Tuesday Watch

Evening Headlines
Bloomberg: 

• The World's Most Extreme Speculative Mania Unravels in China. From the Dutch tulip craze of 1637 to America’s dot-com bubble at the turn of the century, history is littered with speculative frenzies that ended badly for investors. But rarely has a mania escalated so rapidly, and spurred such fevered trading, as the great China commodities boom of 2016. Over the span of just two wild months, daily turnover on the nation’s futures markets has jumped by the equivalent of $183 billion, outpacing the headiest days of last year’s Chinese stock bubble and making volumes on the Nasdaq exchange in 2000 look tame. What started as a logical bet -- that China’s economic stimulus and industrial reforms would lead to shortages of construction materials -- quickly morphed into a full-blown commodities frenzy with little bearing on reality. As the nation’s army of individual investors piled in, they traded enough cotton in a single day last month to make one pair of jeans for everyone on Earth and shuffled around enough soybeans for 56 billion servings of tofu.
• Brazil Impeachment Resumes Bumpy Course After House Challenge. (video) Brazil’s political system fell further into disarray on Monday when the new head of the lower house annulled that body’s vote to impeach President Dilma Rousseff while the chief of the Senate said he would go ahead anyway with hearings on the ouster. The announcement by the Senate head seemed to take precedence and suggested that the drive to impeach Rousseff was back on track after a day of chaos. But the Supreme Court might still get involved. If the proceedings go back to the lower house they could delay by weeks a Senate vote expected as early as Wednesday on whether to put the unpopular president on trial and temporarily remove her from office. She is charged with illegally using state banks to plug a hole in the budget, and newspaper surveys show the opposition has the majority it needs to win in the Senate.
• Ringgit Falls to Six-Week Low as Oil Slide Spurs Export Concern. Malaysia’s ringgit fell to the lowest level in more than six weeks after the dollar strengthened and crude prices tumbled. The ringgit dropped 0.9 percent to 4.0512 per dollar as of 8:35 a.m. in Kuala Lumpur and earlier reached 4.0525, the weakest since March 25, according to prices from local banks compiled by Bloomberg. Brent extended declines Tuesday after sinking 3.8 percent overnight, casting doubt over the sustainability of a recent rebound in energy prices and reviving concern about Malaysia’s oil export earnings.
• Asian Stocks Outside Japan in Longest Losing Streak Since 2000. Asian stocks outside Japan dropped, with a regional benchmark index heading for its longest losing streak since September 2000, as commodity producers fell with crude oil and industrial metals. Japanese equities climbed as the yen weakened. The MSCI Asia Pacific excluding Japan Index fell 0.4 percent to 401.08 as of 9:07 a.m. in Tokyo, heading for a 10th day of losses. Stocks around the world have lost momentum over the past two weeks amid simmering pessimism over the pace of global growth and lackluster corporate earnings.
• Why Are Iron Ore Prices in Free Fall? (video)
• Riding the ‘Solarcoaster’ as Shares Plunge Even More Than Coal. For all the upbeat forecasts about the growth of solar power, this is a punishing year for the industry. And it won’t improve anytime soon. SunEdison Inc., the world’s biggest clean-energy company, is bankrupt. Yingli Green Energy Holding Co., once the top panel maker, warned it may be inching toward default. A Bloomberg index of 20 major solar companies has plunged more than 30 percent this year, with every member in the down column. Solar shares are performing even worse than coal stocks. 
• Summer Swoon? Why the S&P 500 Might Retest the Lows. (video)
• Gap(GPS) Plummets After Comeback Plan Fails to Revive Sales Growth. Gap Inc. shares plunged as much as 15 percent in late trading after the apparel chain posted disappointing results, a sign the company’s much-vaunted springtime comeback hasn’t materialized. Same-store sales -- a key benchmark -- dropped 7 percent in April, the San Francisco-based retailer said in a statement Monday. Analysts had predicted a gain of 1.1 percent, according to Retail Metrics. Preliminary earnings ranged from 31 cents to 32 cents a share in the first quarter, well below the 44 cents estimated by analysts.
• SolarCity(SCTY) Shifting Strategy Spurs Questions About Business Model. “What is SolarCity?” The question, from Ben Kallo, an analyst at Robert Baird & Co., came after SolarCity Corp. pulled back its installation estimate for the third time in seven months, and announced a loan program for residential solar customers. Those are significant shifts for SolarCity, which became the the biggest U.S. rooftop installer by offering leases and pursuing growth at any cost. Analysts have become frustrated trying to keep pace with the changes in strategy and revised forecasts.

Wall Street Journal:

• Wall Street Cops to Hedge Funds: Treat Investors Better. Regulators ramp up scrutiny, with investigations focusing on how thinly traded investments are valued. Regulators are ramping up a new approach in policing the $3 trillion hedge-fund industry, focusing on how fairly managers treat their investors. The tack has emerged in a series of recent investigations into the way hedge funds value their thinly traded holdings and how they respond when investors ask for their money back.
• Hillary: The Conservative Hope. The right can survive liberal presidents. The best hope for what’s left of a serious conservative movement in America is the election in November of a Democratic president, held in check by a Republican Congress. Conservatives can survive liberal administrations, especially those whose predictable failures lead to healthy restorations—think Carter, then Reagan. What isn’t survivable is a Republican president who is part Know Nothing, part Smoot-Hawley and part John Birch. The stain of a Trump administration would cripple the conservative cause for a generation.

Fox News:

• Justice Department, North Carolina file dueling lawsuits over bathroom law. (video)

CNBC:

• If junk bonds slip, a big market drop will be ahead: Technician. (video)

Zero Hedge:

• With A Historic -150% Net Short Position, Carl Icahn Is Betting On An Imminent Market Collapse.
• State Department "Unable To Find" Hillary Emails To IT Aide, Apologizes For Incompetence.
• China Trade And The Inevitability Of Systemic Reset.
• Options Traders Confidence Collapses Most Since August Crash. (graph)
• 'Public Servants' - Who Is Serving Whom?
• Morgan Stanley(MS): "Creative Destruction, Once The Backbone Of Capitalism, Is No Longer Considered".
• The Problem Of Excessive Optimism.
• St. Louis Fed Slams Draghi, Kuroda - "Negative Rates Are Taxes In Sheep's Clothing".
• The Twilight Of The Gods (aka Central Bankers).
• Biotech-Buying Spree Helps Stocks Shrug Off China Crash, Commodity Collapse, & Credit Crunch. (graph)

Business Insider:

• This infographic shows the explosion of bankruptcies in the energy industry.
• The global economy is running on fumes.
• SolarCity(SCTY) is getting whacked after earnings whiff.
• One of the biggest economic warning signs still looks frightening.

Night Trading 

• Asian equity indices are -.50% to +.25% on average.
• Asia Ex-Japan Investment Grade CDS Index 146.0 +.25 basis point. 
• Asia Pacific Sovereign CDS Index 54.50 -.5 basis point. 
• Bloomberg Emerging Markets Currency Index 71.77 -.02%. 
• S&P 500 futures +.10%. 
• NASDAQ 100 futures +.17%.

Morning Preview Links

Earnings of Note
Company/Estimate 

• (AGN)/3.02
• (CS)/-.08
• (DF)/.38
• (LL)/-.23
• (SODA)/.11
• (EA)/.42
• (FOSL)/.16
• (JAZZ)/2.32
• (DIS)/1.40

Economic Releases 
6:00 am EST

• The NFIB Small Business Optimism Index for April is estimated to rise to 93.0 versus 92.6 in March.    

10:00 am EST

• Wholesale Inventories MoM for March are estimated to rise +.1% versus a -.5% decline in February.
• Wholesale Trade Sales MoM for March are estimated to rise +.5% versus a -.2% decline in February.
• JOLTS Job Openings for March are estimated at 5450 versus 5445 in February.   

Upcoming Splits 

• None of note

Other Potential Market Movers

• The German Industrial Production report, $24B 3Y T-Note auction, weekly US retail sales reports, USDA WASDE report, Oppenheimer Industrial Growth Conference, Citi Energy/Utilities Conference, BofA Healthcare Conference, BofA Metals/Mining/Steel Conference, Wells Fargo Industrial/Construction Conference, (WTW) annual meeting, (COP) annual meeting, (TSM) April Sales report and the (HAE) analyst meeting could also impact trading today.

BOTTOM LINE: Asian indices are mostly lower, weighed down by industrial 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.

Stocks Rising Slightly into Final Hour on Central Bank Hopes, Yen Weakness, Short Covering, Biotech/Retail Sector Strength

Broad Equity Market Tone:

• Advance/Decline Line: Modestly Higher
  

• Sector Performance: Mixed
  

• Volume: Below Average

• Market Leading Stocks: Outperforming
  

Equity Investor Angst:

• Volatility(VIX) 14.36 -2.35%

• Euro/Yen Carry Return Index 129.08 +1.14%

• Emerging Markets Currency Volatility(VXY) 11.22 +2.19%

• S&P 500 Implied Correlation 53.03 -2.98%

• ISE Sentiment Index 113.0 +36.14%

• Total Put/Call 1.09 -8.4%

• NYSE Arms 1.62 +69.13% 

Credit Investor Angst:

• North American Investment Grade CDS Index 83.97 -1.05%
  

• America Energy Sector High-Yield CDS Index 998.0 +2.68%

• European Financial Sector CDS Index 98.63 -1.49%

• Western Europe Sovereign Debt CDS Index 26.01 -.65%

• Asia Pacific Sovereign Debt CDS Index 54.52 -.93%

• Emerging Market CDS Index 296.45 +1.79%
  

• iBoxx Offshore RMB China Corporate High Yield Index 127.60 +.43%

• 2-Year Swap Spread 13.75 -.5 basis point
  

• TED Spread 44.25 -.25 basis point

• 3-Month EUR/USD Cross-Currency Basis Swap -23.25 +.75 basis point
  

Economic Gauges:

• Bloomberg Emerging Markets Currency Index 71.83 -.48%
• 3-Month T-Bill Yield .21% +2.0 basis point
  

• Yield Curve 104.0 -1.0 basis point
  

• China Import Iron Ore Spot $54.99/Metric Tonne -5.66%

• Citi US Economic Surprise Index -37.10 -.4 point

• Citi Eurozone Economic Surprise Index -5.3 +5.7 points

• Citi Emerging Markets Economic Surprise Index 8.50 -1.3 points

• 10-Year TIPS Spread 1.6% -2.0 basis points
  
• 15.5% chance of Fed rate hike at July 27 meeting, 27.3% chance at September 21 meeting

Overseas Futures:

• Nikkei 225 Futures: Indicating +118 open in Japan 
• China A50 Futures: Indicating -127 open in China

• DAX Futures: Indicating +14 open in Germany

Portfolio: 

• Higher: On gains in my medical/tech/biotech/retail sector longs and emerging markets shorts
  

• Disclosed Trades: None

• Market Exposure: 50% Net Long

Today's Headlines

Bloomberg:    

• Even China's Party Mouthpiece Is Warning About Debt. (video) China’s leading Communist Party mouthpiece acknowledged the risks of a build-up of debt that is worrying the world and said the nation needed to face up to its nonperforming loans. High leverage is the “original sin” that leads to risks in the foreign-exchange market, stocks, bonds, real estate and bank credit, the People’s Daily said in a full-page interview with an unnamed “authoritative person” starting on page one and filling the second page on Monday. China should put deleveraging ahead of short-term growth and drop the “fantasy” of stimulating the economy through monetary easing, the person was cited as saying. The nation needs to be proactive in dealing with rising bad loans, rather than delaying or hiding them, the report said. “Overall, the report suggests to us that future policy easing may be more cautious and that the government may try to hasten the pace of reform,” said Zhao Yang, chief China economist at Nomura Holdings Inc. in Hong Kong. Similar commentaries have had a “large impact” in the past, the analyst said in a note. 
• Chinese Imports From Hong Kong Raise Red Flag Amid Yuan Worries. (video) China’s problem with fake trade invoices appears to be getting worse. Imports from Hong Kong surged a record 204 percent last month, data on Sunday showed, intensifying the spotlight on a channel used to get capital out of the country. While the value at $2.1 billion is relatively small, the suspected use of phantom goods to secure hard currency shows concern persisting among Chinese savers and companies that the yuan will weaken. “As long as there is an expectation of yuan depreciation against the dollar, there will be a massive outflow of funds,” said Iris Pang, Hong Kong-based senior economist for greater China at Natixis Asia Ltd. “As long as channels under the capital account are still semi-closed, trade will remain a shadow channel for fund outflows.”
• Yuan Declines Amid Bets Depreciation Concern Spurring Outflows. The yuan fell the most in two weeks amid speculation depreciation concerns are prompting investors to shift money overseas and as the dollar headed for its biggest five-day gain since November. A record surge in imports from Hong Kong last month indicates that people are moving money out because they expect the dollar to strengthen as the Federal Reserve prepares to increase interest rates, said Tommy Xie, a Singapore-based economist at Oversea-Chinese Banking Corp. China’s imports from Hong Kong jumped 204 percent in April to $2.1 billion, according to official data released Saturday. “As long as there is an expectation of yuan depreciation against the dollar, there will be a massive outflow of funds,” said Iris Pang, Hong Kong-based senior economist for greater China with Natixis Asia Ltd. “As long as channels under the capital account are still semi-closed, trade will remain a shadow channel for funds outflows.”
• JD.com(JD) Falls After Sales Volume Slows With China Growth Concerns. JD.com Inc., China’s second-biggest online retailer, plunged after it reported flagging sales growth on its marketplaces and management expressed concern about the country’s economic slowdown. The American depositary receipts dropped 9.6 percent as of 11:20 a.m. in New York, after falling as much as 10 percent, the most since its initial public offering in 2014. Trading volume of 25.3 million shares was more than double the daily average of the past three months. It was the second-worst performer on the Bloomberg China-U.S. Equity Index, which slid 3.1 percent. At $22.78, JD.com’s shares are at their lowest since December 2014.
• Brazil Markets Thrown Into Disarray as Impeachment Vote Annulled. (video) Brazilian markets were thrown into turmoil after the effort to impeach President Dilma Rousseff appeared to hit a roadblock, spurring concern that some of the world’s biggest stock and currency rallies would be undone. The Ibovespa stock benchmark plummeted as much as 3.5 percent and the real weakened as much as 4.6 percent, the most since September 2011, before paring some of those losses. The selloff was sparked after the interim chief of Brazil’s lower house called for a new vote on the impeachment, accepting an argument by the attorney general that the ballot last month had procedural irregularities.
• European Stocks Pare Rebound as Oil Hurts Central Bank Optimism. (video) European stocks pared a rebound from their worst week since February as sliding oil prices subdued investor optimism over continued central bank support. Vestas Wind Systems A/S climbed 3 percent after Barclays Plc said new U.S. tax plans would fuel a surge in orders. Anglo American Plc and ArcelorMittal tumbled more than 12 percent, dragging mining stocks to the worst performance of the 19 industry groups on the Stoxx Europe 600 Index, as base-metal prices slid after disappointing Chinese trade data. Tullow Oil Plc lost 5.4 percent, leading energy companies lower, as crude fell amid waning concern over output disruptions from wildfires in Canada. The Stoxx 600 advanced 0.5 percent to 333.22 at the close of trading, trimming earlier gains of as much as 1.4 percent.
• Iron Ore in Free Fall as Port Holdings Expand, Trade Frenzy Ebbs. (video) Iron ore’s in free fall. Prices plummeted as port stockpiles in China expanded to the highest level in more than a year following moves by local authorities to quell frenzied speculation in raw-material futures. Ore with 62 percent content delivered to Qingdao tumbled 5.7 percent to $54.99 a dry metric ton, according to Metal Bulletin Ltd. Prices have slumped 22 percent since peaking at more than $70 on April 21, and Monday’s drop follows a 12 percent loss last week. Miners’ shares fell, with Rio Tinto Group losing as much as much 8 percent in London, Rio de Janeiro-based Vale SA retreating 7.8 percent and Cliffs Natural Resources Inc. tumbling as much as 18 percent.
• Miami Suddenly Has a Glut of Plush Hotel Suites. Hotels in sun-drenched Miami are getting burned by a pullback in Brazilian travel and a building boom that has added thousands of rooms to the market. Nightly room costs are dropping. Greater Miami’s revenue per available room -- a key measure of rates and occupancies known as revpar -- has fallen each month this year, and in April was the worst of the top 25 U.S. markets, according to STR, a data provider for the lodging industry. Marriott International Inc., set to become the world’s largest hotel operator, said on its first-quarter earnings call that Miami is among its weakest U.S. areas.
• Trump Backtracks on Proposal to Renegotiate U.S. Debt. Presumptive Republican presidential nominee Donald Trump backtracked on a statement last week that he would renegotiate U.S. debt if the economy sours. Trump said on CNN on Monday that he intended only to signal he would use advantageous market conditions to save money by repurchasing debt on favorable terms, and refinancing with longer-term bonds. “I said if we can buy back government debt at a discount -- in other words if interest rates go up and we can buy bonds back at a discount -- if we are liquid enough as a country, we should do that,” he said. He called "ridiculous" suggestions that he would favor a default or forced restructuring that would require creditors to take a loss. “You never have to default because you print the money,” he added. “I could see renegotiations where we borrow at long term at very low rates,” he said on CNBC on May 5.
• Clinton’s Bid for Democratic Unity a Tough Sell Among Some Sanders Supporters. Careful courting of ideological, demographic, and geographic subgroups is key to swinging voters to her side.

Wall Street Journal:

• Official Analysis Suggests Tough Talks Over Greek Debt Relief. Extraordinary meeting in Brussels is part of attempt to break deadlock over bailout.

Fox News:

• Ryan opens door to stepping down as convention chair, if Trump asks. (video) House Speaker Paul Ryan opened the door Monday to stepping down as Republican convention chairman if asked by presumptive presidential nominee Donald Trump, whom Ryan has declined to endorse. Ryan first made the comments during a meeting with Milwaukee Journal Sentinel reporters.

Zero Hedge:

• Facebook(FB) Workers Admit They "Routinely" Suppressed Conservative News.
• Trump On Debt Renegotiation: "You Never Have To Default Because You Print The Money".
• The Bank Of Japan Begins Selling ¥1.3 Trillion In Stocks Acquired Over The Years.
• Tesla(TSLA) Enters Bear Market (Again) - Drops 23% In A Month. (graph)
• "Capitalism Has A Crisis" - Deutsche Sees No Light At The End Of The Tunnel "Until There Is A Recession".
• The Short Squeeze Is Over (For Now). (graph)
• Iron Ore, Rebar Crash Into Bear Market, Baltic Dry Dead-Cat-Bounce Dies. (graph)
• These Are The 8 Triggers For A New Financial Crisis.
• Who's Telling The Truth On American Jobs - The Fed Or The Government? (graph)
• "Rigged... Not A Real Market" - What Market Pros (And Jim Cramer) Think About The Market.
• WTI Crude Tumbles To $43 Handle After Large Cushing Build. (graph)
• BofA Says It's Time To Sell WTI Crude With A Price Target As Low As $35; Here's Why.

Business Insider:

• It turns out that a booming Wall Street business is based on guesstimates, and that could be a problem.
• 'The company is at risk of getting into a death spiral': Bill Ackman's emails reveal a wild relationship with Valeant(VRX).
• Ominous photos of Russia's most militaristic Victory Day parade in years. (pic)

Express: 

• As EU celebrates ‘Europe Day’ FIFTH consecutive poll puts Britain on course for Brexit.

Bear Radar

Style Underperformer:

• Large-Cap Value -.3%

Sector Underperformers:

• 1) Gold & Silver -6.0% 2) Steel -5.6% 3) Oil Service -4.1%

Stocks Falling on Unusual Volume:

• KWEB, QIHU, YY, FGL, VNET, JD, GTN, MOMO, AWI, TX, YELP, SHOP, JOY, SINA, BIDU, CPA, SBAC, VET, ZPIN, WB, TV, PTR, SCHN, LIVN and VRX

Stocks With Unusual Put Option Activity:

• 1) LC 2) XME 3) BK 4) JOY 5) NUE

Stocks With Most Negative News Mentions:

• 1) ATW 2) CALM 3) PBR 4) ANDE 5) LC

Charts:

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

Bull Radar

Style Outperformer: 

• Small-Cap Growth +1.0%

Sector Outperformers:

• 1) Biotech +2.6% 2) Retail +1.9% 3) Drugs +1.5% 

Stocks Rising on Unusual Volume: 

• KKD, W, CLNY, HCP, HZNP, TEVA, DEPO, PJT, NSAM and MUSA

Stocks With Unusual Call Option Activity: 

• 1) TSN 2) AGN 3) ASNA 4) HLF 5) CPN

Stocks With Most Positive News Mentions: 

• 1) DEPO 2) PETS 3) ARIA 4) GLNG 5) CWST

Charts:

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

Morning Market Internals

NYSE Composite Index:

• Volume Running -.1% Below 100-Day Average
• 7 Sectors Rising, 3 Sectors Declining
• 43.8% of Issues Advancing, 53.3% Declining
• 177 New 52-Week Highs, 18 New Lows
• 52.7% of Issues Above 200-day Moving Average
• Average 14-Day RSI 41.9%
• Vix 15.1 +2.4%
• Total Put/Call 1.28 +7.6%
• TRIN/Arms 1.78 +86.3%