Morning Market Internals

NYSE Composite Index:

• Volume Running -15.7% Below 100-Day Average
• 7 Sectors Rising, 3 Sectors Declining
• 77.5% of Issues Advancing, 19.8% Declining
• 184 New 52-Week Highs, 4 New Lows
• 63.9% of Issues Above 200-day Moving Average
• Average 14-Day RSI 42.9%
• Vix 11.8 -3.9%
• Total Put/Call .86 -6.5%
• TRIN/Arms .7 -60.2%

Tuesday Watch

Evening Headlines

Bloomberg:

• China's Best Bank Called 'Mirage' of Shadow Lending. Case of Bank of Tangshan highlights opaque financial risks across the nation. The bank is the most prominent example of the off-loan-book wizardry that’s turbo-charging some of China’s small and mid-sized banks, creating opaque risks that could lead to failures, bailouts or liquidity shocks that jolt the nation and global markets in the years ahead.
• The Risks From China's Shadow Banking Industry. (video)
• Merkel Says Brexit Is U.K.’s Loss While Pledging Results for EU. German Chancellor Angela Merkel said the European Union needs to show it can prosper without the U.K. as she and the leaders of France and Italy sought to chart a way forward for Europe. “We respect Britain’s decision but naturally also want to make it clear that the other 27 are working for a prosperous, safe Europe,” said Merkel, standing alongside President Francois Hollande and Prime Minister Matteo Renzi on an Italian aircraft carrier to show resolve in mastering the continent’s crises. “We need results,” she said.
• Asia Stocks Swing as Investors Await Yellen, Energy Shares Fall. Asian stocks swung between gains and losses as energy producers declined after crude oil futures slumped and investors weighed the chances of higher U.S. interest rates this year. The MSCI Asia Pacific Index rose less than 0.1 percent to 139.07 as of 9:11 a.m. in Tokyo, after falling as much as 0.1 percent. Investors are awaiting a speech by Federal Reserve Chair Janet Yellen later this week at Jackson Hole, Wyoming, following hawkish comments from Fed Vice Chairman Stanley Fischer and New York Fed President William Dudley. The odds the Fed will raise borrowing costs in December climbed to 51 percent, while traders are betting there’s a 24 percent chance of tightening next month, data compiled by Bloomberg show.
• Oil Faces Dark Clouds as China Chases Blue Skies for G-20 Summit. China is throwing the world’s leaders a party, and oil bulls may be hit with the hangover. Authorities in the Asian nation have ordered hundreds of factories to curb activity ahead of the Group of 20 summit in Hangzhou in early September, in a bid to ensure blue skies when the red carpet is rolled out. The curtailments, along with flooding earlier this summer, may cut petroleum demand in the world’s second-biggest oil consumer by 250,000 barrels a day in the third quarter, according to industry consultant Energy Aspects Ltd.

Fox News:

• Clinton Foundation executive left 148 phone messages for Hillary Clinton's top aide. (video) 

CNBC:

• Monetary policy has nationalized the Japan stock market: CLSA.
• Zika could spread to other Gulf Coast states, health official warns. (video)

Zero Hedge: 

• Meet The Hedge Fund Puppetmaster Behind The US Presidential Election.
• Jeffrey Miller: "I Don’t Know How Dumb Things Will Get Before Central Banks Finally Stop".
• Trump Demands Special Prosecutor To Investigate Clinton's "Email Crimes". (video)
• "Selling Puts" - Latest Pension Strategy Is Truly 2006 All Over Again.
• Bill Gates Net Worth Tops $90 Billion For First Time: 0.5% Of US GDP. (graph)
• As Predicted, Obamacare Is Absolutely Killing The Middle Class.
• Merkel Accused Of "Fearmongering" After Telling Germans To Stockpile Food "In Case Of Catastrophe".
• One Trader's Advice If The "Ultimate Breakdown Is Likely To Be Sudden, Intense And Large".
• Jim Grant: "This Will Turn Out To Be Very Bad For Many People".
• Congress Demand An Explanation For Epipen Price Increases; Mylan Slides.
• Fed Admits Another $4 Trillion In QE Will Be Needed To Offset An "Economic Shock".
• "Orchestrated Chaos" - Stocks Rollercoaster Despite Oil, Dollar, Bond Yield Tumble. (graph)

Business Insider:

• The oil rally isn't here to stay.

Telegraph:

• China caught in 'dead money' trap as central bank pleads for fiscal stimulus.

Night Trading 

• Asian equity indices are -.25% to +.25% on average.
• Asia Ex-Japan Investment Grade CDS Index 112.0 +.5 basis point.
• Asia Pacific Sovereign CDS Index 42.50 -.5 basis point.
• Bloomberg Emerging Markets Currency Index 73.38 +.03%. 
• S&P 500 futures +.01%. 
• NASDAQ 100 futures +.04%.

Morning Preview Links

Earnings of Note
Company/Estimate 

• (BBY)/.43
• (SJM)/1.73
• (TOL)/.61
• (TSL)/.32
• (INTU)/-.02 

Economic Releases  
9:45 am

• Preliminary Markit US Manufacturing PMI for August is estimated to fall to 52.6 versus 52.9 in July.

10:00 am EST

• Richmond Fed Manufacturing Index for August is estimated to fall to 6.0 versus 10.0 in July.
• New Home Sales for July are estimated to fall to 580K versus 592K in June.

Upcoming Splits 

• None of note

Other Potential Market Movers

• The Japan Manufacturing PMI report could also impact trading today.

BOTTOM LINE:  Asian indices are mostly lower, weighed down by technology and industrial 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 Slightly Lower into Final Hour on Diminished Central Bank Hopes, Global Growth Fears, Oil Decline, Metals & Mining/Energy Sector Weakness

Broad Equity Market Tone:

• Advance/Decline Line: About Even
  

• Sector Performance: Mixed
  

• Volume: Light

• Market Leading Stocks: Performing In Line
  

Equity Investor Angst:

• Volatility(VIX) 12.44 +9.61%

• Euro/Yen Carry Return Index 118.59 +.07%

• Emerging Markets Currency Volatility(VXY) 10.09 +1.51%

• S&P 500 Implied Correlation 44.40 +4.39%

• ISE Sentiment Index 100.0 +1.01%
  

• Total Put/Call .95 +14.46%

• NYSE Arms 1.79 +90.34% 

Credit Investor Angst:

• North American Investment Grade CDS Index 71.59 +1.35%
  

• America Energy Sector High-Yield CDS Index 683.0 +.07%

• European Financial Sector CDS Index 93.21 +.38%

• Western Europe Sovereign Debt CDS Index 25.14 +1.60%

• Asia Pacific Sovereign Debt CDS Index 42.54 -1.32%

• Emerging Market CDS Index 241.87 +.30%
  

• iBoxx Offshore RMB China Corporate High Yield Index 131.65 +.19%

• 2-Year Swap Spread 25.5 -2.25 basis points
  

• TED Spread 52.25 +.5 basis point

• 3-Month EUR/USD Cross-Currency Basis Swap -36.5 +.25 basis point
  

Economic Gauges:

• Bloomberg Emerging Markets Currency Index 73.36 -.43%
• 3-Month T-Bill Yield .29% -1.0 basis point 

• Yield Curve 81.0 -2.0 basis points
  

• China Import Iron Ore Spot $61.23/Metric Tonne +.46%

• Citi US Economic Surprise Index 1.9 -2.7 points

• Citi Eurozone Economic Surprise Index 27.4 -.2 point

• Citi Emerging Markets Economic Surprise Index -1.2 +.6 point

• 10-Year TIPS Spread 1.48% -2.0 basis points
• 30.8% chance of Fed rate hike at Nov. 2 meeting, 51.2% chance at Dec. 14 meeting

Overseas Futures:

• Nikkei 225 Futures: Indicating -58 open in Japan 
• China A50 Futures: Indicating n/a open in China

• DAX Futures: Indicating +7 open in Germany

Portfolio: 

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

• Disclosed Trades: None

• Market Exposure: 50% Net Long

Today's Headlines

Bloomberg:

• Opaque Assets at Europe Investment Banks Fuel Capital Doubts. Eight years after the financial crisis, Europe’s biggest investment banks are holding illiquid assets amounting to more than half their combined shareholders’ equity, underlining concerns about capital. Deutsche Bank AG, Credit Suisse Group AG and Barclays Plc say their hardest-to-value securities -- known as Level 3 assets -- were worth $102.5 billion at the end of June. These include investments that gained notoriety in the financial crisis, from bespoke credit derivatives to mortgage-backed bonds. “The scale of Level 3 assets is material in terms of the banks’ capital levels,” said Simon Chester, who helps manage $39 billion of fixed-income securities at American Century Investment Management in London. “If there were to be a significant mistake or miscalculation where they have got the valuations wrong, that could be problematic.”
• China Power Glut Seen Lingering Five Years on Slower Growth. China’s electricity overcapacity will continue for another five years as demand growth slows and new projects come online, according to IHS Market Inc. China started showing signs of “bad overcapacity” in 2013 and 2014, and hit a high in 2015 due to new plants coming online, according to Xizhou Zhou, head of China energy research at IHS Markit. The overcapacity will likely remain as it would be too difficult to reverse construction plans for new power plants, he said in a phone interview on Friday. “That doesn’t bode well for anybody,” including power generators or fuel suppliers, Zhou said. “Power demand is still growing, but a lot of the plants are going to be much less utilized than what they had planned for.” 
• China Stocks Fall Most in Three Weeks on Bets Yuan Will Weaken. (video) Chinese stocks dropped the most in three weeks, led by industrial companies and small-cap shares, amid concern that a weaker yuan will limit prospects for further stimulus and state-backed funds will sell shares. The Shanghai Composite Index declined 0.8 percent at the close. Beijing Originwater Technology Co. posted its biggest loss since February. Hong Kong’s Hang Seng Index rose 0.3 percent, reversing a loss of as much as 0.6 percent. The ChiNext gauge of small-cap companies slid the most since July 27.
• Merkel Tells Renzi He Can’t Bend Euro Rules to Boost Growth. German Chancellor Angela Merkel lauded Italian Premier Matteo Renzi’s economic policy as “courageous,” while signaling that European Union budget rules can’t be bent to help Italy boost growth. Merkel’s comments alongside Renzi and French President Francois Hollande hinted at one of the divisions between the leaders of the euro area’s three biggest economies as they met on Monday to plan the European Union’s way forward after Britons voted to leave the bloc. Italy’s economy stagnated in the second quarter, pushing off budget forecasts, and Renzi is pressing for greater flexibility by the European Commission.
• Europe Stocks Little Changed, While Miners Drop for Second Day. A slide in commodity producers weighed on European equities, which pared earlier gains amid speculation over a potential increase in U.S. borrowing costs this year. While a weaker euro initially helped the Stoxx Europe 600 Index rise as much as 0.9 percent, the gains were short-lived. The gauge fell 0.3 percent before ending the day up 0.1 percent. Miners dropped the most, as commodities declined on a stronger dollar after Federal Reserve Vice Chairman Stanley Fischer signaled a hike is still possible this year.
• Yield Hunt Emboldens Companies to Chip Away Loan Safeguards. Riskier companies are increasingly getting credit agreements that allow them to raise the amount of future cost savings to appear more creditworthy, boosting potential losses for investors. The tweaks make it easier for borrowers to stay in compliance with their loan terms and add more debt, according to Charles Tricomi, a senior analyst at covenant research firm Xtract Research. “There is too much money chasing too few loans,” Tricomi said. “Lenders are really at a disadvantage and have to agree to these terms significantly against their own interest, terms that they should be fighting off.” “The market is so much leveraged on the side of the borrower at this point and they are forcing lenders to swallow a lot of things that they wouldn’t otherwise take,” Tricomi said. “In the event there is a default, there is a greater likelihood of lower recoveries.”
• El-Erian Says Fed Risks Instability, Excess by Keeping Rates Low. (video) Allianz SE’s Mohamed El-Erian said that Federal Reserve officials need to consider the costs of keeping interest rates low, even as the U.S. economy is pressured by diminished worker productivity. “There is also the risk of financial instability down the road” because of extraordinary monetary policy, El-Erian, Allianz’s chief economic adviser, said Monday in an interview on Bloomberg Radio. “And that, I think, is the strongest argument for trying to slowly normalize rates, because otherwise you contribute to excessive risk taking.”
• Biotechs Rise on Bet Medivation Losers Will Look to Next Deal. (video)
• Michael Kors(KORS), Ralph Lauren(RL) Hit Hard by Stores’ Discounting Binge. As retailers rely more heavily on promotions to drive traffic, Michael Kors Holdings Ltd. and Ralph Lauren Corp. have been two of the biggest victims. The brands were among the most heavily discounted at upscale U.S. retailers in recent months, according to Edited, a company that crunches data for the fashion industry. That supports the view of Michael Kors Chief Executive Officer John Idol, who said promotions reached an all-time high last quarter. Fashion brands and retailers slashed prices on products by as much as 80 percent in May, June and July, Edited found.

Fox News:

• Emails reveal Clinton aide gave foundation donors 'special' access, group says. (video) Newly released emails reveal more instances of the Clinton Foundation appearing to reach out to then-Secretary of State Hillary Clinton’s State Department for favors involving wealthy donors – including Crown Prince Salman of Bahrain – according to a watchdog group that fought to obtain the emails.
• Photos: Boy caught before detonating explosive belt in Iraq. (video) Dramatic photos Monday showed police in Iraq arresting a boy and uncovering an explosive belt around his waist, as the child reportedly claimed terrorists kidnapped him and forced him to blow himself up.

CNBC:

• Here's another stock market measure that looks like the tech bubble era. A key stock market valuation metric has risen to a level it's only ever been at once before in recent history — and that was during the giant tech bubble of 2000. S&P Global Market Intelligence provided data which show that the current price-earnings ratio on trailing GAAP earnings per share is at 25.3 times, second only to the trailing P/E which peaked at 31.7 times during the overheated bull market of 2000. S&P studied P/E data from bull markets going back to World War II.
• Don't be tricked by high dividend yields.

Zero Hedge:

• FBI Uncovers Over 15,000 More Emails In Clinton Probe.
• Jim Grant: "This Will Turn Out To Be Very Bad For Many People".
• From Soccer Stars To Bahrain Princes: New Emails Reveal Hillary Clinton Gave Special Access To Foundation Donors.
• Obama's DOJ Warns Louisiana "You Better Not Be Racist Down There" Like You Were During Katrina.
• Multiple People Stabbed By Woman With Machete In Brussels Street Attack.
• Jeff Gundlach Explains Why He Is Now "100% Net Short".
• "Evidence Points To Another Snowden At The NSA".
• Texas Judge Blocks Obama Transgender Bathroom Policy: "It Threatens Students’ Safety And Privacy".
• Wrong Then, Even Wronger Now: Asininity On Raising Inflation Target To 4%.
• Merkel, Hollande And Renzi Meet To Discuss The "Relaunching Of Europe".

Business Insider:

• Energy companies are facing another huge problem.
• For the first time, a county in America has lost all of its Obamacare insurers.
• A high-profile hedge fund has lost a third of its assets.
• Elite colleges are ditching a major admissions requirement. Conversations about SAT and ACT scores are ubiquitous among high school students applying to colleges. Increasingly, however, many colleges and universities have begun to eschew mandatory standardized test scores as requirements for their application processes. The elite schools are no longer requiring the tests, also referred to as the SAT II. The reasoning: The exams are not reliable indicators of students' performance in college and may harm low-income students.
• Speedo and Ralph Lauren are dropping Ryan Lochte.
• North Korea threatens to turn US and South Korea into ‘heap of ashes’.
• Hillary Clinton has reversed nearly a decade of transparency in political campaigns by closing her fundraisers to journalists.
• Report: In less than a year, Russia has killed more civilians than ISIS.

The Telegraph:

• Jackson Hole: the three tough questions central banks must ask themselves.

Bear Radar

Style Underperformer:

• Mid-Cap Value -.5%

Sector Underperformers:

• 1) Oil Service -2.6% 2) Gold & Silver -2.3% 3) Paper -2.0%

Stocks Falling on Unusual Volume: 

• IEP, MSG, WPXP, MSGN, HOT, ZEUS, PTLA, SHW, FIXX, MAR, YRD, LITE, CVI, NDSN, JCI, WDAY, VIAB, PERY, SGY, WUBA, SINA, BIS, AG, MRO, GRMN and RPD

Stocks With Unusual Put Option Activity:

• 1) HCA 2) SWFT 3) CY 4) SCHW 5) BBY

Stocks With Most Negative News Mentions:

• 1) MNST 2) WDAY 3) URBN 4) GRMN 5) HAIN

Charts:

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