Wednesday Watch

Evening Headlines
Bloomberg:

• Templeton Fund Embracing Debt as Rally Makes India Stocks Pricey. Franklin Templeton Investments may increase exposure to bonds in its Indian fund if the highest stock valuations in 15 months aren’t backed by growth in company profits. “The biggest risk to Indian equities is if earnings growth remains below par,” Anand Radhakrishnan, chief investment officer at Franklin Templeton India, said in an interview. “We have shifted money from equity to bonds in the past six months in our dynamically-managed fund. We can go all the way to 90:10” in favor of bonds if earnings growth doesn’t pick up, he said. Indian stocks and bonds have rallied as Asia’s third-largest economy benefits from the gush of money flowing into emerging markets amid a renewed wave of global policy easing. Valuations for India’s key equity gauge are now at levels that have presaged losses in the past, while the appeal of local debt has been burnished by the prospect of interest-rate cuts.
• Seoul Says North Korea Has Fired a Ballistic Missile Into the Sea. North Korea has fired another ballistic missile into the sea, South Korea's military said Wednesday. The Joint Chiefs of Staff said in a statement that the missile was launched toward the waters off the North's east coast. North Korea routinely conducts missile and other weapons tests, but Wednesday's launch came after North Korea made angry threats against a U.S. plan to deploy an advanced missile defense system in South Korea by the end of next year.
• Currency Traders Ensnared by Volatility See 2016 Losses Deepen. Money managers trading in the $5.3-trillion-a-day currency market can’t catch a break. The investors have endured a five-month slump, their longest losing streak in foreign exchange since 2013. What was shaping up as the first monthly gain since February turned into yet another bust, after a rough stretch last week left the Citi Parker Global Currency Manager Index down 0.9 percent in July and on pace for a second straight annual drop. 
• Asian Stocks Drop After Yen Jumps on Abe Stimulus Disappointment. Asian stocks fell for a second day, following declines in global equities, as Japanese shares led losses after the yen gained on disappointment over Prime Minister Shinzo Abe’s stimulus steps. The MSCI Asia Pacific Index dropped 0.9 percent to 135.71 as of 9:04 a.m. in Tokyo. The Topix index slid 1.8 percent after Japan’s currency climbed 1.5 percent against the dollar Tuesday following the government’s announcement of 4.6 trillion yen ($45 billion) in extra spending for the current fiscal year. 

Wall Street Journal:

• Anxiety Weighs on U.S. Corporate Earnings. Profits are expected to fall for fourth straight quarter—down 2.6% from a year earlier. America’s biggest companies logged a fourth straight quarter of shrinking profits and tepid sales, as weakness from energy companies and lower business investment more than offset U.S. consumer strength.
• Regulators Ask Big Banks to Give More Details About Trading Activity. Push could give investors more details about a major and volatile source of Wall Street revenue. Regulators are asking big banks to provide investors with more-detailed disclosures about their trading businesses, a push that could peel back the curtain on a huge and volatile source of Wall Street revenue, according to people familiar with the matter.

Fox News:

• Heads roll at DNC: 3 top officials out after email hack. (video) The Democratic National Committee’s CEO and two other top officials have resigned in the wake of the leaked email controversy that marred the start of the party’s convention last week – in the latest shake-up at party headquarters. According to a DNC statement, CEO Amy Dacey; chief finance officer Brad Marshall; and communications director Luis Miranda left their jobs on Tuesday.

CNBC:

• Fed's Lockhart says he isn't ruling out a rate hike before year-end. (video)
• Investors to central banks: We aren't listening anymore. (video) "Under no circumstances should you listen to the Fed. Cover your ears and maybe hold your nose," says a money manager.
• CVS Health to replace higher-cost drugs on covered medication list for 2017.

Zero Hedge:

• Something Strange Emerges When Looking At A Congresswoman's Daytrading Records.
• Hidden In Today's Revised Personal Income Data, A Troubling Trend For The US Consumer. (graph)
• D-Day For Australia's Real Estate Bubble?
• 65 Million Americans Would Like To Work But Can't Risk Losing Their Entitlements.
• July U.S. Auto Sales - The Good, The Bad, & The Downright Ugly. (graph)
• "It Takes A Village To Maintain A Dangerous Financial System".
• White House Caught Secretly Airlifting $1.7 Billion US Taxpayer Cash To Tehran To Ensure Iran Nuclear Accord Success.
• There Is No Asset Bubble? (graph)
• Global Trade Is Not Growing Slowly... It's Not Growing At All! (graph)
• Welfare Is The New Work. (graph)
• Fitch Sees $3.8 Trillion Of Losses For "Investment-Grade" Sovereign Bond Investors. (graph)
• Oil Bounces On Unexpected Cushing Inventory Draw. (graph)
• Stocks Slump Most Since Brexit Amid Creditnado, Oilmageddon, Yenplosion. (graph)

Business Insider:

• A huge part of the economy is hitting a wall.
• Donald Trump declines to endorse Paul Ryan: 'I'm just not quite there yet'.
• San Francisco housing prices are now above previous bubble levels.
• Millennials are ringing the register on their homes.
• Sturm, Ruger & Co.(RGR) reports a 19% jump in sales and greater demand for guns.
• IBM's(IBM) day of reckoning is near.
• Rio's architecture and infrastructure are collapsing days before the Olympics.

NBC News: 

• New Counterterrorism 'Heat Map' Shows ISIS Branches Spreading Worldwide. (video) As the U.S. launched more airstrikes Tuesday against ISIS targets in Libya — representing an expansion of the U.S. military operations beyond Iraq and Syria — NBC News has exclusively obtained a map showing the global expansion of the terror group. The map is part of a classified briefing document received by the White House dated "August 2016" and prepared by the National Counterterrorism Center. It shows a stunning three-fold increase in the number of places around the globe where ISIS is operating. U.S. State Department documents indicated that in 2014, when the U.S. military began its campaign to destroy the extremists, there were only seven nations in which the fledgling state was operating.

Night Trading 

• Asian equity indices are -1.25% to -.25% on average.
• Asia Ex-Japan Investment Grade CDS Index 121.25 +2.5 basis points.
• Asia Pacific Sovereign CDS Index 48.0 +.25 basis point.
• Bloomberg Emerging Markets Currency Index 72.36 -.07%. 
• S&P 500 futures -.02%. 
• NASDAQ 100 futures -.02%.

Morning Preview Links

Earnings of Note
Company/Estimate 

• (DDD)/.06
• (CLX)/1.28
• (DLPH)/1.55
• (D)/.71
• (HUM)/2.28
• (ICE)/3.37
• (OXY)/-.19
• (ODP)/.06
• (TWX)/1.16
• (ZTS)/.44
• (AGU)/4.08
• (CF)/.67
• (FSLR)/.55
• (HLF)/1.21
• (JACK)/.87
• (MRO)/-.25
• (MET)/1.35
• (PRU)/2.50
• (TSLA)/-.65
• (TSO)/1.77
• (RIG)/-.02

Economic Releases 
8:15 am EST

• ADP Employment Change for July is estimated to fall to 170K versus 172K in June. 

9:45 am EST

• Final US Markit Services PMI for July are estimated to rise to 51.0 versus a prior estimate of 50.9.

10:00 am EST

• ISM Non-Manufacturing Composite for July is estimated to fall to 55.9 versus 56.5 in June.
  

Upcoming Splits 

• (BF/B) 2-for-1

Other Potential Market Movers

• The Eurozone Services PMI report, Australia Retail Sales report and the weekly MBA Mortgage Applications report could also impact trading today.

BOTTOM LINE:  Asian indices are lower, weighed down by technology 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 25% net long heading into the day.

Stocks Falling into Final Hour on European Bank Worries, Yen Strength, Oil Decline, Transport/Retail Sector Weakness

Broad Equity Market Tone:

• Advance/Decline Line: Substantially Lower
  

• Sector Performance: Almost Every Sector Declining
  

• Volume: Around Average

• Market Leading Stocks: Underperforming
  

Equity Investor Angst:

• Volatility(VIX) 13.68 +9.97%

• Euro/Yen Carry Return Index 118.31 -.93%

• Emerging Markets Currency Volatility(VXY) 9.46 -.32%

• S&P 500 Implied Correlation 50.24 +7.23%

• ISE Sentiment Index 77.0 +6.94%
  

• Total Put/Call 1.17 -13.97%

• NYSE Arms .86 -42.90% 

Credit Investor Angst:

• North American Investment Grade CDS Index 76.99 +2.28%
  

• America Energy Sector High-Yield CDS Index 795.0 +2.4%

• European Financial Sector CDS Index 97.75 +6.52%

• Western Europe Sovereign Debt CDS Index 23.93 -4.93%

• Asia Pacific Sovereign Debt CDS Index 48.30 +1.24%

• Emerging Market CDS Index 264.82 +.50%
  

• iBoxx Offshore RMB China Corporate High Yield Index 131.37 +.02%

• 2-Year Swap Spread 24.5 +2.0 basis points
  

• TED Spread 49.0 -2.0 basis points

• 3-Month EUR/USD Cross-Currency Basis Swap -47.5 -.75 basis point
  

Economic Gauges:

• Bloomberg Emerging Markets Currency Index 72.41 +.06%
• 3-Month T-Bill Yield .27% +2.0 basis points

• Yield Curve 87.0 +5.0 basis points

• China Import Iron Ore Spot $61.94/Metric Tonne -.53%

• Citi US Economic Surprise Index 15.80 +2.0 points

• Citi Eurozone Economic Surprise Index 29.2 unch.

• Citi Emerging Markets Economic Surprise Index -2.0 -.3 point

• 10-Year TIPS Spread 1.44% -3.0 basis points
• 21.7% chance of Fed rate hike at Nov. 2 meeting, 37.3% chance at Dec. 14 meeting

Overseas Futures:

• Nikkei 225 Futures: Indicating -311 open in Japan 
• China A50 Futures: Indicating -69 open in China

• DAX Futures: Indicating -5 open in Germany

Portfolio: 

• Slightly Higher: On gains in my biotech sector longs, index hedges and emerging markets shorts
  

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

• Market Exposure: Moved to 25% Net Long

Today's Headlines

Bloomberg:

• Abenomics Return to Fiscal Lever Shows Failure to Hit High Goals. (video) Prime Minister Shinzo Abe’s return to the fiscal-stimulus lever that he first pulled three years ago showed how far he remains from hitting ambitious targets for reviving Japan’s economy. The cabinet Tuesday approved a spending-and-lending package totaling 28 trillion yen ($275 billion), including 4.6 trillion yen in outlays this year and just under 3 trillion yen further out. The administration completed its plan days after the central bank adopted a modest boost to its own stimulus efforts. Behind the government’s move: public concern that the Abenomics program isn’t working. While voters were happy to give Abe a resounding win in an election for the upper house of parliament last month, polls have shown at least half of respondents say a policy rethink is in order. Consumers, who will get some of the largesse in the fiscal package set to be approved by parliament by October, have yet to recover from the wallop of a sales-tax hike Abe allowed to go through in 2014. That’s contributed to at least three years of growth below 1 percent -- a far cry from Abe’s 2 percent goal.
• ECB Bond-Buying Pace Slows for Portugal, Spain and Italy: Chart.
• Commerzbank Scraps Full-Year Target, Sees Decline in Profit. (video) Commerzbank AG dropped the most in more than a month after Germany’s second-largest lender forecast a decline in full-year profit, adding pressure on Chief Executive Officer Martin Zielke to lower costs further. Both operating profit and net income will be lower this year, the Frankfurt-based lender said in a statement on Tuesday. In 2015, Commerzbank posted operating profit of 1.9 billion euros ($2.1 billion) and net income of 1.06 billion euros. In the second quarter, the bank reported a 32 percent drop in net income, in line with a preliminary release on July 26. Record-low interest rates and deposit charges, designed to spur economic growth across the euro area, have eroded bank earnings as the cost of holding cash for their clients rises.
• Infineon Drops After Earnings Disappoint on Smartphone Miss. Infineon Technologies AG fell as much as 5.6 percent in Frankfurt trading after reporting third-quarter sales and earnings that missed analysts’ estimates because of weakness at its smartphone business. Sales were 1.63 billion euros ($1.82 billion), and the segment result, a measure of profitability, totaled 254 million euros, according to a statement Tuesday. Analysts had forecast sales of 1.65 billion euros and a segment result of 265 million euros. Infineon’s power-management and multimarket business, which includes the major part of the smartphone activities, missed profitability expectations “significantly,” Baader Bank AG analyst Guenther Hollfelder said in an e-mailed note. That was a surprise after stronger results from chip peers and customers Apple Inc. and Samsung Electronics Co. The shares fell 3.8 percent to 14.14 euros at 12:22 p.m. local time.
• Europe’s Tumbling Lenders Lose Almost Half Their Value in a Year. On Tuesday, the second day of trading since stress tests showed almost all euro-area lenders would have sufficient capital to cope with a crisis, Germany’s Commerzbank AG and Deutsche Bank AG tumbled to fresh record lows, dragging a Stoxx Europe 600 Index gauge of their peers towards its biggest two-day loss in almost four weeks. “I don’t want to say it, but it’s Armageddon for the banks,” if the index drops any further, said Joe Tracy, head of continental European equities at Svenska Handelsbanken AB in Stockholm. Analysts forecast bank earnings will drop 18 percent this year, behind only energy and mining companies as the Stoxx 600’s biggest-contracting industry group.
• Global Stocks Drop, Yen Strengthens as Growth Worries Resurface. (video) The MSCI All-Country World Index fell 0.8 percent, while the Stoxx Europe 600 Index lost 1.3 percent.
• Junk Bonds Aren't Ignoring the Fall in Oil Prices. (graph) High-yield debt sold by energy companies is tracking the fall in crude.
• Trump Says He’ll Spend More Than $500 Billion on Infrastructure. The proposal would amount to a massive new government program. Donald Trump on Tuesday proposed a plan to rebuild U.S. infrastructure that costs “at least double” the amount that Hillary Clinton has floated, in what would amount to a massive new government program.Asked on Fox Business Network how much he'd spend, the Republican presidential nominee said, “Well, I would say at least double her numbers, and you're going to really need more than that. We have bridges that are falling down. I don't know if you've seen the warning charts, but we have many, many bridges that are in danger of falling.” Trump was vague when asked how he'd pay for his much larger plan. “We'll get a fund. We'll make a phenomenal deal with the low interest rates,” he said. Who would provide the money? “People, investors. People would put money into the fund. The citizens would put money into the fund,” he said, adding that he'd use “infrastructure bonds from the country, from the United States.”
• Trump Urges Exit From Stock Market Boosted by ‘Artificially Low’ Rates. Donald Trump on Tuesday said interest rates set by the Federal Reserve are inflating the stock market and recommended 401(k)-holders to get out of equities, just like he did. “I did invest and I got out, and it was actually very good timing,” the Republican presidential nominee said in a phone interview with Fox Business. “But I’ve never been a big investor in the stock market.” “Interest rates are artificially low,” Trump said. “The only reason the stock market is where it is is because you get free money.”
• Aetna’s(AET) Obamacare Reversal Is Latest Blow to U.S. Health Law. Aetna Inc., facing more than $300 million in losses from Affordable Care Act health plans this year, may exit Obamacare markets in some states as challenges to the health-care overhaul pile up. While the health insurer has yet to leave any states in which it now sells Obamacare programs, Chief Executive Officer Mark Bertolini said Aetna is evaluating its participation by market and will start making decisions in coming weeks. The company, which covers 838,000 people through Obamacare, is halting a planned expansion of those offerings in new states for next year. “We’ve got to be able to cover the costs associated with providing the care,” Bertolini said in an interview.
• Macy’s(M), Kohl’s(KSS) Fall on Concern About Slow Department-Store Sales. Shares of Macy’s Inc., Nordstrom Inc. and Kohl’s Corp. fell on Tuesday after reports about weak summer sales reignited fears of a department-store slump. Macy’s, the biggest department-store company, suffered a sales downturn in July, following improving trends in late May and June, Cleveland Research said in a note. The slowdown has forced the retailer to be more aggressive with markdowns, the firm said. Nordstrom, meanwhile, is getting less of a bump from its famous Anniversary sale, according to Detwiler Fenton.
• U.S. Airlines Tumble After Delta Issues Weak July Revenue Report. U.S. airlines marked the second-sharpest decline on the Standard & Poor’s 500 Index, following a weak revenue report from Delta Air Lines Inc. Passenger revenue for each seat flown a mile fell 7 percent in July from a year earlier, the country’s second-largest carrier by traffic reported Tuesday. The Atlanta-based airline blamed bad bets on currency exchange, excess seat supply on trans-Atlantic flights and reduced prices for tickets booked shortly before travel.

Wall Street Journal:

• Biogen(BIIB) Draws Takeover Interest from Rival Drugmakers. Merck(MRK), Allergan(AGN) each have sounded out Biogen on the possibility of a huge deal.
• July Auto Sales Stoke Fears of Market Plateau. Ford(F) and GM(GM) sales fall as Chrysler ekes out a slight gain for the month

Recode: 

• Uber’s surrender in China puts more pressure on big tech companies to thrive in India. Why Apple(AAPL), Google(GOOG) and Facebook(FB) might head south in Asia.

Fox News:

• Obama slams Trump as 'unfit to serve'; GOP nominee ramps up Clinton criticism. (video)

CNBC:

• 10% drop in equities 'quite possible' in coming months: Goldman's Oppenheimer. (video)
• Reasons to be optimistic on stocks are fading, says portfolio manager. (video)

Zero Hedge:

• A "1 In 10,000 Year Event": JPM Head Quant Explains Why The S&P Refuses To Sell Off. (graph)
• What Could Possibly Go Wrong Here? (graph)
• Why Seven Million Student Loan Defaulters Are In A Standoff With Uncle Sam.
• ETF Inflows Soar To $43 Billion In July, Most Since 2014. (graph)
• As Oil Crashes Under $40, How Much Further Can It Drop. (graph)
• European Bank Bloodbath Destroys Stress Test Credibility. (graph)
• Bazooka'd - USDJPY Tumbles To 100 Handle. (graph)
• US Personal Income Growth Slumps To Lowest Since 2013, Spending Rises. (graph)
• The Wall Street Hockey Stick Fades Again - S&P 500 EPS Drops Another 8% In The Past Month. (graph)
• JGB Carnage Sparks Contagion Across Global Bond Market. (graph)
• Why Goldman Is Shocked By What Bill Dudley Said: "This Can't Be In The Best Interest Of The US".
• Why Japan's "Massive" ¥28 Trillion Fiscal Stimulus Plan Was A Disappointment.

Business Insider:

• This is why Uber failed in China.
• The No. 2 figure at the DNC just resigned.
• Cruise ship stocks are getting whacked after Zika travel warnings.

NY Times:

• As ISIS Posts in Portuguese, U.S. and Brazil Bolster Olympics Security. Worried about possible terrorist attacks at theOlympics in Rio de Janeiro, Brazil’s government is working closely with American law enforcement and intelligence services to identify threats and thwart potential disasters at the Games.

The Telegraph:

• Uh-oh, it’s August and these are the five biggest risks for markets.

Bear Radar

Style Underperformer:

• Small-Cap Growth -1.7%

Sector Underperformers:

• 1) Airlines -4.1% 2) Oil Tankers -4.1% 3) Hospitals -2.8%

Stocks Falling on Unusual Volume:

• ANGO, GLOP, TXRH, RAIL, BGSF, IDTI, GKOS, SABR, GNRC, RSO, FEX, ZEUS, WPXP, DISH, PHI, NAP, FTRPR, IONS, CUK, VGLT, IQNT, HW, MCRN, SHOO, EPC, THRM, CONE, EXPE, BWA, LDOS, KR, F, EMR, THC, PLAY, EPC, GNRC, DISH, RCL, NCLH, GPRE, RDC, SABR, ACCO and ENSG

Stocks With Unusual Put Option Activity:

• 1) EWJ 2) COH 3) JWN 4) XRT 5) SMH

Stocks With Most Negative News Mentions:

• 1) KERX 2) CHK 3) KR 4) CBT 5) BIG

Charts:

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

Bull Radar

Style Outperformer:

• Large-Cap Growth -1.1%

Sector Outperformers:

• 1) Gold & Silver +.5% 2) Tobacco -.3% 3) Utilities -.6%

Stocks Rising on Unusual Volume:

• CARB, SODA, VECO, ADXS, CGNX, NLS, TREX, QUAD, HRTX, IIVI, MNK, IDXX, WPZ, DISCA, WSTC, CEMP, DNB and CVS

Stocks With Unusual Call Option Activity:

• 1) DLTR 2) SYF 3) CIA 4) CVS 5) NVAX

Stocks With Most Positive News Mentions:

• 1) NEM 2) FORM 3) CTRV 4) QUAD 5) THC

Charts:

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

Morning Market Internals

NYSE Composite Index:

• Volume Running +8.4% Below 100-Day Average
• 0 Sectors Rising, 10 Sectors Declining
• 19.6% of Issues Advancing, 78.0% Declining
• 79 New 52-Week Highs, 13 New Lows
• 59.4% of Issues Above 200-day Moving Average
• Average 14-Day RSI 43.1%
• Vix 13.9 +12.0%
• Total Put/Call 1.25 -8.1%
• TRIN/Arms .96 -35.9%