Stocks Slightly Lower into Final Hour on Growing Hong Kong Unrest, Fed Rate Hike Worries, Global Growth Fears, Commodity/Homebuilding Sector Weakness

Broad Equity Market Tone:

• Advance/Decline Line: Lower
  

• Sector Performance: Almost Every Sector Declining
  

• Volume: Slightly Below Average

• Market Leading Stocks: Performing In Line

Equity Investor Angst:

• Volatility(VIX) 16.33 +9.97%

• Euro/Yen Carry Return Index 144.99 +.19%

• Emerging Markets Currency Volatility(VXY) 8.26 +6.44%

• S&P 500 Implied Correlation 56.62 +9.35%

• ISE Sentiment Index 79.0 -3.66%

• Total Put/Call .87 -22.32%

• NYSE Arms 1.93 +166.32% 

Credit Investor Angst:

• North American Investment Grade CDS Index 66.75 +3.72%

• European Financial Sector CDS Index 67.08 +6.28%

• Western Europe Sovereign Debt CDS Index 30.44 +8.40%
• Asia Pacific Sovereign Debt CDS Index 71.99 +4.14%

• Emerging Market CDS Index 279.16 +5.93%

• China Blended Corporate Spread Index 311.26 +.13%
• 2-Year Swap Spread 24.75 +2.25 basis points

• TED Spread 22.75 +.25 basis point

• 3-Month EUR/USD Cross-Currency Basis Swap -10.0 -1.5 basis points

Economic Gauges:

• 3-Month T-Bill Yield .00% unch.

• Yield Curve 192.0 -3.0 basis points

• China Import Iron Ore Spot $77.70/Metric Tonne -1.15%

• Citi US Economic Surprise Index 24.90 -2.0 basis points

• Citi Emerging Markets Economic Surprise Index -14.30 +2.9 points

• 10-Year TIPS Spread 1.95 -6.0 basis points

Overseas Futures:

• Nikkei Futures: Indicating -25 open in Japan

• DAX Futures: Indicating -1 open in Germany

Portfolio: 

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

• Disclosed Trades: Covered some of my (IWM)/(QQQ) hedges, then added them back

• Market Exposure: 50% Net Long

Today's Headlines

Bloomberg:

• HK Protesters Vow More to Come Unless Leader Leung Quits. Pro-democracy protesters vowed to press ahead with demonstrations unless Hong Kong’s top official steps down, with thousands of people surrounding government offices after violent clashes paralyzed the city center. Protesters dressed in black have gathered in the Admiralty district to demand free elections, while blocking a main road into the central business area. Rallies in the shopping neighborhoods of Causeway Bay and Mong Kok are picking up after a lull in the morning, leading banks to shut branches and deterring tourists.

• Merkel Says EU, U.S. May Be Facing Long Ukraine Crisis. Chancellor Angela Merkel invoked the 40-year history of communist East Germany as showing that the European Union and the U.S. may be in for a long haul in their face-off with Russia over its actions in Ukraine. “I don’t see any change at the moment regarding Russia’s position,” Merkel said at a joint news conference with Finland’s Prime Minister Alexander Stubb today in Berlin. “I’m from former East Germany. Weneeded 40 years to overcome East Germany. Sometimes in history one has to be prepared for the long haul, and not ask after four months if it still makes sense to keep up our demands.”

• Ukraine Army Sees Worst Day Since Truce as Battles Flare. Ukraine’s army endured its deadliest day since signing a cease-fire with pro-Russian militants 3 1/2 weeks ago, threatening to unravel a truce that calmed the six-month conflict in the nation’s east. Nine Ukrainian servicemen were killed in attacks during the last 24 hours, including an assault by a separatist tank on a government armored personnel carrier near the airport of Donetsk, the combat zone’s largest city, military spokesman Andriy Lysenko said today. Twenty-seven soldiers were wounded as troops repelled two “powerful” storming attempts by rebel fighters, killing 50 militants, he said. The rebels do not release casualty figures.

• Russia’s RTS Slides Into Bear Market as Sistema Tumbles. Russia’s dollar-denominated RTS (RTSI$) Index entered a bear market as a court ruling restricting AFK Sistema from receiving dividend payments from its OAO Bashneft unit wiped a quarter off the holding’s value. The RTS dropped 2.6 percent to 1,126.21 by the close in Moscow, the lowest since April 25 and taking its decline from a June 24 high to 21 percent. The benchmark Micex Index (INDEXCF) fell 1.8 percent to 1,408.28. Sistema, controlled by the billionaire placed under house arrest in a probe into alleged money laundering, tumbled 25 percent to 12.68 rubles. The stock has lost 65 percent since Vladimir Evtushenkov’s Sept. 16 detention.

• Ibovespa Leads World Losses as Real Tumbles After Poll. The Ibovespa plunged the most among global stock benchmarks while the real slumped to a 13-month low after a poll showed increased support for President Dilma Rousseff’s re-election bid. The Ibovespa declined 3.4 percent to 55,283.69 at 12:52 p.m. in Sao Paulo, set for the biggest decline since July 2013. State-controlled oil producer Petroleo Brasileiro SA contributed the most to the gauge’s decline, tumbling as much as 8.9 percent. The real fell 1.1 percent to 2.4466 per U.S. dollar, the most among 31 major currencies tracked by Bloomberg. Traders are paring bets on the chances a new government will be elected next month and jump-start economic growth after the country fell into a recession in the first half of the year.

• Europe Stocks Fall as Banks Drop Amid Hong Kong Protests. A decline in bank shares led European stocks lower, with HSBC Holdings Plc weighing on the benchmark index amid pro-democracy protests in Hong Kong. HSBC and Standard Chartered Plc slid more than 1.5 percent each as they shuttered some Hong Kong branches as protesters stayed on the streets after clashes with police. Commerzbank AG fell 4.2 percent after a person with knowledge of the matter said the lender faces a U.S. inquiry into whether it broke anti-money-laundering laws. Balfour Beatty (BBY) Plc slid to its lowest price in more than 10 years after signaling the outlook for construction earnings has worsened. The Stoxx Europe 600 Index slid 0.4 percent to 340.99 at the close of trading, paring losses of as much as 0.9 percent.

• Nickel Poised for Bear Market as Prices Head for Quarterly Loss. Nickel was poised to fall into a bear market after prices tumbled this quarter on signs an ore-export ban by the world’s biggest producer hasn’t depleted supplies as fast as forecast. The metal in London retreated as much as 2.5 percent today and is down 12 percent this quarter. Indonesia introduced restrictions on shipments in January, sending prices to the highest in more than two years. Nickel has since plunged as analysts from Credit Suisse Group AG to Citigroup Inc. said the shortfall will be less than expected. London Metal Exchange stockpiles are at the highest in records going back to 1979. 

• Bond Warnings Rise as ’94 Parallels Seen in Fed-CPI Split. For bond investors who are convinced a lack of inflation will keep the Federal Reserve from upending Treasuries when it begins to raise interest rates, there’s one parallel in history that suggests they still have cause for concern. The last time consumer-price increases were slowing before the Fed started increasing borrowing costs was in 1994 -- when Treasuries lost 3.3 percent in what was then the biggest selloff on record. At the time, Fed Chairman Alan Greenspan shocked the financial world by doubling the benchmark rate to 6 percent, even though inflation was at a seven-year low of 2.5 percent.

• Hedge Funds Score With Small-Cap Shorts in Russell Drop. Hedge funds are finally getting something right in the equity market. Large speculators tracked by the Commodity Futures Trading Commission have pushed short sales on the Russell 2000 Index (RTY) of the smallest shares to the highest in more than three years, just as the gauge is poised for its worst quarterly return since 2011. Bearish bets rose since March in the index, whose companies have a median value that’s 4 percent the size of Standard & Poor’s 500 Index stocks.

• California College Students Must Now Consent Before Sex. Colleges in California that receive state funding must bolster policies on campus sexual assault under laws signed yesterday, the first in the U.S. requiring students give consent before they have sex. The bill, signed by Governor Jerry Brown, requires public universities and private colleges that get financial grants to mandate students agree verbally or through some other affirmative signal before having sex.

CNBC:

• Markets remain 'vulnerable,' says Cashin. (video)

ZeroHedge:

• "This Is What We Do" Warns 2nd Oklahoman ISIS-Supporter Arrested For Threatening To Behead Co-Worker.

• "Hong Kong Risks Losing Its Role As A Financial Capital," Deutsche Bank Chief Economist Warns.

• Can The US Economy Handle A Meaningful Downturn In Financial Asset Prices?

• Stunning Drone Clip Reveals Massive Size Of Hong Kong Protest. (video)

• Pending Home Sales Drop In August (After Record Surge In New Home Sales). (graph)

• Stocks Tumble; High-Yield Credit Risk Spikes To 1-Year Highs. (graph)

• Despite 2nd Slowest Income Growth In 2014, Spending Rises Most Since March Driven By Subprime, Car Sales. (graph)

• New Global Crisis Imminent Due To “Poisonous Combination Of Record Debt And Slowing Growth", CEPR Report Warns.

Business Insider:

• Obama Throws America's Spies Under The Bus.

• The Chilling Quote That Shows You Just How Bad The Hong Kong Protests Could Get.

• NETANYAHU: 'We Must Remove The Cancer' Of 'Militant Islam ... Before It's Too Late'.

• DEAR GOPRO(GPRO) SPECULATORS: Here's What Will Have To Happen To Justify Today's Stock Price ...

• ISIS Seems To Be Getting Closer And Closer To Baghdad.

Telegraph:

• Mass default looms as world sinks beneath a sea of debt. Global debt is still rising strongly, crimping growth and threatening defaults around the world. 

• Morgan Stanley(MS) warns on Asian debt shock as dollar soars. Foreign debt in emerging Asia has soared from $300bn to $2.5 trillion over the last decade.

Nikkei:

• Keidanren Says Further Yen Weakening Would Hurt Japan. Sadayuki Sakakibara, head of Japan's business lobby Keidanren, said further weakening of the yen would have a negative impact on the Japanese economy. Sakakibara said a weak yen would increase gasoline and raw materials prices boosting costs for households and small businesses.

Bear Radar

Style Underperformer:

• Small-Cap Value -.80%

Sector Underperformers:

• 1) Gaming -2.41% 2) Steel -1.92% 3) I-Banks -1.32%

Stocks Falling on Unusual Volume:

• CVEO, TXTR, PTY, JNS, ELGX, PGP, CMTL, ADHD, SBRA, POWL, ATW, SGEN, PBR, BHP, CSWC, MDP, CTRP, BGC, GDOT, CMCM, AVY, CM, PHI, INVN, AME, RUBI, WMS, RPTP and XLS

Stocks With Unusual Put Option Activity:

• 1) DHI 2) OPK 3) ADSK 4) TXN 5) ADBE
  

Stocks With Most Negative News Mentions:

• 1) MDC 2) AIG 3) WFC 4) TXTR 5) RDC
  

Charts:

• ETFs Falling on Unusual Volume

• Stocks Falling on Unusual Volume

Bull Radar

Style Outperformer:

• Small-Cap Growth -.01%

Sector Outperformers:

• 1) Hospitals +.46% 2) Utilities +.24% 3) Biotech +.21%
  

Stocks Rising on Unusual Volume:

• BAGL, ATHL, TIBX, AMAG, DWA, AGIO, NI, CLVS, GPRO, CONN, AMBA and LPI

Stocks With Unusual Call Option Activity:

• 1) TSN 2) TIBX 3) RUSL 4) ARIA 5) AGN

Stocks With Most Positive News Mentions:

• 1) ECA 2) NI 3) ATHL 4) TIBX 5) DWA
  

Charts:

• ETFs Rising on Unusual Volume 

• Stocks Rising on Unusual Volume

Monday Watch

Weekend Headlines 
Bloomberg: 

• Netanyahu to Push Iran as Worse Threat Than Islamic State. Israeli Prime Minister Benjamin Netanyahu will urge world leaders to keep up the pressure on Iran over its nuclear program even as they confront the threat of Islamic State militants in Iraq and Syria. Netanyahu, addressing the United Nations General Assembly today, will expand on his Sept. 22 remarks mocking “esteemed commentators in the West” who say “the major powers need to go easy on Iran’s nuclear program so that Iran will fight” Islamic State, according to aides familiar with his speech. They asked not to be identified because it hasn’t been delivered.

• Turkey Wants Secure Syria Zone as Militants Strike Kurds. Turkish President Recep Tayyip Erdogan said setting up a “secure zone” inside Syria is necessary to help refugees return after they fled Islamic State’s onslaught against Kurdish areas into Turkey. Erdogan’s remarks to the World Economic Forum in Istanbul may anger Kurdish officials, who accuse him of siding with Islamic State against the Kurds in Syria to justify creating a buffer zone that would smother the autonomous region there. The Turkish government denies supporting Islamic State or any militant group.

• Ukraine Warns of Renegade Rebel Attacks Threatening Cease-Fire. Ukraine warned that groups beyond the control of rebel leaders in the country’s east were continuing attacks on government forces, undermining a truce that has mostly held since it was signed this month. Two autonomous rebel units, “Zarya” and “Don,” fired from long-range artillery at the Ukrainian army near Shchastya, a town 15 kilometers north of Luhansk, regional Governor Hennadiy Moskal said Sept. 27 on his website. Ukrainian troops repelled an attack on the Donetsk airport yesterday, according to military spokesman Andriy Lysenko.

• Alibaba Slumps in First Week as Short Sellers Enter Trade. Day one for shareholders of Alibaba Group Holding Ltd (BABA) was great. Week one proved less so. China’s largest e-commerce company slumped 3.7 percent to $90.46 last week.'

• Softbank Discussing Buyout of DreamWorks Animation. Softbank Corp., the Japanese wireless carrier headed by Masayoshi Son, is in talks to buy Jeffrey Katzenberg’s DreamWorks Animation SKG Inc. film studio, people familiar with the situation said. 

• Commerzbank Said to Face U.S. Laundering Controls Probe. Commerzbank AG (CBK), the German lender seeking to resolve a probe into Iran sanctions violations, also faces a U.S. inquiry into whether it broke anti-money-laundering laws, according to a person with knowledge of the situation.

• Hong Kong Dollar, Stocks Slide Amid Protest Crackdown. Hong Kong’s stocks fell to a two-month low, its currency dropped and equity-market volatility surged amid the biggest police crackdown on protesters since the city returned to Chinese rule. The benchmark Hang Seng Index sank 1.3 percent as of 9:50 a.m. in Hong Kong to the lowest intraday level since July 18 as developers and retailers tumbled. The MSCI Hong Kong Index headed for its biggest drop in a year, while a gauge of stock volatility jumped 15 percent, poised for the steepest surge since February. The city’s currency slid 0.03 percent to HK$7.7602 per greenback.

• Asia Stocks Fall, Led by Hong Kong, as Dollar Climbs. Asian stocks dropped, led by a rout in Hong Kong, after clashes between police and pro-democracy protesters in the Chinese city. The dollar extended gains and the cost of insuring debt against default jumped after U.S. economic data bolstered the outlook for higher interest rates. The Hang Seng Index lost 2.3 percent by 11:22 a.m. in Tokyo, erasing its gain for the year and dragging the MSCI Asia Pacific Index to a 0.7 percent decline.

• Iron Ore Seen Weak by Albanese as High-Cost Mines Face Pain. Iron ore prices that fell to a five-year low this month are seen staying weak for a sustained period as supply exceeds demand and China’s economy slows, according to Tom Albanese, former head of Rio Tinto Group. High-cost producers are facing a “pain point” at prices of about $80 a metric ton, Albanese, chief executive officer of London-based Vedanta Resources Plc (VED), said in interviews with Bloomberg Television and a reporter today. While low-cost producers would still be able to make good money in iron ore, there will be closures of higher-cost mines over time, he said.

• Nickel Poised to Enter Bear Market on Path to Quarterly Loss. Nickel fell, heading for a bear market, on concern that demand will slow in China, the biggest metals user, and after Philippine lawmakers clarified last week they won’t seek an ore-export ban for at least seven years. The metal in London retreated as much as 2.5 percent and is down 13 percent this quarter. Profits at industrial companies in China fell last month for the first time in two years as a slowdown deepens, data showed Sept. 27.

• Hedge Funds Raise Bullish Cocoa Bets on Ebola Concerns. Hedge funds raised bullish bets on cocoa before prices climbed to the highest since 2011 on concern that the deadly Ebola disease will disrupt supplies from West Africa, which produces 70 percent of global supply. Money managers raised their net-long positions by the most in 16 weeks.

• Warren Calls For Hearings on New York Fed Allegations. U.S. Senator Elizabeth Warren called for a congressional investigation into allegations that the Federal Reserve Bank of New York had been too deferential to the institutions it regulated. “Congress must hold oversight hearings on the disturbing issues raised by today’s whistle-blower report when it returns in November -- because it’s our job to make sure our financial regulators are doing their jobs,” Warren, a Massachusetts Democrat and member of the Senate Banking Committee, said in a statement today. 

• Fisher Says Fed Must Weigh Wage Pressures in Setting Rate Policy. The Federal Reserve mustn’t “fall behind the curve” as it weighs when to start raising interest rates, Dallas Fed President Richard Fisher said, citing strengthening U.S. growth and building wage-price pressures. Fisher, a vocal advocate for tighter monetary policy to protect against inflation, also said today that two soon-to-be-released economic reports from his Fed district would “knock your socks off.”

Wall Street Journal:

• China's One-Two Punch Threatens to Hit Economic Growth. Anticorruption Drive Could Disrupt Plans for Wider Overhauls.

• Billions Fly Out the Door at Pimco. About $10 Billion Is Withdrawn After Departure of Gross.

• Small Caps Miss Out on Stock Rally.

• When Central Bankers Become Central Planners. Macroprudential regulation is not likely to prevent asset bubbles. But credit allocation will depress growth.

Fox News:

• US 'understimated' rise of ISIS, Obama says. President Obama acknowledged Sunday that U.S. intelligence officials "underestimated" the threat posed by the Islamic State and overestimated the Iraqi army’s capacity to defeat the militant group.

CNBC:

• Is the long-expected high-yield selloff under way?

• Political reticence blunts ECB’s asset purchase plan.

Zero Hedge:

• S&P Warns On Germany As Anti-Euro Political Party Soars In Popularity.

• The Rise In Volatility.

• BofA Fears "This Would Exacerbate Any Equity Market Sell-Off". (graph)

• High-Yield Credit's Worst Week In 15 Months Sends Stocks Sliding. (graph)

• What Happens When A Money Printer Finally Crashes. (graph)

• The Escape Velocity Delusion: Running Out Of "Next Year".

• What Consumer-Facing CEOs Think: "It's Like Being At War".

• Peak Debt - Why The Keynesian Money Printers Are Done. (graph)

• Goldman(GS): "Some European Economies Already Qualify As A Japanese-Style Stagnation".

• This Riot Is Not In Ferguson, It Is In Hong Kong.

• Russia Discovers Massive Arctic Oil Field Which May Be Larger Than Gulf Of Mexico.

• "Hope Is Not Good Policy" - Saxo Bank Warns The Entire World Is Headed For A Minsky Moment.

• Can Market Forces Prevail: The Eurozone’s Unresolved Situation.

• Police Officer Shot In Ferguson.

• The Plunge Protection Team Is Opening An HFT-Focused Chicago Office.

• The "Only Chart That Matters", Projected Until 2016. (graph)

• "I Am Putting Everything In Goldman Sachs Because These Guys Can Do Whatever The Hell They Want".

Business Insider:

• MICHAEL LEWIS: The 'Ray Rice Video' Of Wall Street Has Arrived. The recordings "portray a New York Fed that is at times reluctant to push hard against Goldman [Sachs]," Bernstein writes.

• Another Round Of Nude Celebrity Photo Leaks Hits The Internet.

• Now Part Of Spain Is Fighting For Independence.

• Taliban Escalates Attacks In Afghanistan.

• We Screwed Up On Ebola, And Now The Crisis Is Getting Much Worse.

• Macy's(M) CEO Offers An Ominous Insight About American Consumers.

• Ukraine Backs Off From EU-Backed Russia Gas Deal.

• Cell Phones Give Away Much More Data Than Customers Realize.

• Ukraine's Poroshenko Is Starting To Lose Support As Putin Gets His Way.

• Hong Kong Protesters Aren't Going Anywhere Despite Massive Police Crackdown.

• It Was A Bad Weekend For Europe.

• John Hussman Just Issued His Strongest Warning Of A Stock Market Crash Yet.

• The Arrest Of A Billionaire Does Not Bode Well For Russia's Economy.

• The Russian Navy Is Aiming To Be Much Larger Than The US Navy.

Reuters:

• Top U.S. regulators warn banks over 'Shellshock' bug. A group of top U.S. financial regulators urged banks to quickly fix their software to protect it against the "Shellshock" computer bug, saying it could expose them to fraud.

Financial Times: 

• Geneva Report warns record debt and slow growth point to crisis. A “poisonous combination” of record debt and slowing growth suggest the global economy could be heading for another crisis, a hard-hitting report will warn on Monday.

Wirtschaftswoche:

• Ifo's Sinn Urges Germany to Act Against ECB ABS Purchases. Germany should take legal moves to oppose the European Central Bank's purchase of asset-backed securities, Hans-Werner Sinn, head of the Ifo economic institute, says in preview of guest editorial to be published in the coming edition. ECB would exceed its treaty-restricted monetary mandate with the planned purchases, Sinn said.

Night Trading

• Asian indices are -.75% to +.25% on average.

• Asia Ex-Japan Investment Grade CDS Index 99.0 +4.5 basis points.

• Asia Pacific Sovereign CDS Index 69.25 +4.0 basis points.

• FTSE-100 futures -.12%.

• S&P 500 futures -.29%.

• NASDAQ 100 futures -.25%.

Morning Preview Links

Earnings of Note
Company/Estimate

• (CALM)/1.17

• (CTAS)/.75

• (COCO)/.11

Economic Releases
8:30 am EST

• Personal Income for August is estimated to rise +.3% versus a +.2% gain in July.

• Personal Spending for August is estimated to rise +.4% versus a -.1% decline in July.

• The PCE Core for August is estimated unch. versus a +.1% gain in July. 

10:00 am EST

• Pending Home Sales for August are estimated to fall -.5% versus a +3.3% gain in July.
  

10:30 am EST

• Dallas Fed Manufacturing Activity for September is estimated to rise to 10.5 versus 7.1 in August.

Upcoming Splits

• None of note

Other Potential Market Movers

• The Eurozone Consumer Confidence report, China HSBC Manufacturing PMI, Deutsche Bank Leveraged Finance Conference, Johnson Rice Energy Conference, (NI) investor day and the (F) investor day could also impact trading today.

BOTTOM LINE: Asian indices are mostly lower, weighed down by commodity and financial shares in the region. I expect US stocks to open modestly lower and to maintain losses into the afternoon. The Portfolio is 50% net long heading into the week.