Stocks Slightly Lower into Final Hour on Earnings Outlook Concerns, Emerging Markets Debt Angst, Oil Decline, Biotech/Pharma Sector Weakness

Broad Equity Market Tone:

• Advance/Decline Line: Slightly Lower
  

• Sector Performance: Mixed
  

• Volume: Below Average

• Market Leading Stocks: Performing In Line

Equity Investor Angst:

• Volatility(VIX) 15.44 +3.07%

• Euro/Yen Carry Return Index 142.06 +.47%

• Emerging Markets Currency Volatility(VXY) 11.25 +.27%

• S&P 500 Implied Correlation 61.55 +3.0%

• ISE Sentiment Index 73.0 -39.67%

• Total Put/Call 1.03 +15.73%

• NYSE Arms .99 -21.79% 

Credit Investor Angst:

• North American Investment Grade CDS Index 80.75 -.45%

• America Energy Sector High-Yield CDS Index 1,057.0 -.22%

• European Financial Sector CDS Index 74.51 -.98%

• Western Europe Sovereign Debt CDS Index 19.81 -5.94%

• Asia Pacific Sovereign Debt CDS Index 76.89 +2.56%

• Emerging Market CDS Index 334.79 +1.26%
  

• iBoxx Offshore RMB China Corporates High Yield Index 121.66 +.11%

• 2-Year Swap Spread 10.75 -1.0 basis point

• TED Spread 30.75 -1.5 basis points

• 3-Month EUR/USD Cross-Currency Basis Swap -24.5 -.25 basis point

Economic Gauges:

• Bloomberg Emerging Markets Currency Index 72.67 -.34%
• 3-Month T-Bill Yield .01% +2.0 basis points

• Yield Curve 144.0 +1.0 basis point

• China Import Iron Ore Spot $52.93/Metric Tonne -.69%

• Citi US Economic Surprise Index -7.20 +4.1 points

• Citi Eurozone Economic Surprise Index 7.5 +.7 point

• Citi Emerging Markets Economic Surprise Index -17.40 +.7 point

• 10-Year TIPS Spread 1.48 +2.0 basis points
• # of Months to 1st Fed Rate Hike(Morgan Stanley) 6.75 +.25

Overseas Futures:

• Nikkei 225 Futures: Indicating +67 open in Japan 
• China A50 Futures: Indicating -9 open in China

• DAX Futures: Indicating +9 open in Germany

Portfolio: 

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

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

• Market Exposure: Moved to 25% Net Long

Today's Headlines

Bloomberg: 

• China Stabilizes on Shaky Pillar, Making More Stimulus Likely. China’s economy is relying on a shaky pillar, making more stimulus likely. While authorities won’t unleash the same flood of credit that followed the 2008 financial crisis, more targeted measures to get money flowing to jump start infrastructure projects is on the way. Recently announced measures also include a tax cut for vehicle purchases and a reduction in the minimum down payment for first-time home buyers. And unlike global peers, the People’s Bank of China still has room to cut interest rates.

• For Mongolia, China's Slowdown Is Provoking Emergency Response. While China’s slowing economy has singed stock markets around the world, no nation is more affected than neighboring Mongolia. Things have gotten so bad that the government in this mineral-rich nation is planning job and salary cuts for bureaucrats, and the sale of of shares in state-owned companies including the postal service. Mongolia, sandwiched between China and Russia, is an early illustration of fallout from slower growth in the world’s second-biggest economy. “When China sneezes, we get a cold. That is how the situation is. It really affects us in a major way,” Dale Choi, founder and director of the research firm Independent Mongolian Metal & Mining Research, said in a phone interview.

• China Mobile Profit Misses Estimates as User Growth Slows. China Mobile Ltd. posted third-quarter profit that missed analyst estimates as the world’s largest carrier faces stiffer competition, slowing subscriber growth and costs for its new high-speed network. Net income rose 13 percent to 28.2 billion yuan ($4.4 billion) in the three months ended September, according to figures derived from nine-month results published Tuesday. That’s the highest quarterly growth in at least five years. China Mobile has boosting investment to get more users onto its fourth-generation network as competitors with virtual operator licenses enter the market, escalating competition and hitting average revenue per user.

• Swiss Watch Quarterly Exports Decline the Most Since 2009. Swiss watch exports had their biggest quarterly decline since 2009 as the industry struggles with the strong franc and as a slump in demand in China and Hong Kong began to spread across Asia. The value of shipments fell 7.2 percent in the third quarter, adjusted for working days, the Swiss customs office said Tuesday in a statement. Exports dropped 2 percent in the first nine months of the year to 15.8 billion francs ($16.5 billion), according to the Federation of the Swiss Watch Industry.  

• Emerging Stocks, Currencies Decline on Global Stimulus Outlook. Emerging-market stocks fell from a two-month high as investors weighed the prospects for a pullback in the monetary stimulus in developed nations that has helped prop up demand for riskier assets. The MSCI Emerging Markets Index slipped 0.4 percent to 864.19 at 12:01 p.m. in New York, ending a three-day gain.

• European Stocks Fall After ECB Report Dims Prospects of More QE. European stocks declined after a report showing an improvement in the region’s lending conditions lowered the prospects for additional monetary stimulus. After hovering near a two-month high in the first hour of trading, equities slid as a European Central Bank survey showed credit standards on loans to companies eased for the sixth straight quarter. Banks fell after the ECB said its quantitative-easing program will drag on profitability at those companies in the next six months. The report gives policy makers less cause to act when they meet this week, said Mirabaud Securities’ John Plassard. “The market is disappointed because if there is any improvement there, then for sure there’s no expansion of the purchases,” said Plassard, a senior equity-sales trader at Mirabaud in Geneva. “Good news is bad news. Draghi will probably continue saying ECB will use all its tools and they will repeat what is in the bank lending report.” The Stoxx Europe 600 Index dropped 0.4 percent to 362.67 at the close of trading.

• Iran Plans 20-Year Contracts as Incentive for Energy Investments. Iran will pay foreign oil companies larger fees than it did under previous buy-back contracts to attract $100 billion of investments needed to rebuild its energy industry. The Persian Gulf state, once OPEC’s second-largest crude producer, will also offer 20-year contracts on oil and natural gas projects, Roknoddin Javadi, managing director of state-run National Iranian Oil Co., said in an interview in Tehran.

• Diamond Prices Lose Luster in China-Fueled Slump. (video)

• Posco Posts Biggest Loss Since at Least '10 as Steel Slumps. Posco, South Korea’s biggest steelmaker, reported the largest quarterly loss in at least five years amid losses on foreign exchange and mining assets, a lawsuit settlement and as a deluge of Chinese exports pushed down world prices. The net loss, excluding minority interests, was 534.2 billion won ($474 million) in the three months ended September, from a 237.8 billion won profit a year earlier, the Pohang-based company said Tuesday. That compares with an expected loss of 156 billion won, according to the average of 13 analyst estimates compiled by Bloomberg. 

• Hedge Funds are Bringing Back Everyone's Least Favorite Toxic Investment. Joshua Siegel is bringing back a version of one of the most toxic financial vehicles ever devised and arguing that this time it’s going to be different. His StoneCastle Financial is among the funds that are reviving the collateralized debt obligation, or CDO. CDOs stuffed with mortgages and their derivatives caused billions in losses around the world during the 2008 crisis.

• Bernie Sanders's Danish Utopia Girds for Deeper Welfare Cuts. Bernie Sanders’ utopia needs fixing. The Vermont senator used part of a debate this month with Senator Hillary Clinton and other contenders vying to become the Democratic Party’s candidate for U.S. elections to tell voters they should model their society on Scandinavia. “We should look to countries like Denmark, like Sweden and Norway,” he said. Ironically, the Denmark that Sanders wants the U.S. to emulate is now taking a long, critical look at its welfare model as it decides which bits to scale back.

• IBM Drops to Almost 5-Year Low as Profit Forecast Is Cut. IBM’s stock dropped to almost a five-year low after the company cut its profit forecast, underscoring the difficulty of trying to reinvent itself as a powerhouse in cloud computing and data analytics. The shares tumbled 5.4 percent to $141.23 at 11:07 a.m. Tuesday in New York. The stock earlier fell to $140.50, its lowest intraday price since late October 2010.

• Even the Cheapest Homes Are Too Expensive For Millennials. Lowest-priced homes are now outpacing growth for the highest tier.

Barron's:

• Micron(MU): Redstone Says Short it; Margin Recovery a Ways Away.

Fox News: 

• Webb drops Democratic presidential bid, weighs possible independent run. (video)

Zero Hedge: 

• Saudi Arabia Warns Iran: "Stop Meddling In Our Neighborhood!"

• S&P Earnings Expectations Tumble 15 Days In A Row - Longest Streak Since Financial Crisis. (graph)

• Will "Vice" Stocks' Out-Performance Put Clamps On The Bull Market? (graph)

• Crude Crumbles Back To $45 Handle - Down 6% From China GDP. (graph)

• Good Luck, Canada. (graph)

• Tech Bubble Pops: Dropbox Warned It Can't IPO At Its "Private Valuation".

• Oil Prices Still Not Low Enough To Fix The Markets. (graph)

• Housing Permits Plunge To 7-Month Lows Despite Decade-High Homebuilder Sentiment. (graph)

• Ominous Signs Of Peak Employment. (graph)

• Peak Debt, Peak Doubt, & Peak Double-Down.

Business Insider:

• Chinese shipping imports just nosedived to their worst levels ever. Growth of exports from China has been dropping relentlessly, for years. Now this “growth” has actually turned negative. In September, exports were down 3.7% from a year earlier, the “inevitable fallout from China’s unsustainable and poorly executed credit splurge,” as Thomson Reuters’Alpha Now puts it. Most of these exports are manufactured goods that are shipped by container to the rest of the world. And imports into China – a mix of bulk and containerized freight – have been plunging: down 20.4% in September from a year earlier, after at a 13.8% drop in August.

• Consumer Reports pulls recommendation for Tesla(TSLA) Model S. Consumer Reports has withdrawn its recommendation for the Tesla Model S sedan, citing reliability issues, the Los Angeles Times reported. Tesla shares were down 11% in trading on the news, to $204.

• The next China bubble is forming right before our eyes. China's bubble of investor money has moved from the stock market to a new asset class: corporate bonds. And all we can do is watch.

• HALLIBURTON CEO(HAL): The oil industry's 'day of reckoning' is near.

• These CIA-vetted Syrian rebel groups fighting Assad are Russia's primary targets.

• People are worried this could be the next US 'subprime' crisis.

• Europe is starting to look even more like Japan.

Telegraph:

• Why there's no easy way out of Spain's insurmountable economic mess. Despite being hailed as an unmitigated EU success story, the eurozone's fourth largest economy still faces daunting economic challenges.

Bear Radar

Style Underperformer:

• Small-Cap Growth -1.14%

Sector Underperformers:

• 1) Biotech -3.37% 2) Computer Services -3.35% 3) Drugs -2.68%

Stocks Falling on Unusual Volume:

• BIN, HOG, RMBS, HXL, EAT, HZNP, VRX, IBM, HASI, AMSG, TASR, PAYC, ASTE, FCFS, SJM, CXRX, WWAV, VAR, WDC, LG, AMCX, TSLA, IEX, ATI, HA, VAR, EAT, BOFI, DPLO, CEMP and DEPO

Stocks With Unusual Put Option Activity:

• 1) HOG 2) EWC 3) IBM 4) GE 5) UA
  

Stocks With Most Negative News Mentions:

• 1) HOG 2) TSLA 3) AMZN 4) WWAV 5) BOFI
  

Charts:

• ETFs Falling on Unusual Volume

• Stocks Falling on Unusual Volume

Bull Radar

Style Outperformer:

• Small-Cap Value +.27%

Sector Outperformers:

• 1) Gold & Silver +3.98% 2) Homebuilders +1.76% 3) Construction +1.05%
  

Stocks Rising on Unusual Volume:

• WTW, TMH, TTS, SNDK, SONC, ETSY, FLEX, DOV and MNST

Stocks With Unusual Call Option Activity:

• 1) WTW 2) SVU 3) SYF 4) TASR 5) HZNP
  

Stocks With Most Positive News Mentions:

• 1) AEP 2) BKS 3) SONC 4) TRV 5) YUM
  

Charts:

• ETFs Rising on Unusual Volume 

• Stocks Rising on Unusual Volume

Morning Market Internals

NYSE Composite Index:

• Volume Running -1.0% Below 100-Day Average
• 5 Sectors Rising, 5 Sectors Declining
• 62.4% of Issues Advancing, 34.4% Declining
• 54 New 52-Week Highs, 12 New Lows
• 34.1% of Issues Above 200-day Moving Average
• Average 14-Day RSI 46.8
• Vix 15.31
• Total Put/Call 1.22
• TRIN/Arms .99

Tuesday Watch

Evening Headlines 

Bloomberg:

• U.S. Softens Criticism of Yuan Level Amid Currency Pressures. The U.S. Treasury dropped its view that China’s currency is “significantly undervalued” while saying that the forces driving appreciation in the longer term remain and China needs to allow such strengthening eventually. The yuan remains “below its appropriate medium-term valuation,” the department said Monday in its semiannual report on foreign-exchange policies. The “core factors” that have driven the appreciation of the yuan in recent years remain in place, such as a large and growing current-account surplus, and net inflows of foreign direct investment, the Treasury said.  
• Asia Stocks Drop, Led by Material Shares, as October Rally Halts. Asian stocks fell, paring the benchmark regional equities gauge’s biggest monthly rally in five years, as material shares led losses. The MSCI Asia Pacific Index slipped less than 0.1 percent to 134.01 as of 9:08 a.m. in Tokyo.
• OPEC Brings Oil Price War Home in Pursuit of Asia's Cash. When it comes to deciding how much to charge Asian oil buyers, OPEC members are showing little regard for tradition. Suppliers from the Organization of Petroleum Exporting Countries have long moved in lockstep, raising or lowering prices in tandem. Now, Kuwait is undercutting Saudi Arabia by the most on record and Iraq is also selling its oil more cheaply than the group’s biggest member. Qatar is pricing cargoes at the biggest discount in 27 months to competing crude from the U.A.E.’s Abu Dhabi.
• Fed's Williams Sees Reasons to Increase Rates Soon and Slowly. The Federal Reserve is progressing toward its dual mandate of stable prices and maximum employment and should raise interest rates in the near future, said John Williams, president of the Federal Reserve Bank of San Francisco. "We always have to be looking through the front window” in setting monetary policy since it works on the economy with a lag, Williams said, speaking on Bloomberg Television with Michael McKee on Monday. "My own view is that the economy is still on a good trajectory.”
• Illinois Downgraded by Fitch as State Budget Crisis Worsens. Illinois was lowered to three steps above junk by Fitch Ratings amid a political stalemate that has left the state without a budget for nearly four months, worsening a financial crisis that has already triggered credit downgrades to cities and local agencies. The one-step downgrade to BBB+ from A- affects $26.8 billion of general-obligation bonds. Fitch said in a statement that its outlook is now stable. Illinois is already the worst-rated state with an A3 by Moody’s Investors Service, four steps above junk, and an equivalent A- by Standard & Poor’s.

Wall Street Journal: 

• Voters in Canada Head to Ballot Box in Tight Race. Early results in Atlantic Canada put the centrist Liberal Party in the lead. Early results from Canada’s national election put the centrist Liberal Party in the lead in Atlantic Canada, based on tallies from that region of the country, as voters waited for the majority of polls to close and ultimately decide the fate of the incumbent Conservative government.
• As Conservation Cuts Electricity Use, Utilities Turn to Fees. Double-digit percentage increases for distribution, maintenance anger power consumers. Electric utilities across the country are trying to change the way they charge customers, shifting more of their fixed costs to monthly fees, raising the hackles of consumer watchdogs and conservation advocates.
• Radiation Sensors in Major U.S. Cities Turned Off Because They Don’t Work. Most stations run by EPA can’t monitor for beta particles in real time, prompting criticism; agency says monitoring for gamma rays is enough.
• Obama Takes the Military Hostage. He’ll veto a bipartisan defense bill to coerce more domestic spending. President Obama is determined to end his second term in another blaze of spending glory, and toward that end he’s taking the U.S. military hostage. That’s the way to understand his threat to veto the National Defense Authorization Act. 

Fox News: 

• Top California official pushes ammo background checks. (video) Gun control advocates are launching a new regulatory push in California to impose first-in-the-nation instant background checks for ammunition sales, a move that comes as gun violence surfaces as a lightning rod issue in the 2016 presidential race.

CNBC:

• Earnings 'recession' worries could be a drag.

Zero Hedge: 

• Chinese Economists Have No Faith In 7% Growth "Target". (graph)
• Chinese Officials Say "Unnecessary To Be Anxious" About Economy As Margin Debt Rises Most Since June Bubble Peak. (graph)
• Deflation = Debt + Demographics + Disruption... But Mostly Debt.
• "Shadow Convexity" Means The Death Of Modern Portfolio Theory.
• Martin Armstrong Rages Against Socialism: "Government Has Replaced God".
• IBM(IBM) Reports Terrible Q3 Earnings: Worst Revenue Since 2002; Slashes Guidance. (graph)
• VIX Tumbles To 2-Month Lows But Commodites Crumble After China "Good News". (graph)

Business Insider:

• The US government is finally taking soaring drug prices seriously.
• A Democratic candidate is considering dropping his run as a Democrat and running as an Independent.
• Insanely clear video shows a Syrian army offensive in a rebel stronghold of Damascus.
• The outlook for coal has gone from bad to worse.
• 3 worrying recession signs to keep an eye on.

Reuters:

• Cheap imports, high inventories hurt Steel Dynamics' profit. U.S. steelmaker Steel Dynamics Inc on Monday reported a lower quarterly net profit, which it blamed on a glut of lower-priced imports and higher customer inventories but said that it expects improvement in domestic U.S. steel production in 2016. Western steel producers have been hit by a global slump in steel prices and record exports from China, which produces half the world's steel. As China's economy has lost steam, critics say it has been dumping steel at low prices, exacerbating existing over-capacity around the world.

Financial Times: 

• US Treasury: capital outflows from China top $500bn. Capital outflows from China topped $500bn in the first eight months of this year, according to new calculations by the US Treasury that highlight the shifting fortunes in the global economy. The outflows, which peaked at some $200bn during the turbulent month of August according to the new estimates released on Monday, have also contributed to a shift by Washington in its assessment of the valuation of China's currency, the renminbi, Shawn Donnan, trade editor, reports in Washington. 
• China still hacking US companies, cyber group warns.

Shanghai Securities News: 

• China Power Growth May Slow to 1% in 2015. China Electricity Council cut estimate on power consumption growth from prior 2% after 3Q usage didn't meet expectation, citing Ouyang Changyu, deputy secretary general at the council.

Evening Recommendations 

• None of note

Night Trading

• Asian equity indices are -.50% to +.25% on average.

• Asia Ex-Japan Investment Grade CDS Index 139.25 +.75 basis point.

• Asia Pacific Sovereign CDS Index 75.0 -.25 basis point.
• Bloomberg Emerging Markets Currency Index 72.81 -.15%. 

• S&P 500 futures -.15%.

• NASDAQ 100 futures -.16%.

Morning Preview Links

Earnings of Note

Company/Estimate

• (ATI)/-.36
• (BK)/.71
• (EAT)/.55
• (CP)/2.68
• (HOG)/.78
• (LMT)/2.72
• (NVR)/26.91
• (PNR)/.89
• (RF)/.20
• (UTX)/1.56
• (VZ)/1.02
• (WWW)/.48
• (CMG)/4.63
• (CB)/2.01
• (CREE)/.20
• (ILMN)/.79
• (ISRG)/4.22
• (IRBT)/.25
• (TEX)/.62
• (VMW)/1.00
• (WERN)/.43
• (YHOO)/.16

Economic Releases

8:30 am EST

• Housing Starts for September are estimated to rise to 1142K versus 1126K in August.
• Building Permits for September are estimated at 1170K versus 1170K in August.

Upcoming Splits

• None of note

Other Potential Market Movers

• The Fed's Yellen speaking, Fed's Dudley speaking, Fed's Powell speaking, Japan Trade Balance report, weekly US retail sales reports, BIO Investor Forum, (SJM) investor day and the (GPN) investor conference could also impact trading today.

BOTTOM LINE: Asian indices are mostly lower, weighed down by commodity and real estate shares in the region. I expect US stocks to open mixed and to weaken into the afternoon, finishing modestly lower. The Portfolio is 50% net long heading into the day.