Stocks Slightly Lower into Final Hour on US Debt Ceiling/Shutdown Concerns, Global Growth Fears, Yen Strength, Transport/Defense Sector Weakness

Broad Equity Market Tone:

• Advance/Decline Line: Lower
  

• Sector Performance: Most Sectors Declining
  

• Volume: Below Average

• Market Leading Stocks: Performing In Line

Equity Investor Angst:

• Volatility(VIX) 16.69 +7.40%

• Euro/Yen Carry Return Index 137.92  -.23%

• Emerging Markets Currency Volatility(VXY) 9.91 -1.29%

• S&P 500 Implied Correlation 48.67 +4.64%

• ISE Sentiment Index 134.0 +19.64%

• Total Put/Call .76 -10.59%

• NYSE Arms .67 -4.09% 

Credit Investor Angst:

• North American Investment Grade CDS Index 79.66 +.34%

• European Financial Sector CDS Index 139.61 +.27%

• Western Europe Sovereign Debt CDS Index 81.50 -.61%

• Emerging Market CDS Index 293.44 +2.06%

• 2-Year Swap Spread 13.25 unch.

• TED Spread 23.0 unch.

• 3-Month EUR/USD Cross-Currency Basis Swap -6.0 unch.

Economic Gauges:

• 3-Month T-Bill Yield .02% unch.

• Yield Curve 230.0 -1 basis point

• China Import Iron Ore Spot $131.40/Metric Tonne unch.

• Citi US Economic Surprise Index 51.70 -1.6 points

• Citi Emerging Markets Economic Surprise Index -.10 -.7 point

• 10-Year TIPS Spread 2.21 +1 basis point

Overseas Futures:

• Nikkei Futures: Indicating +80 open in Japan

• DAX Futures: Indicating +17 open in Germany

Portfolio: 

• Slightly Higher: On gains in my tech sector longs and index hedges

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

• Market Exposure: 50% Net Long

Today's Headlines

Bloomberg:

• Euro Strengthens as Draghi Refrains From New Measures; Yen Rises. The euro strengthened the most in two weeks against the dollar after European Central Bank President Mario Draghi refrained from signaling that any new measures were needed to boost the region’s recovery. Europe’s single currency advanced versus all except two of its 16 major counterparts after Italian Prime Minister Enrico Letta won a confidence vote in parliament, avoiding the need for another election. The yen rose for a second day against the dollar as U.S. lawmakers made no progress toward resolving a partial government shutdown and an industry report showed American companies added fewer workers than economists forecast. Australia’s dollar fell as the nation reported a trade deficit. The euro advanced 0.5 percent to $1.3594 at 11:22 a.m. in New York, reaching the biggest one-day gain since Sept. 18. The single currency was 0.2 percent weaker at 132.34 yen after falling as much as 0.9 percent. The yen strengthened 0.7 percent to 97.33 per dollar. 

• Italy’s Letta Wins Confidence Vote as Berlusconi Backs Down. Italian Prime Minister Enrico Letta won a confidence vote in the Senate today after Silvio Berlusconi backtracked on a pledge to bring down the five-month old government as his party showed signs of deserting him. Letta was supported by 235 senators while 70 opposed him during a vote today in Rome. Just hours before, former Premier Berlusconi announced that he would support the government, reversing an earlier pledge to oppose Letta in the vote.

• European Stocks Drop as Hochtief Plunges Following Report. European stocks declined the most in more than a month as the shutdown of the U.S. federal government entered its second day. Hochtief AG slumped 7.9 percent after the Sydney Morning Herald reported allegations of corruption at the company’s Australian business. KappAhl AB dropped 9.8 percent after the clothing retailer proposed paying no dividend this financial year. Portugal Telecom SGPS SA jumped the most in almost four months after agreeing to merge with Brazil’s Oi SA to form a network operator with 100 million subscribers. The Stoxx Europe 600 Index slipped 0.7 percent to 310.79 at the close in London, its biggest slide since Aug. 30.

• WTI Crude Rises on Expected Gulf Pipeline Commissioning. West Texas Intermediate crude rose after TransCanada Corp. (TRP) said it expects to complete work on the southern portion of its Keystone pipeline expansion by the end of October. The spread between WTI and Brent oil, the European benchmark, narrowed on speculation that the link will help reduce stockpiles at Cushing, Oklahoma, the delivery point for the WTI contract. The 700,000-barrel-a-day pipeline will run to the Texas Gulf Coast from Cushing. Futures extended gains after a government report showed that stockpiles at the hub fell to the lowest level since February 2012.

• Monsanto(MON) Buying Climate Corp. to Add Big Data for Farmers. Monsanto Co. (MON), the world’s largest seed company, agreed to buy The Climate Corp. for about $930 million to provide farmers with weather data and farm modeling to help them boost yields and manage risk.

Wall Street Journal:

• Budget Battle: Streaming Coverage.

• U.S. Mortgage Application Volume Slips 0.4% in Latest Week -- MBA. The number of mortgage applications filed slipped 0.4% in the week ended Sept. 27 from the prior week on a seasonally adjusted basis while interest rates fell to their lowest level since June, the Mortgage Bankers Association said Wednesday. On an unadjusted basis, MBA reported the market composite index decreased 1%. The refinance index climbed 3%, while the seasonally adjusted purchase index fell 6%.

• Foreign Firms Tap U.S. Gas Bonanza. The U.S. boom in natural-gas production is luring investment from foreign manufacturers eager to tap a cheap, abundant supply of fuel and feedstocks.

Fox News: 

• Make It Hurt? Republicans accuse administration of inflicting added budget pain. Is the Obama administration employing a make-it-hurt strategy to gain political leverage in the budget battle on Capitol Hill? Republicans are making that charge as the stalemate drags on, and point to the Pentagon furlough of 400,000 civilian staffers -- even though Congress passed and the president signed a bill to supposedly keep them on the job. The partial government suspension, which started Monday after lawmakers failed to strike a budget deal, is expected to result in the furlough of roughly 800,000 total government workers. Many federal agencies have significantly curtailed their operations; national parks and monuments are closed. But Republicans are accusing the Obama administration of making the situation worse than it has to be. They complained overnight that the Pentagon furloughed 400,000 of its civilian staffers. "This is no time to use national security or our national security workforce as a political pawn," Rep. Buck McKeon, R-Calif., wrote in a letter to Defense Secretary Chuck Hagel.

• Firefighters alarmed by latest rescue risk: solar panels.

CNBC:

• Don't look for tapering anytime soon, says Fed's Rosengren.

• The phrase that betrays: 'Government shutdown'.

Zero Hedge:

• Only Payroll Indicator In Shutdown Week Disappoints As ADP Misses, Follows Large Downward Revisions. (graph)

• Best And Worst Performing Assets In September And Q3. (graph)

• Jamie And Lloyd Visit Obama.

• Key Pillar Of Housing "Recovery" Cracks As Private Equity Becomes Marginal Seller.

Business Insider: 

• Alleged Founder Of Silk Road — The Site Where You Can Buy Illegal Drugs — Arrested And Millions In Bitcoins Seized.

USA Today: 

• John Boehner: Obama owns this shutdown now. Washington Democrats have slammed the door on reopening the government. The president isn't telling the whole story when it comes to the government shutdown. The fact is that Washington Democrats have slammed the door on reopening the government by refusing to engage in bipartisan talks. And, as stories across the country highlight the devastating impact of Obamacare on families and small businesses, they continue to reject our calls for fairness for all Americans.

Reuters: 

• Investors turn their backs on "robot" hedge funds. Investors in the $330 billion computer-driven hedge fund sector are pulling out money for the first time since 2008, data showed on Wednesday, signalling the possible start of a bigger exit from the industry. These so-called CTAs (commodity trading advisors), which employ mathematicians and physicists to build programmes betting on market trends, have been in demand since they racked up large profits during the credit crisis.

• Swap exchanges launch in threat to Wall Street profits. More than a dozen new U.S. exchanges opened their doors for clients on Wednesday, marking the start of regulated trading of derivatives in a threat to one of Wall Street's most lucrative businesses.

Bear Radar

Style Underperformer:

• Mid-Cap Growth -.22%

Sector Underperformers:

• 1) Oil Tankers -1.31% 2) Defense -1.24% 3) I-Banks -1.13%

Stocks Falling on Unusual Volume:

• PKT, EA, EQIX, COG, XCO, MET, AA, KEP, SCCO, TGP, TISI, MEMP, RECN, FLTX, EME, IMPV, ICPT, CLDX, BAX, VMI, HOS, MON, CREE, GHL, FNGN, IMAX, CSTM, EV and WHR

Stocks With Unusual Put Option Activity:

• 1) DISH 2) EWY 3) KSS 4) BEN 5) XLV
  

Stocks With Most Negative News Mentions:

• 1) AXP 2) ORCL 3) CREE 4) CME 5) AIG
  

Charts:

• ETFs Falling on Unusual Volume

• Stocks Falling on Unusual Volume

Bull Radar

Style Outperformer:

• Small-Cap Growth -.41%

Sector Outperformers:

• 1) Gold & Silver +1.86% 2) Disk Drives +.84% 3) Homebuilders +.81%
  

Stocks Rising on Unusual Volume:

• MCP, ABX, DISH, WNR, GPN, RUE, RMTI, ALLT, OMER, OSIR, P, VVUS, TRLA, Z, PANW and ANAC

Stocks With Unusual Call Option Activity:

• 1) MDLZ 2) KSS 3) CL 4) CLX 5) CXO

Stocks With Most Positive News Mentions:

• 1) P 2) LMT 3) GPN 4) ADSK 5) VRX
  

Charts:

• ETFs Rising on Unusual Volume 

• Stocks Rising on Unusual Volume

Wednesday Watch

Evening Headlines 
Bloomberg:

• The Threat of ‘Abegeddon’ From Taxes in Japan. Posterity is watching carefully as Shinzo Abe goes ahead with a sales-tax increase aimed at getting a handle on Japan’s huge debt burden, the world’s largest. Unfortunately history may judge him no better than Ryutaro Hashimoto, the last Japanese prime minister to kill an economic recovery with ill-timed fiscal tightening.

• ADB Cuts Developing Asia Forecasts as Fed Taper Adds Pressure. A slowdown in China and India is reverberating across the region with the Asian Development Bank forecasting easing expansion this year, putting pressure on policy makers to take steps to bolster their economies. Developing Asia, which excludes Japan, will probably grow 6 percent in 2013 and 6.2 percent next year, the Manila-based lender said in a report today. In July, it had forecast expansion of 6.3 percent this year and 6.4 percent in 2014. Slowing growth in two of Asia’s biggest economies is compounded by concern that the Federal Reserve’s impending reduction of its record stimulus will drive investors away from emerging nations and spur volatility in financial markets.

• Asia Stocks Outside Japan Rise as Market Weighs Shutdown. Asian stocks outside Japan rose as investors speculated economic effects would be limited from the first partial U.S. government shutdown in 17 years. Japanese shares fell. Samsung Electronics Co. gained 2.4 percent in Seoul after the consumer-electronics maker said third-quarter earnings will improve at its mobile unit. Paladin Energy Ltd. soared 8.3 percent in Sydney after the uranium explorer reported it is cutting costs. Nissan Motor Co., a Japanese carmaker that gets about 80 percent of its revenue outside Japan, dropped 1 percent as the yen gained. The MSCI Asia Pacific excluding Japan Index gained 0.3 percent to 462.26 as of 11:54 a.m. in Tokyo.

• Rubber Reaches 7-Week Low as U.S. Auto Data Raise Demand Concern. Rubber extended losses for a fourth day to the lowest level in seven weeks after data showed U.S. auto sales fell for the first time in 27 months, raising concern that demand may weaken for the commodity used in tires. The contract for March delivery on the Tokyo Commodity Exchange lost as much as 1.7 percent to 256.4 yen a kilogram ($2,619 a metric ton), the lowest level since Aug. 9. Futures traded at 257.2 yen at 10:28 a.m., extending this year’s losses to 15 percent for a most-active contract. 

• Coal to Surpass Gas in Southeast Asia Power-Use Boom, IEA Says. Coal will replace natural gas as the dominant fuel for producing electricity in Southeast Asia as the region almost doubles its energy consumption in the next two decades, according to the International Energy Agency. The 10 members of ASEAN, with energy demand growing at more than twice the global average, will get 49 percent of their power from coal by 2035, up from 31 percent in 2011, the IEA said today in its Southeast Asia Energy Outlook. The share from gas will drop to 28 percent from 44 percent.

• Maersk Four Rate Rises Fail to Spread as Demand Falls: Freight. Global container-shipping operators’ efforts to boost freight rates this year are failing to bring results because of overcapacity and weak demand. That may undermine the recent rise in container-shipping stocks after second-quarter industry results were better than expected, according to Robin Byde, an analyst at Cantor Fitzgerald Europe in London. The industry’s traditional peak season in the third quarter probably will disappoint, he added.

• Draghi Seen Putting Words Before Action on ECB Policy. Mario Draghi is likely to rely on the power of his voice rather than new policies to steer Europe’s banks through the early stages of an economic recovery. The ECB president will hold off from pumping more cash into the currency bloc’s financial system as long as the threat of action keeps market interest rates under control, according to economists from Berenberg Bank to Nomura International Plc. While Draghi put investors on notice last week that a long-term refinancing operation is possible, other policy makers have played down the likelihood of that for now.

• Samaras Cautions Europeans Against Procrastinating on Greek Debt. Greek Prime Minister Antonis Samaras said the European nations that are financing Greece’s bailout should not wait too long before helping the country address its debt burden. Citing a pledge made in November by euro-area nations to consider further assistance to lower Greece’s debt, Samaras said his country is on track to meet the main condition, an annual budget surplus before interest payments, or primary surplus.

Wall Street Journal:

• Capital Digs In for Long Haul. Congress, Obama Prepare for Siege Over Shutdown, Then Debt Ceiling. Lawmakers and the White House dug in Tuesday for a long fight as the first federal government shutdown in nearly two decades showed no signs of breaking, increasing the likelihood it will become entangled in an even larger battle over the Treasury's ability to pay the government's bills. The two parties held no negotiations to resolve the impasse, instead trading blame. Republicans criticized Senate Democrats as being unwilling to negotiate an end to the standoff that forced federal agencies to curtail a range of activities and begin the furlough of more than 800,000 workers. 

• Budget Battle: Streaming Coverage.

• New York Plans Action on Alleged Mortgage Violations. New York's top prosecutor plans to announce on Wednesday both an agreement with Bank of America Corp. and a lawsuit against Wells Fargo & Co. over alleged violations of a $25 billion mortgage settlement reached last year.

• Weak Trading, Mortgage Slump, Legal Costs to Cut Results at Banks. Analysts Rush to Reduce Estimates. New troubles are piling up for U.S. banks as they prepare to release third-quarter results amid warnings of weak trading revenue, a sharp decline in mortgage-refinancing activity and rising legal costs. Analysts are scrambling to ratchet down earnings estimates ahead of the reports. J.P. Morgan Chase JPM +0.52% & Co. and Wells Fargo WFC +0.41% & Co. are slated to post results on Oct. 11, with Citigroup Inc., C +0.19% Bank of America Corp., BAC +0.72% Morgan Stanley MS +0.71% and Goldman Sachs Group Inc. GS +0.50% due to weigh in the following week.

• Fred Barnes: The President's Shutdown. Where leadership is needed, Obama stays on the sidelines—except when he's attacking Republicans.

Fox News:

• Physicians prepare to deal with increased demand, strain on practices under ObamaCare. As enrollment in ObamaCare begins, physicians throughout the country are preparing to deal with an influx of newly insured patients – as well as the increased financial demands this will place on their practices. While it will take a few years for doctors to fully determine how they will be affected by ObamaCare, some physicians are already anticipating the need to make major changes to the way they run their practices.

MarketWatch.com:

• Power companies look at charging customers for solar energy. Utilities in a few solar-friendly states are looking for ways to charge their solar customers for energy, a story by the Associated Press said. That includes creating extra fees for solar customers, or attempting to roll back or end programs that allow solar customers to trade the solar power they generate on sunny days for grid power the rest of the time.

CNBC:

• Shutdown may last week; budget talks possible: Boehner aide. (video)

Zero Hedge:

• 4 Bearish Divergences For "Different This Time" Believers. (graph)

• Millennials Devastated As American Dream Becomes Nightmare For Most. (graph)

• Trade Of The Decade: Short 'Trust'. (graph)

• Carl iCahn's Nightmare (Or The Credit Bubble In 4 Simple Charts).

• Goldman's(GS) Global Leading Indicator Plunges Back To "Slowdown".

Business Insider:

• Report: Three Top Microsoft(MSFT) Investors Call For Bill Gates To Step Down From The Board.

• MORGAN STANLEY(MS) ECONOMIST: I Worry About A 1913 Scenario With Dire Consequences For The Global Economy. One unintended consequence of QE and ZIRP was a rush of liquidity into emerging markets, which offered a seemingly successful growth model and thus higher expected returns. Five years on, the EM growth model looks severely challenged, as Manoj Pradhan and I already pointed out more than a year ago. 

• The Depressing Reality Of Spain's Youth Unemployment Crisis Brought To Life By A Grim Facebook Post.

• GEORGE SOROS: Europe's Nightmare Is Getting Worse, And Only Germany Can Make It Stop.

• The 'Smart Money' In The Stock Market Has Been Headed For The Exits Since May. (graph)

The Detroit News: 

• Electric vehicle sales slow in September. Electric vehicle sales lagged in September after a very strong August that was fueled by new discounts. General Motors Co. said sales of its plug-in hybrid electric Chevrolet Volt fell 38 percent to 1,766 in September, down from 2,851 in September 2012. But in August, GM sold 3,351 Volts after announcing a hefty price cut. GM slashed the base price of its plug-in hybrid by $5,000, from $39,995 to $34,995, making it the latest automaker to lower prices of electric vehicles in the face of lagging consumer demand. For the first nine months of the year, Volt sales are up just 2.5 percent to 16,760.

Reuters:

• JC Penney(JCP) is sued over share sale, stock plunge. A JC Penney Co shareholder on Tuesday sued the struggling retailer over its surprise decision to issue more than $810 million of stock to shore up liquidity, which led to a steep drop in its share price. 

• Detroit defaults on more than $600 mln of 'unsecured' GO bonds. Detroit on Tuesday defaulted on more than $600 million of general obligation bonds deemed unsecured by the city's emergency manager, a city spokesman said. 

• 'The system is down': Obamacare glitches go public, reasons unclear. Blank boxes where security questions are supposed to appear. Pleas to "be patient." Error messages galore. Notices that "the system is busy right now." Web pages timing out before they load. Garbled lines of text riddled with stray question marks. Technology experts and government officials were stumped about the reasons for the computer glitches plaguing the Obama administration's launch of new health insurance exchanges.

• Nikkei falls to 2-week low, Abe stimulus fails to inspire.

Nikkei:

• Toyota Plans Lower Japan Output on Sales Tax. Co. forecasts domestic production of 3m vehicles next year, 350,000 fewer than planned 2013 production, anticipating impact of sales tax increase. Co. has informed suppliers.

Evening Recommendations 

• None of note

Night Trading

• Asian equity indices are -.50% to +.75% on average.

• Asia Ex-Japan Investment Grade CDS Index 150.0 -6.5 basis point.

• Asia Pacific Sovereign CDS Index 118.75 -4.25 basis points. 

• FTSE-100 futures -.08%.

• S&P 500 futures -.15%.

• NASDAQ 100 futures -.12%.

Morning Preview Links

Earnings of Note
Company/Estimate

• (MON)/-.43 

Economic Releases 
8:15 am EST

• The ADP Employment Change for September is estimated to rise to 180K versus 176K in August.

 10:30 am EST

• Bloomberg consensus estimates call for a weekly crude oil inventory build of +2,500,000 barrels versus a +2,635,000 barrel gain the prior week. Gasoline supplies are estimated to fall by -700,000 barrels versus a +217,000 barrel gain the prior week. Distillate inventories are estimated to fall by -1,000,000 barrels versus a -234,000 barrel decline the prior week. Finally, Refinery Utilization is estimated to fall by -.95% versus a -2.2% decline the prior week.

Upcoming Splits

• None of note

Other Potential Market Movers

• The Fed's Bernanke speaking, Fed's Rosengren speaking, ECB rate decision, China Non-Manufacturing PMI, weekly MBA mortgage applications report, ISM New York for Sept., (ADSK) investor day, (CXW) analyst day and the (PLL) investor day could also impact trading today.

BOTTOM LINE: Asian indices are mostly higher, boosted by consumer and real estate 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 Diminished US Govt Shutdown Fears, Less Eurozone/Emerging Markets Debt Angst, Short-Covering, Healthcare/Biotech 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) 16.01 -3.56%

• Euro/Yen Carry Return Index 138.06 -.35%

• Emerging Markets Currency Volatility(VXY) 10.07 -.40%

• S&P 500 Implied Correlation 48.62 -1.06%

• ISE Sentiment Index 109.0 +73.02%

• Total Put/Call .87 -20.91%

• NYSE Arms .75 -53.56% 

Credit Investor Angst:

• North American Investment Grade CDS Index 80.48 -1.76%

• European Financial Sector CDS Index 139.26 -5.63%

• Western Europe Sovereign Debt CDS Index 82.0 -6.75%

• Emerging Market CDS Index 287.75 -2.21%

• 2-Year Swap Spread 13.25 unch.

• TED Spread 23.0 -1.25 basis points

• 3-Month EUR/USD Cross-Currency Basis Swap -6.0 +1.0 basis point

Economic Gauges:

• 3-Month T-Bill Yield .02% +2 basis points

• Yield Curve 231.0 +1 basis point

• China Import Iron Ore Spot $131.40/Metric Tonne unch.

• Citi US Economic Surprise Index 53.30 +2.8 points

• Citi Emerging Markets Economic Surprise Index .60 -5.6 points

• 10-Year TIPS Spread 2.20 +1 basis point

Overseas Futures:

• Nikkei Futures: Indicating +15 open in Japan

• DAX Futures: Indicating -6 open in Germany

Portfolio: 

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

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

• Market Exposure: Moved to 50% Net Long