Stocks Reversing Modestly Lower into Final Hour on Emerging Markets/US High-Yield Debt Angst, Earnings Outlook Worries, Oil Decline, Energy/Retail Sector Weakness

Broad Equity Market Tone:

• Advance/Decline Line: Lower
  

• Sector Performance: Mixed
  

• Volume: Slightly Below Average

• Market Leading Stocks: Underperforming

Equity Investor Angst:

• Volatility(VIX) 15.84 +3.6%

• Euro/Yen Carry Return Index 137.86 -.11%

• Emerging Markets Currency Volatility(VXY) 10.68 -.65%

• S&P 500 Implied Correlation 55.57 +2.27%

• ISE Sentiment Index 67.0 -34.95%

• Total Put/Call .84 -16.83%

• NYSE Arms 1.46 +45.9% 

Credit Investor Angst:

• North American Investment Grade CDS Index 80.70 -.49%

• America Energy Sector High-Yield CDS Index 1,124.0 +1.01%

• European Financial Sector CDS Index 70.14 -2.22%

• Western Europe Sovereign Debt CDS Index 19.28 -5.37%

• Asia Pacific Sovereign Debt CDS Index 68.84 -1.42%

• Emerging Market CDS Index 325.88 +1.76%
  

• iBoxx Offshore RMB China Corporate High Yield Index 123.68 +.02%

• 2-Year Swap Spread 9.75 +.5 basis point

• TED Spread 22.75 -3.75 basis points

• 3-Month EUR/USD Cross-Currency Basis Swap -40.5 unch.

Economic Gauges:

• Bloomberg Emerging Markets Currency Index 71.13 +.17%
• 3-Month T-Bill Yield .13% unch.

• Yield Curve 146.0 unch.

• China Import Iron Ore Spot $48.58/Metric Tonne +.7%

• Citi US Economic Surprise Index 1.0 +.1 point

• Citi Eurozone Economic Surprise Index 23.8 +.1 point

• Citi Emerging Markets Economic Surprise Index -3.0 +1.1 points

• 10-Year TIPS Spread 1.58 -2.0 basis points
• # of Months to 1st Fed Rate Hike(Morgan Stanley) 2.98 +.10

Overseas Futures:

• Nikkei 225 Futures: Indicating +22 open in Japan 
• China A50 Futures: Indicating -17 open in China

• DAX Futures: Indicating -23 open in Germany

Portfolio: 

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

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

• Market Exposure: Moved to 25% Net Long

Today's Headlines

Bloomberg:  

• Asia Hedge Fund Started by Ex-Alibaba's Wu Is Bearish on China. F&H Fund Management, the asset manager co-founded by the former chief technology officer of Alibaba Group Holding Ltd., is so bearish on stocks in China that it is opening its hedge fund to outside investors. The FengHe Asia Fund is seeking to more than triple assets to $300 million by the end of next year from $80 million currently, said Matt Hu, a former portfolio manager at China Securities Ltd. who started Singapore-based F&H in 2010 with John Wu, the 19th person hired by Jack Ma’s e-commerce company Alibaba.
• Brazil's Corruption Scandal Isn't Its Biggest Problem. In Brazil, the push to oust President Dilma Rousseff has shifted, as often happens in politics, away from the corruption scandal that first landed her government in trouble. Impeachment calls are now focused on her handling of fiscal accounts, and that is perhaps fitting since few problems in Brazil rank higher than its exploding budget deficit. At 536 billion reais ($141 billion), the gap has swollen to the equivalent of more than 9 percent of gross domestic product. It’s not just that the figure is the biggest in at least two decades; it’s how quickly it has grown as the country sinks into a protracted recession. Eighteen months ago, the deficit was 3 percent of GDP. So while no one is talking about default as a near-term concern -- and bond yields show no such jitters -- many do say that it’s helping fuel an inflation surge and could eventually push the country toward a full-blown debt crisis unless spending is reined in after a decade of largesse.
• Hungary Against Taking Even a ‘Single Syrian’ from Germany. Germany shouldn’t send back refugees to the their first point-of-entry in the European Union based on the bloc’s Dublin accord, Hungarian Foreign Minister Peter Szijjarto said, according to an interview with MTI news service. “The Dublin system is dead since apart from a few exceptions, countries aren’t abiding by its terms,” Szijjarto said on Wednesday, according to MTI. “Not a single Syrian” should be returned from western Europe to Hungary, he said.
• OPEC Challenges Shale Afresh as Iraq Crude Floods U.S. Market. OPEC’s latest challenge to U.S. shale oil producers would be about two miles long, lined end to end, and weigh almost 3 million metric tons. It’s due to reach American ports this month. Iraq, the fastest-growing producer within the 12-nation group, loaded as many as 10 tankers in the past several weeks to deliver crude to U.S. ports in November, ship-tracking and charters compiled by Bloomberg show. Assuming they arrive as scheduled, the 19 million barrels being hauled would mark the biggest monthly influx from Iraq since June 2012, according to Energy Information Administration figures. The cargoes show how competition for sales among members of the Organization of Petroleum Exporting Countries is spilling out into global markets, intensifying competition with U.S. producers whose own output has retreated since summer. For tanker owners, it means rates for their ships are headed for the best quarter in seven years, fueled partly by the surge in one of the industry’s longest trade routes. 
• Energy Default Alarms Get Louder as Pain Seen Lasting Into 2016. Eleven months of depressed oil prices are threatening to topple more companies in the energy industry. Four firms owing a combined $4.8 billion warned this week that they may be at the brink, with Penn Virginia Corp., Paragon Offshore Plc, Magnum Hunter Resources Corp. and Emerald Oil Inc. saying their auditors have expressed doubts that they can continue as going concerns. Falling oil prices are squeezing access to credit, they said. And everyone from Morgan Stanley to Goldman Sachs Group Inc. is predicting that energy prices won’t rebound anytime soon. The industry is bracing for a wave of failures as investors that were stung by bets on an improving market earlier this year try to stay away from the sector. Barclays Plc analysts say that will cause the default rate among speculative-grade companies to double in the next year. Marathon Asset Management is predicting default rates among high-yield energy companies will balloon to as high as 25 percent cumulatively in the next two to three years if oil remains below $60 a barrel.
• Biggest Metals Market Set for First Trade Drop Since Crisis. The biggest market for metals is going into reverse for the first time since the 2008-09 financial crisis as slowing Chinese demand deters investors. The London Metal Exchange is set for weaker volumes this year as hedge funds and banks have scaled back their commodities business, regulators increase scrutiny of the market and the bourse charges higher transaction fees. 
• Steel Output Drops in China as Maike Flags Iron Ore Mismatch. The world’s biggest steelmaker is pouring less metal. Production in China dropped in October from a year earlier as mills battled lower domestic demand, slumping prices and rising industry losses. Crude steel output was 66.12 million metric tons, 3.1 percent lower than the same month last year, according to National Bureau of Statistics data on Wednesday. Supply for the first 10 months was 675.1 million tons, 2.2 percent less than the same period in 2014.
• Bank Hedges Hit Record Low. Investors in U.S. financial stocks are putting their faith in the Fed like never before as confidence grows that the day is drawing nearer when banks will benefit from higher interest rates. Short interest in an exchange-traded fund tracking financial stocks in the Standard & Poor’s 500 Index is the lowest in data going back to 2006, according to data compiled by Bloomberg and Markit Ltd. Traders are protecting less than ever against declines in financial firms as the Federal Reserve is seen as twice as likely to lift interest rates at its December meeting compared with just two months ago.

Fox News:

• ‘The biggest sham’: Sheriffs fume at mass release of 6,000 federal inmates.

CNBC:

• Fed's Williams says 'very strong case' to raise rates next month. San Francisco Federal Reserve President John Williams said Tuesday there's a "very strong case" for the Fed to raise interest rates next month if the economy continues to improve and policymakers are confident that inflation will pick up. "Assuming the data are consistent with those (conditions), I think there's a very strong case for starting the process of raising interest rates" at the Fed's Dec. 15-16 meeting, Williams said in an exclusive interview with USA TODAY. "The next natural step...is to start raising rates and to do that gradually."
• Andreessen sells thousands of Facebook(FB) shares.

Zero Hedge:

• The Legendary U.S. Consumer Is Out Of Cash In These Cities. (graph)
• Macy's(M) Massacre - 3 Years Of Wasted Buybacks Ends Financial Engineering Dreams. (graph)
• Hedge Fund Hotel SunEdison(SUNE) Is Crashing Again - Now Down 86% In Three Months. (graph)
• Confused About What Mario Draghi Will Do Next? Here's The Official Decision Tree From His Former Employer.
• "Irreversibly Broken & Dysfunctional" - There's Something Wrong In The Markets.
• "It's A Bloodbath" - Here Is The Biggest Casualty Of Canada's Recession. (graph)
• The SEC Cracks Down On The Biggest Market Threat: Short Sellers On Twitter.
• BABA Battered As Macro Fears & Counterfeit Concerns Trump Singles-Day Celebrations. (graph)
• "No QE For You!": ECB May Cut "Lifeline" To Portugal After Socialists Overthrow Government.
• Valeant(VRX) Fiasco Hits Biggest Holder: Sequoia Suffers Largest Outflow Of The Year, And Why It Could Get Worse. (graph)
• Macy's(M) Blames "Tepid Spending" On Revenue Miss: Same Store Sales Tumble; Slashes Guidance. (graph)
• Forget Oil, Base Metals Collapse 50% From 2011 Highs. (graph)
• The World's Biggest Bond Bubble Continues To Burst As China Suffers More Defaults. (graph)

Handelsblatt:

• EU's Tusk Says 'Risk of a Brexit Is Real'. EU President Donald Tusk says the risk of the U.K. exiting the European Union is "real,", citing an interview with Tusk. Refugee crisis "adding fuel to the arguments of the euro-skeptics" in U.K., he said.

Bear Radar

Style Underperformer: 

• Small-Cap Value -.62%

Sector Underperformers: 

• 1) Coal -7.08% 2) Hospitals -4.06% 3) Retail -2.22%

Stocks Falling on Unusual Volume:

• VWR, AFSI, PINC, MIDD, AEUA, BOOT, M, AYA, HZNP, NDRM, RNET, GIII, ARLP, INSY, INGN, JWN, KSS, APC, SEDG, BSX, TERP, BPMC, DDS, WGP, DEPO, PRAA, SCTY, VWR, GMCR, DEPO, INSY, ATRO, ICPT and BOOT

Stocks With Unusual Put Option Activity: 

• 1) KSS 2) NAV 3) JWN 4) FCX 5) FOSL

Stocks With Most Negative News Mentions: 

• 1) DLTR 2) ORCL 3) GMCR 4) ESRX 5) SUNE

Charts:

• ETFs Falling on Unusual Volume 
• Stocks Falling on Unusual Volume

Bull Radar

Style Outperformer:

• Large-Cap Growth +.28%

Sector Outperformers: 

• 1) Homebuilders +1.98% 2) Internet +.93% 3) Networking +.91%

Stocks Rising on Unusual Volume: 

• ALRM, FLDM, TSEM, LITE, W, ZFGN, BOX, BZH and P

Stocks With Unusual Call Option Activity: 

• 1) BX 2) TAP 3) ASNA 4) XRX 5) ANF

Stocks With Most Positive News Mentions: 

• 1) PRU 2) IIIN 3) ADT 4) AMZN 5) ALNY

Charts: 

• ETFs Rising on Unusual Volume 
• Stocks Rising on Unusual Volume

Morning Market Internals

NYSE Composite Index:

• Volume Running +3.5% Above 100-Day Average
• 5 Sectors Rising, 5 Sectors Declining
• 39.3% of Issues Advancing, 57.8% Declining
• 36 New 52-Week Highs, 94 New Lows
• 35.9% of Issues Above 200-day Moving Average
• Average 14-Day RSI 43.3
• Vix 15.7
• Total Put/Call .85
• TRIN/Arms 1.36

Wednesday Watch

Evening Headlines
Bloomberg:

• China's Shanshui Cement to Default on Onshore Bonds on Thursday. China Shanshui Cement Group Ltd. will default on a local bond payment due Thursday after a shareholder tussle stymied financing, becoming at least the sixth company to renege on onshore note obligations this year. The firm "will be unable to obtain sufficient financing on or before" the Nov. 12 maturity date on its 2 billion yuan ($314 million) of 5.3 percent securities, it said in a filing to the Hong Kong stock exchange Wednesday. "It is therefore certain that the Group will default on the onshore debt," it said. The company’s $500 million of 7.5 percent dollar debentures due in 2020 slid 37 cents to a record low 45 cents as of 8:40 a.m. in Hong Kong. 
• China Fund That Gained 24% on Bonds Sees Substantial Correction. An executive who oversees China’s top bond fund, which returned 24 percent in the first nine months, predicts a “substantial correction” in riskier debt as the restart of initial public offerings drives money back into shares. Cash that piled into lower-rated notes after a stock rout in June is likely to return to equities, according to Shao Jiamin, head of fixed income investment at HFT Investment Management Co. in Shanghai. HFT Pure Bond Fund ranked No. 1 among 270 peers this year through Sept. 30, according to Haitong Securities Co. “The renewal of IPOs, along with the year-end effect of tighter liquidity, will lead to a jump in bond yields in general,” Shao said. “For those lower-rated bonds whose valuations are unreasonable, there will be a substantial correction.”
• JD.Com(JD), Vipshop(VIPS) Slump as Economy Concern Outweighs Singles' Day. Online retailers including JD.com Inc. and Vipshop Holdings Ltd. slumped, leading U.S.-traded Chinese stocks lower as fresh signs that growth in the world’s second-largest economy is faltering outweighed an anticipated sales boost during the annual Singles’ Day promotion. The Bloomberg China-US Equity Index fell 1 percent in a second consecutive decline in New York. Vipshop, an online discount retailer of branded apparel and other products, contributed the most to the gauge’s retreat, dropping 6.6 percent to $19.52. JD.com, the country’s second-biggest e-commerce company fell 2 percent to $28.2. Alibaba Group Holdings Ltd. was little changed at $81.43 after falling as much as 2.2 percent.
• RBNZ Sees Risk of 'Damaging Correction' in Auckland Housing. Auckland’s soaring housing market and low milk prices pose increased risks to New Zealand’s financial system, the country’s central bank said. “The increasingly stretched Auckland market is at risk of a damaging correction, especially if economic conditions deteriorate,” the Reserve Bank said Wednesday in Wellington in its semi-annual Financial Stability Report. Many indebted farms are also coming under increased pressure, “which would be exacerbated if low dairy prices are sustained or dairy farm prices fall significantly,” it said.
• Japan Banks Seen Losing Profit Driver as Asian Economies Weaken. Japan’s three biggest lenders will probably report a drop in second-quarter profit after Asia’s economic slowdown weakened overseas loan growth and global financial-market volatility crimped fee businesses. Combined net income at Mitsubishi UFJ Financial Group Inc., Sumitomo Mitsui Financial Group Inc. and Mizuho Financial Group Inc. fell 24 percent from a year earlier to 597 billion yen ($4.8 billion) in the three months ended Sept. 30, according to calculations based on the average of five analyst estimates compiled by Bloomberg.
• Russia Said to Plot Strategy to Block IMF Lending to Ukraine. Russia is exploring strategies to try to block the International Monetary Fund’s next loan payment to Ukraine as a dispute between the two countries over a $3 billion bond comes to a head, according to a person familiar with the matter. Russia bought the bond from the government of Ukrainian leader Viktor Yanukovych in December 2013, before he was overthrown and Russian forces annexed Crimea in a move that set off a conflict that has killed 8,000 people. Ukraine proposed the security be included in a restructuring of debt held by private creditors. Russia has refused to accept the terms, insisting the bond is a loan between governments, rather than commercial debt. 
• Dollar Stuck Near Decade High as Stocks Rally Falters. The dollar is stuck near a decade high against major counterparts as traders look to stocks as a gauge of risk sentiment to withstand higher U.S. interest rates. The greenback reached a six-month high against the euro Tuesday as markets price in the possibility of the European Central Bank expanding its stimulus next month ahead of a meeting by the Federal Reserve. The odds of U.S. policy makers increasing rates in December grew after October saw the biggest gain in payrolls this year, shifting market focus to whether risk assets are resilient enough for the first rate increase since June 2006. The dollar has advanced at least 1 percent against all of its 10 developed-nation peers this month.
• Asian Stocks Fluctuate as Investors Await China Economic Reports. Asian stocks fluctuated, with the regional benchmark index trading near the lowest since mid-October, as investors awaited a spate of Chinese data for clues on the extent of the slowdown in the world’s second-largest economy. About the same number of shares gained and fell on the MSCI Asia Pacific Index, which added 0.1 percent to 132.87 as of 9:07 a.m. in Tokyo.

Wall Street Journal:

• Live Blog: WSJ/Fox Business GOP Presidential Debate. Republican candidates gather in Milwaukee on Tuesday for the fourth night of GOP presidential debates. Here is our live blog.
• Copper’s Rout Deepens as China’s Inflation Decelerates. Decline in copper prices is reverberating across the global mining sector.
• Christian Belief Cost Kelvin Cochran His Job. Atlanta says it terminated its fire chief because he published a book without permission. The real reason is because of what's in it.

Fox News:

• GOP candidates tout tax plans, vow to gut IRS at evening debate. Republican presidential candidates touted plans to simplify the tax code – and made a punching bag out of the IRS -- at the opening of the first of two GOP debates Tuesday evening. New Jersey Gov. Chris Christie said at the Fox Business Network/Wall Street Journal debate that he would get rid of special interest deductions virtually across the board.

CNBC:

• A disease on track to bankrupt Medicare.

Zero Hedge:

• It's Not The Record High Debt That Is The Biggest Risk, It's This. (graph)
• Caught On Tape: University of Missouri Media Professor Incites Mob Violence Against Reporter For Doing His Job.
• Inside The Fukushima Radioactive Wasteland: A Trip Through The "Exclusion Zone".
• The Rise Of Trump & Sanders - Distrust & Anger Ripples Across America.
• America's Most 'Unequal' Big Cities Exposed. (graph)
• WTI Tumbles To $43 Handle After API Confirms Huge Inventory Build. (graph)
• Bullish Hopes, Bearish Signals. (graph)
• Germany Sells Out Of Pepper Spray As "Frightened Germans Buy Protection Against Refugees".
• Why Hank Paulson Is Laughing: 4 Of 5 Regional Fed Voters In 2017 Will Be Ex-Goldman(GS).
• For The First Time Ever, Corporate Bond Inventories Turn Negative - What This Means.
• S&P (Barely) Ends Losing Streak Despite Crumbling Credit, Pumping'n'Dumping Dollar. (graph)

Business Insider:

• The New York attorney general ordered FanDuel and DraftKings to stop accepting bets in New York.
• Russia will deploy weapons 'capable of penetrating' the US missile defense system.
• Antarctica gains enough ice each year to bury Rhode Island 85 feet deep.
• Incredible photos from the Korean War campaign that showed what the US Marine Corps is made of. (pic)

Reuters:

• Japan business mood dips as economy seen in recession -Reuters Tankan. Confidence among Japanese manufacturers fell in November for a third straight month to levels unseen in about 2-1/2 years, a Reuters poll showed on Wednesday, reflecting fears that a China-led slowdown in overseas demand may have pushed the economy into recession.

Telegraph:

• Greek debt deal would encourage mass write-off calls in Spain, claims finance minister. Euclid Tsakalotos claims lenders have delayed debt relief talks for fear of emboldening anti-austerity movements in the Mediterranean.
• Emerging markets face debt boom just as growth slows down. Corporate debt in emerging markets is five-times higher now than it was just a decade ago as companies have gorged on cheap loans.  
• Portugal on collision course with EU as centre-Right government falls after 11 days. Leftist anti-austerity forces wait in the wings after bringing down shortest government in Portugal's history.

Evening Recommendations 

• None of note

Night Trading 

• Asian equity indices are -.75% to unch. on average.
• Asia Ex-Japan Investment Grade CDS Index 126.75 -1.0 basis point.
• Asia Pacific Sovereign CDS Index 69.75 -1.0 basis point.
• Bloomberg Emerging Markets Currency Index 70.94 +.16%.
• S&P 500 futures +.08%.
• NASDAQ 100 futures +.06%.

Morning Preview Links 

Earnings of Note 
Company/Estimate

• (ADT)/.48
• (M)/.53
• (NAT)/.26
• (NTES)/2.12
• (PLKI)/.45 

Economic Releases 

• None of note

Upcoming Splits

• None of note

Other Potential Market Movers

• The China Industrial Production/Retail Sales reports, Australia Unemployment report, Japan Machine Orders report, weekly MBA mortgage applications report, Jefferies Energy Conference, UBS Building Products Conference and the Morgan Stanley Tech/Media/Telecom Conference could also impact trading today.

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