Tuesday, July 31, 2012

Stocks Falling into Final Hour on Rising Eurozone Debt Angst, US "Fical Cliff" Concerns, Rising Global Growth Fears, Earnings Worries


Broad Market Tone:

  • Advance/Decline Line: Lower
  • Sector Performance: Most Sectors Declining
  • Volume: Slightly Slightly Below Average
  • Market Leading Stocks: Performing In Line
Equity Investor Angst:
  • VIX 18.64 +3.38%
  • ISE Sentiment Index 146.0 +.69%
  • Total Put/Call .78 -1.27%
  • NYSE Arms 1.28 +45.83%
Credit Investor Angst:
  • North American Investment Grade CDS Index 106.60 bps +.34%
  • European Financial Sector CDS Index 258.58 bps +1.89%
  • Western Europe Sovereign Debt CDS Index 255.64 +.49%
  • Emerging Market CDS Index 248.34 +1.59%
  • 2-Year Swap Spread 20.25 +.75 basis point
  • TED Spread 34.0 -.75 basis point
  • 3-Month EUR/USD Cross-Currency Basis Swap -42.0 +3.5 basis points
Economic Gauges:
  • 3-Month T-Bill Yield .10% unch.
  • Yield Curve 126.0 -1 basis point
  • China Import Iron Ore Spot $117.0/Metric Tonne +1.56%
  • Citi US Economic Surprise Index -41.90 +7.1 points
  • 10-Year TIPS Spread 2.11 +3 basis points
Overseas Futures:
  • Nikkei Futures: Indicating -60 open in Japan
  • DAX Futures: Indicating -11 open in Germany
Portfolio:
  • Slightly Lower: On losses in my Biotech and Retail sector longs
  • Disclosed Trades: None
  • Market Exposure: 50% Net Long
BOTTOM LINE: Today's overall market action is mildly bearish as the S&P 500 trades near session lows on rising eurozone debt angst, high food prices, US "fiscal cliff" worries, earnings concerns and rising global growth fears. On the positive side, Networking and Semi shares are are especially strong, rising more than +.75%. Oil is falling -2.1%, the UBS-Bloomberg Ag Spot Index is down -.7% and Gold is down -.5%. Major Asian indices were mostly higher overnight, led by a +2.1% gain in South Korea. However, the Shanghai Composite continues to sit out the global equity rally as it fell another -.3%. This index is now down -4.4% ytd and sits at its lowest level since March 2009, which is a big red flag for global investors. On the negative side, Oil Service, I-Banking, Biotech, HMO, Homebuilding and Gaming shares are especially weak, falling more than -1.5%. Homebuilding shares have traded heavy throughout the day. Lumber is falling -.5%. The 10Y Yld is falling -3 bps to 1.48%. The Portugal sovereign cds is gaining +1.7% to 834.28 bps, the Saudi sovereign cds is up +2.6% to 106.0 bps and the UK sovereign cds is up +1.4% to 56.25 bps. Moreover, the European Investment Grade CDS Index is rising +1.2% to 159.80 bps, the Spain 10Y Yld is rising +2.1% to 6.75%, the Italian/German 10Y Yld Spread is rising +3.1% to 479.81 bps. The UBS/Bloomberg Ag Spot Index is up +26.4% in about 2 months. The benchmark China Iron/Ore Spot Index is down -4.8% in 5 days(-35.4% since 9/7/11). Moreover, the China Hot Rolled Steel Sheet Spot Index is also picking up downside steam. As well, despite their recent bounces off the lows, the euro, copper and lumber all continue to trade poorly given equity investor perceptions that global central bank stimuli will boost economic growth in the near future. US weekly retail sales have decelerated to a sluggish rate at +1.6%, which is the slowest since the week of Feb. 2, 2010. US Trucking Traffic continues to soften. Moreover, the Citi US Economic Surprise Index, while showing some improvement recently, is still around early-Sept. levels. Lumber is -5.0% since its March 1st high despite improving sentiment towards homebuilders and the broad equity rally ytd. Moreover, the weekly MBA Home Purchase Applications Index has been around the same level since May 2010 despite investor perceptions of a big improvement in the nationwide housing market. The Baltic Dry Index has plunged around -55.0% from its Oct. 14th high and is now down around -45.0% ytd. Shanghai Copper Inventories have risen +90.0% ytd. Oil tanker rates have plunged recently, with the benchmark Middle East-to-US voyage down to 25.0 industry-standard worldscale points, which is the lowest since Oct. 2009. The CRB Commodities Index is now down -17.3% since May 2nd of last year despite the recent surge in food prices. The 10Y T-Note continues to trade too well. There still appears to be a high level of complacency among US investors regarding the deteriorating macro backdrop. It remains unclear to me whether or not Germany will put its own balance sheet on the line to save the euro even as investors appear to be pricing this outcome into stocks. The Citi Eurozone Economic Surprise Index is at -71.70 points, which is near the lowest since mid-Sept. of last year. Massive tax hikes and spending cuts are still yet to hit in several key eurozone countries that are already in recession. A lack of competitiveness remains unaddressed. The European debt crisis is also really beginning to bite emerging market economies now, which will further pressure exports from the region and further raise the odds of more sovereign/bank downgrades. Uncertainty surrounding the effects on business of Obamacare, the "US fiscal cliff" and the election outcome uncertainty will likely become more and more of a focus for investors as the year progresses. Little if anything being discussed by global central bankers will actually boost global economic growth in any meaningful way, in my opinion. Thus, recent market p/e multiple expansion is creating an unstable situation for equities, which could become a big problem this fall unless a significant macro catalyst materializes soon. For this year's equity advance to regain traction, I would expect to see a resumption in European credit gauge improvement, a subsiding of hard-landing fears in key emerging markets, a rising 10-year yield, better volume, stable-to-lower energy prices, a US "fiscal cliff" solution and higher-quality stock market leadership. I expect US stocks to trade mixed-to-lower into the close from current levels on rising eurozone debt angst, profit-taking, high food prices, earnings worries, US "fiscal cliff" concerns and rising global growth fears.

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