Friday, January 27, 2012

Stocks Slightly Lower into Final Hour on Global Growth Fears, Profit-Taking, Some Earnings Disappointments

Broad Market Tone:

  • Advance/Decline Line: Higher
  • Sector Performance: Mixed
  • Volume: Below Average
  • Market Leading Stocks: Outperforming
Equity Investor Angst:
  • VIX 18.46 -.59%
  • ISE Sentiment Index 130.0 +73.33%
  • Total Put/Call .95 -2.06%
  • NYSE Arms 1.48 -20.65%
Credit Investor Angst:
  • North American Investment Grade CDS Index 101.14 +.70%
  • European Financial Sector CDS Index 177.12 -1.93%
  • Western Europe Sovereign Debt CDS Index 331.63 -.37%
  • Emerging Market CDS Index 266.87 -.05%
  • 2-Year Swap Spread 32.0 -1 bp
  • TED Spread 50.0 -1 bp
  • 3-Month EUR/USD Cross-Currency Basis Swap -73.0 -4.0 basis points
Economic Gauges:
  • 3-Month T-Bill Yield .05% unch.
  • Yield Curve 169.0 -3 bps
  • China Import Iron Ore Spot $139.80/Metric Tonne unch.
  • Citi US Economic Surprise Index 65.40 -3.2 points
  • 10-Year TIPS Spread 2.10 -1 bp
Overseas Futures:
  • Nikkei Futures: Indicating -26 open in Japan
  • DAX Futures: Indicating +6 open in Germany
  • Higher: On gains in my Technology, Biotech, Medical and Retail sector longs
  • Disclosed Trades: Added to my (IWM), (QQQ) hedges and then covered some of them, added to my (GOOG) long and took profits in another tech long
  • Market Exposure: 75% Net Long
BOTTOM LINE: Today's overall market action is mildly bearish, as the S&P 500 trades slightly lower, but near session highs, on more global growth fears, profit-taking, more shorting, technical selling, high energy prices and some earnings disappointments. On the positive side, Coal, Alt Energy, Oil Service, Gold & Silver, Hospital, HMO and Airline shares are especially strong, rising more than +1.25%. Small-caps are outperforming. The UBS-Bloomberg Ag Spot Index is falling -.5% and Oil is down -.25%. Oil continues to trade poorly given the recent uptick in saber-rattling from Iran, escalating violence in Mid-east, better US economic data and euro bounce. Major Asian indices rose around +.5% overnight, led by a +.92% gain in India shares. The Germany sovereign cds is falling -2.25% to 85.0 bps, the Italy sovereign cds is down -5.4% to 399.17 bps, the France sovereign cds is falling -3.2% to 166.0 bps and the Belgium sovereign cds is down -5.72% to 240.0 bps. The Italian/German 10Y Yield Spread is falling -3.4% to 403.95 bps. On the negative side, Energy, Utility, Defense and Drug shares are under pressure, falling more than -.5%. The Portugal sovereign cds is up +2.68% to 1,433.35 bps(+32.5% in 10 days to new record high), the Japan sovereign cds is gaining +2.7% to 132.36 bps, the Hungary sovereign cds is rising +1.2% to 581.0 bps and the Brazil sovereign cds is rising +1.75% to 147.17 bps. Lumber has declined -11.0% since its Dec. 29th high and is still near the lower end of its recent range(near a multi-year low) despite the better US economic data, more dovish Fed commentary, improving sentiment towards homebuilders, equity rally and decline in eurozone debt angst. Moreover, the Baltic Dry Index has plunged over -60.0% from its Oct. 14th high and is now down over -50.0% ytd. The 10Y T-Note Yield is falling -4 bps to 1.89% and remains a large concern considering the recent stock rally, falling Eurozone debt angst and improvement in US economic data. The Western Europe Sovereign CDS Index is still near its Jan. 9th all-time high. The TED spread is near the highest since May 2009. The 2Y Euro Swap Spread is near the highest since Nov. 2008. The 3M Euribor-OIS spread is near the highest since February 2009. The Libor-OIS spread is still very near the widest since May 2009, which is also noteworthy considering the equity surge off the recent lows. Overall, the improvement in credit gauges appears to be stalling at still stressed levels, which may be related to rising concerns surrounding Portugal. China Iron Ore Spot has plunged -22.8% since Sept. 7th of last year. Shanghai Copper Inventories are up over 300.0% ytd to the highest level since March of last year. Bloomberg ran a concerning story last night on India’s most expensive property market. Residential home sales in Mumbai hit a 3-year low in December as prices hit another record. The city’s unsold inventory hit 44 months worth(healthy market normally has around 8 months) at the current absorption rate. Major European indices fell around -1.0%, with the Bloomberg European Bank/Financial Services Index falling -.87%. European equities continue to price in a pause in the debt crisis and a stabilization in economic growth. While the "debt crisis can" appears to have been kicked again, economic growth is likely to contract further in the region over the coming months as more austerity measures take hold. The Philly Fed’s ADS Real-Time Business Conditions Index has stalled over the last 3 weeks after showing meaningful improvement from mid-Nov. through year-end. Equity investors are currently pricing in a successful outcome to the Greece bailout talks and a calming in Portugal's serious debt situation. I am more concerned about the latter. Volume is poor today and trading has an unstable feel. For an intermediate-term equity advance from current levels, I would still expect to see further European credit gauge improvement, subsiding hard-landing fears in key emerging markets, a rising 10-year yield, better volume, stable-to-lower energy prices and higher-quality stock market leadership. One of my longs, (GOOG), is bouncing strongly off its 200-day moving average ahead of Facebook's IPO, which will make its shares look even cheaper. I think the shares offer compelling value around current levels and should outperform over the intermediate-term. I expect US stocks to trade mixed-to-higher into the close from current levels on less Eurozone debt angst, short-covering and more tech/financial sector optimism.

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