Tuesday Watch

Evening Headlines
Bloomberg: 

• Saudi's Other Warning Makes Oil Traders Sweat After Doha Failure. After his comments thwarted supply negotiations in Doha, oil traders are weighing another implied warning from the Saudi deputy crown prince: the threat of an intensifying clash with Iran over market share. It was Mohammed Bin Salman’s repeated assertions that the kingdom wouldn’t join an output freeze without Iran that derailed talks between 16 producing countries on April 17. In interviews with Bloomberg News, the prince cautioned that if other producers increased output, Saudi Arabia could respond in kind. Iran is restoring exports after international sanctions over its nuclear program were lifted in January. “It was an indication to Iranians that, look guys, if you’re not joining the table we have enough power to crank up production,” Abhishek Deshpande, an analyst at Natixis SA in London, said in a Bloomberg Television interview Monday. “You can question how much more they can crank it up by, but the chances are that, now there’s no freeze, the Saudis will go ahead and increase their production as they were planning.”
• The Problem in China's Bond Market. (video)
• China's Once Booming Smartphone Sales Barely Grew in 2015: Chart.
• China's Crowded Smartphone Market Heads for an Epic Shakeout. As the economy slows and saturation takes hold, half of 300-plus domestic brands may disappear. The startup Dakele looked pretty smart when it released a phone in China four years ago. The market was doubling annually, and the company put brand-name components inside a device that cost a fraction of the iPhone. That $160 gadget went on sale just four months after Dakele opened its doors, and soon the company, which translates as "Big Cola," made inroads against Huawei Technologies Co. and Xiaomi Corp. Buzz was building for the Dakele 3 model last year, with online reviews calling it the best Apple Inc. clone. Then the sizzle started to fizzle. 
• RBA Says ‘Very Accommodative’ Policy Appropriate, Aussie Hinders. Australia’s central bank said “very accommodative” policy is appropriate given low inflation and reaffirmed the currency’s strength could complicate the economy’s rebalancing away from mining. The Reserve Bank of Australia, in minutes of its April 5 meeting where interest rates were left unchanged at a record-low 2 percent, noted the economy’s 3 percent expansion in 2015 was better than forecast and “broadly consistent” with last year’s improved jobs market. It said recent data suggested the economy “had continued to grow at a moderate pace” in early 2016.
• Asian Stocks Advance as Oil Rebounds to $40; Won, Kiwi Climb. Asian equities rose, following U.S. stocks higher, as crude oil climbed for the first time in five days. South Korea’s won strengthened before a central bank policy meeting and New Zealand’s dollar advanced to a 10-month high. The MSCI Asia Pacific Index climbed to a four-month high as Japan’s Topix jumped more than 3 percent.
• Fed's Rosengren Says Market Is Too Pessimistic on Rate Path. The market’s outlook for interest rates is too dovish for one of the Federal Reserve’s more dovish policy makers. Federal Reserve Bank of Boston President Eric Rosengren said he and many private-sector economists envision a “much healthier U.S. economy” than the forecast implied by financial markets, where investors expect the Fed to raise rates by about one-quarter percentage point a year over the next three years. “The very shallow path of rate increases implied by financial futures-market pricing would likely result in an overheating that necessitates the Fed eventually raising interest rates more quickly than is desirable, which could endanger the ongoing recovery and continued growth,” Rosengren said, according to the text of a speech he is scheduled to deliver Monday in New Britain, Connecticut.
• Netflix Plunges on Forecast for Weakening Subscriber Growth. (video) Netflix Inc., the world’s largest paid online TV network, plunged after rattling investors with forecasts for weakening subscriber growth in the second quarter, especially in newer markets outside the U.S. Netflix expects to add 2 million new international customers, according to a statement Monday on its website. That’s fewer than the 3.45 million average of five analysts’ estimates compiled by Bloomberg. Domestic customers may increase by 500,000 in the second quarter, Netflix said, compared with the 505,000 average of estimates. Netflix plunged as low as $92.38 before recovering to $100 in extended trading after the forecast was released.
• IBM(IBM) Earnings Show It's Still Struggling With New Product Growth. (video) IBM forecast second-quarter profit that fell short of analysts’ projections, signaling its multiyear effort to become a purveyor of cloud products and technology using artificial intelligence won’t soon stop its four-year sales slump. About 38 percent to 39 percent of the company’s full-year earnings forecast of at least $13.50 per share will come in the first half, Chief Financial Officer Martin Schroeter said Monday. That projects to about $2.78 to $2.92 a share, compared with the $3.45 average of analysts’ estimates compiled by Bloomberg.IBM shares fell as much as 5.4 percent to $144.30 in extended trading.

Wall Street Journal:

• Theranos Is Subject of Criminal Probe by U.S. Federal prosecutors are investigating whether the blood-testing company misled investors about the state of its technology and operations. Federal prosecutors have launched a criminal investigation into whether Theranos Inc. misled investors about the state of its technology and operations, according to people familiar with the matter.
• Illumina(ILMN) Lowers Revenue Guidance on Disappointing Europe Results. Gene-sequencing machine maker has made management changes in region. Illumina Inc. lowered its revenue guidance for the first quarter and full year due to disappointing Europe results that have led to management changes in the region. The maker of gene-sequencing machines projects 12% revenue growth for the year, compared with earlier guidance of 16% growth. Illumina said first-quarter revenue was about $572 million. Analysts polled by Thomson Reuters had projected $596 million. Shares fell 18% to $145.25 in after-hours trading. 
• Trump’s Bully Pulpit. His threats to blow up the July convention are a sign of weakness. Donald Trump says he wants to unite the Republican Party, but he keeps acting as if he’s mounting a hostile takeover. He’s now threatening to blow up the party’s July convention because he and his campaign were too lazy or inept to understand the 50 state nomination rules

Fox News: 

• Study confirms medical costs rising for post-ObamaCare patients – along with premiums. (video) For Americans wondering why their health care premiums and deductibles are rising so dramatically, a new study by the Blue Cross Blue Shield Association provides some answers. The study, released on March 30, found that people who enrolled in BCBS after the Affordable Care Act became law had higher rates of disease than those who'd been enrolled before ObamaCare took effect, suggesting insurers indeed are taking on higher-risk and higher-cost patients. Their costs are rising, along with premiums in general.
• AGs, activists accused of 'collusion' on Exxon probe amid new emails. State Democratic officials are facing mounting accusations they secretly coordinated with climate activists to investigate whether ExxonMobil hid the truth about global warming, as new documents show the collaboration went deeper than previously thought. Emails obtained and released by the Energy & Environment Legal Institute show a number of state attorneys general and their staff received advice and guidance from environmental activists at a March 29 meeting in New York, on the same day as a major press conference.

Zero Hedge:

• The Whole System Is Built Upon Lies And "We're In The Terminal Phase".
• Days After Wells Fargo Admits Defrauding The Government, NY Fed Rewards It With Primary Dealer Status.
• Caught On Tape: Chinese Bulldozers Battle As Economic Frustration Boils Over. (video)
• Dozens Of Large Earthquakes Strike As Speculation Mounts That Japan's Southern Island May Split.
• Capitulation? US Equity Bears Dump Shorts Fastest Since 2012. (graph)
• Americans Spend More On Taxes Than On Housing, Food And Clothing. (graph)
• Netflix Crashes After Forecasting Slower Subscriber Growth, Despite Burning $1BN In Last 12 Months. (graph)
• Dow Tops 18,000 As Doha Dud Didn't Matter. (graph)

Business Insider:

• Wary consumers could cause the next recession.
• Brazil is set for years of political turmoil.
• Nordstrom(JWN) is cutting hundreds of jobs, confirming a terrifying new trend among wealthy shoppers.
• The US is 'digging a great big hole'. (graph)

China Business News:

• IMF's Zhu Says China Shouldn't Swap Bad Debt for Equity. China shouldn't swap bad debt for equity to avoid passing on risks to the financial system, citing IMF deputy managing director Zhu Min as saying in an interview. China should use market-oriented ways including debt and bankruptcy restructuring for deleveraging, Zhu said. Govt's stimulus shouldn't be too large as China's real economic growth rate is close to its potential rate, Zhu said.

Night Trading 

• Asian equity indices are -.25% to +1.0% on average.
• Asia Ex-Japan Investment Grade CDS Index 138.75 -1.5 basis points. 
• Asia Pacific Sovereign CDS Index 57.75 +1.25 basis points. 
• Bloomberg Emerging Markets Currency Index 72.73 +.05%. 
• S&P 500 futures +.04%. 
• NASDAQ 100 futures +.12%.

Morning Preview Links

Earnings of Note
Company/Estimate 

• (EAT)/.99
• (CMA)/.45
• (GPC)/103
• (GS)/2.50
• (HOG)/1.30
• (JNJ)/1.66
• (KSU)/.97
• (PM)/1.11
• (AMTD)/.38
• (UNH/1.72
• (DFS)/1.29
• (INTC)/.48
• (IBKR)/.43
• (ISRG)/4.33
• (LLTC)/.50
• (MANH)/.39
• (VMW)/.84
• (YHOO)/.07 

Economic Releases  
8:30 am EST

• Housing Starts for March are estimated to fall to 1166K versus 1178K in February.
• Building Permits for March are estimated to rise to 1200K versus 1167K in February.
  

Upcoming Splits 

• None of note

Other Potential Market Movers

• The German ZEW Index and US weekly retail sales reports could also impact trading today.

BOTTOM LINE: Asian indices are mostly higher, boosted by industrial and commodity 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 Reversing Higher into Final Hour on Less European/Emerging Markets/US High-Yield Debt Angst, Oil Bounce Off the Lows, Short-Covering, Energy/Biotech Sector Strength

Broad Equity Market Tone:

• Advance/Decline Line: Higher
  

• Sector Performance: Almost Every Sector Rising
  

• Volume: Below Average

• Market Leading Stocks: Performing In Line
  

Equity Investor Angst:

• Volatility(VIX) 13.3 -2.35%

• Euro/Yen Carry Return Index 128.63 +.31%

• Emerging Markets Currency Volatility(VXY) 11.1 -2.63%

• S&P 500 Implied Correlation 54.48 -7.2%

• ISE Sentiment Index 90.0 +11.11%

• Total Put/Call 1.02 +29.11%

• NYSE Arms .97 -17.13% 

Credit Investor Angst:

• North American Investment Grade CDS Index 77.85 -2.94%
  

• America Energy Sector High-Yield CDS Index 1,243.0 -1.13%

• European Financial Sector CDS Index 86.68 -3.26%

• Western Europe Sovereign Debt CDS Index 27.41 +1.74%

• Asia Pacific Sovereign Debt CDS Index 57.57 +1.21%

• Emerging Market CDS Index 279.93 -3.76%
  

• iBoxx Offshore RMB China Corporate High Yield Index 127.55 +.15%

• 2-Year Swap Spread 12.25 unch.
  

• TED Spread 41.50 +.5 basis point

• 3-Month EUR/USD Cross-Currency Basis Swap -22.25 unch.
  

Economic Gauges:

• Bloomberg Emerging Markets Currency Index 72.73 +.26%
• 3-Month T-Bill Yield .20% -2.0 basis points
  

• Yield Curve 103.0 +1.09 basis point
  

• China Import Iron Ore Spot $60.36/Metric Tonne +3.57%

• Citi US Economic Surprise Index -9.30 +2.9 points

• Citi Eurozone Economic Surprise Index -21.60 +3.7 points

• Citi Emerging Markets Economic Surprise Index 18.9 unch.

• 10-Year TIPS Spread 1.58% +2.0 basis points
  
• 13.7% chance of Fed rate hike at June 15 meeting, 25.6% chance at July 27 meeting

Overseas Futures:

• Nikkei 225 Futures: Indicating +424 open in Japan 
• China A50 Futures: Indicating +67 open in China

• DAX Futures: Indicating +41 open in Germany

Portfolio: 

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

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

• Market Exposure: Moved to 50% Net Long

Today's Headlines

Bloomberg:    

• It's All Suddenly Going Wrong in China's $3 Trillion Bond Market. The unprecedented boom in China’s $3 trillion corporate bond market is starting to unravel. Spooked by a fresh wave of defaults at state-owned enterprises, investors in China’s yuan-denominated company notes have driven up yields for nine of the past 10 days and triggered the biggest selloff in onshore junk debt since 2014. Local issuers have canceled 60.6 billion yuan ($9.4 billion) of bond sales in April alone, while Standard & Poor’s is cutting its assessment of Chinese firms at a pace unseen since 2003. While bond yields in China are still well below historical averages, a sustained increase in borrowing costs could threaten an economy that’s more reliant on cheap credit than ever before. The numbers suggest more pain ahead: Listed firms’ ability to service their debt has dropped to the lowest since at least 1992, while analysts are cutting profit forecasts for Shanghai Composite Index companies by the most since the global financial crisis.
• China State Enterprises Likely to Suffer More Defaults, S&P Says. China’s state-owned enterprises are likely to suffer more defaults over the next year as the government shows its readiness to shut companies in industries struggling with overcapacity, according to Standard & Poor’s. “In a major policy shift, the central government appears willing to close and liquidate struggling enterprises in the steel, mining, building materials, and shipbuilding industries,” S&P analyst Christopher Lee wrote in a report Monday. “We believe this stance will exacerbate the problems of companies in these cyclical and capital-intensive sectors, which are facing sluggish demand amid slowing investment growth.”
• Brazil Investor Impeachment Euphoria May Fade Quickly as It Came. Investors in Brazil may find that getting what they wished for isn’t all it was cracked up to be. The real slumped and the Ibovespa edged higher after the lower house of Congress voted to proceed with President Dilma Rousseff’s ouster. The scope of gains going forward is seen as limited given the difficulty in tackling the country’s economic and fiscal crises no matter who is in power, according to long-time watchers. Investors have piled into Brazilian assets this year on speculation Rousseff’s ouster will allow a new government to push through measures aimed at pulling Latin America’s biggest economy out of its worst recession in a century and tackling an exploding budget deficit. But the severity of the problems means her likely successor -- Vice President Michel Temer -- will have little margin for error.
• Europe's Biggest Chipmaker Says Semiconductor Goldrush Over. The semiconductor acquisitions bonanza, which soared to about $110 billion of deals last year, is over, according to Infineon AG Chief Executive Officer Reinhard Ploss. Industry consolidation “has decelerated,” said the head of Europe’s largest chipmaker by revenue, which kicked off the spate of deals with its announcement in 2014 that it would pay $2.3 billion for International Rectifier Corp. “It’s not the same goldrush.” The wave of takeovers was prompted by the rising costs of production and a shrinking customer list, and included Intel Corp.’s $14 billion acquisition of Altera Corp., NXP Semiconductors NV’s $16 billion purchase of Freescale Semiconductor Ltd. and Avago Technologies Ltd.’s $30 billion deal for Broadcom Corp. Chipmakers are now digesting their purchases and focusing on product development to target new growth areas such as the Internet of things and self-driving vehicles.
• Italian Bonds at Risk From Efforts to Break Bank-Sovereign Nexus. Bonds from peripheral countries may be the most vulnerable to Europe’s effort to limit banks’ sovereign-debt holdings. As European Union nations wrangle over ways to integrate and safeguard the region’s banking system years after the euro debt crisis, a major point of contention is how to deal with the government bonds banks have on their balance sheets.
• Strategists Turn Bearish on One of Europe's Most-Loved Markets. As recently as last year, German stocks were among investors’ favorite in Europe. Now, even strategists, who started the year with bullish calls, have turned bearish. The benchmark DAX Index will fall 1.6 percent this year, according to the average of 13 projections compiled by Bloomberg. That would mark the first annual decline since 2011 for the gauge, which rallied almost twice as much as its regional peers since a low that year.Strategists have slashed their year-end forecasts across the region amid rising pessimism about earnings.
• China's Stocks Slump Most in Three Weeks as Oil Producers Slide. Chinese stocks fell by the most in three weeks, led by energy producers and property developers, as oil tumbled and accelerating home prices sparked concern the government will act to cool the property market. The Shanghai Composite Index fell 1.4 percent at the close. China Petroleum & Chemical Corp. lost 3 percent while Yanzhou Coal Mining Co. slid 2 percent. Crude slumped the most in two months in New York after talks between major oil producers ended in Doha without any agreement on limiting output. Average new-home prices rose 1.9 percent from February, when they advanced 0.6 percent, according to SouFun Holdings Ltd., the owner of China’s biggest property website. Falling oil would undercut one of the biggest drivers in Chinese stocks this year. A gauge of energy shares jumped 11 percent in the three months through Friday, the most among industry groups, as crude rebounded. The Shanghai Composite closed at 3,033.66, the lowest since April 12. The Hang Seng China Enterprises Index retreated 1.4 percent at the close in Hong Kong, with Huaneng Power International Inc. leading declines. The Hang Seng Index fell 0.7 percent.A gauge of information-technology companies on the CSI 300 Index slumped 2.2 percent, the biggest loss among the 10 industries on the measure.
• European Stocks Rise as Carmakers, Miners Gain, Oil Pares Drop. (video) European stocks rebounded as carmakers and commodity producers surged, while energy companies pared declines with oil. Daimler AG and BMW AG led automakers to the biggest advance among industry groups on the Stoxx Europe 600 Index. Miners recovered, with Rio Tinto Group and BHP Billiton Ltd. pacing gains as base metals rose. While crude trimmed losses, it still pulled energy producers lower, with Total SA and Royal Dutch Shell Plc weighing heaviest. Apple Inc. suppliers ARM Holdings Plc and Dialog Semiconductor fell at least 3.3 percent on speculation the iPhone maker will cut production amid slower-than-expected sales of the 6S and 6S Plus models. The Stoxx 600 added 0.4 percent to 344.2 at the close of trading, after earlier sliding as much as 1.4 percent.  
• Aiming at Iran, Saudi Arabia Mixes Oil Policy With Politics. After taking over defense and economic planning, Saudi Arabia’s Deputy Crown Prince Mohammed bin Salman has now stamped his authority over oil policy. In so doing, the 30-year-old son of King Salman upended the Saudis’ decades-long approach of separating commercial from political considerations. Over the weekend, Saudi officials quashed an agreement among major oil producers in Doha to freeze output due to Iran’s refusal to participate, a sign the regional rivalry is infecting the market. “Everything at Doha was about politics,” said Yasser Elguindi, an oil analyst at Medley Global Advisors, a consultant that advises large hedge funds.
• The Hole at the Center of the Rally: S&P Margins in Decline. (video) Stocks are rising, the worst start to a year is a memory, and short sellers are getting pummeled. And yet something is going on below the surface of earnings that should give bulls pause. It’s evident in quarterly forecasts for the Standard & Poor’s 500 Index, where profits are declining at the steepest rate since the financial crisis relative to revenue. The divergence reflects a worsening contraction in corporate profitability, with net income falling to 8 percent of sales from a record 9.7 percent in 2014. Bears have warned for years that such a deterioration would sound the death knell for a bull market that is about two weeks away from becoming the second-longest on record even as productivity sputters and industrial output weakens. While none of it has prevented stocks from advancing in seven of the last nine weeks, rallies have seldom weathered a decline in profitability as violent as this one -- and the squeeze is often a bad sign for the economy, too.

Wall Street Journal:

• U.S. Pledges More Troops for Iraq as Senior Isis Fighter Reported Dead. Defense Department promises 200 more troops while Kurdish state media reports Salman Abu Shabib al-Jebouri killed near Mosul.
• Supreme Court Justices Appear Split on Immigration Case. If court deadlocks, Obama’s policy to shield millions from deportation likely would be frozen.
• The Damage Bernie’s Hillary Bashing May Do. Damage from attacks is starting to matter, especially in Clinton’s standing with independent voters.
• Germany Can’t Save Europe. Berlin needs tax cuts for growth, not more Keynesian spending.

CNBC:

• By this measure, the S&P 500 is overvalued by 72%. (video)
• Low oil prices don't cut into US production by much. Overall output has fallen by about 6 percent since peaking a year ago, but many producers have opted to keep on pumping, even as prices remain stuck at around $40 a barrel — less than half the peak of mid-2014.
• Oil is headed to $30 after Doha. (video)

Zero Hedge:

• Greenspan Admits The Fed's Plan Was Always To Push Stocks Higher. (video)
• One Trader Finally Loses It.
• Dow Tops 18,000 - Highest In 9 Months (Earnings At 12-Month Lows). (graph)
• Multiple Clinton Connections Emerge As More "Panama Papers" Names Revealed.
• WTI Crude Soars 5% Off Post-Doha Lows. (graph)
• China's GDP Growth "Just Doesn't Add Up". (graph)
• Should Investors Be Bullish Or Bearish Right Now: BofA Explains.
• Brazil Buyers Bruised As "Sell The Impeachment News" Slams Stocks, Real. (graph)
• Morgan Stanley(MS) Profit Plunges By More Than 50% As Trading Revenue Tumbles 40%.

Business Insider:

• There's another sign the US could be headed for recession. (graph)
• It looks like 'helicopter money' isn't headed to Japan anytime soon.
• US Navy official: Russia's submarine activities are at their highest since the Cold War.
• A maker of jet fuel, paint and asphalt is getting smashed by more than 45%.
• Amazon(AMZN) is now selling Prime Video for $1 less a month than Netflix(NFLX).

Financial Times:

• Oil bulls will be the losers as technology upends demand. The crude oil market is likely to remain volatile for the foreseeable future, pushed and pulled by a myriad of large opposing forces. A highly uncertain outlook that has dramatically polarised market participants and price expectations for crude oil in 2020 — a key period for valuations and investment decisions — and will probably produce major winners and losers across energy and global markets.

Bear Radar

Style Underperformer:

• Mid-Cap Growth +.2%

Sector Underperformers:

• 1) Homebuilders -.8% 2) Airlines -.2% 3) Utilities -.2%

Stocks Falling on Unusual Volume:

• CPXX, YRD, LMCA, ATHM, LMCK, KITE, TASR, LII, AAPL, NAII, NVCR, DSW, TSCO, UFPI, ASR, RLYP, CHUY, HNP, GWW, NTAP, ARMH, NFLX, SYNT, CAVM and RCL

Stocks With Unusual Put Option Activity:

• 1) AKS 2) OIH 3) MS 4) NFLX 5) FXI

Stocks With Most Negative News Mentions:

• 1) CLMT 2) KBH 3) NTAP 4) NFLX 5) PBR

Charts:

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