Stocks Lower into Afternoon on Emerging Markets Currency Worries, Terrorism Fears, Oil Decline, Commodity/Transport Sector Weakness

Broad Equity Market Tone:

• Advance/Decline Line: Substantially Lower
  

• Sector Performance: Almost Every Sector Declining
  

• Volume: Light

• Market Leading Stocks: Performing In Line

Equity Investor Angst:

• Volatility(VIX) 16.82 +4.60%

• Euro/Yen Carry Return Index 137.53 +.05%

• Emerging Markets Currency Volatility(VXY) 11.38 -.09%

• S&P 500 Implied Correlation 57.34 +.56%

• ISE Sentiment Index 74.0 -11.90%

• Total Put/Call 1.02 +24.39%

• NYSE Arms 1.92 +183.42% 

Credit Investor Angst:

• North American Investment Grade CDS Index 88.31 -1.54%

• America Energy Sector High-Yield CDS Index 1,693.0 -.95%

• European Financial Sector CDS Index 76.98 +1.93%

• Western Europe Sovereign Debt CDS Index 16.96 -.56%

• Asia Pacific Sovereign Debt CDS Index 71.49 -.67%

• Emerging Market CDS Index 357.05 +1.07%
  

• iBoxx Offshore RMB China Corporate High Yield Index 123.74 -.02%

• 2-Year Swap Spread 10.0 +1.75 basis points

• TED Spread 40.0 +2.5 basis points

• 3-Month EUR/USD Cross-Currency Basis Swap -19.5 +3.0 basis points

Economic Gauges:

• Bloomberg Emerging Markets Currency Index 69.15 -.60%
• 3-Month T-Bill Yield .13% -7.0 basis points

• Yield Curve 122.0 unch.

• China Import Iron Ore Spot $42.42/Metric Tonne +2.62%

• Citi US Economic Surprise Index -27.5 +1.2 points

• Citi Eurozone Economic Surprise Index 14.5 +.3 point

• Citi Emerging Markets Economic Surprise Index 12.90 -1.9 points

• 10-Year TIPS Spread 1.56% unch.
• 53.8% chance of next Fed rate hike at March 16 meeting, 60.9% chance at April 27 meeting

Overseas Futures:

• Nikkei 225 Futures: Indicating +6 open in Japan 
• China A50 Futures: Indicating -321 open in China

• DAX Futures: Indicating -29 open in Germany

Portfolio: 

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

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

• Market Exposure: Moved to 25% Net Long

Bear Radar

Style Underperformer: 

• Small-Cap Value -.8%

Sector Underperformers: 

• 1) Coal -5.4% 2) Airlines -1.5% 3) Oil Serivce -1.4%

Stocks Falling on Unusual Volume:

• PBY, IEP, CNL, MIE, NHTC, BPT, TW, TGI, UDF, DVAX, MGPI, RWLK, AHGP, AIMT, KYN, SEMG, BAK, PAG, TOUR, EGN, KEX, WRLD and GSM

Stocks With Unusual Put Option Activity: 

• 1) MAR 2) M 3) CF 4) MA 5) VZ

Stocks With Most Negative News Mentions: 

• 1) PBR 2) CMG 3) PBR 4) DDD 5) JOY

Charts:

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

Bull Radar

Style Outperformer:

• Small-Cap Growth -.4%

Sector Outperformers: 

• 1) Alt Energy +.1% 2) Computer Hardware +.1% 3) Drugs +.1%

Stocks Rising on Unusual Volume: 

• FXCM, WTW, OLED and SEDG

Stocks With Unusual Call Option Activity: 

• 1) HLT 2) IP 3) THC 4) WTW 5) GIS

Stocks With Most Positive News Mentions: 

• 1) INTC 2) EPD 3) PBY 4) IEP 5) WASH

Charts: 

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

Morning Market Internals

NYSE Composite Index:

• Volume Running -43.5% Below 100-Day Average
• 0 Sectors Rising, 10 Sectors Declining
• 35.9% of Issues Advancing, 61.5% Declining
• 49 New 52-Week Highs, 27 New Lows
• 34.4% of Issues Above 200-day Moving Average
• Average 14-Day RSI 43.5%
• Vix 17.0 +5.78%
• Total Put/Call 1.05 +28.1%
• TRIN/Arms 1.98 +192.8%

Wednesday Watch

Evening Headlines
Bloomberg: 

• China seen ending share sale ban that drew foreign fund scorn. China stock investors are about to find out whether a budding equities recovery can cope with the end of a sales ban that's kept an estimated $185 billion of shares off the market. All seven strategists and fund managers surveyed by Bloomberg say it can, with those respondents expecting regulators to allow major shareholders to sell their investments when a six-month ban imposed at the height of the stock crash expires Jan. 8. The measure drew criticism at the time from foreign investors including Templeton Emerging Markets Group and UBS Wealth Management, who saw the intervention as a step too far as authorities struggled to stem a $5 trillion rout.
• China Sends Japan a ‘Don't Meddle’ Message Via an Ex-Navy Ship. Tensions are rising in the East China Sea after China deployed an armed, former navy frigate for the first time to challenge Japan’s control of contested islands in what may be an attempt to shift Tokyo’s attention away from disputes in the South China Sea. Three ships including the frigate still equipped with gun turrets and now operated by the Chinese coast guard sailed within the 12-mile exclusion zone that Japan claims around the islands on Dec. 26, said a Japanese foreign ministry official who asked not to be named, citing government policy. Japan lodged an official protest over the incident. The escalation in the East China Sea comes at a time of heightened tensions in the South China Sea after the U.S. Navy began freedom of navigation patrols there to challenge China’s claims in territorial contests with the Philippines and Vietnam. Japan is home to the U.S. Seventh Fleet, which is leading the patrols, and backs the U.S. effort. China has repeatedly urged Prime Minister Shinzo Abe to stay out of the South China Sea dispute.
• S. Korea's Factory Output Unexpectedly Falls on Export Decline. South Korea’s factory output missed estimates in November as poor exports due to weak global demand continue to weigh on production in Asia’s fourth-largest economy. Industrial production fell 0.3 percent from a year earlier, Statistics Korea said. Output fell 2.1 percent from October, the most since January this year. Exports declined in the first 11 months of this year and that trend is expected to continue, with an almost 12 percent drop forecast for this month.   
• Asian Stocks Pare 2015 Retreat Following Rallies in U.S., Europe. Asian stocks advanced, paring the regional measure’s annual retreat, as financial and technology shares gained following an equities rally in the U.S. and Europe. The MSCI Asia Pacific Index added 0.4 percent to 132.31 as of 10:20 a.m. in Tokyo.
• In World With Too Much Crude Oil, 1,100-Foot Steel Monsters Rule. The most destructive oil crash in a generation is giving ship owners a billion-dollar windfall. With the Organization of Petroleum Exporting Countries abandoning output limits in a drive for market share, ships that carry as much as 2 million barrels a trip are in demand to haul crude from the Middle East to Asia and North America. While oil prices fell 34 percent in 2015, average earnings for these carriers jumped to $67,366 a day, the most since at least 2009, according to Clarkson Plc, the world’s largest shipbroker. 
• Too Much Rubber, Too Few Tires Leaves Tappers in a Sticky Place. As rubber prices slumped toward a six-year low, 20 of 30 workers who drained the sticky latex from trees on Winai Chaikunanant’s plantation in Thailand quit. Even with income sharing, they earned less than the minimum wage. Winai isn’t faring much better. The 70-year-old loses money on every kilogram produced on the farm he’s tended for five decades because government subsidies aren’t big enough to make up the difference. Half his trees were left untapped this season, and he plans to raze about 100 rai (40 acres) to grow cassava or pineapple instead. And the market may only get worse for rubber growers.
• Noble Group(NBL) Shares Tumble After Moody's Cuts Rating to Junk. Noble Group Ltd.’s shares and bonds slumped after the commodity trader had its credit rating cut to junk by Moody’s Investors Service on concerns about the company’s liquidity amid the rout in raw materials. The stock fell as much as 5.7 percent to 41.5 Singapore cents and traded at 42 cents at 9:55 a.m. local time. The shares have lost 63 percent this year, the most among members of the Straits Times Index. Noble Group’s dollar bonds due in 2020, its most liquid, were down 1.8 U.S. cents on the dollar at 67.7 cents, the lowest since Nov. 16, according to Bloomberg-compiled prices.
• Colorado Republican Says Trump Is Hurting Party. Swing-state Senator Cory Gardner says Republicans can't be "against people." A young up-and-coming Republican senator from a swing state assailed his party's presidential front-runner, Donald Trump, for hurting his party by spreading hate. "Anytime you present a message that is seen as hate," said Senator Cory Gardner of Colorado, "you're  going to have a negative impact." Gardner, a Senate freshman with impeccable conservative credentials, made these comments in an interview on the Charlie Rose Public Broadcast System television program. A shrewd and cautious politician, Gardner supports Marco Rubio's bid for the Republican nomination. The Coloradans'  anti-Trump rhetoric–stronger than that of most Republicans–underscores the concern among office-holders over the impact the billionaire showman is having on the party.
• NYSE Arca Rules Partly Responsible for August ETF Rout, SEC Says. A bout of market mayhem that halted trading in hundreds of exchange-traded funds in August was exacerbated by stock exchange rules intended to limit extreme price movements, according to a U.S. regulator’s report released Tuesday. The Securities and Exchange Commission’s analysis of the events on Aug. 24 said price bands imposed by exchange NYSE Arca restricted how quickly ETFs could rebound after steep price declines triggered halts. Arca’s narrow bands, which it has since proposed to widen, may have spurred more delays by limiting faster price adjustments, the regulator’s report said. 

Wall Street Journal:

• U.S. Spy Net on Israel Snares Congress. National Security Agency’s targeting of Israeli leaders also swept up the content of private conversations with U.S. lawmakers. President Barack Obama announced two years ago he would curtail eavesdropping on friendly heads of state after the world learned the reach of long-secret U.S. surveillance programs. But behind the scenes, the White House decided to keep certain allies under close watch, current and former U.S. officials said. Topping the list was Israeli Prime Minister Benjamin Netanyahu.
• Not Even OPEC Can Fix Oil Glut. Pace of production outside Middle East and U.S. adds to uncertainty.
• The Clinton War on Women. If Hillary plays the sexism card, then Bill’s behavior is fair game.

MarketWatch.com:

• 5 black swans that could rock markets in 2016.

CNBC:

• Buffett subsidiary faces renewed misconduct claims. The mobile home subsidiary of Warren Buffett's Berkshire Hathaway is strongly denying renewed accusations that it exploits minorities, as the controversy threatens to seep into the 2016 presidential race.
• Talk of this black swan gains momentum. Speculation is rising that Saudi Arabia's oil price strategy will force the kingdom to give up its dollar exchange peg.

Zero Hedge:

• The Big Short's Michael Burry Warns "The Little Guy Will Pay" For The Next Crisis. (video)
• Why Energy Investors Are Hoping Saudi Arabia And Iran's Oil Price Forecasts Are Dead Wrong. (graph)
• In Latest NSA Spying Scandal, World Learns Obama Lied Again; Congress Furious it Was Spied On.
• Sweden's First Month Of 'Islamic Multiculturalism' - Rapes, Acquittals, & Severed Heads.
• "Zero Confidence": 8 In 10 Americans Think Obama Is Losing To ISIS.
• The Herd Is Heading For A Cliff.
• The Russian Economy Is Cracking, "Social Unrest" Coming In "A Few Months", Official Warns. (graph)
• Hedge Funds Dropping Like Flies: Doug Hirsch's Seneca Capital Closing After 20 Years.
• WTI Slides After API Reports Surprisingly Large Inventory Build. (graph)
• Santelli Thanks Plunge Protection Team As Bond Bloodbath Sparks Buying Frenzy In Stocks & Commodities. (graph)

Business Insider:

• US: Iran fired rockets near American warships. An Iranian rocket came within 1,500 yards of American aircraft carrier USS Harry S. Truman in the Strait of Hormuz, a Pentagon official reportedly told CNN.
• China's unprecedented real estate bubble is collapsing.
• Wall Street is making fun of this crazy statement from a Chinese company.

Politico: 

• Kasich gains support of Ron Burkle. The billionaire investor has often supported Democrats in the past.

Reuters:

• Brazil primary budget deficit swells, debt seen climbing. Brazil's primary public sector budget deficit widened sharply in November, the central bank said on Tuesday, as falling tax revenues undermined government efforts to shore up public accounts amid a deepening recession. At 19.567 billion reais ($5.07 billion), the November primary shortfall was the third worst on record. The deficit, which represents revenues minus expenditures before debt interest payments, is a closely watched gauge of creditworthiness.
• Cuba sees growth halving to 2 percent on lower export revenues. Cuba is forecasting that economic growth will halve in 2016 to 2 percent from this year, and Cuban President Raul Castro on Tuesday blamed the decline on falling export revenues.

Financial Times:

• Warren Buffett faces worst year on stock market since 2009.

Telegraph:

• Oil price rout will bring end to era of Saudi Arabian largesse, warns Bank of America. Declining crude prices signal that an era of Saudi overspending is "firmly behind us".

The Independent:

• Isis 'fatwa' on female sex slaves tells militants how and when they can rape captured women and girls. (video) Thousands of women and girls from religious minorities have been captured and enslaved by the group. Isis has released a fatwa detailing how and when its fighters can rape female sex slaves – “one of the inevitable consequences of jihad”. The document, drawn up by the terrorist group’s “Committee of Research and Fatwas”, was revealed by Reuters news agency after being discovered among a huge trove of documents seized by US special forces in Syria.

Bild:

• EU's Oettinger Warns of 'Serious' Danger EU May Break Up. Cites number of countries with unstable or populist govts as reason for concern, citing interview with the European Commissioner.

Evening Recommendations 

• None of note

Night Trading 

• Asian equity indices are -.25% to +.50% on average.
• Asia Ex-Japan Investment Grade CDS Index 138.25 unch.
• Asia Pacific Sovereign CDS Index 72.0 unch.
• Bloomberg Emerging Markets Currency Index 69.52 -.08%.
• S&P 500 futures -.07%.
• NASDAQ 100 futures -.05%.

Morning Preview Links 

Earnings of Note 
Company/Estimate

• None of note

Economic Releases
10:00 am EST

• Pending Home Sales for November are estimated to rise +.7% versus a +.2% gain in October. 

10:30 am EST

• Bloomberg consensus estimates call for a weekly crude oil inventory decline of -1,766,670 barrels versus a -5,877,000 barrel decline the prior week. Gasoline supplies are estimated to rise by +411,110 barrels versus a +1,111,000 barrel gain the prior week. Distillate supplies are estimated to rise by +433,330 barrels versus a -661,000 barrel decline the prior week. Finally, Refinery Utilization is estimated to rise by +.09% versus a -.6% decline prior.

Upcoming Splits

• None of note

Other Potential Market Movers

• The Eurozone M3 data, $35B 5Y T-Note auction and the $29B 7Y T-Note auction could also impact trading today.

BOTTOM LINE: Asian indices are mostly higher, boosted by commodity 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 day.

Stocks Surging into Final Hour on Less Emerging Markets/US High-Yield Debt Angst, Oil Bounce, Seasonality, Tech/Biotech Sector Strength

Broad Equity Market Tone:

• Advance/Decline Line: Higher
  

• Sector Performance: Almost Every Sector Rising
  

• Volume: Light

• Market Leading Stocks: Performing In Line

Equity Investor Angst:

• Volatility(VIX) 16.20 -4.20%

• Euro/Yen Carry Return Index 137.61 -.29%

• Emerging Markets Currency Volatility(VXY) 11.35 +.71%

• S&P 500 Implied Correlation 56.44 -1.96%

• ISE Sentiment Index 72.0 -15.29%

• Total Put/Call .82 -36.92%

• NYSE Arms .77 -54.28% 

Credit Investor Angst:

• North American Investment Grade CDS Index 89.06 -2.32%

• America Energy Sector High-Yield CDS Index 1,710.0 +1.29%

• European Financial Sector CDS Index 75.53 +4.81%

• Western Europe Sovereign Debt CDS Index 17.06 -.87%

• Asia Pacific Sovereign Debt CDS Index 72.03 -.06%

• Emerging Market CDS Index 353.28 -1.29%
  

• iBoxx Offshore RMB China Corporate High Yield Index 123.76 unch.

• 2-Year Swap Spread 8.25 -4.0 basis points

• TED Spread 37.5 -3.0 basis points

• 3-Month EUR/USD Cross-Currency Basis Swap -22.5 +3.0 basis points

Economic Gauges:

• Bloomberg Emerging Markets Currency Index 69.58 -.13%
• 3-Month T-Bill Yield .20% unch.

• Yield Curve 122.0 +1.0 basis point

• China Import Iron Ore Spot $42.31/Metric Tonne +2.45%

• Citi US Economic Surprise Index -28.7 +2.5 points

• Citi Eurozone Economic Surprise Index 14.2 +.3 point

• Citi Emerging Markets Economic Surprise Index 14.80 -1.1 points

• 10-Year TIPS Spread 1.56% +3.0 basis points
• 54.5% chance of next Fed rate hike at March 16 meeting, 61.4% chance at April 27 meeting

Overseas Futures:

• Nikkei 225 Futures: Indicating +197 open in Japan 
• China A50 Futures: Indicating -11 open in China

• DAX Futures: Indicating +17 open in Germany

Portfolio: 

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

• Disclosed Trades: Covered some of my (IWM)/(QQQ) hedges

• Market Exposure: Moved to 75% Net Long