Morning Market Internals

NYSE Composite Index:

• Volume Running -8.2% Below 100-Day Average
• 2 Sectors Rising, 8 Sectors Declining
• 33.8% of Issues Advancing, 63.1% Declining
• 42 New 52-Week Highs, 37 New Lows
• 37.3% of Issues Above 200-day Moving Average
• Average 14-Day RSI 47.2
• Vix 15.2
• Total Put/Call .94
• TRIN/Arms 1.0

Monday Watch

Today's Headlines 

Bloomberg:  

• Barclays to BlackRock Say the China Rebound Rally Won't Last. The rebound in Chinese equities spurred by the government’s efforts to boost growth will probably fade as the measures underscore fundamental weakness in the world’s second-largest economy, according to Barclays Plc, Blackfriars Asset Management Ltd. and BlackRock Inc. A $582 million exchange-traded fund tracking mainland stocks jumped to a two-month high in the U.S. on Friday as the People’s Bank of China, after the close of local trading, announced its sixth interest-rate cut since November. The gain pushed the advance from this year’s low in August to 23 percent. The rebound has been driven in large part by speculation that the government will move more aggressively to bolster an economy projected to expand in 2015 at the slowest pace in a quarter century. “I don’t think this is the start of a new move in Chinese equities higher,” Ajay Rajadhyaksha, head of macro research at Barclays, said by phone from New York on Friday. The country needs economic “growth numbers to improve sharply, and that does not seem to be happening,” he said. 

• China's Bid to Prop Up Property Investment Challenged Amid Glut. China’s moves to ease mortgage restrictions and cut interest rates are bearing fruit in the nation’s smaller cities, where home prices have staged a recovery. Now comes the bigger challenge: Clearing a supply glut to spur investment by developers. Lower borrowing costs are helping a residential market recovery spread from the economic hubs such as Shanghai and Shenzhen to smaller and less-prosperous cities. New-home prices rose in September from August in more than half of the 70 major cities monitored by the government for the first time in 17 months. Yet, a construction boom over the past two years has led to 424.7 million square meters of unsold homes languishing nationwide as of Sept. 30.

• Nomura Bond Trader Says China Rate Shift Raises Odds of Fed Move. China’s interest-rate cut will lead the Federal Reserve to raise borrowing costs in the U.S., said John Gorman, the head of dollar debt trading for Asia and the Pacific at Nomura Holdings Inc. China’s policy shift last week will help curb volatility in its markets, removing an obstacle that kept the Fed from acting at its last meeting in September, Gorman said. The U.S. central bank’s next policy session is Oct. 27-28. Asian stocks rose Monday after China cut both interest rates and lenders’ reserve requirements on Friday. “It reduces the chance of volatility out of China, which is one of the reasons the Fed didn’t go in September,” Gorman said. “I think they’re going in December.” Nomura is one of the 22 primary dealers that trade directly with the U.S. central bank.

• India Is Spending Billions to Populate a Remote Area Claimed by China. India plans to invest billions of dollars to populate a remote northeastern state it has neglected since fighting a war with neighboring China more than five decades ago. Prime Minister Narendra Modi’s government is finalizing blueprints for a $6 billion highway in Arunachal Pradesh, which is also claimed by China. Construction on the 2,000-kilometer (1,243-mile) road will start as early as 2018, Kiren Rijiju, minister of state for home affairs, said in an interview. 

• India to Squeeze State-Run Companies as Deficit Worries Grow. With funds running short to sustain an infrastructure spending spree that’s underpinning India’s economic growth, Finance Minister Arun Jaitley will step up pressure on state-run companies to pick up the slack. Jaitley plans to meet public-sector companies in November -- two months earlier than usual -- to urge them to pay higher dividends if they don’t invest more, according to two people familiar with the discussions. The dividends will go to the government, which is the majority shareholder in companies like Coal India Ltd., the world’s largest producer of the fuel.

• Israel Debt Risk Gains Most in 14 Months as Violence Rises. The deteriorating security situation in Israel and the impact it may have on economic growth has led to the second-biggest surge in credit risk this month among developed nations. Israel’s credit-default swaps, contracts insuring the nation’s debt against default for five years, have advanced four basis points so far this month, the second-biggest gain after the U.S. among 23 developed countries, to 73 basis points, CMA prices show. The swaps increased five basis points last week, the most since August 2014. Meanwhile, the shekel depreciated the most in two months during the same period. 

• Ringgit Retreats as China Easing Deepens Growth Outlook Concern. The ringgit fell the most in almost a week as China’s interest-rate cut heightened concern that growth in Asia’s biggest economy and a top Malaysian export market is slowing. The People’s Bank of China also reduced the amount of cash banks must set aside as reserves on Friday to bolster growth, which is set for the slowest annual expansion in a quarter of a century. Malaysia’s 2016 budget last week included tax increases for high-income earners and a pledge to further lower the fiscal deficit. The macro economic outlook hasn’t changed though amid lower energy prices and weak domestic demand, according to a Morgan Stanley report on Monday. 

• Korean Won Leads Declines in Asia After China Cuts Interest Rate. South Korea’s won led a decline in Asian currencies amid concern China’s interest-rate cut will lead to more weakness in the yuan and other regional exchange rates. The won fell the most in a month after the People’s Bank of China lowered its policy rate for a sixth time since November late on Friday. That followed data last week that showed gross domestic product in China, South Korea’s biggest export market, increased at the slowest pace in more than six years in the third quarter. The devaluation of the yuan on Aug. 11 sparked declines in Asian exchange rates and raised fears of a currency war.

• Asian Stocks Extend Two-Month High as China Cuts Interest Rates. Asian stocks rose after China’s central bank cut its benchmark lending rate, stepping up efforts to cushion a deepening economic slowdown. The MSCI Asia Pacific Index gained 0.3 percent to 136.15 as of 9 a.m. in Tokyo after closing Friday at the highest since Aug. 19. The gauge climbed 9.7 percent this month through the end of last week as investors pushed back expectations for the first U.S. interest-rate increase and central banks signaled further measures will be enacted to stave off weak economic growth. 

• Oil Swings Near 4-Week Low as Investors Weigh Rigs Against China. Oil swung between gains and losses near the lowest closing price in almost four weeks as investors weighed a slowing pace of U.S. drilling-rig reductions against an interest rate cut in China. Futures in New York rose as much as 0.5 percent and fell as much as 0.4 percent. The number of active machines targeting oil dropped by 1 through Oct. 23 after declining by 45 over the prior three weeks, according to Baker Hughes Inc. China, the world’s second-biggest crude consumer, stepped up monetary easing with its sixth interest-rate cut in a year on Friday to combat deflationary pressures and a slowing economy.

Wall Street Journal:

• Cash Crunch Clouds Future for Oil Firms. Spending on new projects, share buybacks and dividends outstrips cash flow. The world’s biggest oil companies are struggling to generate enough cash to cover their spending and dividends, despite efforts to slash billions of dollars from their budgets in the face of tumbling oil prices.

Zero Hedge:

• America's Top 10 Fears.

• The Death Of Europe.

• The Mechanics Of The Fed As Seen By The Eurodollar Curve. 

• Chinese Stocks Rise To 2 Month High Following PBOC's Rate, RRR Cut But Copper, Crude Struggle. (graph)

• "If We Don't Find A Solution Today, It's The End Of The European Union" - Refugee Crisis Hits Tipping Point. 

• "The Distress Is Showing Up" Credit Managers Index Plunges To Recessionary Levels. (graph)

• The Fatal Fallacy Of Faith In The Fed's Assumed Powers.

• Hedge Funds Suffer Worst Year Since 2011. (graph)

• US Economic Data Has Never Been This Weak For This Long.

• 6 Months Later, The Australian Crack Shack Sells For $60,000 More.

• Putting China's "6.9% GDP Growth" In Context.

• The Fed's Inconvenient Truth (In 1 Hope-Crushing Chart). (graph)

Business Insider:

• China's fix for falling profits is only making things worse.

• 6 reasons China's economy is weaker than you think.

• I went to a seminar with one of the world's largest banks and almost everything said there was really bearish. (graph)

• Valeant(VRX) is about to hold the most intense investor call in years — here are the questions they must answer.

• The junk bond market isn't the only place to look for signs of trouble in the lending markets. (graph)

Telegraph:

• Eurozone crosses Rubicon as Portugal's anti-euro Left banned from power. Constitutional crisis looms after anti-austerity Left is denied parliamentary prerogative to form a majority government. 

• China does not need to defend 7pc growth target 'to the death', says premier. Li Keqiang claims China's prospects remain bright as world's second largest economy shifts to "new normal" of slower, more sustainable growth. 

Night Trading

• Asian indices are unch. to +.75% on average.

• Asia Ex-Japan Investment Grade CDS Index 131.75 -3.5 basis points.

• Asia Pacific Sovereign CDS Index 71.25 -3.0 basis points.

• Bloomberg Emerging Markets Currency Index 72.17 +.05%.  

• S&P 500 futures -.21%.

• NASDAQ 100 futures -.19%.

Morning Preview Links

Earnings of Note

Company/Estimate 

• (LH)/2.07

• (SOHU)/-.58

• (AVB)/1.93

• (BRCM)/.73

• (CAKE)/.56

• (IACI)/.78

• (MSTR)/2.16

• (PCL)/.51

• (RCII)/.45

Economic Releases 
10:00 am EST

• New Home Sales for September are estimated to fall to 550K versus 552K in August.

10:30 am EST

• Dallas Fed Manufacturing Activity for October is estimated to rise to -6.5 versus -9.5 in September.
  

Upcoming Splits

• None of note

Other Potential Market Movers

• The China Economic Meeting and German IFO Business Climate Index could also impact trading today.

BOTTOM LINE: Asian indices are mostly higher, boosted by real estate and consumer 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 week.

Weekly Outlook

Week Ahead by Bloomberg. 

Wall St. Week Ahead by Reuters.

Weekly Economic Calendar by Briefing.com.

BOTTOM LINE: I expect US stocks to finish the week modestly lower on China bubble-bursting fears, Fed rate-hike worries, commodity weakness, rising European/Emerging Markets/US High-Yield debt angst, technical selling and earnings outlook concerns. My intermediate-term trading indicators are giving neutral signals and the Portfolio is 50% net long heading into the week.

Today's Headlines

Bloomberg: 

• Bulgaria, Romania, Serbia Ready to Close Borders for Migrants. Bulgaria, Romania and Serbia are concerned that possible closing of borders for migrants by some European Union countries may cause a bottleneck stranding millions of refugees on their territory, forcing the three states to close their borders as well. Bulgarian Prime Minister Boyko Borissov met Romanian and Serbian counterparts Victor Ponta and Aleksandar Vucic in Sofia Saturday to coordinate their policies before EU leaders gather on Sunday to forge plans to control the region’s worst migrant crisis since World War II. “If Germany and Austria or other states close their borders for migrants, we won’t allow our countries to become a buffer zone for millions of migrants stranded between Turkey and the new barriers that may follow,” Borissov told reporters in Sofia. “We’re also prepared to close our borders immediately.”

• The Fed's Next Big Decision May Not Be About Rates. Bond investors looking to the Federal Reserve next week for hints about when it will be ready to lift interest rates for the first time since 2006 may be missing a bigger question. With policy makers seemingly making little progress on their path to raising rates, they’re also delaying resolving how they approach the $215 billion of Treasuries poised to mature and roll off the Fed’s balance sheet next year, and almost $800 billion through 2018. That’s creating uncertainty about a less-publicized issue for the central bank: how it plans to reinvest proceeds from holdings of government bonds amassed since the financial crisis, and whether it may do so in a way that addresses rising bond-market volatility.

• Hurricane Patricia Leaves No Major Damage, Deaths. Hurricane Patricia hit Mexico’s west coast in an area between commercial centers and rapidly broke down into a tropical depression, sparing Latin America’s second-biggest economy from a feared catastrophe. Mexico has suffered “no major incidents” from the storm, Communications and Transportation Minister Gerardo Ruiz Esparza told reporters in Guadalajara, Jalisco, the state most affected. Evacuations and security measures put in place ahead of the hurricane helped spare lives and infrastructure, he said.

Wall Street Journal: 

• Obama Calls for Capping Class Time Devoted to Standardized Tests. Education Department to make it easier for states to satisfy federal mandates.

• Obama’s Tragic Let ’em Out Fantasy. The president leads the charge to cut the prison population, but mass incarceration isn’t the problem. Rising crime is. President Obama paid a media-saturated visit in July to a federal penitentiary in Oklahoma. The cell blocks that he toured had been evacuated in anticipation of his arrival, but after talking to six prescreened inmates he drew some conclusions about the path to prison. “These are young people who made mistakes that aren’t that different than the mistakes I made and the mistakes that a lot of you guys made,” the president told the waiting journalists. The implication was that anyone who had smoked marijuana and tried cocaine (as Mr. Obama had) could land in a place like the El Reno Federal...

Fox News: 

• 3 dead, 34 injured in crash at OSU parade; woman taken into custody for DUI. Three people were killed Saturday and 34 others injured when a car being driven by a suspected drunk driver crashed into a large crowd of spectators at the Oklahoma State University homecoming parade. Police said the driver of the vehicle, Adacia Chambers, 25, of Stillwater, Okla., was taken into custody on suspicion of driving under the influence.

Zero Hedge:

• The Three Things Goldman's Clients Were Most Worried About This Week.

• Icelandic Bankers Are Not Too Big To Jail: Face 74 Years In Prison As US Bankers Bask In Bailouts.

• Why The Chinese Rate Cut Will Do Nothing To Slow China's Economic Decline. (graph)

• Russia Takes Over The Mid-East: Moscow Gets Green Light For Strikes In Iraq, Sets Up Alliance With Jordan.

• Here's What Happens When Central Banks Go Broke.

• How The U.S. Government "Covers Up" 72% Inflation Before Your Very Eyes.

• DOJ Closes Lois Lerner Investigation Without Charges.

• "The International Buyer Has Been Absent" Unsold Hamptons' Mansions Pile-Up As Bubble Bursts.

• Three Chinese Warships To Dock In Florida Port.

• We Now Have An ETA When The Biggest Bond Bubble In The World Will Burst. (graph)

• Weekend Reading: Compelling Intellection.

• Crude Crashes & Stocks Soar As Global Central Bankers Hit Panic Button. (graph)

Business Insider:

• China's companies are a snake eating its own tail. Profits are falling, in part because of the costs of paying back debt. They are responding by adding more debt, making the matter worse.

• MORGAN STANLEY: The 7 biggest risks to the global economy.

• LARRY SUMMERS: The global economy is facing a 'dangerous' situation. "I would suggest that the defining financial development of the last year is likely to push things towards more secular stagnation," Summers said this week at the HSBC seminar. "It is the substantial reduction in capital inflows to developing countries, and the substantial increase in capital outflows from developing countries." Here's the chart from Summers' presentation, which shows the decline in money coming into emerging markets.

• We're seeing the first signs of trouble in San Francisco's red-hot real-estate market.

• Russia is the king of Arctic oil.

• Banks are seriously discussing negative interest rates for normal peoples' savings. The concept of earning interest on money in the bank is so deeply ingrained into economic life that few people even know that the opposite can happen too: Banks can take a percentage of cash from your account in the form of negative interest rates, under certain conditions.

Financial Times: 

• Wall Street takes a more cynical view of Fed stimulus. “We see another round of QE as one of the biggest risks to equities, suggesting $4.5tn was not enough to prop up the economy,” analysts at Bank of America Merrill Lynch wrote, adding that they were downgrading prospects both for the stock market and economic growth. “What if there is a QE 4 and the market sells off?” asks one Singapore-based hedge fund manager. “There is no ammunition left. The Fed is out of bullets.” 

Market Week in Review

• S&P 500 2,075.15 +2.1%*

The Weekly Wrap by Briefing.com.

*5-Day Change

Weekly Scoreboard*

Indices

• S&P 500 2,075.15 +2.1%

• DJIA 17,646.70 +2.5%

• NASDAQ 5,031.86 +3.0%

• Russell 2000 1,166.06 +.3%

• S&P 500 High Beta 31.39 +1.3%

• Goldman 50 Most Shorted 112.16 -2.29% 

• Wilshire 5000 21,462.39 +1.7%

• Russell 1000 Growth 1,007.79 +2.3%

• Russell 1000 Value 989.9 +1.3%

• S&P 500 Consumer Staples 520.80 +2.1%

• Solactive US Cyclical 128.75 +3.9%

• Morgan Stanley Technology 1,097.52 +3.4%

• Transports 8,295.98 +2.7%

• Utilities 594.41 -.43%

• Bloomberg European Bank/Financial Services 106.99 +1.54%

• MSCI Emerging Markets 35.89 +.1%

• HFRX Equity Hedge 1,149.92 -.18%

• HFRX Equity Market Neutral 1,037.05 +1.42%

Sentiment/Internals

• NYSE Cumulative A/D Line 233,917 +.57%

• Bloomberg New Highs-Lows Index 141.0 +246

• Bloomberg Crude Oil % Bulls 55.0 +168.16%

• CFTC Oil Net Speculative Position 264,992 n/a

• CFTC Oil Total Open Interest 1,645,951 n/a

• Total Put/Call .78 -8.24%

• OEX Put/Call .68 +70.0%

• ISE Sentiment 108.0 +20.0%

• NYSE Arms .98 -22.83%

• Volatility(VIX) 14.41 -3.99%

• S&P 500 Implied Correlation 57.63 -6.26%

• G7 Currency Volatility (VXY) 9.81 +6.51%

• Emerging Markets Currency Volatility (EM-VXY) 10.87 -1.18%

• Smart Money Flow Index 17,742.83 +1.09%

• ICI Money Mkt Mutual Fund Assets $2.699 Trillion +.03%

• ICI US Equity Weekly Net New Cash Flow -$1.445 Billion

• AAII % Bulls 34.8 +2.0%

• AAII % Bears 24.0 -11.5%

Futures Spot Prices

• CRB Index 193.71 -2.87%

• Crude Oil 44.68 -5.42%

• Reformulated Gasoline 130.10 -1.88%

• Natural Gas 2.29 -5.65%

• Heating Oil 145.44 -2.91%

• Gold 1,164.70 -1.01%

• Bloomberg Base Metals Index 148.63 -.99%

• Copper 235.10 -2.10%

• US No. 1 Heavy Melt Scrap Steel 152.33 USD/Ton -19.69%

• China Iron Ore Spot 51.62 USD/Ton -3.98%

• Lumber 261.0 +1.63%

• UBS-Bloomberg Agriculture 1,058.40 -.86%

Economy

• ECRI Weekly Leading Economic Index Growth Rate -2.7% -50.0 basis points

• Philly Fed ADS Real-Time Business Conditions Index -.1942 +6.37%

• S&P 500 Blended Forward 12 Months Mean EPS Estimate 125.28 -.22%

• Citi US Economic Surprise Index -.1 +14.7 points

• Citi Eurozone Economic Surprise Index 22.2 +16.1 points

• Citi Emerging Markets Economic Surprise Index -13.4 +3.3 points

• Fed Fund Futures imply 94.0% chance of no change, 6.0% chance of 25 basis point hike on 10/28
• # of Months to 1st Fed Rate Hike(Morgan Stanley) 6.68 -3.05%

• US Dollar Index 97.16 +2.53%

• Euro/Yen Carry Return Index 139.56 -1.42%

• Yield Curve 145.0 +3.0 basis points

• 10-Year US Treasury Yield 2.08% +5.0 basis points

• Federal Reserve's Balance Sheet $4.463 Trillion -.07%

• U.S. Sovereign Debt Credit Default Swap 24.0 +37.14%

• Illinois Municipal Debt Credit Default Swap 267.0 +3.50%

• Western Europe Sovereign Debt Credit Default Swap Index 18.82 -11.39%

• Asia Pacific Sovereign Debt Credit Default Swap Index 71.92 -4.20%
  

• Emerging Markets Sovereign Debt CDS Index 166.57 +1.1%
  

• Israel Sovereign Debt Credit Default Swap 72.0 +5.69%

• Iraq Sovereign Debt Credit Default Swap 825.23 +5.31%

• Russia Sovereign Debt Credit Default Swap 293.53 +1.36%

• iBoxx Offshore RMB China Corporates High Yield Index 121.99 +.40%

• 10-Year TIPS Spread 1.52% +3.0 basis points

• TED Spread 32.25 unch.

• 2-Year Swap Spread 12.50 +.5 basis point

• 3-Month EUR/USD Cross-Currency Basis Swap -29.25 -5.5 basis points

• N. America Investment Grade Credit Default Swap Index 79.22 -3.24%

• America Energy Sector High-Yield Credit Default Swap Index 1,071.0 +2.10%

• European Financial Sector Credit Default Swap Index 68.83 -12.39%
  

• Emerging Markets Credit Default Swap Index 324.01 -1.32%
  

• CMBS AAA Super Senior 10-Year Treasury Spread  to Swaps 126.50 +1.5 basis points

• M1 Money Supply $3.015 Trillion -2.11%

• Commercial Paper Outstanding 1,062.90 +1.40%

• 4-Week Moving Average of Jobless Claims 263,250 -1,750

• Continuing Claims Unemployment Rate 1.6% unch.

• Average 30-Year Mortgage Rate 3.79% -3.0 basis points

• Weekly Mortgage Applications 432.70 +11.81%

• Bloomberg Consumer Comfort 43.70 -1.7 points

• Weekly Retail Sales +1.20% +10.0 basis points

• Nationwide Gas $2.22/gallon -.06/gallon

• Baltic Dry Index 786.0 +4.24%

• China (Export) Containerized Freight Index 752.21 -1.65%

• Oil Tanker Rate(Arabian Gulf to U.S. Gulf Coast) 37.50 -21.0%

• Rail Freight Carloads 275,160 unch.

Best Performing Style

• Large-Cap Growth +2.4%

Worst Performing Style

• Small-Cap Growth -.1%

Leading Sectors

• Software +5.6%

• Semis +4.7%

• Internet +4.0%

• Networking +3.4%

• Defense +3.4%

Lagging Sectors

• Oil Tankers -3.9% 

• HMOs -4.5%

• Education -6.1%

• Hospitals -14.1%

• Coal -14.5%

Weekly High-Volume Stock Gainers (10)

• WTW, KLAC, SWI, BABY, TBI, SNDK, TTS, DBD, LRCX and MPAA

Weekly High-Volume Stock Losers (23)

• KRC, MYCC, NTRI, SLGN, EAT, ABG, PII, CMG, WWW, KSU, HOG, SAVE, GNC, CAB, PTCT, PWR, EVHC, EROS, VRX, CYH, RLYP, CEMP and ENTA

Weekly Charts

ETFs

• High-Volume Gainers

• High-Volume Losers

Stocks

• High-Volume Gainers

• High-Volume Losers

*5-Day Change