Morning Market Internals

NYSE Composite Index:

• Volume Running +29.2% Above 100-Day Average
• 7 Sectors Rising, 3 Sectors Declining
• 74.9% of Issues Advancing, 22.1% Declining
• 53 New 52-Week Highs, 42 New Lows
• 34.1% of Issues Above 200-day Moving Average
• Average 14-Day RSI 44.3
• Vix 14.9
• Total Put/Call .87
• TRIN/Arms 1.12

Wednesday Watch

Evening Headlines 

Bloomberg: 

• UBS Analyst Who Called Emerging-Market Rout Sees Rebound Fading. The one-month long rebound in emerging-market assets is poised to reverse, according to Bhanu Baweja, a UBS Group AG strategist, who correctly called this year’s rout. While expectations for more monetary easing from global central banks have helped stabilize developing-nation stocks and currencies in the past month, weakness in exports and commodity prices as well as higher debt repayments will keep the assets under pressure, said Baweja, USB’s head of emerging-market cross asset strategy in London. “Today EM sentiment is taking a break from perceived extreme negativity,” Baweja wrote in a note Tuesday. “However, fundamentals are still slowly worsening.” South Africa’s rand, the Indonesian rupiah, Malaysia’s ringgit and the Columbian peso will lead the renewed decline “before long,” while emerging-market stocks will start underperforming their peers in advanced economies again, he said.  

• Westpac MNI China consumer confidence index sinks to lowest on record in October. (graph) 

• PBOC Done Cutting Benchmark Rates, According to Economist Survey. China’s central bank will refrain from further benchmark interest-rate cuts and economic growth will hold steady in the fourth quarter, according to economists surveyed by Bloomberg News.

• Landlord Boom a Bigger Risk for Aussie Bad Debts Than Businesses. The boom in Australian buy-to-let mortgages that has helped fuel record household borrowing could be the next driver of bank bad debts rather than corporate defaults. While business-loan losses were behind the biggest bad debt cycles in the past three decades, according to a discussion paper from the Reserve Bank of Australia, unprecedented borrowing by individuals and signs that the residential property market is coming off the boil mean that for banks the next one might be different.

• Australian Core Inflation Slows, Sending Currency Down Half Cent. Australian core consumer prices rose less than economists forecast last quarter, giving the central bank scope to resume interest-rate reductions if needed and sending the currency down half a U.S. cent.

• Asian Stocks Retreat Before Fed as Material Shares Lead Losses. Asian stocks followed U.S. shares lower as material companies led declines and investors awaited a Federal Reserve decision on monetary policy. The MSCI Asia Pacific Index slipped 0.2 percent to 135.64 as of 9:01 a.m. in Tokyo.

• Moody's Says Iron Ore to Extend Slump in 2016 on Excess Supplies. Iron ore’s slump will deepen next year as rising supplies from the biggest producers overwhelm weakening demand in China, according to Moody’s Investors Service. Prices will probably average $45 a metric ton next year and in 2017, said Carol Cowan, senior vice president in New York. So far this year, they averaged about $58. The glut may expand as the majors boost low-cost output and billionaire Gina Rinehart’s Roy Hill mine starts up, Cowan said in an interview. 

Wall Street Journal:

• Budget Deal Stirs Anger on the Right. Two-year plan reduces risk of a government shutdown. Congressional leaders worked Tuesday to marshal support for a sweeping budget and debt deal that offered an end to fiscal fights with President Barack Obama but opened up top Republicans to criticism from conservatives, including GOP presidential hopefuls.

• U.S. Looks at Proposals to Step Up Fight Against Islamic State. Washington may send Apache attack helicopters to Iraq. The White House is seriously considering deploying a small squadron of Apache attack helicopters to Iraq as part of a package of new assistance programs to counter Islamic State, according to U.S. officials.

• The Best Worst Budget Deal. Obama gets more spending, the GOP gets some disability reform. The Obama Presidency staged a last policy gasp Tuesday, as the White House and congressional leaders completed a budget deal that defers every serious choice to the next Administration. The mutual nonaggression pact is the product of a hyper-polarized Washington, and perhaps the only thing worse than passing it would be not passing it. 

Fox News: 

• House Republicans introduce measure to impeach IRS Commissioner Koskinen. House Republicans on Tuesday introduced a resolution to impeach IRS Commissioner John Koskinen, accusing him of making "false statements" under oath and failing to comply with a subpoena for evidence. House Oversight Committee Chairman Jason Chaffetz, R-Utah, and 18 other committee members introduced the resolution to begin impeachment proceedings. In doing so, they followed through on a threat first made over the summer, when Republicans accused the IRS leader of making inaccurate statements to Congress regarding the Tea Party targeting scandal and its aftermath.

MarketWatch.com:

• Dow transports take a beating. (graph)

• Weak oil prices deplete Russia’s sovereign-wealth fund.

CNBC: 

• Twitter(TWTR) plunges as much as 12% on light guidance. (video)

• Yellen earns worst grade yet in CNBC Fed Survey. (video)

• Crude oil is making a mad dash for $35: Expert. (video)

Zero Hedge:

• China Margin Debt Hits 8-Week High, Japan Pumps'n'Dumps As Kyle Bass Fears Looming EM Banking Crisis. (graph)

• Why Are Half Of All 25-Year-Olds Living With Their Parents? The Federal Reserve Answers.

• 'Untouchables': Obama Cronies "Protected Wall Street's Most Criminal From Prosecution". (video)

• The Calm Before The Storm.

• Millennials: 70% Want To Be Debt Free, 66% Refuse To "Gamble" In The Stock Market.

• OECD Chief Economist: It's Time To "Temper The Frothiness" In Markets.

• Yes, A New Crisis is Coming - And Here's Why.

• Apple(AAPL) Beats On Sales And EPS, Misses iPhone, iPads Sales, China Slows Down: The Quarter In Charts. (graph)

• Crude Jumps Despite API Reporting 5th Consecutive Weekly Inventory Build. (graph)

• Americans Renouncing US Citizenship Soars To Yet Another Record High. (graph)

• Pre-Fed Jitters Spark Bond Bid, Stock Skid Amid Crude Carnage. (graph)

Business Insider:

• This is why oil prices are crashing again.

• IBM(IBM) is close to buying part of the Weather Company.

• Larry Ellison just painted a frightening picture of what hackers could do next.

Reuters:

• Gilead(GILD) hepatitis C drug sales trend flattens, shares dip. Gilead Sciences Inc on Tuesday said its quarterly profit rose 70 percent, but sales growth for its hepatitis C drugs flattened as health insurers limited access to the expensive treatments. Shares of the biotechnology company fell slightly. Gilead's quarterly product sales rose 37 percent to $8.2 billion. Sales of hepatitis C drugs Sovaldi and Harvoni totaled $4.8 billion, which was just ahead of the $4.5 billion average Wall Street estimate, but little changed from second quarter sales. Company officials said hepatitis C sales were likely to stay flat through 2016 as health insurers restrict patient access to Gilead's drugs, which have list prices of more than $1,000 a pill. Gilead's shares, which rose 2 percent in regular trading, were down 2 percent at $108.75 after hours.

• FTC looking at Valeant's contact lens dealings -source. The U.S. Federal Trade Commission is looking into whether Canadian drugmaker Valeant Pharmaceuticals International Inc illegally cornered the market for a component of a new type of contact lens, an industry source told Reuters. Valeant said on Monday it had received a letter from the FTC on or about Oct. 16 seeking more information about Valeant's recent acquisition of Paragon Vision Sciences, which produces a material used to make gas permeable lenses. That probe focuses primarily on a small subset of the contact lens market, Ortho-K lenses, according to the contact lens industry source, who asked not to be named to protect business relationships.

• Akamai(AKAM) forecasts revenue, profit below analysts' estimates. Akamai Technologies Inc, a provider of services that help deliver Internet content faster, forecast current-quarter revenue and profit below analysts' expectations, citing a strong dollar and slowing online traffic growth. The company's shares fell about 14 percent in extended trading on Tuesday.

• HCA(HCA) says some patients dropping their new insurance coverage. Hospital operator HCA Holdings Inc on Tuesday said more patients are coming through its doors who have lost their health insurance, most likely because they stopped paying for it.

Telegraph:

• Fossil fuel companies risk plague of 'asbestos' lawsuits as tide turns on climate change. The UN says the world is poised for a sweeping climate deal in Paris. 'It is unstoppable. No amount of lobbying is going to change the direction'.

Evening Recommendations 

• None of note

Night Trading

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

• Asia Ex-Japan Investment Grade CDS Index 131.0 -2.75 basis points.

• Asia Pacific Sovereign CDS Index 73.75 +2.0 basis points.

• Bloomberg Emerging Markets Currency Index 71.79 -.07%. 

• S&P 500 futures +.16%.

• NASDAQ 100 futures +.16%.

Morning Preview Links

Earnings of Note

Company/Estimate

• (AGCO)/.50

• (ADP)/.65

• (BSX)/.23

• (CMC)/.43

• (GRMN)/.54

• (GD)/2.13

• (HSY)/1.13

• (HES)/-1.20

• (HLT)/.23

• (IDXX)/.53

• (ICE)/2.92

• (IP)/.93

• (JLL)/2.01

• (MDLZ)/.41

• (NOV)/.55

• (NSC)/1.41

• (NOC)/2.19

• (OXY)/.03

• (Q)/.81

• (HOT)/.71

• (WOOF)/.68

• (WEX)/1.42

• (aem)/.02

• (AMGN)/2.38

• (ABX)/.07

• (BWLD)/1.30

• (CRUS)/.59

•  (ESV)/.75

• (FFIV)/1.74

• (GPRO)/.29

• (MTW)/.09

• (MAR)/.74

• (NEM)/.18

• (ORLY)/2.38

• (TSO)/6.05

• (WDC)/1.56

• (WMB)/.15

• (YELP)/.07

Economic Releases

8:30 am EST

• Advance Goods Trade Balance for Sept. is estimated at -$64.3B versus -$67.19B in August.  

10:30 am EST

• Bloomberg consensus estimates call for a weekly crude oil inventory build of +3,560,000 barrels versus a +8,028,000 barrel gain the prior week. Gasoline supplies are estimated to fall by -1,050,000 barrels versus a -1,518,000 barrel decline the prior week. Distillate inventories are expected to fall by -1,765,000 barrels versus a -2,622,000 barrel decline the prior week. Finally, Refinery Utilization is estimated to rise by +.08% versus a +.4% gain prior.

2:00 pm EST

• The FOMC is expected to leave the benchmark Fed Funds rate at 0.0%-.25%.
  

Upcoming Splits

• None of note

Other Potential Market Movers

• The $35b 5Y T-Note Auction, $15B 2Y FRN Treasury Auction, weekly MBA mortgage applications report, (ABCO) investor day, (ABM) investor day and the (PH) General Meeting could also impact trading today.

BOTTOM LINE: Asian indices are mostly lower, weighed down by industrial and financial 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.

Stocks Lower into Final Hour on Global Growth Fears, Earnings Outlook Concerns, Emerging Markets/US High-Yield Debt Angst, Transport/Homebuilding Sector Weakness

Broad Equity Market Tone:

• Advance/Decline Line: Substantially Lower
  

• Sector Performance: Almost Every Sector Declining
  

• Volume: Slightly Below Average

• Market Leading Stocks: Underperforming

Equity Investor Angst:

• Volatility(VIX) 15.75 +3.01%

• Euro/Yen Carry Return Index 138.82%

• Emerging Markets Currency Volatility(VXY) 10.87 -.91%

• S&P 500 Implied Correlation 60.29 +3.17%

• ISE Sentiment Index 163.0 +21.64%

• Total Put/Call 1.10 +13.4%

• NYSE Arms .95 -18.87% 

Credit Investor Angst:

• North American Investment Grade CDS Index 78.65 +1.13%

• America Energy Sector High-Yield CDS Index 1,107.0 +4.27%

• European Financial Sector CDS Index 69.97 +1.41%

• Western Europe Sovereign Debt CDS Index 18.81 +.03%

• Asia Pacific Sovereign Debt CDS Index 73.99 +2.91%

• Emerging Market CDS Index 326.85 +1.37%
  

• iBoxx Offshore RMB China Corporates High Yield Index 122.26 -.02%

• 2-Year Swap Spread 11.5 +.25 basis point

• TED Spread 31.75 unch.

• 3-Month EUR/USD Cross-Currency Basis Swap -27.5 +2.0 basis points

Economic Gauges:

• Bloomberg Emerging Markets Currency Index 71.83 -.43%
• 3-Month T-Bill Yield .02% +1.0 basis point

• Yield Curve 141.0 -1.0 basis point

• China Import Iron Ore Spot $51.50/Metric Tonne +.92%

• Citi US Economic Surprise Index -10.10 -2.4 points

• Citi Eurozone Economic Surprise Index 18.1 -2.2 points

• Citi Emerging Markets Economic Surprise Index -13.50 -.2 point

• 10-Year TIPS Spread 1.49 unch.
• # of Months to 1st Fed Rate Hike(Morgan Stanley) 5.40 -.05

Overseas Futures:

• Nikkei 225 Futures: Indicating +108 open in Japan 
• China A50 Futures: Indicating -46 open in China

• DAX Futures: Indicating +5 open in Germany

Portfolio: 

• Higher: On gains in my biotech/medical sector longs, index hedges and emerging markets shorts

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

• Market Exposure: Moved to 25% Net Long

Today's Headlines

Bloomberg: 

• U.S. Rivalry With China Heats Up Over Vital Asia Shipping Lane. The moment the U.S. Navy sailed a warship into waters claimed by China in the South China Sea it gave President Xi Jinping a pretext to accelerate his country’s military presence in the disputed waterway, further placing the vital shipping lane at the heart of U.S.-China rivalry in the Pacific. The patrol by the USS Lassen prompted an angry response by Beijing and came just weeks after Xi met with President Barack Obama in Washington, where he said China “does not intend to pursue militarization” of the area. The decision to send in the warship -- the most direct attempt by the U.S. to challenge China over its island building in the waters -- may change that.  

• China's Top Graft Buster Turns Sights on Financial Industry. China’s top graft buster is turning its sights on the financial industry with plans to dig into organizations ranging from the world’s biggest bank to the regulator overseeing a volatile stock market. The People’s Bank of China, the nation’s five biggest lenders, sovereign-wealth fund China Investment Corp. and the banking, securities and insurance regulators are among 31 entities that will be inspected for possible misconduct or corruption.    

• Hitachi Construction Cuts Forecasts as Demand Slump Deepens. Hitachi Construction Machinery Co., Asia’s second-biggest maker of building equipment, cut its sales and profit targets for the year as the slowdown in China extends to the developed world. The company trails only Komatsu Ltd. in Japan’s construction equipment market and is among the world’s top suppliers of the large excavators and dump trucks used by miners. Both Komatsu and Hitachi Construction have been quick to warn on the impact of China’s slowdown, and in a statement Tuesday Hitachi signaled the slump is spreading. “ Sales are expected to fall short of the company’s previous forecast due to demand slowdown in developed countries and further slowdown in emerging markets,” Chief Financial Officer Tetsuo Katsurayama told reporters in Tokyo. For China, he said there are no signs of a recovery in demand. “We have a view that we won’t see a recovery in the second half,” he said.

• Stock Shock: The Threat to Global Growth If Equities Slide Again. That markets are skittish again and remain beneath their peaks nevertheless has economists debating how much power equities wield over global growth. The worrying answer is quite a bit, according to a report from Oxford Economics Ltd., which notes the recent slide in stocks is similar in scale to that seen in 1998.

• Is London’s Housing Bubble About to Burst? (video)

• Brazil Real Falls for Second Day on Renewed Concern Levy Leaving. Brazil’s real declined for a second day as President Dilma Rousseff’s government struggles to win support for measures to shore up the nation’s finances amid speculation Finance Minister Joaquim Levy could leave his post. The currency dropped less than 0.1 percent to 3.9088 per dollar at 12:41 p.m. in Sao Paulo, and was the most volatile among 31 major tenders tracked by Bloomberg. Rousseff’s aides are said to see former minister Antonio Palocci Filho as a candidate for finance minister if Levy leaves the position, according to a report in Valor Economico newspaper that didn’t say how it got the information.

• Emerging Stocks Decline Before Fed Meeting as Ruble Weakens. Emerging-market stocks fell with currencies before a Federal Reserve meeting as utility companies tumbled and lower oil prices dragged down energy producers. Russia’s ruble depreciated the most among its peers. Gazprom PJSC dragged Russian equities lower as oil prices declined before U.S. data forecast to show crude stockpiles expanded in the world’s biggest consumer. The ruble headed for a three-week low. Brazilian raw-material producers led the Ibovespa lower. Indian stocks dropped for a second day. Stocks fell to the lowest level in six weeks in Dubai, while Saudi Arabian shares retreated 3 percent. The MSCI Emerging Markets Index fell 0.7 percent to 861.51 at 11:03 a.m. in New York, dropping for a second day.

• Europe Stocks Fall for a Second Day as Earnings Miss, Oil Drops. (video) European stocks fell for a second day as some disappointing earnings reports cast doubt on the strength of the euro-area economic recovery, amid weak commodity and oil prices. Total SA and Royal Dutch Shell Plc slid at least 1.9 percent, contributing the most to a drop in energy stocks. Novartis AG pulled health-care shares down, falling 1.6 percent after reporting profit that missed estimates and agreeing to pay $390 million to settle claims that it paid kickbacks to some U.S. pharmacies. Anglo American Plc was among the biggest mining decliners, falling 5.7 percent. BASF SE dragged chemical shares lower, losing 4.7 percent after cutting its targets for sales and profit this year. The Stoxx Europe 600 Index slid 1.1 percent to 371.88 at the close of trading.

• Arch Coal(ACI) Ends Debt Exchange, Restructuring Talks Continue. Arch Coal Inc. terminated a debt-exchange offer that it initiated almost four months ago as disputes among creditors helped derail the deal that would have enabled the struggling coal miner to slash its $5.1 billion debt load. The company, which had extended the deadline six times, said the decision was based on opposition from a lender group and a pending law suit, among other factors, according to a company statement Tuesday. 

• IBM(IBM) Says the SEC Is Investigating Accounting for Revenue Recognition. IBM disclosed that the U.S. Securities and Exchange Commission is conducting a probe into the way the technology seller accounts for revenue recognition. International Business Machines Corp. fell 3.5 percent to $138.60 at 1:57 p.m. in New York. The Armonk, New York-based company said Tuesday in a filing that it learned in August that the SEC is looking into the accounting treatment of certain transactions in the U.S., the U.K. and Ireland.

• Fed Rate Hike Close? Economists Say Yes, Investors Say No. (video)

• Fed's Quest to Keep December Options Open: Decision Day Guide. Here’s what to look for when the Federal Open Market Committee releases its policy statement at 2 p.m. Wednesday in Washington following a two-day meeting. Economists don’t expect a rate rise and will scour the statement for clues on what the FOMC may do at its December meeting, amid betting the Fed will delay until next year. Fresh economic data has been mixed, at best, since officials met last month, when they left their benchmark federal funds rate near zero. Figures on U.S. jobs, retail sales, manufacturing, inventories and exports all disappointed, while new jobless claims and housing data -- for the most part -- have showed continued strength. The challenge for policy makers will be to keep their options open for a move this year, while acknowledging tepid data that could tilt the tone of the statement toward liftoff in 2016. 

• Cummins(CMI) Falls After Trimming Annual Forecast, Earnings Miss. Cummins Inc. fell after third-quarter profit trailed analysts’ estimates and the company reduced its annual sales forecast because of weakening demand for its heavy-duty engines. The company also said it’s cutting 2,000 jobs as part of a plan to save as much as $200 million a year. And Chief Financial Officer Pat Ward said on a conference call that Cummins will resume share buybacks this quarter. Its board authorized a $1 billion repurchase program in July 2014.

Wall Street Journal: 

• Chinese Firms Vie to Buy Starwood Hotels. Deal could be the largest-ever Chinese takeover of a U.S. company.

Fox News:

• Carson takes lead from Trump in new national poll. (video)

CNBC: 

• Chance of recession highest in two years: Survey. (video)

• Apple's(AAPL) best days are behind it, says top analyst. (video)

• Get ready for sub $40 oil: Expert. (video)

Zero Hedge:

• Washington's Syria "Strategy" In Complete Disarray As "Ally" Turkey Bombs US-Armed Rebels.

• Valeant(VRX) Hit With Downgrade Warning By S&P Which Sees "Reputational, Legal, And Regulatory Risks".

• Not "Off To The RACEs" - Ferrari Crashes Below IPO Price. (graph)

• Rent-A-Center(RCII) Stock Plummets For A Very Surprising Reason. (graph)

• Who's Really Isolated? Iran Set To Join BRICS Bank, Strengthen Ties With Brazil. (graph)

• Facebook(FB) Caught Secretly Lobbying For Privacy-Destroying "Cyber-Security" Bill.

• Is The Small-Cap Under-Performance A Big Deal? (graph)

• Boehner On Debt Ceiling Deal: Process "Stinks" But Alternative Was Default. (graph)

• Consumer Confidence Slides As Low Gas Prices No Longer Lift Sentiment. (graph)

• US Services Economy Tumbles To Weakest Since Weather-Crushed January. (graph)

• Why Did The Market Surge In October? Here Is The U.S. Treasury's Explanation. (graph)

• US Equities Give Up China Rate Cut Gains As Crude Plunges To $42 Handle. (graph)

• Case-Shiller Home Price Appreciation 'Stable' At Around 5% YoY. (graph)

• Don't Think The Status Quo Will Save You. (graph)

• Durable Goods Orders Tumble For 6th Consecutive Month As Core Capex Plunges Most Since 2009. (graph)

• "Smart Money" Sold Stocks For Third Consecutive Week To Corporate Buybacks, Scrambling Shorts. (graph)

Business Insider:

• Conservatives are in revolt over the Republican budget 'betrayal'.

• This recession indicator just collapsed to a 6-year low. (graph) An offbeat economic indicator is signaling a recession. The "McCulley indicator" — which measures "core" capex orders, or orders of capital goods excluding military orders and planes — is now at its lowest level since 2009. The indicator is named for former PIMCO managing director Paul McCulley, who views it as a leading recession indicator.

• US officials: Iran invited for the first time to next round of Syria talks.

• Walgreens(WAG) might buy Rite Aid(RAD), and the stock is going nuclear.

• Even the Kremlin's own evidence proves that Russia isn't focusing its Syria bombing on ISIS.

Bear Radar

Style Underperformer:

• Small-Cap Value -1.32%

Sector Underperformers:

• 1) Coal -19.1% 2) Oil Tankers -5.08% 3) Road & Rail -4.52%

Stocks Falling on Unusual Volume:

• RCII, GRUB, NTT, SAVE, MSTR, CMI, PLCE, CTS, CPLA, YRCW, RDN, ODFL, HIG, WSO, CAKE, AAN, IACI, KN, CAJ, DECK, HTLD, SKYW, MDSO, CTRP, TWOU, EQT, WBC, CHRW, AME, HURN, F, AGNC, CALM, UVE, FOGO, NCI, AXLL, EXP, PCAR, CIEN, GHL, MPLX, TMUS, TDW, JBLU, AI, CONN, ECHO, YELP, SKYW, LXK and LRN
  

Stocks With Unusual Put Option Activity:

• 1) EWT 2) KBH 3) CMI 4) M 5) HES
  

Stocks With Most Negative News Mentions:

• 1) GM 2) LVS 3) CYH 4) F 5) BTU
  

Charts:

• ETFs Falling on Unusual Volume

• Stocks Falling on Unusual Volume

Bull Radar

Style Outperformer:

• Large-Cap Growth -.43%

Sector Outperformers:

• 1) HMOs +1.57% 2) Biotech +1.46% 3) Drugs +.67%
  

Stocks Rising on Unusual Volume:

• QUNR, TACO, OMG, IDTI, FCS, QSR, IPGP, AGIO, TXT, PCRX, UTHR and GLW

Stocks With Unusual Call Option Activity:

• 1) ACI 2) TSN 3) GRUB 4) SAVE 5) RAI
  

Stocks With Most Positive News Mentions:

• 1) IDTI 2) LMT 3) PFE 4) COH 5) NOC
  

Charts:

• ETFs Rising on Unusual Volume 

• Stocks Rising on Unusual Volume