Today's Headlines

Bloomberg:

• China Battles to Shore Up World's Priciest Stock Market: Chart. (video) Chinese authorities are contending with sky-high valuations as they revive support for the nation’s tumbling equity market. Government funds purchased local stocks on Tuesday after a plunge on Monday triggered a share halt, according to people familiar with the matter. Even after the drop, the median stock on mainland exchanges trades at about 65 times earnings -- more than three times higher than the U.S.’s multiple of 19. "Although they would want to support the stock market, they should have realized that it’s impossible," Stephen Ma, senior portfolio manager at LGM Investments Ltd., said in Hong Kong.  

• Bank of America Merrill Lynch: The Shanghai Composite Will Plummet by Nearly 30% in 2016. This time is not different. The early January blues for Chinese stocks will persist through 2016, according to Bank of America Merrill Lynch, which expects the Shanghai Composite index to end the year down roughly 27 percent, at about 2,600. David Cui, head of China equity strategy, is known to be bearish on the world's second-largest economy—which is to say that he's less sanguine than most of his peers about the consequences of unwinding leverage that has mounted in a short period of time. For China—which has enjoyed a rapid expansion of debt relative to the size of its economy—this time will not be different, Cui contended in a note.

• Dragon Tail Risk for World Economy on Higher Fear of China Slump. It took exactly one trading day in 2016 for the year’s first Black Swan to appear on the horizon. As Monday’s 7 percent slide in China’s CSI 300 Index triggered a worldwide rout in equities, UBS Group AG reminded clients of its December analysis of what a slump in the world’s second-largest economy would imply for global growth. The worst-case scenario of the Swiss  bank’s economists and strategists is for the Chinese economy to grow just 4 percent this year rather than the 6.2 percent they actually predict.

• China's Terrible Start to 2016 Has Beijing Fighting Market Fires. (video) China has started 2016 in fire-fighting mode. After three months of relative calm in the nation’s $6.5 trillion stock market, a 7 percent rout to open the new year prompted government funds to prop up share prices on Tuesday, according to people familiar with the matter. The central bank injected the most cash since September into the financial system to keep a lid on borrowing costs, while the monetary authority was also said to intervene in the currency market to prevent excessive volatility. With Chinese shares and the yuan posting their worst starts to a year in at least two decades, the ruling Communist Party is being forced to scale back efforts to let markets have more sway in the world’s second-largest economy.  

• Dassault Business Jet Orders Tumble on Russia, Brazil Slumps. Dassault Aviation SA said sales of its Falcon business jets tumbled 50 percent last year, hurt by slumping demand from once buoyant markets including Russia and Brazil. The French company won orders for 45 corporate jets in 2015, half the previous year’s total, it said Tuesday, sending the stock down the most in 4 1/2 months. The tally was just 25 planes factoring in the cancellation of a contract for 20 Falcons previously placed by U.S. fractional-ownership specialist NetJets inc. Sales were impacted by the economic environment, “especially in emerging countries,” Paris-based Dassault said. Some 55 new Falcons were delivered, 10 fewer than anticipated, it said, reflecting “the weakening of the order intake.”

• VW Shares Tumble on U.S. Taking Hard Line in Diesel Scandal. (video) Volkswagen AG fell the most in two months after the U.S. government filed a lawsuit seeking penalties as high as $80 billion -- more than the company is worth -- and faulted the German carmaker for a lack of progress fixing cars with rigged engines. Chief Executive Officer Matthias Mueller and Herbert Diess, head of the VW brand, will visit the U.S. for the first time since the scandal broke in September. Diess will work to repair the brand’s tarnished image with appearances at the Consumer Electronics Show in Las Vegas this week and at the North American International Auto Show in Detroit starting Sunday. Mueller is set to meet politicians and possibly other officials next week, though his schedule hasn’t been published.

• Yen Benefits as Stock-Market Losses Drive Appetite for Havens. The yen advanced against 15 of its 16 major counterparts as stock markets struggled to shrug off Monday’s rout, spurring demand for haven investments. Japan’s currency surged the most against the Swedish krona and the New Zealand dollar and climbed to a nine-month high versus the euro even as China moved to support its equities market. The Asian nation’s CSI 300 Index eked out a gain, while the Stoxx Europe 600 Index closed the day higher.

• European Stocks Reverse Early Gains on China, Middle East Worry. (video) European stocks advanced, recovering some of the session’s earlier gains, after yesterday’s worst start to a year. Commodity producers posted the biggest gains among Stoxx Europe 600 Index groups. Glencore Plc and ArcelorMittal added at least 3.5 percent, helping send the regional benchmark up 0.6 percent at the close of trading. It rallied as much as 1.1 percent in the first ten minutes of trading, and then fell as much as 0.5 percent in intraday trading. The Stoxx 600 tumbled the most in a month yesterday as a selloff in China reignited concern that a slowdown there will hamper global recovery.

• This Time Mideast Tensions Are Bad News for Oil. At almost any other time, an escalating diplomatic conflict between OPEC members Iran and Saudi Arabia would mean a spike in oil prices. That the rally this time couldn’t be sustained shows just how abnormal things are in the oil market. Brent crude is little changed this week as a global supply glut and the slowest Chinese growth in a generation trumped mounting strife between the nations on either side of the world’s busiest waterway for oil tankers.

• Baltic Dry Ship Index Tumbles to Fresh Record Amid China Turmoil. The Baltic Dry Index, a measure of the cost of transporting commodities, plunged to a record amid signs of slowing economic growth in China that’s also hurting the nation’s stock market. The index retreated 1.1 percent to 468 points, tumbling below a previous record low set in December. Rates declined for all except one of the vessel types monitored. China moved to support its sinking stock market after a $590 billion sell off as state-controlled funds bought equities and the securities regulator signaled a selling ban on major investors will remain beyond this week’s expiration date, according to people familiar with the matter.

• Fed Playing Whac-A-Mole Faces Limits in Hammering Asset Bubbles. A seasoned Federal Reserve policy maker likened the central bank’s effort to prevent financial bubbles to playing a game of Whac-A-Mole: It can tamp down excessive risk-taking in one area only to see it pop up in another. What’s more, the potentially dangerous speculative activity has a tendency to shift outside the regulated banking industry to places where the Fed has less oversight and control, San Francisco Federal Reserve Bank President John Williams told the American Economic Association’s annual conference.

• Nissan Leads December Sales as Ford, GM Fall Short of Estimates. Fiat Chrysler Automobiles NV, Ford and General Motors ended 2015 with December sales gains that, while lower than analysts predicted, did little to dispel the idea the year was one for the record books. Automakers rode a wave of demand for light trucks as gasoline prices hovered at about $2 a gallon. Fiat Chrysler and Toyota Motor Corp. each posted increases of at least 11 percent, while Nissan Motor Co. led with a 19 percent jump. Shares of Ford and GM fell after they failed to make the gains of at least 10 percent analysts predicted.

Barron's:

• Hong Kong Retail Sales To Record Worst Slump Since 2003 SARS. Hong Kong retail sales is on track to record 3% fall in 2015, the worst since the SARS epidemic in 2003. In November, retail sales in Hong Kong fell 7.8%, worse than the 6.4% decline expected by the street. Hong Kong’s retail stocks retreated today. Watch retailer Hengdeli (3389.Hong Kong) dropped 2.8%, jewelry retailers Luk Fook (590.Hong Kong) and Chow Sang Sang (116.Hong Kong) fell 1.6% and 1.7% respectively.

Zero Hedge:

• Germany In Shock After "Monstrous" Attacks, Rape By 1,000 Men "Of Arab Or North African Origin".

• "We Frontloaded A Tremendous Market Rally" Former Fed President Admits, Warns "No Ammo Left". (video)

• WTI Plunges To $35 Handle As Loonie Hits 12 Year Low. (graph)

• What's Next For Stocks After The New Year's Day 1 Hangover?

• Are We Headed For Another Bust?

• Apple(AAPL) Plunges After Nikkei Reports iPhone Production Cuts Up To 30%. (graph)

• President Obama Explains Why Making It Harder For "We, The People" To Get Guns Will Make Everyone Safer. (graph)

• What Comes After The Commodities Bust? (graph)

• Why $1.5 Billion Nevsky Capital Is Shutting Down: The Full Letter.

• Another Bank Throws In The Towel: "After 6 Years Of Outperformance" Citi(C) Cuts US Stocks To Underweight.

• Oil Tumbles After Saudis Slash Prices To Europe. (graph)

• A "Perfect Storm Is Coming" Deutsche Warns As Baltic Dry Falls To New Record Low. (graph)

• This Is The 'New' Most Important Number For The S&P 500. (graph)

Thrillist Health:

• Facebook(FB) Is Getting in the Way of Your Happiness.

Global Times:

• China Rail freight posts record drop. Rail freight volume in China last year declined by a record amount, Beijing-based financial news site caixin.com reported Tuesday, citing data obtained from the national railway administrator. Rail freight movements fell 10.53 percent year-on-year to 3.4 billion tons, caixin.com noted, citing data from the National Railway Administration. Since China Railway Corp, a spin-off from the now defunct railway ministry, was established in 2012, rail cargo movements have been dropping, media reports said. However, the 2015 volume was roughly the same as that six years earlier, when rail freight data was first published. Experts on railway transport said they weren't surprised by the decline in rail cargo levels, which used to be considered an important indicator of the country's overall economic growth.

Tasnim News Agency:

• Iran’s 2nd Underground “Missile City” Unveiled. (pic) Pictures from an underground missile facility of the Islamic Revolution Guards Corps (IRGC) were released on Tuesday, after Parliament Speaker Ali Larijani paid a visit to the base. Around 3 months after the IRGC Aerospace Force broadcast footage from a tunnel dug deep in the ground and filled with numerous ballistic missiles, photos of another missile city were made public on Tuesday. Seen among the gear stored in a seemingly impregnable mountain base are the country’s “Emad” long-range ballistic missiles on their launch vehicles parked along an underground tunnel.

Bear Radar

Style Underperformer: 

• Small-Cap Growth -.5%

Sector Underperformers: 

• 1) Oil Tankers -4.1% 2) Oil Service -2.5% 3) Alt Energy -2.1%

Stocks Falling on Unusual Volume:

• FIT, SPB, XLRN, AKBA, CFMS, BCC, BBW, MBLY, RLGY, HELE, CPK, LAD, UBIO, PAG, BPY, ACHC, TOT, HA, RUN, AXL, SYNA, QSR, LIVN, COF and TLP

Stocks With Unusual Put Option Activity: 

• 1) XLNX 2) OIH 3) BXLT 4) GT 5) DXJ

Stocks With Most Negative News Mentions: 

• 1) VRSN 2) NOV 3) JWN 4) PBR 5) FIT

Charts:

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

Bull Radar

Style Outperformer:

• Small-Cap Value unch.

Sector Outperformers: 

• 1) Gaming +2.2% 2) Tobacco +1.3% 3) REITs +1.3%

Stocks Rising on Unusual Volume: 

• BIN, SWHC, RGR, FXCM, FSLR, CHSP, FLIR and SAVE

Stocks With Unusual Call Option Activity: 

• 1) MNKD 2) TWX 3) ODP 4) DNKN 5) SWHC

Stocks With Most Positive News Mentions: 

• 1) SE 2) CW 3) NOC 4) SWHC 5) FLIR

Charts: 

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

Morning Market Internals

NYSE Composite Index:

• Volume Running -1.6% Below 100-Day Average
• 2 Sectors Rising, 8 Sectors Declining
• 54.7% of Issues Advancing, 43.0% Declining
• 70 New 52-Week Highs, 60 New Lows
• 26.5% of Issues Above 200-day Moving Average
• Average 14-Day RSI 36.5%
• Vix 20.3 -2.1%
• Total Put/Call 1.0 -6.5%
• TRIN/Arms 1.8 +32.7%

Tuesday Watch

Evening Headlines
Bloomberg:  

• China Stocks Fluctuate as Regulator Seeks to Reassure Investors. China’s stocks swung between gains and losses as the regulator moved to reassure investors after Monday’s plunge put the nation’s new market circuit breakers to the test on their first day. The CSI 300 Index was little changed at 10:05 a.m. local time after rising as much as 1.4 percent and dropping 2.7 percent. Trading was halted on Monday after the gauge dropped 7 percent. The circuit breaker plays an important role in stabilizing the market, and the government will work to improve the system, China Securities Regulatory Commission spokesman Deng Ge said in a statement on Tuesday. The central bank conducted the biggest reverse-repurchase operations since September, adding funds to the financial system after money-market rates climbed to an eight-month high.
• China's Big Banks in 2016: Another Challenging Year on Bad Loans. Lower interest rates, rising bad loans and a growing challenge from Internet finance companies will add up to another tough year for China’s biggest banks in 2016, with their profit growth set to pick up only marginally from the slowest pace in more than a decade in 2015. Here are five snapshots. No end is in sight for increases in nonperforming loans. Going by the official numbers, which are widely regarded as understated, bad loans rose to a seven-year high of 1.2 trillion yuan ($184 billion) as of the end of September. In a sign of the write-offs to come, policy makers are aiming for a clean-up of “zombie companies” that rely on government subsidies and bank loans to keep operating. Xuanlai He, an analyst at Commerzbank AG, is among those forecasting a worsening of asset quality in 2016. 
• DeMark Sees ‘Big Risk’ That Chinese Stocks Will Retreat Further. Chinese stocks trading in Hong Kong may extend their worst start to a year since 1995, according to Thomas DeMark, who correctly predicted the selloff in the country’s equity market last year. “It’s critical tomorrow,” DeMark, founder of DeMark Analytics, said on Bloomberg Television on Monday in New York. “We are going to have a big risk on the downside” if the Hang Seng China Enterprises Index opens lower and trades below Monday’s intraday low, he said. If those conditions are met, the gauge will decline to 7,933, DeMark said in a follow-up phone interview. That would be about a 15 percent decline from Monday’s closing level. The direction of the market will be inconclusive if the conditions are unfulfilled, said DeMark, who has spent more than 40 years developing indicators to identify market turning points. 
• China's Hand Feared Behind Hong Kong Publisher's Disappearance. The disappearance of a Hong Kong-based publisher of books critical of China’s Communist Party is fueling concerns that tactics used to limit dissent on the mainland are being exported to the former British colony.
• Volkswagen Faces Billions of Dollars in Penalties From U.S. Suit. The U.S. Justice Department sued Volkswagen AG for installing illegal devices meant to defeat emissions testing, and laid out claims that could push penalties into the tens of billions of dollars -- an opening salvo in a legal battle that could be far more costly for the German carmaker than had been expected. The civil complaint filed Monday accuses the automaker of four violations of the Clean Air Act and outlines penalties that could amount to as much as $80 billion -- about four times as much as the maximum some legal experts had estimated. While the court is unlikely to come anywhere near that amount, according to a senior Justice Department official, the penalties sought against the company would still be in the billions of dollars, another senior Justice Department official said. 
• Won Drops to Three-Month Low as China Selloff Deters Risk-Taking. The won fell to a three-month low as an equities selloff in China, South Korea’s largest export market, damped demand for emerging-market assets by curbing risk-taking. The Bank of Korea will closely monitor the impact of global volatility on local financial markets, the monetary authority said after meeting Tuesday to discuss the effects of the China rout. The worst-ever start to a year for Chinese shares triggered a trading halt in more than $7 trillion of equities, futures and options on Monday. The won declined as much as 0.4 percent to 1,192.06 a dollar, the weakest level since September, before paring the day’s loss to 0.2 percent as of 10:23 a.m. in Seoul, according to data compiled by Bloomberg. 
• Asia Stocks Stabilize as China Adds Funds to Financial System. Asian stocks stabilized after the worst start to the year since 1988 as China’s central bank added funds to the financial system and U.S. equities staged a late rally. The MSCI Asia Pacific Index was little changed at 128.93 as of 11:05 a.m. in Tokyo, swinging between losses of 0.4 percent and gains of as much as 0.2 percent.
• Oil shrugs as glut blunts shock from deeper Saudi-Iran conflict. At almost any other time, an escalating diplomatic conflict between OPEC members Iran and Saudi Arabia should mean a spike in oil prices. That the rally this time couldn't be sustained shows just how abnormal things are in the oil market. Brent crude erased an initial gain of more than 4 percent as a global supply glut and the slowest Chinese growth in a generation trumped mounting strife between the nations on either side of the world's busiest waterway for oil tankers. "When oil supplies were tight, we've seen bigger reactions to geopolitical tensions," Tushar Tarun Bansal, a senior oil analyst in Singapore at industry consultant FGE, said by phone. "Now the price rise has actually been quite muted because the world is in a surplus situation."
• Why More Retailers Could Default in 2016. Last year was grim for retailers. This year could be even worse. Despite a late surge in holiday sales, companies like J. Crew Group Inc. and 99 Cents Only Stores are struggling under debt they took on in leveraged buyouts years ago. Their bond prices have plummeted -- in some cases to as little as 25 cents on the dollar -- as investors brace for possible defaults. The industry has been limping along for a while now due to a variety of forces. Spending has migrated to the Internet, lenders have turned wary and the debt burdens of pre-crisis buyouts will make it tough to revive struggling merchants. Eleven retailers defaulted last year through Dec. 14, the highest annual tally since 2009, according to Standard & Poor’s data. And the near future doesn’t look much brighter. 

Wall Street Journal: 

• Supermines Add to Supply Glut of Metals. Giant mines, begun when prices were high, weigh down copper, iron ore and other metals. In this volcanic desert, a dusty moonscape patrolled by bats, snakes and guanacos, America’s biggest miner is piling on to the new force in industrial resources: supermines. It’s a strategy that could be driving miners into the ground.
• The U.S. Economy’s Latest Growth Is Looking Increasingly Frail. The Federal Reserve Bank of Atlanta said Monday it now believes fourth-quarter GDP grew at just a 0.7% pace, down from a prior estimate of 1.3% growth. J.P. Morgan Chase cut its estimate in half to 1% growth from 2%. Forecasting firm Macroeconomic Advisers lowered its estimate by three-tenths of a percentage point to 1.1%. 
• Poll Points to Upside for Ted Cruz, Marco Rubio in GOP Race. Trump and Bush would have harder time picking up supporters of other candidates, WSJ/NBC poll suggests. 
• America’s Year of Living Dangerously. In 2016, rogue states will take a hammer to the soft plaster of Obama’s resolve. Two thousand sixteen will be the year of America living dangerously. Barack Obama will devote his last full year in office to shaping a liberal legacy, irrespective of real-world results. America’s enemies will see his last year as an opportunity to take what they can, while they can. America’s allies, or former allies, will do what they must.

Fox News:

• Obama executive action on guns to require background checks for more sales. (video) President Obama’s series of executive actions on guns will require background checks for those purchased from dealers even if they're bought online or at gun shows, the White House announced late Monday. The Justice Department's Bureau of Alcohol, Tobacco, Firearms and Explosives will also issue updated guidance that says the government can consider someone a gun dealer regardless of where the guns are sold.

MarketWatch.com:

• 2016 predictions: 15 game-changers that could happen this year.
• China’s rigged markets could fall much further, much faster.

CNBC:

• The easy way to bet on a Chinese stock market disaster. (video)

Zero Hedge: 

• "It's Coming To A Head In 2016" - Why Bank of America Thinks The Probability Of A Chinese Crisis Is 100%.
• The Tragicomedy Of Self-Defeating Monetary Policy. 
• With A Straight Face, US Government "Finds" Number Of Retiring 20-24 Year-Olds Has Doubled. (graph)
• For Kyle Bass This Is "The Greatest Investment Opportunity Right Now".
• This Just Became The Most Important Map In Geopolitics.
• This Is A Very Troubling Chart. (graph)
• China Day 1: Monumental Destruction. (graph)
• The Fed's New Mandate.
• Visualizing Brazil's Economic Decline In One "Straight-Line" Chart. (graph)
• Are Governments Running Out of Candy?
• The Best Leading Indicator For Recession Is Flashing Red, JPMorgan Warns. (graph)
• Pay Attention, Things Are Beginning To Get Interesting. (graph)
• Citigroup Says "It's Too Early To Panic"; Here's Why. (graph)
• Late-Day Buying Panic Saves Stocks From Worst Start To January In 84 Years. (graph)

Business Insider: 

• Hillary is facing a long fight as Bernie Sanders' fundraising has soared.
• Smith & Wesson(SWHC) says gun sales are booming, and the stock is going bonkers.
• The future of the bank branch is in trouble — here's why.
• The Fed's cheap money regime is a substantial threat to Saudi Arabia.
• China just made yet another provocative move in the disputed South China Sea.
• Head of Putin's military intelligence unexpectedly dies.

Evening Recommendations 

• None of note

Night Trading 

• Asian equity indices are -.50% to +.75% on average.
• Asia Ex-Japan Investment Grade CDS Index 139.25 unch.
• Asia Pacific Sovereign CDS Index 75.5 +3.0 basis points.
• Bloomberg Emerging Markets Currency Index 68.66 +.04%.
• S&P 500 futures +.31%
• NASDAQ 100 futures +.35%.

Morning Preview Links 

Earnings of Note 
Company/Estimate

• (CMC)/.25
• (SONC)/.23
• (TISI)/.84

Economic Releases
9:45 am EST

• ISM New York for December.

Afternoon:

• Total Vehicle Sales for December are estimated to fall to 18.0M versus 18.05M in November.

Upcoming Splits

• None of note

Other Potential Market Movers

• The UK Construction PMI, US weekly retail sales reports, Citi Internet/Media/Telecom conference, (F) Dec. US sales conf call and the (LLY) guidance call could also impact trading today.

BOTTOM LINE: Asian indices are mostly higher, boosted by tech and consumer shares in the region. I expect US stocks to open modestly higher and to weaken into the afternoon, finishing modestly lower. The Portfolio is 25% net long heading into the day.

Stocks Falling Substantially into Final Hour on China Bubble-Bursting Fears, European/Emerging Markets/US High-Yield Debt Angst, Emerging Markets Currency Worries, Homebuilding/Biotech Sector Weakness

Broad Equity Market Tone:

• Advance/Decline Line: Substantially Lower
  

• Sector Performance: Almost Every Sector Declining
  

• Volume: Above Average

• Market Leading Stocks: Performing In Line

Equity Investor Angst:

• Volatility(VIX) 22.18 +21.64%

• Euro/Yen Carry Return Index 135.05 -1.16%

• Emerging Markets Currency Volatility(VXY) 11.65 +2.1%

• S&P 500 Implied Correlation 62.55 +6.0%

• ISE Sentiment Index 81.0 +8.0%

• Total Put/Call 1.09 +7.92%

• NYSE Arms 1.15 -9.75% 

Credit Investor Angst:

• North American Investment Grade CDS Index 91.19 +3.18%

• America Energy Sector High-Yield CDS Index 1,679.0 -.72%

• European Financial Sector CDS Index 79.63 +3.32%

• Western Europe Sovereign Debt CDS Index 16.42 +1.39%

• Asia Pacific Sovereign Debt CDS Index 75.18 +3.71%

• Emerging Market CDS Index 363.73 +1.45%
  

• iBoxx Offshore RMB China Corporate High Yield Index 123.87 +.06%

• 2-Year Swap Spread 12.25 +.25 basis point

• TED Spread 45.0 -1.5 basis points

• 3-Month EUR/USD Cross-Currency Basis Swap -20.0 -1.5 basis points

Economic Gauges:

• Bloomberg Emerging Markets Currency Index 68.60 -.88%
• 3-Month T-Bill Yield .16% unch.

• Yield Curve 121.0 -1.0 basis point

• China Import Iron Ore Spot $44.37/Metric Tonne +1.84%

• Citi US Economic Surprise Index -34.4 -2.6 points

• Citi Eurozone Economic Surprise Index 21.1 +5.7 points

• Citi Emerging Markets Economic Surprise Index 8.90 -4.0 points

• 10-Year TIPS Spread 1.58% unch.
• 49.7% chance of next Fed rate hike at March 16 meeting, 55.3% chance at April 27 meeting

Overseas Futures:

• Nikkei 225 Futures: Indicating -305 open in Japan 
• China A50 Futures: Indicating -389 open in China

• DAX Futures: Indicating +9 open in Germany

Portfolio: 

• Slightly Higher: On gains in my index hedges and emerging market shorts

• Disclosed Trades: Covered some of my (IWM)/(QQQ) hedges, then added them back

• Market Exposure: 25% Net Long