Wednesday, December 16, 2015

Stocks Surging into Final Hour on Less European/US High-Yield Debt Angst, Short-Covering, Seasonal Strength, Alt Energy/Utility Sector Strength

Broad Equity Market Tone:
  • Advance/Decline Line: Higher
  • Sector Performance: Most Sectors Rising
  • Volume: Slightly Above Average
  • Market Leading Stocks: Performing In Line
Equity Investor Angst:
  • Volatility(VIX) 17.38 -17.04%
  • Euro/Yen Carry Return Index 139.66 +.50%
  • Emerging Markets Currency Volatility(VXY) 11.34 -.09%
  • S&P 500 Implied Correlation 56.15 -3.17%
  • ISE Sentiment Index 93.0 -50.27%
  • Total Put/Call .77 -12.5%
  • NYSE Arms 1.03 +38.28
Credit Investor Angst:
  • North American Investment Grade CDS Index 89.44 -1.43%
  • America Energy Sector High-Yield CDS Index 1,680.0 +.58%
  • European Financial Sector CDS Index 75.50 -2.27%
  • Western Europe Sovereign Debt CDS Index 17.19 -4.13%
  • Asia Pacific Sovereign Debt CDS Index 73.09 +.01%
  • Emerging Market CDS Index 350.28 +.97%
  • iBoxx Offshore RMB China Corporate High Yield Index 123.39 +.02%
  • 2-Year Swap Spread 6.5 -.25 basis point
  • TED Spread 26.25 unch.
  • 3-Month EUR/USD Cross-Currency Basis Swap -38.5 -.25 basis point
Economic Gauges:
  • Bloomberg Emerging Markets Currency Index 69.47 +.04%
  • 3-Month T-Bill Yield .25% +1.0 basis point
  • Yield Curve 128.0 -2.0 basis points
  • China Import Iron Ore Spot $39.18/Metric Tonne -.46%
  • Citi US Economic Surprise Index -23.0 -.8 point
  • Citi Eurozone Economic Surprise Index 20.4 +.9 point
  • Citi Emerging Markets Economic Surprise Index 18.80 +2.4 basis points
  • 10-Year TIPS Spread 1.50 -1.0 basis points
  • # of Months to 1st Fed Rate Hike(Morgan Stanley) .92 n/a
Overseas Futures:
  • Nikkei 225 Futures: Indicating +310 open in Japan 
  • China A50 Futures: Indicating -164 open in China
  • DAX Futures: Indicating +120 open in Germany
Portfolio: 
  • Higher: On gains in my biotech/retail/tech/medical sector longs 
  • Disclosed Trades: Covered some of my (IWM)/(QQQ) hedges and some of my (EEM) short
  • Market Exposure: Moved to 75% Net Long

Today's Headlines

Bloomberg: 
  • Fed Ends Zero-Rate Era; Signals 4 Quarter-Point 2016 Hikes. (video) The Federal Reserve raised interest rates for the first time in almost a decade in a widely telegraphed move while signaling that the pace of subsequent increases will be “gradual” and in line with previous projections. The Federal Open Market Committee unanimously voted to set the new target range for the federal funds rate at 0.25 percent to 0.5 percent, up from zero to 0.25 percent. Policy makers separately forecast an appropriate rate of 1.375 percent at the end of 2016, the same as September, implying four quarter-point increases in the target range next year, based on the median number from 17 officials.
  • French Business Grinds to Halt as Services Hit by Terror Attacks. French business unexpectedly slowed in December as services suffered from last month’s terrorist attacks in Paris. A Purchasing Managers’ Index for manufacturing and services fell to 50.3 from 51 in November, London-based Markit Economics said on Wednesday. That’s the lowest since August and just above the 50 mark that divides expansion from contraction. Economists predicted the gauge would remain unchanged at 51. The Nov. 13 attacks have already left their mark on an economy that had been showing the first signs of sustained growth since 2012. The Bank of France cuts its forecast for fourth-quarter growth in the euro region’s second-largest economy to 0.3 percent last week after business sentiment fell. “French private-sector output growth nearly ground to a halt at the end of 2015 amid faltering new business intakes,” said Jack Kennedy, senior economist at Markit. While new business in services was damped by the attacks, the manufacturing sector picked up momentum, he said. A gauge for French services activity slipped to 50 from 51, the lowest level since January, while a measure for manufacturing unexpectedly rose to 51.6 from 50.6, according to the report. A composite index for Germany fell to 55 in December from 55.2, according to a separate Bloomberg survey. 
  • Merkel Allies Betray Growing Alarm `Brexit' Prospect Is Real. German Chancellor Angela Merkel’s party colleagues expressed growing dismay at the prospect of a British exit from the European Union, with one lawmaker portraying Prime Minister David Cameron’s planned referendum as an “existential risk” for Europe. As European leaders prepare to discuss Britain’s call for EU reform in four main areas at a summit in Brussels Thursday, Cameron’s approach is raising concern in the Chancellery in Berlin that his demands go too far, according to a German government official. Another worry is that any agreement Cameron might extract from the rest of the 28-nation EU still wouldn’t be enough to sway EU-skeptical British voters, said the official, who asked not to be identified discussing private deliberations.
  • Brazil Gets Second Junk Rating as Fitch Cites Economic Slump. (video) Brazil’s credit rating was cut to junk by Fitch Ratings, which became the second major ratings company to strip the country of its investment grade as Latin America’s largest economy heads to its longest recession since the Great Depression amid political turmoil. The outlook for the rating is negative, meaning more downgrades may be coming, Fitch said in a statement Wednesday as it lowered the grade one step to BB+. Brazil’s real extended declines, the country’s overseas bonds tumbled and interest-rate swaps soared on expectations for higher borrowing costs. 
  • Brazil's Real Plunges Ahead of New Fiscal Target Announcement. (video) Brazil’s real posted the biggest decline among major currencies and stocks fluctuated after Fitch Ratings handed Latin America’s largest economy its second junk credit grade, a move that may compel some institutional investors to dump the nation’s assets. The real lost 1.6 percent to 3.9332 per dollar at 3:45 p.m. in Sao Paulo, the most among 31 major currencies tracked by Bloomberg. The Ibovespa advanced 0.2 percent to 44,953.88, after earlier dropping as much as 1.7 percent. 
  • $100 Billion Evaporates as World's Worst Oil Major Plunges 90%. Colombia is nursing paper losses of more than $100 billion after its oil boom fell short of expectations, wiping out 90 percent of the value of what was once Latin America’s biggest company. From being the world’s fifth-most valuable oil producer at its zenith in 2012, worth more than BP Plc, state-controlled Ecopetrol SA now ranks 38th. Its market capitalization has fallen to $14.5 billion, down from its peak of $136.7 billion.
  • Xi Defends China's Great Firewall in Push for `Cybersovereignty'. President Xi Jinping defended China’s strict control of websites, saying it was necessary to keep public order, and urged nations to respect each other’s sovereignty over the Internet. Countries must not interfere in the internal affairs of others, Xi told a technology gathering Wednesday in Wuzhen, adapting a concept that has long been part of the Chinese Communist Party’s foreign policy. Cyberspace must not become a “battlefield” between states, Xi said, and he called for greater cooperation on punishing cyber-attacks and fighting terrorism. “We should respect every country’s own choice of their Internet development path and management model, their Internet public policy and the right to participate in managing international cyberspace,” Xi said. “There should be no cyber-hegemony, no interfering in others’ internal affairs, no engaging, supporting or inciting cyber-activities that would harm the national security of other countries.” 
  • European Stocks Rise, Paring Gains in Countdown to Fed Decision. Investors pushed European stocks higher for a second day before the Federal Reserve’s much-awaited interest-rate decision, though equities pared gains in the last hour of trading. The Stoxx Europe 600 Index climbed 0.2 percent at the close of trading in London, trimming an advance of as much as 1 percent.
  • ConocoPhillips(COP), Anadarko(APC) Among Oil Explorers Reviewed by Moody's. ConocoPhillips and Anadarko Petroleum Corp. are among 29 U.S. oil and gas exploration and production companies whose ratings Moody’s Investors Service is reviewing for downgrade. "Industry conditions have weakened further with oil and natural gas prices at multi-year lows," said Pete Speer, Moody’s Senior Vice President. "E&P companies will be stressed for a longer period with much lower cash flows, difficulty selling assets and limited capital markets access."
  • This Junk Bond Derivative Index Is Saying Something Scary About Defaults. Markit's CDX index is pricing in a 2008-like selloff. Citigroup analysts led by Anindya Basu point out that spreads on the CDX HY, as the index is known, are currently pricing in an expected loss of 21.2 percent, which translates into something like 22 defaults over the next five years if one assumes zero recovery for investors. That is a pretty big number once you consider that a total of 41 CDX HY constituents have defaulted since the index really began trading in 2005, equating to about 3.72 defaults per year. A big chunk of those defaults (17) occurred in 2009 in the aftermath of the financial crisis. What to make of it all?
  • Junk Rout Trips Up Longest-Serving Manager. (video) Ernest Monrad has run Northeast Investors Trust since 1960, focusing on high-yield debt before “junk bonds” were a term. Monrad, who is 85 and the longest-serving U.S. mutual fund manager according to Morningstar Inc., outlasted 1970s inflation, the Drexel Burnham Lambert collapse and the 2008 credit crunch. He’s also the biggest loser in an energy-driven high-yield bond rout that prompted comparisons to earlier crises after Third Avenue Management closed a $788.5 million mutual fund and froze client redemptions last week. The $358 million Northeast fund dropped 8.8 percent in the month through Dec. 14, more than any U.S.-based high-yield credit fund with at least $100 million, according to data compiled by Bloomberg. Other big decliners include such established names as the $5 billion Frankin High Income Fund, which was started in 1969 and lost 5.8 percent in the past four weeks. “The funds that got it wrong bet on rising oil prices,” Sumit Desai, an analyst at Morningstar, said in a telephone interview. “Pretty consistently across all the funds we cover, that was the separation between the funds that did well and the funds that didn’t do well.”  
  • Billionaire Sam Zell Says Recession Likely in Next 12 Months. (video) Billionaire investor Sam Zell said the U.S. economy could go into a recession in the next year and that an expected Federal Reserve interest-rate increase is coming at least six months too late. The central bank has been too cautious and the economy would already be adjusting if it raised rates six to nine months ago, giving Chair Janet Yellen “more room if a recession is on the way,” Zell said Wednesday in an interview on Bloomberg Television. Multinational companies are laying off workers, global trade is slowing and there’s a possibility China’s economy will falter, he said.
  • Wall Street's Short Sellers Are Turning On Their Own. The shorts are targeting one of Wall Street’s best known short sellers. Bearish investors have piled on bets against a reinsurer started by hedge fund manager David Einhorn as the company’s losses climbed. Short interest on Greenlight Capital Re Ltd., or bets that the stock will drop, climbed to the highest since 2009, at 5.4 percent of shares outstanding, according to Dec. 15 data compiled by Bloomberg and Markit Ltd. Short sellers are also targeting Dan Loeb’s Third Point Reinsurance Ltd., holding 3 percent of shares outstanding, compared with an average of 0.6 percent since the start of 2014.
CNBC:
Zero Hedge:
Business Insider:
Reuters:
  • OPEC producers bearish on oil in 2016 as oversupply persists. OPEC producers see little chance of significantly higher oil prices in 2016 as extra Iranian production could add to surplus supplies and the prospect of voluntary output restraint remains remote. OPEC delegates, including those from Gulf OPEC members, say higher oil prices are not around the corner yet, despite further growth in global demand and as a rise in non-OPEC supply is tempered by prices that have more than halved in 18 months.

Bear Radar

Style Underperformer: 
  • Mid-Cap Value +.19%
Sector Underperformers: 
  • 1) Steel -2.6% 2) Hospitals -1.6% 3) Oil Tankers -1.5%
Stocks Falling on Unusual Volume:
  • GPN, CTCT, KMT, LAKE, ONCE, RPXC, TK, MBLY, MG, WCC, CASY, CLMT, VNTV, SBSI, GWPH, NUE, CRMT, AJG, JKHY, SPH, BPT, MCY, FDS, SM, NUE and WCC
Stocks With Unusual Put Option Activity: 
  • 1) HUN 2) HAL 3) LQD 4) JNK 5) TWTR
Stocks With Most Negative News Mentions: 
  • 1) PBR 2) MBLY 3) PRTY 4) GNC 5) RRTS
Charts:

Bull Radar

Style Outperformer:
  • Small-Cap Growth +.29%
Sector Outperformers: 
  • 1) Alt Energy +4.7% 2) Gold & Silver +3.7% 3) Utilities +2.0%
Stocks Rising on Unusual Volume: 
  • SCTY, RUN, AM, HPY, ADXS, SEDG, FSLR, CSIQ, CAFD, CIM, NEP, LL and PEGI
Stocks With Unusual Call Option Activity: 
  • 1) MEG 2) HLT 3) XLU 4) GRA 5) HL
Stocks With Most Positive News Mentions: 
  • 1) ALKS 2) NWL 3) ACN 4) T 5) WAG
Charts: 

Morning Market Internals

NYSE Composite Index:

Tuesday, December 15, 2015

Wednesday Watch

Evening Headlines
Bloomberg: 
  • Fed's Historic Liftoff and Everything After: Decision Day Guide. (video) Here’s what to look for when the Federal Open Market Committee releases its policy statement at 2 p.m. Wednesday following a two-day meeting in Washington. Economists and traders expect the first interest rate increase since 2006, marking the beginning of the end for the unprecedented era of easy monetary policy. The move would come at a time when a commodity slump is causing the market for high-yield bonds to gyrate, sending tremors through financial conditions indexes and spreading unease across trading desks.
  • Aussie Borrowing Held Hostage to Fed Impact From Ore to Yields. Australian Treasurer Scott Morrison needs markets to take Wednesday’s Federal Reserve meeting in their stride, after global turmoil blew holes in the nation’s budget plans. Morrison said Tuesday in Perth that the underlying cash deficit in the year through June would be 6.6 percent wider than forecast in May after commodity prices slumped and wage growth sagged to levels normally seen during recessions. Australia will sell A$12.5 billion ($9 billion) more bonds and inflation-linked securities than previously projected, the government’s financing arm said Wednesday. The new estimates hinge partly on iron ore remaining close to its current price, after dropping almost 50 percent this year. The big risk: the Fed. 
  • Indonesia Wouldn't Block OPEC Cuts; Says Prices May Slide Lower. Indonesia wouldn’t oppose any call by OPEC to cut crude production while saying oil prices may trend lower because of weak global demand and high supply. The Southeast Asian producer officially reactivated its OPEC’s membership on Dec. 4 after a seven-year suspension and is the only net-importing country in the producer group. Its return coincides with a collapse in crude prices that’s discouraging energy investments and as the country’s dependence on overseas oil grows.
  • Asian Stocks Rise to Halt Six-Day Selloff Ahead of Fed Decision. Asian stocks rose, following a rally in U.S. shares, as crude oil prices jumped and investors awaited the Federal Reserve’s first interest rate increase in almost a decade. The MSCI Asia Pacific Index rose 1.3 percent to 128.31 as of 9:05 a.m. in Tokyo, its first advance in seven days. 
Wall Street Journal: 
  • Fed Poised to Mark the End of an Era. Long run of near-zero rates helped cut joblessness and boost U.S. growth, but weak spots linger. The Federal Reserve’s likely decision Wednesday to raise short-term borrowing costs will mark the end of an era of zero interest rates, a period of extraordinary policy experimentation that has yielded mixed results.
  • The Global Battle for Oil Market Share. Iran and its rivals vie for advantage amid low prices, oversupply and the likely end of the U.S. export ban.
Fox News:
CNBC: 
  • This year could be Ackman's worst, investors stick by firm. Billionaire hedge fund investor William Ackman, whose funds have been suffering double-digit losses this year, on Tuesday told investors that 2015 could be the firm's worst ever but noted that clients are generally sticking with him.
Zero Hedge:
Financial Times: 
Telegraph:
  • Is the next financial crisis nigh? Could closure of Third Avenue Fund finally explode the post-crisis asset bubble? The closure of a number of US funds linked to the high yield corporate debt market is eerily reminiscent of the events that led up to the global financial crisis.
Securities Times:
  • PBOC Adviser Sees 'Adjustments' in China Economy. Overcapacity, bad debts, and problems in Internet finance haven't been resolved, citing Fan Gang, an adviser to the People's Bank of China.
Evening Recommendations 
  • None of note
Night Trading 
  • Asian equity indices are +1.0% to +2.0% on average.
  • Asia Ex-Japan Investment Grade CDS Index 138.0 -6.0 basis points.
  • Asia Pacific Sovereign CDS Index 73.0 -3.0 basis points.
  • Bloomberg Emerging Markets Currency Index 69.45 +.01%.
  • S&P 500 futures +.18%.
  • NASDAQ 100 futures +.21%.
Morning Preview Links 

Earnings of Note 
Company/Estimate
  • (JOY)/.43
  • (APOG)/.64
  • (FDX)/2.51
  • (MLHR)/.54
  • (JBL)/.80
  • (ORCL)/.60
  • (PIR)/.12
  • (WOR)/.52  
Economic Releases
8:30 am EST
  • Housing Starts for November are estimated to rise to 1130K versus 1060K in October.
  • Building Permits for November are estimated at 1150K versus 1150K in October. 
9:15 am EST
  • Industrial Production MoM for November is estimated to fall -.2% versus a -.2% decline in October. 
  • Capacity Utilization for November is estimated to fall to 77.4% versus 77.5% in October.
  • Manufacturing Production for November is estimated unch. versus a +.4% gain in October.  
9:45 am EST
  • Preliminary Markit US Manufacturing PMI for December is estimated to fall to 52.6 versus 52.8 in November.
10:30 am EST
  • Bloomberg consensus estimates call for a weekly crude oil inventory decline of -600,000 barrels versus a -3,568,000 barrel decline the prior week. Gasoline supplies are estimated to rise by +959,090 barrels versus a +786,000 barrel gain the prior week. Distillate supplies are estimated to rise by +1,778,910 barrels versus a +4,998,000 barrel gain the prior week. Finally, Refinery Utilization is estimated to rise +.58% versus a -1.4% decline prior.
2:00 pm EST
  • The FOMC is expected to raise the benchmark Fed Funds rate to .25%-.5%. 
Upcoming Splits
  • None of note
Other Potential Market Movers
  • The Fed's Yellen speaking, Eurozone PMI, weekly MBA Mortgage Applications report, BofA Merrill Animal Health Summit, (HON) outlook call, (VRX) investor day, (CVS) analyst day and the (DHR) analyst meeting could also impact trading today.
BOTTOM LINE: Asian indices are higher, boosted by commodity and technology shares in the region. I expect US stocks to open modestly higher and to weaken into the afternoon, finishing modestly lower. The Portfolio is 50% net long heading into the day.