Stocks Rising into Final Hour on Less Eurozone/Emerging Markets Debt Angst, Short-Covering, Healthcare/Energy Sector Strength

Broad Equity Market Tone:

• Advance/Decline Line: Higher
  

• Sector Performance: Most Sectors Rising
  

• Volume: Below Average

• Market Leading Stocks: Performing In Line

Equity Investor Angst:

• Volatility(VIX) 14.93 -12.27%

• Euro/Yen Carry Return Index 143.67 -.05%

• Emerging Markets Currency Volatility(VXY) 6.58 -2.08%

• S&P 500 Implied Correlation 56.30 -6.7%

• ISE Sentiment Index 92.0 +113.95%

• Total Put/Call 1.21 -2.42%

• NYSE Arms .62 -32.67% 

Credit Investor Angst:

• North American Investment Grade CDS Index 63.74 -4.30%

• European Financial Sector CDS Index 71.86 -4.23%

• Western Europe Sovereign Debt CDS Index 36.32 -3.75%
• Asia Pacific Sovereign Debt CDS Index 73.46 -2.68%

• Emerging Market CDS Index 278.45 -.71%

• China Blended Corporate Spread Index 310.95 +.44%
• 2-Year Swap Spread 20.75 -.25 basis point

• TED Spread 22.25 +.5 basis point

• 3-Month EUR/USD Cross-Currency Basis Swap -9.75 -.25 basis point

Economic Gauges:

• 3-Month T-Bill Yield .02% unch.

• Yield Curve 202.0 -1.0 basis point

• China Import Iron Ore Spot $95.40/Metric Tonne +.21%

• Citi US Economic Surprise Index -12.70 +.3 point

• Citi Emerging Markets Economic Surprise Index 1.40 +1.8 points

• 10-Year TIPS Spread 2.23 -2.0 basis points

Overseas Futures:

• Nikkei Futures: Indicating +56 open in Japan

• DAX Futures: Indicating +64 open in Germany

Portfolio: 

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

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

• Market Exposure: Moved to 75% Net Long

Today's Headlines

Bloomberg:

• Putin Sanctions Drive Away Banks as Loans Dry Up. Lending to Russian companies reached a crescendo last year, with international banks pledging $31 billion to OAO Rosneft to buy TNK-BP. As sanctions are tightened against the nation, even the smallest deals have dried up. No Russian companies received loans in U.S. dollars, Swiss francs or euros last month, the first time this has happened in at least five years, according to data compiled by Bloomberg. Global banks fell away in the second quarter, with lending plunging 42 percent from a year earlier to $4.7 billion as the Ukraine conflict worsened after President Vladimir Putin annexed Crimea in March. That was the least for any quarter since 2012.

• Libya House Meets as Egypt Sounds Alarm on Growing Mayhem. Libya’s newly elected legislature met for the handover from its predecessor body, a transition marred by militia fighting that has left scores dead, sent foreigners fleeing and pushed the country deeper into chaos. Lawmakers from the House of Representatives, meeting today amid high security, took over from the General National Congress against a backdrop of unrest unseen since the 2011 ouster and killing of Muammar Qaddafi.

• European Stocks Fall for a Fourth Day as Nestle Retreats. European equities declined for a fourth day as the region’s two largest stocks retreated, outweighing reduced concern about the region’s most indebted lenders after Portugal bailed out Banco Espirito Santo SA. Nestle SA and Novartis AG both dropped more than 1 percent. Immofinanz AG slid 2.7 percent after the Austrian property developer reported annual profit that missed projections and said a delay in the construction of a Moscow shopping center hurt rental income. Banco Comercial Portugues SA rallied 6.1 percent. HSBC Holdings Plc gained after reporting lower provisions for bad debt in the first half. The Stoxx Europe 600 Index lost 0.2 percent to 331.15 at the close of trading, the lowest level since April 16. 

• Euro Seen Vulnerable as Blowback From Sanctions on Russia Bites. “The euro area is going to underperform for a long time,” said Marvin Barth, head of European foreign-exchange strategy at Barclays in London. “Russian sanctions reinforce that picture and may increase the speed with which that happens.”

• Lacker Says Markets May Be Surprised by Pace of Rate Rise. Investors may be underestimating the pace at which the Federal Reserve will raise interest rates over the next two years, said Jeffrey Lacker, president of the Federal Reserve Bank of Richmond. Short-term interest-rate markets have for months priced in a slower tempo of increases than policy makers themselves forecast. That’s risky because the misalignment, a bet against a rate path that the central bank alone controls, could lead to volatility if traders have to adjust rapidly, Lacker said. “When there is that kind of gap, it gets your attention,” Lacker, a consistent critic of the Fed’s record easing who votes on policy next year, said in an Aug. 1 interview at his Richmond office overlooking the James River. “It wouldn’t be good for it to be closed with great rapidity.”

• Fed Says U.S. Banks Eased Loans Amid Broad Pickup in Demand. “Survey results showed a continued easing of lending standards and terms for many types of loan categories amid a broad-based pickup in loan demand,” the Fed said today in Washington in its quarterly survey of senior loan officers.

ZeroHedge: 

• Deutsche Bank "Raises The Warning Flag": What The Most Important Chart For The Market Reveals.

• "Ebola Spins Out Of Control" - Latest News Roundup.

• DoJ Subpoenas GM Over Subprime Auto Loans.

• Russia Launches Massive Bomber, Warplane Drill On Ukraine Border As Over 400 Ukraine Soldiers Defect.

• Another Glitch: Espirito Santo Junior Debt Plummets As CDS Trigger May Be Avoided.

Business Insider:

• The Most Dangerous Politician In Latin America Has Only Become More Powerful.

• ISIS Has Punched A Hole Through Kurdish Defenses In Iraq.

Telegraph:

• The next crisis? We’re hardwiring short-termism into the financial system.

Le Monde:

• France's Hollande Sees Real Risk of Europe Deflation. The "real risk of deflation" could have "negative budgetary consequences, both for revenue and for debt," French President Francois Hollande said. Much will depend on euro's exchange rate "which has declined these past few days, but not enough," he said.

Bear Radar

Style Underperformer:

• Small-Cap Value -.30%

Sector Underperformers:

• 1) Gold & Silver -1.21% 2) Airlines -1.14% 3) Utilities -.91%

Stocks Falling on Unusual Volume:

• TKMR, EVR, ALR, KORS, INSM, ASPS, ORBK, CZR, WWWW, OCN, IPXL, DORM, CAH, CLDN, USM, RESI, RIG, AEP, AFOP, NU, KEYW, SRE, AXDX, SJI and NPO

Stocks With Unusual Put Option Activity:

• 1) SM 2) KRE 3) MTW 4) JNK 5) XLU
  

Stocks With Most Negative News Mentions:

• 1) AEP 2) QLGC 3) RIG 4) ESV 5) LLL
  

Charts:

• ETFs Falling on Unusual Volume

• Stocks Falling on Unusual Volume

Bull Radar

Style Outperformer:

• Large-Cap Growth -.23%

Sector Outperformers:

• 1) Internet +.43% 2) Software +.36% 3) Homebuilders +.22%
  

Stocks Rising on Unusual Volume:

• PIKE, DRTX, TREX, BWP, RLGY and BCRX

Stocks With Unusual Call Option Activity:

• 1) XLU 2) CZR 3) INSM 4) BWP 5) ED
  

Stocks With Most Positive News Mentions:

• 1) WAG 2) VRSN 3) WMT 4) LMT 5) GRPN
  

Charts:

• ETFs Rising on Unusual Volume 

• Stocks Rising on Unusual Volume

Monday Watch

Weekend Headlines 
Bloomberg:

• Iraqi Militants Capture Two Oil Fields in North, Kurdish Towns. Militants from Islamic State, a breakaway al-Qaeda group, took control of two oil fields and some predominantly Kurdish towns in northern Iraq following clashes, according to the Northern Oil Co. The Ain Zala and Batma oil fields, which together have an output of 30,000 barrels per day, are under full control of the group, according to a statement by the state-run Northern Oil Co. The Sunni Islamist militants last month occupied the Qayyara oil field north of Baghdad. Islamic State, which was previously known as Islamic State in Iraq and Levant, has seized territory in northern and western Iraq, taking over oil wells and fighting for control of refineries.

• Israel Announces 7-Hour Cease-Fire as Diplomatic Efforts Falters. Israel announced a seven-hour cease-fire for much of Gaza after renewed violence yesterday, including the shelling of a United Nations shelter, tripped up diplomatic efforts to end four weeks of conflict. The “humanitarian window” will apply from 10 a.m. to 5 p.m. local time in all areas of Gaza except those where the Israel Defense Forces are currently operating, the IDF said in an e-mailed statement. “The IDF will respond to any attempt to exploit this window to harm Israeli civilians and IDF soldiers,” then IDF said in the statement. 

• Portugal Announces $6.6 Billion Banco Espirito Santo Rescue. Portugal’s central bank took control of Banco Espirito Santo SA, once the country’s largest lender by market value, in a 4.9 billion-euro ($6.6 billion) bailout that will leave junior bondholders with losses. The Bank of Portugal’s Resolution Fund will move Banco Espirito Santo’s deposit-taking operations and most of its assets to a new company, Novo Banco, which it will own outright. The fund will finance the rescue with a Treasury loan to be repaid by Novo Banco’s eventual sale. Espirito Santo shareholders and junior bondholders will be left with the most “problematic” assets, including loans to other parts of the Espirito Santo Group and the lender’s stake in its Angolan operation, according to a central bank statement yesterday.

• China Central Bank Signals No Broad Monetary Easing. The People’s Bank of China warned that the country’s credit and money supply have increased rapidly and indicated that it will refrain from broader monetary easing to support growth. “The total debt level has been rising relatively quickly,” the PBOC said in its second-quarter monetary policy report on Aug. 1. “Our existing money supply and credit are already relatively large and their growth is also high.” The International Monetary Fund said last week that China’s reliance on debt and investment has created “rising vulnerabilities” and that failure to change its growth pattern increases the likelihood of a sharp economic slowdown. The Washington-based lender urged the nation’s leaders to lower the country’s annual expansion target, rein in credit and speed up reforms. “Restructuring and reform of the economy remains an arduous task,” the central bank said in its 54-page report. “It’s not appropriate to expand overall liquidity sharply to solve structural problems.” 

• China’s Fraught IPOs. China’s Internet companies are exploding in value, so foreign investors naturally want a piece of the action. A little problem: Chinese law restricts foreign investment in Internet businesses (along with those in banking, mining and private education). Not to worry — where there’s a will, there’s a way, in this case an exotic corporate structure that magically turns a Chinese company into a foreign one with shares that overseas investors can buy. And they have.

• Armenia-Azeri War Risks Grow as Clashes Intensify. The leaders of Armenia and Azerbaijan plan to meet this week in a bid to defuse escalating tensions between the two countries after at least 15 soldiers were killed in the worst clashes in two decades. The fighting in the past week in the disputed region of Nagorno-Karabakh has been the deadliest since the two former Soviet states signed a cease-fire in 1994. Armenian President Serzh Sargsyan will hold talks with his Azeri counterpart Ilham Aliyev in the Russian city of Sochi on Aug. 8-9, Armenian Prime Minister Hovik Abrahamyan said on the government’s website.

• Asian Stocks Fall, Extending Biggest Drop in Three Months. Asian stocks fell, after the regional benchmark index last week capped its biggest daily drop in almost three months, as a smaller-than-forecast increase in U.S. payrolls overshadowed a bailout for Portugal’s Banco Espirito Santo SA. Honda Motor Co., which gets 47 percent of its auto sales in North America, fell 1.3 percent in Tokyo. Kubota Corp., a Japanese maker of industrial and farm machinery, lost 3 percent, leading losses among industrial shares. Horizon Oil Ltd., an Australian oil explorer, slumped 8.1 percent on speculation Roc Oil Co. may end plans to combine with Horizon Oil. The MSCI Asia Pacific Index lost 0.2 percent to 147.41 as of 9:24 a.m. in Tokyo.

• Gold Industry Takeovers Reach Three-Year High as Hunters Feast. There’s no sign of a let up in gold industry takeovers as a surge in acquisitions by producers, led by Agnico Eagle Mines Ltd. (AEM) and Yamana Gold Inc. (YRI), has pushed deals to a three-year high. Mid-sized and small producers are seizing on assets discarded by larger competitors as they trim portfolios to focus on their most profitable operations after gold last year notched up the biggest annual drop in more than three decades. 

• Euro Near Eight-Month Low as Short Bets Surge to Most Since 2012. The euro was 0.4 percent from its lowest level versus the dollar since November as investors held the largest position in two years betting on a drop in the currency before the region’s central bank meets this week. Europe’s common currency slid 3.2 percent in the past three months amid unprecedented stimulus as the European Central Bank acted to spur inflation that slowed in July to the weakest in almost five years. Policy makers meet again Aug. 7. Australia’s dollar rose a second day after retail sales in the nation climbed at twice the pace economists forecast. The greenback held gains versus most major peers with data tomorrow predicted to show growth in services activity accelerated.

• U.S. Credit Risk Gauge Caps Biggest Jump in Six Months. A measure of U.S. credit risk posted its biggest weekly increase in six months as a regulator suspended trading of shares in a Portuguese bank and Argentina defaulted on its debt. The Markit CDX North American Investment Grade Index, a credit-default swaps benchmark used to hedge against losses or to speculate on creditworthiness, climbed 7 basis points this week to 66.6 basis points, the biggest advance since the period ended Jan. 24, according to data compiled by Bloomberg. As the Federal Reserve moves closer to curbing its unprecedented stimulus measures, Argentina failed to make an interest payment and Banco Espirito Santo SA shares were suspended by Portugal’s securities regulator. “We’re having a short-term panic,” said Brian Reynolds, chief market strategist for brokerage firm Rosenblatt Securities Inc. in New York. “Argentina being legally declared in default was the switch that made everyone pile onto bearish positions, betting on spread widening and a decline in stock prices.” 

• Evercore to buy Hyman’s ISI to Add Research and Trading. Evercore Partners Inc. (EVR) agreed to buy closely held International Strategy & Investment Group LLC in an all-stock transaction as it seeks to expand its research and trading business.

Wall Street Journal:

• Junk-Debt Liquidity Concerns Bring Sales. Investors Worry Exiting Positions Could Get Harder. A shakeout in the junk-bond market is drawing only cautious interest from bargain-hunters, underscoring investor fears that many once-hot securities could prove hard to sell in an increasingly difficult trading environment. U.S. funds investing in debt rated below investment grade lost an average 1.33% last month, according to a Barclays PLC index, their second-worst monthly performance since November 2011. In June 2013, after the...'

• Jihadists Extend Control Into Lebanese City. Islamic State Seizes Territory in Lebanon. A jihadist group that has already seized control of large swaths of Syria and Iraq extended its territorial claims into Lebanon on Sunday, taking over a small city there after overrunning police posts and a military barracks. Fighters from the extremist group, which calls itself the Islamic State, streamed across the border from Syria in what Lebanon's defense minister called a premeditated attack after one of its commanders was...

• Quake Jolts China's Yunnan Province. Magnitude 6.1 Temblor in Southwest China Kills Hundreds.

MarketWatch.com:

• Warning: That plunge in stocks is just the beginning. (graph) Investors brace for the return of volatility.

• 3 market warning signs predict 20% stock tumble. Insight: When these indicators flash together, it’s time to sell.

CNBC:

• China services data shows 6-month low. Growth in China's services sector slipped to a six-month low in July as new orders rose at their weakest rate in at least a year, data showed, taking some of the shine off an industry that has been a bright spot in the Chinese economy this year. The official Purchasing Managers' Index (PMI) for the non-manufacturing sector slowed to 54.2 in July from June's 55, the National Bureau of Statistics said on Sunday. That is the weakest reading since January.

Zero Hedge:

• WHO Warns Ebola Outbreak Out Of Control, "High Risk Of Spread To Other Countries".

• Guest Post: The EU's Anti-Austerity Hypocrites. (graph)

• Turkey Shuns US (Again); Loads 5th Tanker Of $100 Million Iraqi-Kurdish Oil.

• India Slams US Global Hegemony By Scuttling Global Trade Deal, Puts Future Of WTO In Doubt.

• Stocks Suffer Worst Losing Streak Since 2011. (graph)

• 5 Things To Ponder: The Interest Rate Conundrum.

• Suddenly, Wall Street Is Bailing On Housing.

• Alarm Bells Ringing: Behind The Smoke And Mirrors Of The European Banking System.

• "Good" And "Bad" Economics In One Lesson.

• Goldman(GS) Warns Of 6.5% Japanese GDP Collapse, Worst Since Lehman.

• Why China Wants Control Of The South China Sea In 10 Charts.

• Things That Make You Go Hmmm... Like The Fed's Misplaced Confidence.

• Europe's Russian Connections.

• Portugal's Insolvent Banco Espirito Santo To Be Bailed Out, Existing Equity To Be Wiped Out.

• ISIS Captures Iraq's Biggest Dam: Baghdad Water Supply In Jeopardy.

• G-20 Revolt? France Gets "Positive Reception" To Challenge US Bank Fines.

• BofA(BAC) Warns Euro Bank Stocks Are Rolling Over, "Negative For All Risk Assets". (graph)

• Hussman's Hint Of Advance Warning. (graph)

• Volatility Shocks & The Cheapest Hedge. (graph)

• Despite Surging PMIs, China's Poor Resort To Self-Immolation.

Business Insider:

• Latin America Needs Presidential Term Limits.

• China Admits It Has Nukes That Can Reach The US.

• Saudi Officials Think ISIS Fighters May Hit Them Next.

• Ukraine Tightens The Noose Around Pro-Russian Rebels In East Ukraine.

• A Patient With Ebola Is On US Soil For The First Time In History.

• ALAN GREENSPAN: 'We Are Running Out Of Buffer In The Economy'.

Weekend Recommendations

Barron's:

• Bullish commentary on (EMC), (USTR), (DSW), (FTD) and (DHI).

• Bearish commentary on (TWTR), (HLF) and (CSC).

Night Trading

• Asian indices are -.25% to +.50% on average.

• Asia Ex-Japan Investment Grade CDS Index 109.0 +.5 basis point.

• Asia Pacific Sovereign CDS Index 75.50 +.5 basis point.

• FTSE-100 futures +.27%.

• S&P 500 futures +.33%.

• NASDAQ 100 futures +.23%.

Morning Preview Links

Earnings of Note
Company/Estimate

• (CAH)/.81

• (L)/.67

• (VNO)/1.20

• (THC)/.00

• (MRO)/.75

• (MDR)/-.17

• (CAR)/.61

• (CNA)/.82

Economic Releases

• None of note

Upcoming Splits

• None of note

Other Potential Market Movers

• The Eurozone Investor Confidence, Eurozone PPI, HSBC China Services PMI, Reserve Bank of Australia Decision and the ISM New York for July could also impact trading today.

BOTTOM LINE: Asian indices are mostly higher, boosted by real estate and industrial shares in the region. I expect US stocks to open modestly higher and to weaken into the afternoon, finishing mixed. The Portfolio is 50% net long heading into the week.

Weekly Outlook

Week Ahead by Bloomberg. 
Wall St. Week Ahead by Reuters.
Stocks to Watch Monday by MarketWatch.
Weekly Economic Calendar by Briefing.com.

BOTTOM LINE: I expect US stocks to finish the week modestly lower on Mideast/Ukraine-Russia tensions, technical selling, global growth worries, rising Emerging Markets/European debt angst and Fed rate hike concerns. My intermediate-term trading indicators are giving neutral signals and the Portfolio is 50% net long heading into the week.