Stocks Higher into Final Hour on Central Bank Hopes, Less European/US High-Yield Debt Angst, Seasonal Optimism, Healthcare/Gaming Sector Strength

Broad Equity Market Tone:

• Advance/Decline Line: Modestly Higher
  

• Sector Performance: Almost Every Sector Rising
  

• Volume: Around Average

• Market Leading Stocks: Performing In Line

Equity Investor Angst:

• Volatility(VIX) 15.05 -6.7%

• Euro/Yen Carry Return Index 136.54 +.5%

• Emerging Markets Currency Volatility(VXY) 10.66 -1.30%

• S&P 500 Implied Correlation 55.55 -3.94%

• ISE Sentiment Index 135.0 +16.38%

• Total Put/Call 1.05 -7.89%

• NYSE Arms .81 -31.45% 

Credit Investor Angst:

• North American Investment Grade CDS Index 81.53 -3.07%

• America Energy Sector High-Yield CDS Index 1,307.0 -2.36%

• European Financial Sector CDS Index 67.60 -.72%

• Western Europe Sovereign Debt CDS Index 17.03 -4.59%

• Asia Pacific Sovereign Debt CDS Index 67.74 -.67%

• Emerging Market CDS Index 326.08 -.87%
  

• iBoxx Offshore RMB China Corporate High Yield Index 124.11 -.01%

• 2-Year Swap Spread 6.25 unch.

• TED Spread 22.0 -3.25 basis points

• 3-Month EUR/USD Cross-Currency Basis Swap -52.25 +3.0 basis points

Economic Gauges:

• Bloomberg Emerging Markets Currency Index 70.38 +.31%
• 3-Month T-Bill Yield .20% +3.0 basis points

• Yield Curve 124.0 -4.0 basis points

• China Import Iron Ore Spot $42.24/Metric Tonne -1.70%

• Citi US Economic Surprise Index -20.20 -5.8 points

• Citi Eurozone Economic Surprise Index 28.90 +5.8 points

• Citi Emerging Markets Economic Surprise Index 9.9 +.6 point

• 10-Year TIPS Spread 1.60 -2.0 basis points
• # of Months to 1st Fed Rate Hike(Morgan Stanley) 1.60 -.18

Overseas Futures:

• Nikkei 225 Futures: Indicating -47 open in Japan 
• China A50 Futures: Indicating -89 open in China

• DAX Futures: Indicating +2 open in Germany

Portfolio: 

• Higher: On gains in my biotech/medical/tech sector longs 

• Disclosed Trades: None

• Market Exposure: 50% Net Long

Today's Headlines

Bloomberg:

• Goldman Warns of Brazil Depression After GDP Plunges Again. Latin America’s largest economy shrank more than analysts forecast, as rising unemployment and higher inflation sapped domestic demand, pulling the nation deeper into what Goldman Sachs now calls "an outright depression." Gross domestic product in Brazil contracted 1.7 percent in the three months ended in September, after a revised 2.1 percent drop the previous quarter, the national statistics institute said in Rio de Janeiro. That’s worse than all but three estimates from 44 economists surveyed by Bloomberg, whose median forecast was for a 1.2 percent decline. It also marks the first three-quarter contraction since the institute’s series began in 1996, and a seasonally adjusted annual drop of 6.7 percent. “What started as a recession driven by the adjustment needs of an economy that accumulated large macro imbalances is now mutating into an outright economic depression given the deep contraction of domestic demand,” Alberto Ramos, chief Latin America economist at Goldman Sachs Group Inc., wrote in a report Tuesday. 
• How Fed Liftoff Could Sink the Last Bastion of Canadian Growth. Beware financial spillovers to the Great White North.  
• Scotiabank's Soured Oil-and-Gas Loans Jump 72% in Fourth Quarter. Bank of Nova Scotia’s impaired oil-and-gas loans jumped 72 percent over a three-month period as the Toronto-based firm increased lending to the energy industry amid slumping oil prices. Soured loans for oil and gas climbed to C$165 million ($123 million) as of Oct. 31, up from C$96 million at the end of July and C$44 million a year ago, according to financial disclosures released Tuesday. Two Canadian companies previously on Scotiabank’s “watch list” were classified as impaired in the fiscal fourth quarter, adding C$24 million to loan losses for the oil-and-gas category, Chief Financial Officer Sean McGuckin said Tuesday in an interview.
• Euro to Bear Brunt of Yuan's Inclusion in Reserve-Currency Club. (video) The euro’s worst year in a decade is looking even grimmer after the Chinese yuan’s inclusion in the International Monetary Fund’s basket of reserve currencies. The 19-nation currency’s weighting in the IMF’s Special Drawing Rights basket will drop to 30.93 percent, from 37.4 percent, the organization said Monday. The yuan will join the dollar, euro, pound and yen in the SDR allocation from Oct. 1, 2016, at a 10.92 percent weighting. 
• Linde Plunges as Lower U.S. Health Pricing Clips Profit Goal. Linde AG dropped the most in almost 17 years after U.S. health-care budget cuts and a fall in industrial demand forced the German gases supplier to reduce earnings targets for the third time in just over a year. Operating profit will be between 4.2 billion euros ($4.4 billion) and 4.5 billion euros in 2017, the Munich-based company said in a statement late Monday. That’s 300 million euros less than the range previously forecast by the supplier of oxygen and nitrogen to metalworkers and hospitals. “This warning comes as a big surprise,” Frankfurt-based Kepler Cheuvreux analyst Martin Roediger wrote in a note to clients Tuesday as he cut his recommendation on the shares to reduce from buy. “The main reasons for the adjustments are substantially changed overall conditions compared to October 2014, when the targets were defined.” The stock dropped as much as 14 percent, the steepest intraday decline since Jan. 4, 1999, and was trading down 13.9 percent to 142.35 euros at 10:46 a.m. in Frankfurt. Rival Air Liquide SA shares fell 3.8 percent in Paris.  
• Anticipating China’s Slowdown in 2016. (video)
• Brazil's Real Falls on Worse-Than-Expected Economic Contraction. (video) Brazil’s real followed a rally in emerging markets as prospects for stimulus measures in China, the nation’s top trading partner, overshadowed disappointing data from Latin America’s largest economy.
• Currency Calm Frays as Fed Threatens Another Storm of Volatility. As the Federal Reserve prepares to raise interest rates that have been near zero for almost seven years, a sense that the currency market is becoming trickier to navigate is spreading. Traders are more wary of a jump in price swings than at any point in the past two years, measures of foreign-exchange volatility show. And demand for the dollar is so strong that the cost of converting euro, sterling and yen payments into the world’s reserve currency via funding markets is close to the highest since at least 2012. 
• European Shares Fall From 3-Month High After U.S. Manufacturing. (video) European equities closed lower, dropping from a three-month high, after U.S. factory data raised concern that the world’s largest economy may not be strong enough to withstand higher borrowing costs. The Stoxx Europe 600 Index reversed an earlier gain to end the day down 0.3 percent.
• Vale Reduces Iron Forecast as Spill Adds to Low-Margin Cuts. Vale SA cut its iron-ore output forecast for next year as efforts to limit low-margin operations and a dam spill at a joint venture threaten to close the gap between the Brazilian giant and producers in Australia. The world’s biggest miner of the steel-making ingredient expects to produce 340 million to 350 million metric tons in 2016, it said in a filing Tuesday. That compares with guidance of 376 million tons given a year ago. Vale was expected to forecast 344 million tons, according to the average of three analyst estimates compiled by Bloomberg. 
• How the Fed Has Backed Themselves Into a Corner. (video)
• How Fed Skeptics May Cause the Tightening Cycle to Go Faster Than the Market Expects. Warped expectations. If all the Federal Reserve's hopes and dreams for the American economy come true, the tightening cycle won't look anything like what futures markets are pricing in. That's the assertion of Steven Englander, global head of G10 foreign exchange strategy at Citigroup. Market pricing of the central bank's glide path has been warped by a relatively small group of people who think that the Fed is never going to escape the zero lower bound, observes Englander.
• Under the Hood of Construction Spending Is More Federal Projects. Here’s one key takeaway from the Commerce Department’s report Tuesday on construction spending. The 1 percent gain in October, which exceeded the 0.6 percent median forecast, was broad-based and included the biggest surge in federal outlays since October 2006. U.S. government construction jumped 19.2 percent, the most since October 2006. At $27.6 billion, the value of federal government construction projects was the highest since May 2012. 
• Gilead(GILD) Plan Kept Up Hepatitis C Drug Prices, Senators Say. Gilead Sciences Inc., whose hepatitis C drugs Harvoni and Sovaldi have sold $13.3 billion in the U.S. during the last year, priced the drugs in order to maintain high list prices instead of to make the treatments widely available, or based on how much it cost to develop them, two U.S. senators said in a report Tuesday. 
• UnitedHealth(UNH) Says It Should Have Avoided Obamacare Longer. UnitedHealth Group Inc. should have stayed out of Obamacare’s new individual markets longer, the chief executive officer of the biggest U.S. health insurer said Tuesday, after announcing last month that it will take hundreds of millions of dollars in losses related to the business. “It was for us a bad decision,” Hemsley said. “I take accountability for sitting out the exchange market in year one so we could in theory observe, learn and see how the market experience would develop. This was a prudent going-in position. In retrospect, we should have stayed out longer.” 
• Volkswagen of America November Vehicle Sales Down 24.7%. Volkswagen AG’s namesake brand reported November U.S. sales that fell 25 percent after surprising analysts with a small gain in October. Europe’s largest automaker has been offering generous discounts on gasoline-burning VW models since it stopped selling several diesel-powered vehicles after it was revealed on Sept. 18 that the company used software to evade emission tests.

Zero Hedge:

• Brazil Releases Shocking GDP "Obituary": "It's Mutated Into An Outright Depression," Goldman Exclaims. (graph)
• Ironic Headline Of The Day: Billionaire Buffett To Stump For Hillary's "Everyday Americans" Campaign.
• Atlanta Fed Slashes Q4 GDP Forecast From 2.3% To Just 1.4% In Under One Week. (graph)
• The US Stock Market – An Accident Waiting To Happen. (graph)
• Treasury Bond Yields Are Collapsing As Dec Rate Hike-Odds Slide. (graph)
• CEO Economic Confidence Implodes, Drops To Lowest In Three Years. (graph)
• Majority Of World Economy Weakening As US Manufacturing PMI Tumbles To 2 Year Lows. (graph)
• Chinese Auto Sales Crash, Inventories Soar In November. (graph)
• This Chart Is Too Ugly For Comfort. (graph)
• Looney Plunges As Canadian GDP Collapses Most Since 2009. (graph)
• Legendary Hedge Fund Calls It (Semi) Quits: $8 Billion BlueCrest To Return Outside Client Money.
• The Pain Continues: These Are The Best And Worst Performing Assets In November And 2015.

Business Insider:

• The biggest bank in the US is miffed at the Federal Reserve.
• It's just brutal out in the Bakken oil fields right now.
• FED'S EVANS: I'm a little nervous.

StreetInsider.com:

• Asia Supply Chain Confirms Continued Apple (AAPL) Weakness - Credit Suisse. In an intra-day note on Apple, Credit Suisse analyst Kulbinder Garcha said Asia supply chain confirms continued weakness. "The CS Asia Technology Team has confirmed in their most recent November survey (see note: Asia Feedback: stagnation continues) that the iPhone supply chain orders will be weaker than originally forecast. In our view, the continued weak supply chain news could weigh on Apple shares for the next few weeks/quarters. We continue to believe that with high retention rates, continued installed base growth, and the optionality of a smaller 4-inch iPhone, Apple remains an OP." The firm's Asia team confirmed that Apple has lowered its component orders in November and are now expecting builds of 70-75mn in December and 45-50mn in March (note the March estimate includes as much as 4mn iPhone 6c). The cuts seem to be driven by weak demand for the new iPhone 6s.

Reuters:

• Exclusive: Fidelity star Danoff grows cautious about unicorn phenomenon. Will Danoff, one of the U.S. mutual fund industry's best stock pickers over the past 25 years, is tapping the brakes on funding so-called unicorn companies, saying the prospects for fast growing private businesses before they go public may be fading.

Bear Radar

Style Underperformer: 

• Small-Cap Growth -.11%

Sector Underperformers: 

• 1) Papers -1.88% 2) Biotech -.31% 3) Oil Service -.16%

Stocks Falling on Unusual Volume:

• MPLX, CMI, MPG, JOY, MWE, EFUT, VEEV, BNFT, HUN, SIG, SPH, AMBA, ADRO, KYN, DNAI, XRS, AB, SATS, YY, CONN, CBOE, FIZZ, STRP, ERJ, NTES and SPH

Stocks With Unusual Put Option Activity: 

• 1) ETE 2) CMI 3) XLNX 4) LRCX 5) EWZ

Stocks With Most Negative News Mentions: 

• 1) CMI 2) JOY 3) KRA 4) IP 5) GM

Charts:

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

Bull Radar

Style Outperformer:

• Large-Cap Growth +.54%

Sector Outperformers: 

• 1) HMOs +2.83% 2) Hospitals +1.82% 3) Drugs +1.49%

Stocks Rising on Unusual Volume: 

• MFRM, BLOX, AEZS, MOMO, LOCK and LGIH

Stocks With Unusual Call Option Activity: 

• 1) FITB 2) FE 3) LC 4) ETE 5) NCR

Stocks With Most Positive News Mentions: 

• 1) YUM 2) HSIC 3) BLOX 4) AVGO 5) ABX

Charts: 

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

Morning Market Internals

NYSE Composite Index:

• Volume Running -2.9% Below 100-Day Average
• 7 Sectors Rising, 3 Sectors Declining
• 59.9% of Issues Advancing, 37.1% Declining
• 75 New 52-Week Highs, 32 New Lows
• 38.2% of Issues Above 200-day Moving Average
• Average 14-Day RSI 44.1
• Vix 15.7
• Total Put/Call .73
• TRIN/Arms .66

Tuesday Watch

Evening Headlines
Bloomberg:

• Europe's `Ticking Time Bombs' Are Set for Shorting, Block Says. Carson Block, the short-seller whose bet against Asia’s Noble Group Ltd. helped sink its shares earlier this year, is targeting the "ticking time bombs" of western Europe. Block, who runs research firm Muddy Waters, said European companies are ripe for shorting because of their indebtedness and a lack of scrutiny by investors. In a Real Vision interview to be aired Friday, he said that investors in Europe follow a code that makes it impolite to ask hard questions. “We think Europe has a number of companies that are really problematic, heavily financially-engineered, indebted and where investors just haven’t done the work,” he said in the Nov. 24 interview on the financial video-on-demand channel. “Given what’s happened with interest rates in Europe and this environment that’s conducive to bad companies borrowing, I think it’s really created a lot of ticking time bombs.” 
• China November Manufacturing PMI Below Expectations. (video) 
• China Bears Who Foresaw the Crash Are Back With Record ETF Short. U.S. short sellers are piling on bets against Chinese equities at the fastest pace since the height of the nation’s stock-market bubble five months ago. Short interest in the largest U.S. exchange-traded fund tracking domestic Chinese stocks more than doubled in two weeks to a record 28 percent of shares outstanding on Nov. 27, according to data compiled by Markit and Bloomberg. When such wagers last climbed this fast in June, short sellers proved prescient as China’s equity-market boom turned into a $5 trillion rout.
• Economic Takeaways From South Korea's Trade, Inflation Data. Exports fell 4.7 percent in November from a year earlier (-9 percent forecast). Exports for the year to date are down 7.4 percent compared with the same period last year.
• Sydney Home Prices Drop Most in Five Years as Regulation Bites. Sydney home prices fell the most in five years in November as a regulatory crackdown forces banks to tighten lending and increase mortgage rates. Dwelling values in Australia’s largest city dropped 1.4 percent from a month earlier, data from property researcher CoreLogic Inc. showed on Tuesday. That was the biggest drop since December 2010 and the first decline since May. Prices across the nation’s capital cities dropped 1.5 percent, with Melbourne leading with a 3.5 percent decrease.
• Morgan Stanley Calls 2016 the Year of the Yen With BOJ on Hold. The yen will outshine the dollar as next year’s star performer in the $5.3 trillion-a-day global currency market, according to Morgan Stanley. In what it calls an "out-of-consensus" prediction, the bank said it expects Japan’s currency to strengthen to 115 against the greenback at the end of 2016. That contrasts with a median forecast for the yen to weaken 126 per dollar, according to analysts surveyed by Bloomberg. Morgan Stanley’s top trading recommendations for next year include buying the yen against the British pound, Swiss franc, South Korean won and offshore Chinese yuan, according to a Nov. 29 report.
• China's Stocks Fall to One-Month Low After Manufacturing Data. China’s benchmark stock index fell to the lowest level in a month after data showed manufacturing conditions are deteriorating, overshadowing the International Monetary Fund’s decision to add the yuan to its basket of reserve currencies. The Shanghai Composite Index slipped 0.3 percent to 3,435.46 at 9:35 a.m. local time, led by financial companies.
• Asian Stocks Rise Before China Factory Data as Lenders Advance. Asian stocks rose after Monday’s selloff as investors awaited Chinese factory data and financial shares climbed. The MSCI Asia Pacific Index added 0.3 percent to 132.19 as of 9:00 a.m. in Tokyo after dropping 1 percent on Monday to cap a 2 percent decline for November. 
• Copper Drops With Metals After Chinese Factory Activity Slows. Copper declined with other metals after an official gauge of factory activity in China deteriorated, underscoring a weak outlook for demand in the world’s biggest metals consumer. China’s official manufacturing purchasing managers index slipped to 49.6 last month, lower than in a survey of economists and below 50 indicating deterioration. The official PMI figure has been in contraction territory for four months. Copper for three-month delivery on the London Metal Exchange dropped 0.5 percent to $4,561.50 a ton by 9:29 a.m. in Shanghai. Nickel slid 0.2 percent and zinc fell 0.8 percent.
• Copper Bears See More Pain as Prices Trade at Lowest Since 2009. Hedge funds are betting there’s more pain in store for copper, even with prices trading at the lowest in six years.Money managers are holding the biggest net-short position in the metal since August. Futures are trading near the lowest since 2009 as economic growth slows to the weakest pace in more than two decades in China, the world’s top consumer. Declining industrial profits in the Asian country added to concern that the government still hasn’t done enough to spur a rebound.

Wall Street Journal:

• Companies Shy Away From Spending. Growth in investments limited by uneven consumer demand, global turmoil. Business investment across the U.S. is fizzling out. Companies appear reluctant to step up spending on the basic building blocks of the economy, such as machines, computers and new buildings. The broadest measure of U.S. business investment advanced 2.2% from a year earlier in the third quarter, the Commerce Department said last week, marking one of the worse performances of the six-year-old economic expansion.
• World Leaders in Paris Vow to Overcome Divisions on Climate Change. President Barack Obama calls on countries to ‘rise to this moment’. World leaders on Monday vowed to finish a deal to curb greenhouse gases and overcome a thorny divide on financing, as they kicked off international climate talks against a backdrop of heavy security.
• Obama’s Appalachian Tragedy. The president’s anti-coal policies have devastated West Virginia. Since 2009, 332 mines have closed. ‘The traveler comes to the Appalachians in the lovely season. He sees the hills, the streams, the foliage—but not the poor.” That passage comes from “The Other America,” Michael Harrington’s 1962 book that opened the eyes of liberal policy makers to America’s invisible poverty. The classic work helped provide the intellectual ammunition for President Lyndon Johnson’s “unconditional war on poverty,” announced in his State of the Union address two years later.

Fox News:

• Nearly 1,000 Clinton emails had classified info. (video) The State Department’s latest release of Hillary Clinton documents brings the total number of Clinton emails known to contain classified material to nearly 1,000. The department on Monday released its largest batch of emails yet, posting 7,800 pages of the former secretary of state’s communications. The latest batch contains 328 emails deemed to have classified information. According to the State Department, that brings the total number with classified information to 999.

MarketWatch.com:

• UnitedHealth(UNH) sees 2016 revenue below estimates. UnitedHealth Group Inc., ahead of its investor day on Tuesday, projected revenue next year that falls just shy of analysts' estimates, less than two weeks after it said weak performances on public health exchanges would cut into profit.
• This chart warns that stock market investors should be on high alert. (graph)

CNBC:

• Hatzius: Feds will raise rates 1 time each quarter. (video) With investors still uncertain about how the Federal Reserve's tightening of monetary policy will affect the economy, Goldman Sachs' top economist expects the central bank to take a slow approach—and for the status quo on growth to prevail. 
• Buffett's bad year: Trading winners and losers. (video)

Zero Hedge:

• China Manufacturing Slumps To 3-Year Lows And Soars To 5-Month Highs. (graph)
• Erdogan Says Will Resign If Oil Purchases From ISIS Proven After Putin Says Has "More Proof".
• AsiaPac Unleashes Baffle 'Em With Bullshit Data Bonanza. (graph)
• 4 Telltale Signs The Credit Cycle Is Turning Now. (graph)
• Pedro Da Costa Has The Courage To Review Ben Bernanke's Memoir, Finds A Few Gaping Holes.
• Number Of Millennials Living In Parents' Basement Climbs (Again); Weddings Blamed (Again). (graph)
• The Lull Before The Storm - An Ideal Chance To Exit The Casino, Part 1. (graph)
• 2015: The Last Christmas In America. (graph)
• Which Stocks Are Cheap? (graph)
• Stocks End November With Nothing Despite Biggest Short-Squeeze In 6 Months. (graph)

Business Insider:

• One of New York's most powerful politicians convicted in major corruption case.
• The EPA is boosting the amount of ethanol and other renewable fuels in the US gasoline supply.

Reuters:

• Einhorn's Greenlight Capital down 5 pct in Nov., off 20.6 pct YTD-sources. Hedge fund manager David Einhorn has lost 20.6 percent this year, widening already deep losses when a bet on SunEdison cratered more than 50 percent this month, two people who have seen his returns said on Monday. Einhorn's Greenlight Capital lost 5 percent in November, the people said. The Standard & Poor's 500 stock index gained 1.17 percent during the month.
• In retail slump, HK jeweller lets clients try before they buy.

Telegraph:

• George Soros' pro-democracy charity banned in Russia for being a threat to state. Open Society Foundations poses a 'threat to the foundations of the constitutional system of the Russian Federation and the security of the state', Russia says.

Evening Recommendations 

• None of note

Night Trading 

• Asian equity indices are +.50% to +1.50% on average.
• Asia Ex-Japan Investment Grade CDS Index 130.25 +.5 basis point.
• Asia Pacific Sovereign CDS Index 68.25 -.75 basis points.
• Bloomberg Emerging Markets Currency Index 70.25 +.13%.
• S&P 500 futures +.60%.
• NASDAQ 100 futures +.57%.

Morning Preview Links 

Earnings of Note 
Company/Estimate

• (BNS)/1.44
• (BOBE)/.39
• (POWL)/.47

Economic Releases
9:45 am EST

• Final Markit US Manufacturing PMI for November is estimated at 52.6 versus a prior estimate of 52.6.

10:00 am EST

• Construction Spending for October is estimated to rise +.6% versus a +.6% gain in September.
• ISM Manufacturing for November is estimated to rise to 50.5 versus 50.1 in October.
• ISM Prices Paid for November is estimated to rise to 40.0 versus 39.0 in October.

Afternoon:

• Total Vehicle Sales for November are estimated to rise to 14.25M versus 14.14M in October.

Upcoming Splits

• (CTRP) 2-for-1

Other Potential Market Movers

• The Fed's Evans speaking, Eurozone PMI, Eurozone Unemployment rate, weekly US retail sales reports, Cowen Energy conference, Citi Basic Materials conference, Goldman Metals/Mining conference, Piper Healthcare conference and the (JCI) anaylst meeting could also impact trading today.

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