$42.2B versus -$43.84B in June.
  

9:45 am:

• Final Markit US Composite PMI for August.
  

10:00 am EST

• The ISM Non-Manufacturing Composite for August is estimated to fall to 58.2 versus 60.3 in July.
  

Upcoming Splits

• None of note

Other Potential Market Movers

• The Fed's Kocherlakota speaking, ECB rate decision, ECB's Draghi speaking, Eurozone Services PMI, weekly Bloomberg Consumer Confidence Index, (FAST) August sales update, (TWTR) board meeting and the (LSTR) mid-quarter conference call could also impact trading today.

BOTTOM LINE: Asian indices are mostly higher, boosted by industrial and technology 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.