Tuesday Watch

Evening Headlines

Bloomberg:

• Emerging Market Crisis Echoes Grow Louder. Everyone who covers emerging markets has heard the mantra: Yes, there's a lot of debt but, unlike the late 1990s, sovereign balance sheets are fine. Corporations are the ones to worry about, and they are hardly ever sources of systemic risk. That may have been true five years ago. It isn't any longer, if the companies that specialize in assessing credit strength are to be believed.
• Asian Stocks Join Italy Relief Rally as Swings Ease; Crude Drops. Asian stocks joined the global relief rally, as investors switched their focus back to the outlook for U.S. monetary policy following the defeat of Italy’s constitutional referendum. The Korean won climbed, while bonds and crude oil retreated. Mining and bank shares led the Asian equity benchmark higher, with Japanese stocks rising for the first time in three days following the Dow Jones Industrial Average’s return to a record. The won increased for the first time in three days, and the euro was near its strongest level since mid-November after wiping out an initial slump Monday on the Italian premier’s resignation. The Australian dollar was close to a more than two-week high, while the nation’s bonds fell with debt in the region amid expectations interest rates will be held in a review. Oil snapped a four-day climb as the yen and gold tried to rally. The MSCI Asia Pacific Index jumped .9% as of 9:57 a.m. Tokyo time, with Japan's Topix index rising .9% as well.
• Trump’s ‘Retribution’ Tax Stirs Questions, GOP Resistance. Donald Trump’s threats to use taxes as “retribution” against U.S. companies that move jobs overseas are legally dubious, tax specialists say -- and they’re prompting resistance from some Republican leaders who fear a coming era of economic protectionism or international trade wars. “There’s other ways to achieve what the president-elect is talking about,” House Majority Leader Kevin McCarthy told reporters Monday, arguing that changing the tax code is the way to entice companies to create jobs and keep them in the U.S. “I don’t want to get into some type of trade war,” McCarthy said. Implementing large tariffs like those Trump proposed had little apparent support in the Senate either, where most Republicans have long backed deals lowering trade barriers, not raising them.
• The Pessimist's Guide to 2017. 
• Why U.S. Stocks May Be Poised for a Correction. (video) 

Wall Street Journal:

• For Europe’s Unity, 2017 Will Be a Year of Reckoning. Mainstream parties are feeling pressure from populist politicians, setting up votes next year in several core European nations that will help determine fate of open borders and the euro.
• Italian Prime Minister Matteo Renzi Resigns, Ushering in Period of Uncertainty. President accepts resignation but asks premier to stay until 2017 budget gets Senate approval.
• Harsh Political Winds Test Euro’s Stability and Future. Some question how long the common currency can survive amid repeated tests, political and economic, across the Continent.
• Donald Trump Picks Ben Carson to Head Housing Agency. The one-time political rival would be the first African-American appointed to a senior position so far during the transition.
• Donald Trump Shuffles the Ideological Deck. The president-elect’s moves so far don’t adhere to strict conservative or outsider themes.

Fox News:

• Ellison's bid to lead DNC complicated by calls to relinquish House seat. (video)

CNBC:

• Five tools that would let Trump follow through on his tariff threats. (video)
• Amazon Go is the first of 3 or more new Amazon food store formats, reports say. (video)
• Tech giants to cooperate on removal of extremist content.
• Apple(AAPL) Watch shipments plunge 70% as consumers favor simpler wearables, IDC says.
• Pacific Crest says don't expect year-end Apple(AAPL) rally, seeing weaker-than-expected iPhone 7 demand.

Zero Hedge:

• The First Defection: Republican Elector Writes In NYT Op-Ed Why He Won't Be Voting For Trump.
• Website Raising Money To Fund Assassinations Of Trump, Pence Uncovered On "Dark Web".
• Mark Carney Defends The Bank of England: "We Are Not Robbing The Poor To Pay The Rich".
• Morgan Stanley(MS) Set To Slash 2017 Broker Bonuses With 10% Increase In "Pay Grid" Thresholds.
• Carrier & The Slippery Slope.
• What Happens Next? (graph)
• As Rome Burns... Investors Dump Gold, Send US Equity Markets To Record Highs.

Business Insider:

• The manufacturer that Trump convinced to keep 1,000 jobs in the US is raising prices.
• A second major drugmaker just committed to limiting price increases.
• The market may have shrugged at Italy's 'No' vote, but the drama is just getting started.
• NY TIMES PUBLIC EDITOR: Some tweets from our politics reporters 'outrageous' and there 'ought to be some kind of consequence'.
• Al Gore just had an 'extremely interesting conversation' with Trump on global warming. "I had a lengthy and very productive session with the President-elect," Gore said, according to a pool report. "It was a sincere search for areas of common ground. I had a meeting beforehand with Ivanka Trump," he added. "The bulk of the time was with the President-elect, Donald Trump. I found it an extremely interesting conversation, and to be continued, and I'm just going to leave it at that." 
• Apple(AAPL) is urging the US government to speed up self-driving cars.

Telegraph:

• Italy's ailing banks now have to wade through the referendum quagmire to secure a rescue.

Night Trading 

• Asian equity indices are +.25% to +1.0% on average.
• Asia Ex-Japan Investment Grade CDS Index 124.50 -1.5 basis points.
• Asia Pacific Sovereign CDS Index 40.5 -1.0 basis point.
• Bloomberg Emerging Markets Currency Index 69.69 +.03%. 
• S&P 500 futures unch. 
• NASDAQ 100 futures +.10%.

Morning Preview Links

Earnings of Note
Company/Estimate 

• (AZO)/9.32
• (BOBE)/.45
• (MIK)/.43
• (TOL)/.99
• (AVAV)/-.08

Economic Releases 
8:30 am EST

• The Trade Deficit for October is estimated to widen to -$42.0B versus -$36.4B in September.
• Final 3Q Non-Farm Productivity is estimated to rise +3.3% versus a prior estimate of a +3.1% gain.
• Final 3Q Unit Labor Costs are estimated to rise +.3% versus a prior estimate of a +.3% gain.

10:00 am EST

• Factory Orders for October are estimated to rise +2.6% versus a +.3% gain in September.
• IBD/TIPP Economic Optimism for December is estimated to rise to 52.0 versus 51.4 in November.

Upcoming Splits 

• None of note

Other Potential Market Movers

• The Australia GDP report, German Factory Orders report, US weekly retail sales reports, Goldman Financial Services Conference, (PBI) Analyst Day, (ADSK) Investor Day and the Cowen Energy/Natural Resources Conference could also impact trading today.

BOTTOM LINE:  Asian indices are higher, boosted by commodity and technology 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 Rising into Final Hour on Less European/Emerging Markets/US High-Yield Debt Angst, Short-Covering, Yen Weakness, Energy/Homebuilding Sector Strength

Broad Equity Market Tone:

• Advance/Decline Line: Substantially Higher
  

• Sector Performance: Almost Every Sector Rising
  

• Volume: Slightly Below Average

• Market Leading Stocks: Outperforming
  

Equity Investor Angst:

• Volatility(VIX) 12.47 -11.69%

• Euro/Yen Carry Return Index 127.85 +1.11%

• Emerging Markets Currency Volatility(VXY) 10.92 -.27%

• S&P 500 Implied Correlation 51.73 -2.85%

• ISE Sentiment Index 92.0 +12.2%
  

• Total Put/Call .82 -10.87%

• NYSE Arms .74 -25.81%

Credit Investor Angst:

• North American Investment Grade CDS Index 72.14 -1.15%
  

• America Energy Sector High-Yield CDS Index 500.0 -9.07%

• European Financial Sector CDS Index 107.63 +2.75%

• Western Europe Sovereign Debt CDS Index 23.50 +1.38%

• Asia Pacific Sovereign Debt CDS Index 40.51 -2.33%

• Emerging Market CDS Index 266.42 -2.35%
  

• iBoxx Offshore RMB China Corporate High Yield Index 133.0 +.04%

• 2-Year Swap Spread 21.75 +1.25 basis points

• TED Spread 48.5 +1.0 basis point

• 3-Month EUR/USD Cross-Currency Basis Swap -58.25 +2.75 basis points
  

Economic Gauges:

• Bloomberg Emerging Markets Currency Index 69.69 +.51%
• 3-Month T-Bill Yield .46% -1.0 basis point

• Yield Curve 127.0 -2.0 basis points
  

• China Import Iron Ore Spot $78.62/Metric Tonne +1.07%

• Citi US Economic Surprise Index 28.70 +4.0 points

• Citi Eurozone Economic Surprise Index 58.90 -2.5 points

• Citi Emerging Markets Economic Surprise Index 3.6 +2.1 points

• 10-Year TIPS Spread 1.97% +2.0 basis points
• 100.0% chance of Fed rate hike at Feb. 1 meeting, 100.0% chance at March 15 meeting

Overseas Futures:

• Nikkei 225 Futures: Indicating +136 open in Japan 
• China A50 Futures: Indicating +46 open in China

• DAX Futures: Indicating +8 open in Germany

Portfolio: 

• Slightly Lower: On losses in my index hedges and emerging markets shorts

• Disclosed Trades: None

• Market Exposure: 25% Net Long

Today's Headlines

Bloomberg:

• Europe Caught in Headlights as Populists Hinder ‘Radical’ Change. (video) Votes in Italy and Austria say little about whether populist parties will sweep elections elsewhere in Europe, but they do spell more political paralysis. Both were widely watched as indicators of whether the anti-establishment upsets of Brexit in the U.K. and President-elect Donald Trump in the U.S. will continue through a bumper year of major European elections in 2017. The answer was hardly comforting for investors or centrist parties. Sunday’s defeat of a far-right presidential candidate in Austria and of a constitutional referendum in Italy suggest pressure from the extreme left and right continues to grow, just not as a post-Trump wave of election victories fated to sweep the continent, said Wolfango Piccoli, co-president of consultants Teneo Intelligence. That risks discouraging Europe’s leaders from tackling the fundamental economic reform that might address the root causes of the popular discontentment. “The question isn’t so much whether the populists win -- they are here to stay, they will impact politics,” said Piccoli. “You have to look at each set of local conditions separately.”
• China Regulator Slams Leveraged Stock Acquirers as ‘Robbers’. China’s top securities regulator resorted to unusually harsh language to denounce leveraged acquisitions of shares in listed companies, as officials move to rein in financial risks associated with a surge in dealmaking. China Securities Regulatory Commission Chairman Liu Shiyu also questioned the legitimacy of the funding sources at acquirers that he didn’t identify, saying their behavior challenges the nation’s rules, as well as their own professional ethics. Such acquisitions show “retrogress and decay in humanity and commercial morals, and is by no means financial innovation,” Liu, 55, said. “By using improperly obtained money to conduct leveraged acquisitions, you’ve gone from strangers at the gate, to barbarians and eventually robbers of the industry, ” he said at a meeting of the Asset Management Association of China in Beijing on Saturday, a transcript of which was posted on the regulator’s website. “That’s not allowed.”
• What Happens If Trump Labels China a Manipulator? (video)
• The World's New Fear Gauge Is Ringing Alarm Bells in the Era of Trump. (graph) A key barometer of risk aversion soared after Trump's victory fueled a dollar rally.
• OPEC Target Gets Harder as African Members Boost November Output. OPEC’s mission to implement last week’s historic deal to curb production for the first time in eight years just got a little bit harder after three of its African members increased output in November. Crude production from the Organization of Petroleum Exporting Countries rose to a record 34.16 million barrels a day in November with gains led by Angola, according to a Bloomberg News survey of analysts, oil companies and ship-tracking data. That’s up from a revised 33.96 million barrels a day in October.
• Trump, Gore Meet on Climate After Talks Opened With Ivanka. Donald Trump met in New York Monday with Al Gore to discuss an issue the Republican president-elect has long scoffed at: Global warming. The meeting at Trump Tower was initially scheduled with the president-elect’s daughter, Ivanka Trump. After Gore emerged, the Democratic politician-turned climate activist told reporters he wound up spending "the bulk of the time" with Trump himself.
• Trump Vows Prompt Review of Rejection of Dakota Pipeline. President-elect Donald Trump backs the Dakota Access Pipeline and will review a decision by the Obama administration to deny a permit for the project, a spokesman said. After weeks of protests from Native Americans and environmental activists, the Army Corps of Engineers announced Sunday that it was refusing to let Energy Transfer Partners LP build a section of the project under Lake Oahe in North Dakota and would begin a lengthy environmental review. But that decision runs headlong into the pledge from Trump to greenlight new energy infrastructure. The pipeline "is something we support construction of, and we will review the situation when we are in the White House to make the appropriate determination at that time," Jason Miller, a spokesman for the Trump transition team, told reporters Monday.
• Ford(F) Said to Issue $2.8 Billion in Auto Debt for Tech Spend. Ford Motor Co. plans to issue $2.8 billion in debt, the company’s first automotive borrowing in almost four years, as it boosts spending on self-driving cars, mobility services and electrified vehicles, according to a person familiar with the deal.

Fox News:

• China flew nuclear-capable bombers around Taiwan before Trump call with Taiwanese president. (video)

Zero Hedge:

• "Fake News" Site Threatens Washington Post With Defamation Suit, Demands Retraction.
• 20 Years Later, Greenspan's "Irrational Exuberance" Has Become Even More Irrational.
• Renzi Delays Resignation Until Senate Passes Budget Law.
• Germany Outraged After Afghan Refugee Arrested In Rape, Murder Of 19 Year Old Female Student.
• Here Are The Biggest "Post-Trump" Market Risks According To Bank of America.
• Forget Italy, Turkey Is The Main Course. (graph)
• Trump Advisor Says Administration Not Looking To "Rip Up NAFTA" Or Impose "Quote-Unquote Tariffs".
• Wall Street Analysts Are Slowly Losing It.
• Deutsche Bank(DB) CEO Warns Employees "Europe Is Endangered" After Italy Vote.
• What Happens Next In Italy: Here Is Goldman's Take.
• OPEC Oil Production Hits New All Time High As Brent Surges To 16 Month High. (graph)
• "The Curve Is Screaming Producer Hedging" - Shale Companies Scramble To Lock In Oil Prices.
• Fed Labor Market Conditions Index Contracts For 5th Straight Month. (graph)
• "Things Have Tapered Off" - US Services Economy Jumps To 13-Month Highs But New Orders Stall. (graph)
• Draghi 'Put' Steadies Stocks As Italian Banking System Collapses. (graph)

The Telegraph:

• Italian banking shares poised for worst year since 2011 after referendum defeat.
• Fresh fears over mortgages as loan-to-income ratios hit record high.

Bear Radar

Style Underperformer:

• Large-Cap Value +.4%

Sector Underperformers:

• 1) HMOs -1.6% 2) Airlines -.3% 3) Gaming -.2%

Stocks Falling on Unusual Volume: 

• CNSL, AGIO, TLYS, BLCM, OMCL, GBT, TLRD, SPB, HUM, AET, RETA, ETP, UNH, FNV, ROK, TCAP, FIVE, WDC, JEC, WLB, LPLA, ALK, XLRN, NWE and BLCM

Stocks With Unusual Put Option Activity:

• 1) ACAD 2) VFC 3) WMB 4) DD 5) AET

Stocks With Most Negative News Mentions:

• 1) TLRD 2) KEY 3) UNH 4) CNC 5) LUV

Charts:

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

Bull Radar

Style Outperformer:

• Small-Cap Value +1.5%

Sector Outperformers:

• 1) Coal +3.7% 2) Steel +3.2% 3) Oil Service +2.3%

Stocks Rising on Unusual Volume:

• FRP, MCRN, EDU, GMED, HMST, WDAY, SITE, NSR, GIII, GCO, KITE, CLF, CUBI, NSR, CVGW, VSI, PLAB, SLM, RPD, RHP, IBKC and SITE

Stocks With Unusual Call Option Activity:

• 1) HLT 2) COG 3) HUM 4) TOL 5) RH

Stocks With Most Positive News Mentions:

• 1) FGP 2) VNCE 3) SAFM 4) MHK 5) SMTC

Charts:

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

Morning Market Internals

NYSE Composite Index:

• Volume Running +3.7% Above 100-Day Average
• 6 Sectors Rising, 4 Sectors Declining
• 69.8% of Issues Advancing, 27.7% Declining
• 192 New 52-Week Highs, 25 New Lows
• 54.2% of Issues Above 200-day Moving Average
• Average 14-Day RSI 42.3%
• Vix 12.75 -9.7%
• Total Put/Call .75 -18.5%
• TRIN/Arms .63 -37.2%